Purchases cannot be Disallowed Merely on Employee Statements without Evidence: ITAT Deletes 12.5% Ad-Hoc Disallowance [Read Order]

The Mumbai Bench of Income Tax Appellant Tribunal (ITAT) deleted ad-hoc disallowance calculated at 12.5% of the total purchase value, holding that employee statements recorded a decade after the relevant assessment year, in absence of any additional supporting and incriminating evidence, is bad in law.

The cross-appeals arose against separate impugned orders of Commissioner of Income Tax (Appeals)-51, Mumbai [CIT(A)], passed under section 250 of the Income TaxAct, 1961 for the Assessment Years 2013-14, 2014-15, 2015-16 and 2017-18. The Assessee, Kalpataru Projects International Ltd., is engaged in manufacturing of power transmission line towers and steel structures, and biomass based power generation plant, among others.

In the Assessment Year 2013-2014, declared total income of ₹126,94,66,880/- with a profit booked under Section 115JB of the Income Tax Act, 1961 of ₹137,65,27,847/-. The assessment was selected for scrutiny, subsequently a search was conducted on the Kalpataru Group in August 2023. The case arose from allegations concerning bogus purchase transactions by a subsidiary company, JMC Projects (India) Ltd, now merged with the assessee.

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Based on certain employees’ statements, the Assessing Officer (AO) treated purchases from five vendors as non-genuine and disallowed the entire expenditure under Section 37 of the Income Tax Act, 1961. On the appeal, CIT(A) held as-hoc disallowance at the rate of 12.5% to “plug the leakage” of the revenue. Aggrieved by which, the assessee approached ITAT, with the Revenue.

Vijay Mehta and Tarang Mehta appearing for the appellant, argued that the statements relied upon are non-conclusive as the relevant assessment year was before they joined the organisation and the possibility of familiarity of business transactions among every employee is impractical. Further, documentary evidence such as ledger and invoice, etc. were submitted contrary to absence of incriminating evidence.

The Bench of Sandeep Singh Karhail, Judicial Member, and Om Prakash Kant, Accountant Member deleted the ad-hoc disallowance made under Section 37 of theIncome Tax Act, 1961, ruling that the employee statements recorded nearly after a decade of relevant assessment period coupled with their non-engagement in procurement cannot be the sole basis for treating purchases a bogus.

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The Tribunal accepted the argument of unfamiliarity, and noted that the assessee irrespective of being the parent company did not enter into any transaction-in-question. Further, observed that there was no incriminating material linking the assessee to accommodation entries or bogus purchases.

The ITAT ruled that the CIT(A) erred in disallowance expenditure in the light of identifiable vendors and documentary evidence, merely to plug revenue leakage was arbitrary and unsupported by law. Therefore, allowed the appeals by the assessee and dismissed the Revenue’s appeal.

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