Disallowance under section 37(1) for alleged non-genuine purchases overturned after transactions shown to be bona fide business expenditure.

Disallowance under analysis concerned treating purchases from five vendors as non-genuine and denying deduction under the principle that expenditure must be wholly and exclusively for business; the factual record did not establish accommodation entries or bogus transactions, and the purchases were shown to be by the operating subsidiary for ongoing projects, with subsequent acceptance of similar transactions in later years, so the part disallowance of 12.5% adopted to plug leakage lacked evidentiary basis and was deleted, resulting in dismissal of Revenues challenge to the CIT(A)s partial deletion and full restoration of the business expenditure.

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Issues: (i) Whether the disallowance under section 37(1) of the Income-tax Act, 1961 in respect of certain purchase transactions treated as non-genuine is sustainable; (ii) Whether the part-disallowance of 12.5% of the total purchase value to "plug leakage of revenue" is justified and applicable to subsequent assessment years by way of mutatis mutandis application.

Analysis: The reassessment and disallowance were founded on statements and field inspection conducted more than a decade after the year under consideration and on records relating to transactions executed by a merged predecessor entity. Documentary material for the year was partly unavailable due to historical accounting system limitations, while consistent transactional relationships and supporting documentation for subsequent years were produced. Statements of individuals recorded during search showed unfamiliarity with vendors; however, such statements were from persons who joined the relevant units well after the year under consideration or who could not reasonably be expected to know historic procurement across a large multi-site organisation. The field inspection took place many years after the transactions and absence of vendors at inspected addresses can have several legitimate explanations. No incriminating material was produced to establish that the transactions were accommodation entries, and subsequent year records showed acceptance of similar transactions by the revenue. The Tribunal found the decision relied upon by the Revenue factually distinguishable.

Conclusion: The disallowance under section 37(1) in respect of the impugned purchase transactions is not sustainable and is deleted. The ad hoc part-disallowance of 12.5% of the total purchases is also not justified and is deleted. The same conclusions apply mutatis mutandis to the connected assessment years.

Ratio Decidendi: Where reassessment and disallowance rest on temporally remote search statements and field inspections without incriminating material, and taxpayer furnishes consistent transactional links and subsequent-year corroboration, the revenue has not discharged the burden to treat historical purchase expenditures as non-genuine for disallowance under section 37(1).

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