Assessee wins appeal as expenses under section 37 allowed despite supplier's denial of goods supply

Sushil Kumar Versus DCIT Circle-22 (2) Delhi.

Sushil Kumar Versus DCIT Circle-22 (2) Delhi. - TMI 1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the addition of INR 98,40,545/- towards alleged bogus purchases made by the assessee from a supplier who denied the transactions is justified under section 37(1) of the Income Tax Act, 1961 ("the Act")Rs.

(b) Whether the denial by the purported supplier, Elegant Impex, of having supplied goods to the assessee, without corroborative evidence or confirmation, is sufficient ground for disallowance of the purchase expenses claimed by the assesseeRs.

(c) Whether the assessee's documentary evidence including ledger accounts, bills, e-way bills, bank statements, stock registers, and sales invoices sufficiently establishes the genuineness of the purchases and payments made to the supplierRs.

(d) Whether the Revenue authorities erred in relying solely on the supplier's denial without conducting further enquiries into the payments made and the delivery of goodsRs.

(e) The applicability and scope of section 37(1) of the Act in disallowing expenses on the ground of bogus purchases, and the relevance of precedents cited by the Revenue and the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Legitimacy of addition under section 37(1) based on supplier denial

The legal framework involves section 37(1) of the Act, which allows disallowance of expenditure not incurred wholly and exclusively for business purposes. The Assessing Officer (AO) relied on the denial by the supplier Elegant Impex, who stated in response to notice under section 133(6) that he was not engaged in business currently, had not obtained GST registration under his PAN, and denied any supply to the assessee. The AO concluded that the purchases amounting to INR 98,40,545/- were bogus and disallowed the expenses accordingly.

The First Appellate Authority (CIT(A)) affirmed this finding, noting the absence of any confirmation from Elegant Impex and relying on the supplier's denial as decisive.

The Revenue's position was supported by reliance on judicial precedents where denial by suppliers and non-availability of GST registration were held sufficient to disallow expenses under section 37(1) or related provisions.

Issue (c): Adequacy of documentary evidence furnished by the assessee

The assessee contended that it had furnished comprehensive documentary evidence including:

• Ledger accounts of Elegant Impex
• Purchase bills and e-way bills indicating transportation details
• Bank statements reflecting payments made to Elegant Impex
• Stock registers showing purchases and subsequent sales
• Sales bills confirming disposition of goods purchased

It was emphasized that the assessee is a trader, not a manufacturer, and the goods purchased were sold without modification. The sales recorded were accepted by the Revenue, and the assessee incurred a nominal loss, indicating the genuineness of transactions. The assessee argued that the supplier's denial was vague and cryptic, merely stating non-engagement in current business and not expressly denying transactions for the relevant financial year.

Issue (d): Adequacy of Revenue's enquiries and reliance on supplier's denial

The Tribunal noted that the AO had not conducted further enquiries into the payments made or the delivery of goods despite the assessee's submissions. The e-way bills and transportation details were not disputed. The Tribunal observed that the Revenue's reliance on a "simplicitor denial" by the supplier without investigating the payment trail or the physical receipt and sale of goods was unjustified and "half-baked."

The Tribunal further reasoned that in the case of a trader, sales cannot occur without corresponding purchases, and since sales were undisputed, the purchases must be considered genuine unless disproved by cogent evidence.

Issue (e): Applicability of precedents and legal principles

The Revenue relied on judgments where denial of supply and absence of GST registration led to disallowance under section 37(1) or related provisions. However, the assessee distinguished these precedents on facts, noting that those cases involved section 69C (dealing with source and nature of payments), whereas the present case concerns section 37(1) which requires proof of business purpose and genuineness of expenditure.

The assessee also cited a coordinate bench decision where similar additions were reversed due to inadequate enquiry and reliance on supplier denial alone. Additionally, the assessee referred to a High Court decision emphasizing that half-baked investigations do not justify additions.

3. SIGNIFICANT HOLDINGS

The Tribunal held that the addition under section 37(1) disallowing purchases of INR 98,40,545/- was unjustified. The key reasoning includes:

"One cannot fathom the factum of sales without corresponding purchases particularly in the case of a trader assessee. The sales recorded has neither been disturbed by the Revenue nor could have been. The legitimacy of sales having been accepted, the AO could not have put question mark on the legitimacy of the corresponding purchases. The outcome of the enquiries made with the supplier is clearly half-baked and transgresses common sense approach."

The Tribunal emphasized that the Revenue's reliance on the supplier's denial was "blind" and lacked any corroborative enquiry into payments or delivery of goods. The assessee's documentary evidence was sufficient to establish the genuineness of purchases and business purpose of expenses.

The Tribunal concluded:

"In the absence of any adverse finding on the factum of payments made coupled with transportation and corresponding sales of goods, we have no hesitation to dislodge the additions made by the Assessing Officer and restore the position claimed by the assessee."

Core principles established include:

• Denial by a supplier, without corroborative evidence or confirmation, is insufficient to disallow expenditure under section 37(1).
• In trading businesses, sales cannot exist without corresponding purchases; acceptance of sales supports the genuineness of purchases.
• Revenue authorities must conduct thorough enquiries including verification of payments and delivery before making additions on the ground of bogus purchases.
• Half-baked or incomplete investigations do not justify disallowance of expenses.

Final determination: The appeal was allowed, and the addition of INR 98,40,545/- was deleted, restoring the assessee's claim of purchases as genuine and allowable business expenditure under section 37(1) of the Act.