Business expenditure cannot be disallowed on suspicion alone when records and consistency support genuineness

Business expenditure under section 37(1) cannot be disallowed on the basis of general search statements or suspicion without specific incriminating material. The record showed no rejection of books, no adverse financial evidence, and no finding that the claimed expenses were bogus, inflated, or unrelated to business. Routine salary, rent, administrative and compliance expenses were accepted as genuine, and the absence of fresh facts also meant the earlier accepted treatment should have been maintained under the rule of consistency. On that basis, the sustained disallowance was held unsustainable and deleted.

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Issues: Whether the disallowance of business expenditure claimed under section 37(1) of the Income-tax Act, 1961, sustained by the first appellate authority on the basis of third-party statements and a perceived lack of substantial business activity, was justified.

Analysis: The disallowance was founded on generalised search statements and not on any cogent incriminating material specific to the assessees. The record showed that the Assessing Officer had not rejected the books of account, had not brought on record any adverse balance sheet, profit and loss account or bank statement, and had not established that the claimed expenditure was bogus, inflated or unrelated to business. The appellate authority itself accepted that the assessees were engaged in business and that statutory and compliance-related expenses were genuine, yet sustained salary, rent and other routine administrative outgoings without identifying any specific defect. In the absence of fresh material or distinguishing facts, the departure from earlier accepted assessments was held to be contrary to the rule of consistency. The reasoning also rested on the principle that routine business expenditure necessary for carrying on business and statutory compliance cannot be disallowed merely on suspicion or on uncorroborated third-party statements.

Conclusion: The disallowance sustained under section 37(1) was held unsustainable and was deleted; the issue was decided in favour of the assessees.

Ratio Decidendi: Business expenditure supported by records and not shown to be non-genuine cannot be disallowed on mere suspicion, uncorroborated third-party statements, or without specific adverse material, and consistency must be maintained where no new facts emerge.

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