Mitesh Shah Vs ITO (ITAT Ahmedabad Bench)
Bogus Purchase Is Not Unexplained Expenditure: Ahmedabad ITAT Quashes Section 263 Attempt to Trigger 60% Tax u/s 115BBE
Summary: The assessee, Mitesh Shah, filed his return declaring total income of ₹17,23,300. Based on information alleging bogus purchases of ₹40,80,71,780, the assessment was reopened. The AO examined the transactions & concluded that the assessee was a beneficiary of accommodation entries relating to bogus purchases.
The AO disallowed the entire amount of ₹40.80 crore u/s 37 & determined total income at ₹40,97,95,080. The assessee challenged the addition before the CIT(A), where the quantum appeal remained pending.
Subsequently, the PCIT invoked revisionary jurisdiction u/s 263. According to the PCIT, the AO had applied an incorrect provision. The alleged bogus purchases should have been treated as unexplained expenditure u/s 69C instead of being disallowed u/s 37. Such recharacterisation would attract the higher tax rate of 60% u/s 115BBE.
The PCIT held that the assessment order was erroneous & prejudicial to the interests of the Revenue, set it aside & directed the AO to pass a fresh assessment order. The assessee challenged the revision before the Tribunal.
Issue before the Tribunal
The principal issue was whether the PCIT could invoke section 263 merely because he preferred section 69C r.w.s. 115BBE over section 37, even though the AO had examined the alleged bogus purchases & disallowed the entire amount.
The Tribunal also considered whether section 69C applies where purchases are alleged to be fictitious, as opposed to expenditure actually incurred from an unexplained source.
A further jurisdictional issue was whether revision u/s 263 could be exercised on the same bogus-purchase issue when the assessee’s appeal against the assessment was already pending before the CIT(A).
Assessee’s submissions
The assessee contended that the purchases were recorded in the regular books & payments were made through banking channels. Although certain documents could not be furnished because they had been seized by the CGST Department during a raid on 9 January 2019, the assessee had submitted bank statements, cash-book summaries & the purchase ledger relating to ferrous & non-ferrous metals purchased from Bright Corporation.
The AO had examined these details before treating the purchases as bogus & disallowing them u/s 37. Therefore, the assessment order was not passed without enquiry or verification.
The assessee argued that section 69C applies only where expenditure has actually been incurred but its source remains unexplained. In the case of an alleged bogus purchase, the Department’s case is that no genuine expenditure was incurred at all. Therefore, section 37 was the appropriate provision for disallowing the claim.
It was further submitted that the PCIT could not revise the same issue because the quantum addition was already pending before the CIT(A).
Revenue’s contentions
The Revenue supported the revision order. According to the PCIT, the AO failed to properly examine the legal character of the addition. Since the alleged purchase transactions remained unexplained, the amount ought to have been assessed u/s 69C & subjected to section 115BBE.
The Revenue contended that application of section 37 resulted in loss of tax because income falling u/s 69C attracts the special rate prescribed u/s 115BBE. Therefore, the assessment order was both erroneous & prejudicial to the Revenue.
Tribunal’s findings & legal reasoning
Relying upon Malabar Industrial Co. Ltd. v. CIT, the Tribunal reiterated that section 263 requires two cumulative conditions: the assessment order must be erroneous as well as prejudicial to the interests of the Revenue. If either condition is absent, revision cannot be sustained.
The Tribunal found that the AO had conducted necessary enquiry. He considered the available bank statements, cash-book summary & purchase ledger before disallowing the entire amount. The PCIT did not dispute the quantum of disallowance; his objection concerned only the statutory provision applied.
The Tribunal drew a clear distinction between sections 37 & 69C. Section 69C applies where expenditure is actually incurred but the source of such expenditure is unexplained. Bogus expenditure, on the other hand, represents a claim where no real expenditure is considered to have been incurred. Such a claim falls within section 37, dealing with allowability of business expenditure.
The Tribunal relied upon Arvind Kumar v. PCIT, where it was held that when purchases are recorded in the books & payments are made through banking channels, the source of expenditure stands explained. A dispute concerning genuineness of the purchase claim cannot automatically be converted into unexplained expenditure u/s 69C merely to attract section 115BBE.
The AO had therefore adopted a plausible & legally permissible view. Where two views are possible, the PCIT cannot substitute his preferred view through section 263 merely because it produces a higher tax consequence.
