Recorded expenditure and no defect in books defeat section 37(1) disallowance based on survey material and estimates.

Disallowance of contingency expenses under section 37(1) was held unsustainable where the expenditure was already recorded in the regular books and the Revenue failed to show any defect or positive evidence of unrecorded outgo. The project cost reflected in the cost-to-completion reports matched the total expenditure in the books, even though the allocation under individual heads differed. Presumptions under section 132(4A) were held applicable to search cases and not to survey proceedings. In the absence of cogent material proving bogus booking or cash expenditure, suspicion, estimation, or alleged SOP non-compliance could not justify the addition, and the disallowance was directed to be deleted.

---

---

Issues: Whether disallowance of contingency expenses made under section 37(1) of the Income-tax Act, 1961, on the basis of survey material and Cost to Completion reports, was sustainable when the expenditure stood recorded in the regular books of account.

Analysis: The additions were founded on the premise that contingency expenses shown in the project cost reports represented unrecorded cash expenditure and bogus booking of expenses. The recorded material showed that the total project cost in the cost-to-completion reports matched the total expenditure reflected in the books, although the allocation under individual heads differed. The presumption under section 132(4A) applies to search cases and was held inapplicable to survey proceedings. In the absence of any defect in the books or cogent evidence of unrecorded expenditure, the burden remained on the Revenue to prove that the impugned expenditure was not recorded, and mere objections regarding SOP compliance could not justify disallowance.

Conclusion: The disallowance of contingency expenses was not sustainable and the additions were directed to be deleted, in favour of the assessee.

Ratio Decidendi: Where expenditure is found fully recorded in the regular books and no defect or positive material shows unrecorded outgo, a disallowance under section 37(1) cannot rest on suspicion, estimation, or survey-based surmise.

---