Pranav B Prem

The Mumbai Bench of the Income Tax Appellate Tribunal has struck down a reassessment resulting in an addition of ₹2.70 crore against Kalpataru Projects International Ltd., holding that purchases cannot be treated as bogus merely on the basis of statements of employees recorded years after the transactions, in the absence of any incriminating material unearthed during a search. The Tribunal emphasised that where no adverse material is found in the course of search proceedings, disallowance of genuine business expenditure under Section 37(1) of the Income Tax Act, 1961, is legally unsustainable.

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The appeal was decided by a Bench comprising Om Prakash Kant, Accountant Member, and Sandeep Singh Karhail, Judicial Member. The Tribunal observed that “it is evident that no incriminating material was brought on record by the Revenue to prove that the purchase transaction by JMC with the afore-noted five impugned vendors was nongenuine and bogus.”

The case arose out of a search conducted on the Kalpataru Group on 4 August 2023. Pursuant to the search, reassessment proceedings were initiated in the case of Kalpataru Projects International Ltd. in respect of purchases aggregating to ₹2.70 crore made by JMC Projects (India) Ltd. between Assessment Years 2013–14 and 2017–18. JMC Projects, a subsidiary of Kalpataru, subsequently merged with Kalpataru with effect from 1 April 2022.

During the reassessment proceedings, the Assessing Officer relied primarily on statements of certain employees recorded during the search and a field inspection report indicating that some of the vendors from whom purchases were made were not traceable at their registered addresses. On this basis, the Assessing Officer treated the entire purchase amount as non-genuine and disallowed ₹2.70 crore under Section 37(1) of the Act, adding it back to the income of the assessee.

Challenging the addition, Kalpataru submitted that the search did not yield a single document or piece of incriminating evidence to suggest that the purchases were bogus. It was argued that the employee statements relied upon by the Revenue were recorded nearly ten years after the transactions and from individuals who either joined the company much later or were never associated with procurement functions during the relevant period. The assessee also pointed out that the purchases were directly linked to execution of actual construction and infrastructure projects undertaken by JMC Projects, the revenues from which had already been accepted by the tax department without dispute.

The Commissioner of Income Tax (Appeals) substantially accepted the assessee’s factual submissions. He recorded that the employee statements merely reflected lack of familiarity with old vendors and that the field inspection had been conducted several years after the relevant transactions. However, despite these findings, the appellate authority sustained 12.5% of the disallowance on an ad hoc basis, stating that such retention was necessary to “plug the leakage of revenue.”

The Tribunal did not approve of this approach. It noted that the search had been conducted almost a decade after the assessment years in question and that none of the statements relied upon by the Revenue established that the purchases were sham or fictitious. The Tribunal observed that in the case of a large organisation employing more than 8,000 persons across multiple divisions, it would be unreasonable to expect employees to recall details of vendors involved in transactions carried out many years earlier.

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Rejecting reliance on the field inspection report, the Tribunal held that the mere fact that certain vendors were not found at their registered addresses long after the transactions could not, by itself, disprove the genuineness of purchases made in the past. The Tribunal further criticised the appellate authority for sustaining an ad hoc disallowance despite having recorded detailed findings in favour of the assessee. It held that once purchases are linked to genuine business activity and no incriminating material is found during the search, even partial disallowance under Section 37(1) is impermissible in law.  Accordingly, the Tribunal deleted the entire addition of ₹2.70 crore made for Assessment Year 2013–14. Extending the same reasoning, it granted identical relief for Assessment Years 2014–15, 2015–16 and 2017–18 as well, thereby quashing the reassessment in its entirety.

Appearance

For Appellant: Vijay Mehta and Tarang Mehta

For Respondent: Ritesh Misra

Cause Title: Kalpataru Projects International Ltd v. Deputy Commissioner of Income Tax

Case Number: ITA No.5962/MUM/2025

Coram: Om Prakash Kant, Accountant Member, and Sandeep Singh Karhail, Judicial Member