ITAT Disallows Bogus Purchases Under Section 37(1)

Case Details: Arvind Kumar vs. Principal Commissioner of Income-tax - [2025] 178 taxmann.com 351 (Delhi - Trib.)

Judiciary and Counsel Details

• Satbeer Singh Godara, Judicial Member
•  Naveen Chandra, Accountant Member
• Dhruv Goel, CA for the Appellant
• Jitender Singh, CIT-DR for the Respondent

Facts of the Case

The case of the assessee was reopened under section 148 on the basis of the allegation that the assessee had claimed purchases from Kanheya Exports, which was not a genuine entity. During the scrutiny assessment proceedings, the assessee furnished audited books of account, ledger accounts, purchase bills, bank statements and a certificate from the auditor.

The Assessing Officer (AO) also conducted physical verification from the supplier and collected a statement from the controller of the entity. Finally, the AO held the expenses of Rs. 2,14,810 claimed by the assessee to be not genuine and disallowed them under Section 37.

On assuming jurisdiction under section 263, the Principal Commissioner of Income Tax (PCIT) issued a show cause notice to the assessee stating that the disallowance was to be made under section 69C and not section 37. The higher rate of 60% as per section 115BBE of the Act was applicable instead of normal rates, and thus the assessment order was prejudicial to the interest of the Revenue.

The matter reached the Delhi Tribunal.

Tribunal Held

The Tribunal held that section 37 of the Act is a specific provision that disallows business expenses when it is found not to be wholly and exclusively for business. In contrast, section 69C applies where the explanation of the assessee regarding the nature and source of the expense was not satisfactory to the AO.

In the present case, the nature of the expense, i.e. purchases, and the source of the expense, i.e. bank payments, are not doubted. The only doubt was regarding the genuineness of the expense, and thus, disallowance has been correctly made under section 37 by the AO.

Further, the PCIT’s observation that the AO has incorrectly ignored to apply the ratio laid down by the Hon’ble Supreme Court in N. K. Proteins Ltd. v. Dy. CIT [2017] 84 taxmann.com 195/250 Taxman 22 (SC) is not valid. The said decision was a non-speaking order where the Hon’ble Supreme Court dismissed the SLP filed by the assessee against the order of the Hon’ble Gujarat High Court, and it is a settled law that such an order does not get binding force, not covered under the doctrine of merger finds force.

Thus, the assessee’s appeal was allowed, and the order of the PCIT was set aside.

List Of Cases Reviewed

• CIT v. Amitabh Bachchan [2016] 69 taxmann.com 170/240 Taxman 221/384 ITR 200 (SC)
• Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 10)
• Shashikant Bhavajjibhai Rajpara v. Pr. CIT [IT Appeal No.59/RJT/2022, dated 22.3.2023]
• Vijubha Jitubha Jadeja v. Pr. CIT [2023] 154 taxmann.com 615 (Rajkot – Trib.) (para 11)Followed
• N. K. Proteins Ltd. v. Dy. CIT [2017] 84 taxmann.com 195/250 Taxman 22 (SC) (para 12) Distinguished

List of Cases Referred To

• CIT v. Amitabh Bachchan [2016] 69 taxmann.com 170/240 Taxman 221/384 ITR 200 (SC) (para 7)
• Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 7)
• Shashikant Bhavajjibhai Rajpara v. Pr. CIT [IT Appeal No.59/RJT/2022, dated 22.3.2023] (para 7)
• Vijubha Jitubha Jadeja v. Pr. CIT [2023] 154 taxmann.com 615 (Rajkot – Trib.) (para 7) 
• N. K. Proteins Ltd. v. Dy. CIT [2017] 84 taxmann.com 195/250 Taxman 22 (SC) (para 12).