The Tribunal also invoked Explanation 1(c) to section 263. Since the bogus-purchase addition was already pending before the CIT(A), the PCIT could not revise the assessment on the same issue. Pendency of the quantum appeal operated as a jurisdictional bar.
Accordingly, the Tribunal quashed the revision order & restored the original assessment order dated 26 March 2024.
Practical implications
The ruling establishes that section 69C cannot be mechanically invoked for every alleged bogus purchase. The Revenue must distinguish between non-genuine expenditure & genuine expenditure incurred from an unexplained source.
It also prevents section 263 from being used merely to replace section 37 with section 69C for attracting the higher rate u/s 115BBE. If the AO has made enquiries & adopted a sustainable view, revision is impermissible.
Importantly, the Tribunal has not deleted the underlying ₹40.80 crore addition; that issue remains pending before the CIT(A). The decision only quashes the PCIT’s attempt to recharacterise it. The central principle is that section 263 cannot become a tool for converting a debatable classification into a 60% tax liability.
Cases Discussed
- Malabar Industrial Co. Ltd. Vs CIT — 243 ITR 83 (SC), on the twin conditions for section 263 revision.
- Arvind Kumar Vs PCIT — [2025] 178 taxmann.com 351 (Delhi-Trib.), on section 37 versus section 69C for alleged non-genuine purchases.
- CIT Vs Kwality Steel Suppliers Complex — (2017) 395 ITR 1 (SC), on revision where the AO has adopted a plausible view.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, AHMEDABAD
The assessee has filed the appeal against the order dated 18-03-2026 passed by Principal Commissioner of Income Tax-1, Ahmedabad (in short, referred to as the PCIT) u/s. 263 of the Income Tax Act, 1961 (herein referred to as “the Act”) relating to Assessment Year 2019-20.
2. Brief facts of the case are that assessee filed its return of income admitting total income of Rs. 17,23,300/-. Consequent to receipt of information which indicated that assessee had made bogus purchase to the tune of Rs. 40,80,71,780/-, the re-opened assessment was completed determining the total assessed income at Rs. 40,97,95,080/- by disallowing bogus purchase for accommodation entry of Rs. 40,80,71,780/- u/s. 37 of the Act. Assessee is in appeal before CIT(A) on this issue.
3. Subsequently, PCIT passed the revision order u/s. 263 of the Act dated 18-03-2026 holding that AO had failed to make proper examination of the issues and made error in the assessment order which had resulted in loss of revenue. According to the PCIT, the addition should have been made u/s. 69C r.w.s. 115BBE of the Act and assessee is liable to tax at 60%. Consequently, he directed the AO to pass fresh assessment order in the light of the directions given in the order.
4. Aggrieved by the revision order, the assessee is in appeal with the following grounds of appeal:-
“1. That the Learned PCIT, Ahmedabad-1 has erred in law and facts by invoking proceedings under section 263 of the Income Tax Act, 1961 and therefore the Order passed by Ld. PCIT, Ahmedabad-1 u/s 263 is required to be quashed.
2. That the learned PCIT, Ahmedabad-1, has erred in law and facts by invoking section 263 of the Income Tax Act, 1961 and set-aside the assessment order passed by the ld.AO u/s 147 rws 144B of the Act, on the ground that addition made of purchase remains unexplained and is to be added u/s 69C as unexplained expenditure and tax under section 115BBE of the Act, though it is genuine purchase and duly accounted for in the books of accounts and therefore, the order passed u/s 263 is liable to be quashed.
3. That your appellant craves a leave to add, alter OR amend any grounds at the time of hearing.”
5. The short issue for consideration is whether Ld. PCIT was justified in assuming revisionary jurisdiction u/s. 263 of the Act on the ground that the A.O. ought to have invoked section 69C r.w.s. 115BBE of the Act instead of disallowing the amount u/s. 37 of the Act. It is a settled position of law, as laid down by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83, that for invoking section 263, two conditions must be satisfied cumulatively, namely, the order of the Assessing Officer must be erroneous and it must also be prejudicial to the interests of the revenue. If either of these conditions is absent, then assumption of jurisdiction under section 263 is not sustainable in law. It is not meant to allow CIT to act as an appellate authority and substitute his own view when the view of AO is legally tenable.
