Issue Involved

Whether disallowance u/s. 37 is tenable where AO has not doubted the nature and source of purchases expenditure and addition is made solely on the basis of genuineness of expenditure?

Facts of the Case

The assessee’s case was reopened u/s 148 on the basis of the allegation that the assessee had claimed purchases from a certain entity which was not a genuine entity. During the course of scrutiny assessment proceedings, the assessee furnished audited books of account, ledger accounts, purchase bills, bank statement and certificate from the auditor.

The Assessing Officer also conducted physical verification from supplier and collected statement from the controller of the entity. Finally, the Assessing Officer held the expenses claimed by the assessee to be not genuine and disallowed the same under section 37. Assuming jurisdiction conferred upon by provisions of section 263, the PCIT issued a show cause notice to the assessee stating that the disallowance was to be made under section 69C and not section 37 and higher rate of 60 per cent as per section 115BBE was applicable instead of normal rates and thus the assessment order was prejudicial to the interest of the revenue.

Arguments of the Appellant (Assessee)

1. The Ld. Counsel of the assessee argued that the assessment order was not erroneous as the AO has taken a possible view and conducted adequate enquiry. The Ld. AR further contended that there is no mandate in law that all the disallowance of business expense is to be made u/s 69C only.
2. AO also conducted physical verification from supplier and collected statement from controller of entity and held expenses claimed by assessee to be not genuine and disallowed same under section 37(1).
3. Disallowance made by the AO u/s 37 is tenable and no addition is made u/s 69C where the AO has not doubled the nature and source of the expenditure incurred, thus higher rate of 60% as per Section 115BBE of the Act is not applicable.

Arguments of the Respondent (Revenue)

PCIT initiated revision proceedings u/s 263 since the AO failed to conduct proper enquiry and the assessment order was not only erroneous but also prejudicial to the interest of the revenue and that the disallowance was to be made u/s 69C and not u/s 37 and higher rate of 60% was applicable normal rate of tax was incorrectly charged by the AO instead of special rate u/s 115BBE.

Decision of the Court

Section 37 is specific provision which disallows business expense when it is found to be not wholly and exclusively for business. In contrast, section 69C applies where the explanation of assessee regarding nature and source of expense was not satisfactory to AO. In this case, the nature of expense i.e. purchases and source of expense i.e bank payments are not doubted. Only doubt was regarding genuineness of expense and thus disallowance has been correctly made u/s 37 by AO.

The AO had, in re-assessment under section 143(3)/147 conducted physical verification from supplier, collected statement of alleged controller of supplier, considered reply of assessee and thereafter passed order disallowing expense u/s 37. Thus, observation of PCIT that there is lack of enquiry on the part of AO, is not justified.