When disallowance is made u/s 37(1) section 69C is not applicable – ITAT

When AO invoked provisions of section 37(1) to disallow purchases, provisions of section 69C of the Act are not applicable

In a recent judgment, ITAT Delhi has held that when AO did not raise any doubts about the source of such purchases but invoked the provisions of section 37(1) to disallow the purchases, the provisions of section 69C of the Act are not applicable.

ABCAUS Case Law Citation:
4896 (2025) (11) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the PCIT u/s 263 of the Income Tax Act, 1961 (the Act) holding the assessment order as erroneous and prejudicial to the interest of the Revenue in terms of Explanation 2 of section 263 and directed the AO to conduct fresh enquiries and passed the speaking order.

The case of the appellant assessee was reopened for the that assessee had made purchases from a creditor which was found to be a non-genuine entity.

Accordingly, based on the statements of the owner of the said creditor, the AO disallowed the purchases under section 37(1) of the Act treating purchases as not genuine in terms of the order passed u/s 147 r.w.s. 143(3) of the Act.

While the appeal of the assessee against the assessment order was pending, based on the audit objections that AO should have made the disallowance towards the bogus purchases u/s 69C of the Act and tax on such purchases should have been charged at the special rate as prescribed u/s 115BBE of the Act, the AO forward a proposal to the PCIT for initiation of proceedings u/s 263 of the Act.

The PCIT initiated proceedings u/s 263 and issued a show cause notice. Not convinced with the submissions of the assessee, the PCIT held the assessment order as erroneous and prejudicial to the interest of the Revenue and directed the AO to make enquiries and disallowed the purchases u/s 69C of the Act and charge tax at the special rates of tax as prescribed in section 115BBE of the Act.

Before the Tribunal, the assessee submitted that such purchases were duly recorded in the books of accounts maintained in regular course thus the immediate source of such purchases cannot be doubted solely for the reason that the supplier was found non-existent.

It was further submitted that provisions of section 69C of the Act can be invoked where the assessee has not been able to explain the source of the expenditure. That the provisions of section 69C cannot be invoked on the facts of the present case and, therefore, the assessment order was neither erroneous nor prejudicial to the interest of the Revenue.

To support his contentions, the assessee placed reliance on judgment of the Co-ordinate Bench of ITAT wherein the ITAT held that once the AO had disallowed the bogus expenditure u/s 37(1), the CIT(A) cannot direct to invoke the provisions of section 69C and further u/s 115BBE of the Act in the order passed u/s 263 of the Act. The assessee also placed on the reliance on the judgment of Hon’ble Punjab & Haryana High Court wherein it is held that on the basis of mere audit objection, the order of AO cannot be held as erroneous and prejudicial to the interest of Revenue.

The Tribunal observed that provisions of section 69C are applicable where assessee incurred any expenditure for which he has failed to offer any Explanation or the Explanation given was not found satisfactorily by the AO.

The Tribunal further observed that in the instant case, it was not the allegation of the AO that source of purchases was not explained rather the AO alleged the said party was bogus thus the purchases made from that party was not genuine and nowhere in the assessment order, AO raised any doubts about the source of such purchases. Therefore, he invoked the provisions of section 37(1) of the Act and disallowed the purchases made by the assessee. This being so, the provisions of section 69C of the Act were not applicable on the facts of the instant case.

The Tribunal opined that for disallowance of purchases claimed in the Profit & Loss account held as bogus, provisions of section 69C of the Act could not be invoked and, therefore, the assessment order was neither erroneous nor prejudicial to the interest of revenue for not invoking the provisions of section 69C r.w.s. 115BBE of the Act. Accordingly, the Tribunal we quashed the revisionary order passed by PCIT u/s 263 of the Act.

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