6. In the present case, it is undisputed fact that the A.O. examined the issue of alleged bogus purchase to the tune of Rs. 40,80,71,780/- during the reopened assessment proceedings and disallowed the entire amount of bogus purchase. The PCIT has not disputed the quantum of disallowance made by A.O. The only basis for invoking section 263 is that, according to PCIT, the disallowance should have been made u/s. 69C r.w.s. 115BBE of the Act instead of section 37 of the Act.
7. At this stage, it is necessary to examine the scope and applicability of section 69C of the Act. Section 69C applies to cases where an expenditure is actually incurred from unexplained sources. On the other hand, bogus expenses represent no real expenditure at all and therefore fall outside scope of section 69C. The provision is a deeming fiction meant to bring to tax expenditure incurred from unexplained sources. Section 37(1) deals with allowability of business expenditure and empowers Assessing Officer to disallow expenditure which is found to be not genuine or not incurred wholly and exclusively for the purposes of business.
8. Even though assessee could not submit certain details called for by A.O., as the said documents were seized by CGST Department during raid conducted by it on 09-01-2019, yet, assessee submitted bank account statement, summary of cash book, details of ledger of purchase of Ferrous and Non-Ferrous metal from M/s. Bright Corporation. AO after due examination of details submitted, held that assessee as a beneficiary of such bogus purchase transaction and the impugned amount was disallowed u/s. 37 of the Act as the bogus transaction remained unexplained and unsubstantiated. It is obvious from record that AO had caused necessary inquiry or verification on this issue.
9. In Arvind Kumar v. PCIT [2025] 178 taxmann.com 351 (Delhi-Trib.), the Tribunal addressed the limited but important controversy whether disallowance of allegedly non-genuine purchases should fall under section 37(1) or be re-characterised as unexplained expenditure under section 69C so as to attract section 115BBE. The assessee’s case was reopened on the allegation of purchases from a non-genuine entity, during which the Assessing Officer carried out detailed enquiries including examination of audited books, bank statements, purchase bills, physical verification of the supplier and recording of statements, and thereafter disallowed 100% of the expenditure holding it to be not genuine under section 37(1). The Principal Commissioner sought to revise the assessment under section 263 on the ground that the addition ought to have been made under section 69C and taxed at the higher rate prescribed under section 115BBE. The Tribunal rejected this approach, holding that section 37 is the appropriate provision where the nature of expense (purchases) and the source of expense (bank payments) are not in dispute and the only doubt relates to the genuineness of the claim, whereas section 69C applies only where the source of expenditure itself remains unexplained. It was further held that the Assessing Officer had taken a plausible and legally sustainable view after conducting adequate enquiry, and the PCIT could not substitute his own view merely because he preferred a different charging provision.
10. The matter of impugned addition is in appeal before the CIT(A). As per clause (c) of explanation 1 to section 263, if an appeal is pending before CIT(A) on a particular issue, the PCIT cannot validly exercise revision order on the same issue when the appeal is pending i.e. pendency of an appeal on a given issue (alleged bogus purchase) operates as a jurisdictional bar to section 263 proceedings on that issue.
11. It is well settled that where two views are possible and the Assessing Officer has adopted one of the plausible views, the order cannot be branded as erroneous merely because Principal Commissioner prefers another view. This principle has been reiterated by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. (supra) and CIT vs. Kwality Steel Suppliers Complex v. CIT (2017) 395 ITR 1 (SC).
12. In view of the foregoing discussion, we hold that the Assessing Officer, after examining the issue of alleged bogus purchases during the reassessment proceedings, has taken a legally permissible and plausible view by disallowing the entire amount of 40,80,71,780/- under section 37 of the Act. The purchases had been recorded in the regular books of account and the payments had been made through banking channels, thereby explaining the source of expenditure, and that the mere fact that the learned Principal Commissioner was of the opinion that section 69C read with section 115BBE ought to have been invoked does not render the assessment order erroneous or prejudicial to the interests of the revenue within the meaning of section 263 of the Act. Rather, the impugned revisionary action represents an impermissible substitution of the Principal Commissioner’s view for that of the Assessing Officer on a debatable issue of law, which is not sanctioned under section 263.
13. Accordingly, the impugned order passed by the learned Principal Commissioner under section 263 of the Act is set aside and the assessment order dated 26.03.2024 is restored.
14. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 25-08-2026
