Revisional Jurisdiction cannot convert disallowance of bogus purchases into taxation as unexplained expenditure under special rate provisions.

Whether the Principal Commissioner correctly invoked revisional jurisdiction to require invocation of taxation of unexplained expenditure was considered; the tribunal held that disallowance of purchases found to be bogus after independent enquiries under the general disallowance principle is a permissible view and does not automatically convert recorded transactions into unexplained expenditure for special rate taxation. Because the assessee had not been shown to have failed to explain the source of purchases and no deficiency rendering the assessment erroneous or prejudicial to revenue was established, the revision under revisional jurisdiction was quashed and set aside in favour of the assessee.

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Issues: Whether the Principal Commissioner of Income Tax was justified in invoking revisional jurisdiction under section 263 of the Income-tax Act, 1961 to set aside the reassessment order on the ground that the Assessing Officer should have invoked section 69C read with section 115BBE when purchases recorded in the books were held to be bogus and disallowed under section 37(1) of the Income-tax Act, 1961.

Analysis: The reassessment was based on independent enquiries which led the Assessing Officer to conclude that purchases from the supplier were bogus and therefore disallow them as non-genuine expenses under section 37(1) of the Income-tax Act, 1961. Section 69C applies where an assessee has incurred expenditure and offers no explanation or an explanation not satisfactory to the Assessing Officer about the source of such expenditure; it operates to deem unexplained expenditure as income and precludes deduction. The Principal Commissioner alleged that section 69C and section 115BBE ought to have been invoked, but did not establish that the assessee had failed to explain the source of the recorded purchases. Coordinated decisions of the Tribunal distinguish disallowance of expenses found to be not genuine (disallowance under section 37(1)) from taxation of unexplained expenditure under section 69C, and have held that mere doubt about genuineness of recorded transactions does not convert them into unexplained expenditure for invoking section 69C or the special rate provisions. The revisional power under section 263 requires demonstration that the assessment order is erroneous and prejudicial to the revenue; here the Assessing Officer had applied a permissible view by disallowing purchases as bogus after enquiries, and the Principal Commissioner did not point to any deficiency showing the assessment to be erroneous for failing to invoke section 69C.

Conclusion: The reassessment order is not erroneous or prejudicial to the revenue for the reasons stated by the Principal Commissioner; the revision order under section 263 is quashed and set aside. Decision in favour of the assessee.

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