ITAT Deletes Entire Disallowance on Alleged Non-Genuine Purchases of Merged Subsidiary:

ITAT Deletes Entire Disallowance on Alleged Non-Genuine Purchases of Merged Subsidiary Kalpataru Projects International Ltd. filed returns for AYs 2013-14, 2014-15, 2015-16 and 2017-18. The assessments were reopened pursuant to a search under Section 132 conducted on the Kalpataru Group. The reopening related to alleged non-genuine purchases made in AY 2013-14 by JMC Projects (India) Ltd., a subsidiary that later merged with the assessee w.e.f. 01.04.2022 pursuant to an NCLT order. The Assessing Officer, relying on statements of certain employees recorded during the 2023 search and on field inspection reports conducted a decade after the transactions, treated purchases aggregating to Rs. 2,70,49,440 from five vendors as non-genuine and disallowed the same under Section 37(1). The CIT(A) accepted that the purchases were linked to genuine projects and revenue but nevertheless sustained an ad hoc disallowance of 12.5% to “plug leakage of revenue.” Both the assessee and the revenue filed cross-appeals. Main Issue: Whether purchases made by the assessee’s erstwhile subsidiary before merger could be treated as non-genuine and disallowed under Section 37(1) solely based on post-search employee statements and delayed field inquiries, and whether any ad hoc disallowance was justified in the absence of incriminating material. Tribunal Decided: The ITAT Mumbai held that the entire disallowance under Section 37(1) was unsustainable. The Tribunal noted that the impugned purchases were made by JMC Projects (India) Ltd. long before its merger with the assessee, and the search took place nearly ten years later. Statements of employees who joined the assessee much after the relevant period, expressing unfamiliarity with vendors, could not form the basis to hold purchases as bogus. The Tribunal further held that no incriminating material was found during the search to establish that the transactions were accommodation entries or sham. Once the CIT(A) had recorded detailed findings that the purchases were linked to executed projects, supported by payments through banking channels, and accepted in later years, there was no justification for sustaining any ad hoc disallowance merely to “plug leakage of revenue.” The entire disallowance of Rs. 2,70,49,440 was directed to be deleted. Thus, the Revenue’s appeal was dismissed, and the assessee’s appeals for all assessment years were allowed on merits, with jurisdictional grounds kept open. To Read Full Judgment, Download PDF Given Below