Bogus purchase expenditure disallowance: AO used s.37(1) instead of s.69C/115BBE; revision u/s263 upheld, appeal dismissed

The dominant issue was whether revision under s.263 was justified where the AO, after finding purchase expenditure to be bogus, disallowed it under s.37(1) instead of invoking s.69C read with s.115BBE. The Tribunal held that s.37(1) concerns allowability based on commercial expediency, and no such controversy existed once the AO concluded that the goods were never received and the assessee failed to evidence receipt. Section 69C applies where expenditure is claimed but the assessee gives no satisfactory explanation of its source; those conditions were met, making the assessment order erroneous and prejudicial to the Revenue. The revisionary directions were upheld and the assessee's appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the assessment order was "erroneous in so far as it is prejudicial to the interests of the Revenue" because the Assessing Officer, after holding the purchases to be bogus/non-genuine, made the addition under section 37(1) instead of applying section 69C read with section 115BBE, thereby justifying revision under section 263.

(ii) Whether, on the facts found in assessment (no actual receipt of goods and only accommodation entries), the claim of purchase expenditure attracted section 69C, and whether reliance on the proposition that booked expenditure/payments through banking channels negate section 69C was applicable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of section 263 revision for non-application of section 69C r.w.s. 115BBE (and use of section 37(1) instead)

Legal framework: The Court examined section 263 (including Explanation 2), section 69C, section 115BBE, and section 37(1) as reproduced in the order. It treated the "twin conditions" for section 263-error and prejudice-as applicable, and also considered that loss of lawful tax due to incorrect application of law constitutes prejudice.

Interpretation and reasoning: The Court found that the assessment had conclusively recorded that the alleged suppliers were paper concerns, statutory notices/enquiries to such parties went unanswered, verification enquiries established that the purported proprietors admitted no such business activity, and documentary deficiencies showed absence of actual movement/supply of goods. On these facts, the Court held that the Assessing Officer's own findings established that the purchases "never happened" and that the assessee was effectively obtaining accommodation entries/commission-based bogus purchase bills. In that setting, the Court held that section 37(1) (which addresses allowability of business expenditure based on business purpose/commercial expediency and related limitations) was not the correct provision to govern such bogus purchase expenditure; rather, the case fit the statutory mischief contemplated by section 69C, and the consequent rate implication under section 115BBE was material. The non-application of section 69C r.w.s. 115BBE caused short levy of tax "lawfully payable," thereby satisfying both "erroneous" and "prejudicial" requirements for section 263.

Conclusions: The Court upheld the exercise of section 263 jurisdiction, holding that failure to apply section 69C r.w.s. 115BBE (and adopting section 37(1) instead) was a legally incorrect application leading to prejudice to the Revenue; the revisional direction to redo the assessment to that extent was confirmed.

Issue (ii): Applicability of section 69C to bogus purchase expenditure despite recording in books and banking channel payments; distinction of the relied-upon principle

Legal framework: The Court applied section 69C as requiring (a) incurring of expenditure, and (b) absence of satisfactory explanation about the "source of such expenditure." It also treated section 115BBE as consequential where income is determined under section 69C.

Interpretation and reasoning: The Court accepted the factual findings that no goods were supplied/received and that the "purchases" were accommodation entries; therefore, the expenditure claimed towards purchases was "bogus" and its source, in substance, was not satisfactorily explained through evidence of actual receipt of goods. The Court expressly held that mere payment through banking channels did not neutralize section 69C where the underlying purchase transaction itself was found non-existent and the assessee failed to produce basic supporting evidence (delivery documents, transport details, etc.) to prove receipt of goods. It further held that the relied-upon proposition (that where expenditure is recorded and source is explained, section 69C may not apply) was inapplicable on these facts, because here the enquiries established that the purchases were not genuine and that the assessee was only procuring bogus entries (commission), making the case factually distinguishable.

Conclusions: The Court concluded that the factual matrix attracted section 69C, and the Assessing Officer's treatment under section 37(1) was therefore faulty; as a result, the section 263 direction requiring correct application of law was sustained and the appeal was dismissed.

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