Accommodation entries and bogus purchases disallowance: tribunal upholds AO's expense disallowance and quashes revision directing alternate provision

Accommodation entries treated as bogus purchases were disallowed by the assessing officer under the business expense provision rather than under unexplained investment provisions. The tribunal held that treating the claimed purchases as bogus supported disallowance under the business expense provision and that the failure to invoke the unexplained investment provision did not render the reassessment erroneous or prejudicial to revenue. Consequently, the revision under the review power was quashed and the assessee's grounds were allowed, leaving the AO's disallowance intact.

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Issues: Whether the Principal Commissioner of Income Tax was justified in invoking revisionary jurisdiction under section 263 to direct the Assessing Officer to treat purchases held by the AO as bogus under section 37(1) to be taxed under section 69C r.w.s. 115BBE instead, thereby setting aside the reassessment order.

Analysis: The Tribunal examined (i) the scope of section 69C which applies where an assessee incurs expenditure and offers no explanation or an explanation is found unsatisfactory as to the source of such expenditure; and (ii) the factual finding of the Assessing Officer that the purchases were bogus and disallowed under section 37(1) without expressing doubt as to the source of payment. The Tribunal considered precedents of coordinate Benches holding that disallowance of expenses found not genuine falls in a different legal category from unexplained-source expenditure taxable under section 69C, and that section 69C/115BBE cannot be invoked where the AO has taken a plausible view under section 37(1) based on genuineness of transactions.

Conclusion: The revisionary order under section 263 is quashed and the reassessment order is held not to be erroneous or prejudicial to the revenue for not invoking section 69C r.w.s. 115BBE; appeal is allowed in favour of the assessee.

Ratio Decidendi: Where the Assessing Officer disallows expenditures as not genuine under section 37(1) without doubting the source of payments, section 69C is not attracted and a revision under section 263 directing invocation of section 69C/115BBE is unsustainable.

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