The Delhi Bench of the Income Tax Appellate Tribunal has reaffirmed that the mere failure of the Assessing Officer to verify a business expense due to an incorrect address or the subsequent non-existence of a vendor does not justify disallowance under Section 37(1) of the Income Tax Act, if the assessee has produced credible documentary proof. This ruling provides critical clarity for businesses relying on third-party vendors and underscores the limits of the revenue’s verification powers.
Background & Facts
The Dispute
The appellant, Delhivery Freight Services Private Limited, claimed a business expenditure of Rs.70,64,178/- paid to M/s Vishal Cargo Careers under Section 37(1) of the Income Tax Act, 1961, for logistics and freight services rendered during Assessment Year 2023-24. The Assessing Officer (AO) disallowed this amount, alleging that the transaction was not genuine, as verification attempts at the address provided by the assessee failed.
Key Facts
- The payment of Rs.70,64,178/- was made via account payee cheques to M/s Vishal Cargo Careers on 12.03.2023
- The assessee submitted the following documents to substantiate the transaction:
- Copy of invoice dated 10.03.2023
- Bank statement showing payment via cheque
- TDS deduction certificate (Form 16A) issued by Vishal Cargo Careers
- KYC documents including PAN, GST registration, and address proof of the vendor
- Contractual agreement for logistics services
- The AO attempted verification at 54/3, 3rd Cross, Santosh Nagar, Pipe Line, T. Dasarahalli, Bangalore
- The address provided by the assessee in its return and documents was: 41, 8th Cross, Sanjeevini Nagar, Moodalpalya, Nagarbhavi, Bangalore
- The AO concluded the transaction was bogus because the vendor could not be located at the wrong address
- The Ld. CIT(A) upheld the disallowance, rejecting the KYC and TDS documents as insufficient without physical verification
- The assessee had no control over the vendor’s operational address changes or subsequent strike-off from ROC records
Procedural History
- 31.03.2023: Filing of return for AY 2023-24 claiming deduction of Rs.70,64,178/-
- 15.06.2024: Notice u/s 133(6) issued by AO to verify vendor’s address
- 20.07.2024: AO conducted verification at incorrect address in Dasarahalli, Bangalore
- 14.10.2025: Order u/s 250 passed by NFAC, Delhi disallowing Rs.70,64,178/-
- 15.12.2025: Appeal filed before CIT(A) against disallowance
- 28.02.2026: CIT(A) dismissed appeal, affirming disallowance
- 15.04.2026: Appeal filed before ITAT Delhi (ITA No.8792/DEL/2025)
- 01.07.2026: Hearing conducted
- 15.07.2026: Judgment pronounced
Relief Sought
The appellant sought deletion of the disallowance of Rs.70,64,178/-, restoration of the deduction under Section 37(1), and direction to the AO to accept the documentary evidence submitted.
The Legal Issue
The central question was whether the Assessing Officer can disallow a business expenditure under Section 37(1) solely on the ground that verification at the provided address failed, when the assessee has submitted credible documentary evidence including TDS certificates, bank records, and KYC details.
Arguments Presented
For the Appellant
The Ld. AR contended that the assessee had discharged its burden under Section 37(1) by producing complete documentary evidence: account payee cheques, invoices, TDS certificates, and vendor KYC. The AO’s verification at a wrong address was a procedural lapse, not a reflection of the transaction’s genuineness. Reliance was placed on Airovient Fans and Systems (P) Ltd. and the Calcutta High Court decisions in Ashok Surana v. CIT and PCIT v. Paharpur Cooling Towers Ltd., which held that the burden on the assessee to prove expenditure is not absolute and cannot be defeated merely because the vendor is untraceable at a later date or due to AO’s error in verification.
For the Respondent
The Ld. DR relied on the findings of the AO and CIT(A), arguing that the absence of physical verification and the inability to confirm the vendor’s existence rendered the transaction suspect. The revenue contended that the burden of proof lies entirely on the assessee and that documentary evidence alone, without corroboration through physical verification, is insufficient to establish genuineness.
The Court's Analysis
The Tribunal observed that the AO’s verification was conducted at a completely different address than the one furnished by the assessee. This error alone invalidated the basis of the disallowance. The Tribunal further noted that the CIT(A) failed to appreciate the legal principle that the assessee’s burden under Section 37(1) is to demonstrate that the expenditure was incurred wholly and exclusively for business purposes, not to guarantee the perpetual availability of the vendor.
"It is felt that even the Ld. CIT(A) has failed to appreciate that there are limits to the kind of evidences that any normal business entity would have with it to justify the expenditure incurred for earning business income."
The Tribunal relied on Ashok Surana v. CIT, which held that once appropriate evidence is adduced, the AO cannot arbitrarily disallow expenditure merely on the ground that the sum is not verifiable. It also cited PCIT v. Paharpur Cooling Towers Ltd., where the Calcutta High Court upheld the allowance of consultancy fees despite the vendor being struck off at the time of verification, because the transaction occurred during the relevant year and was supported by invoices, cheques, and service tax registration.
The Tribunal emphasized that the assessee had not merely submitted documents but had done so with meticulous care: payments were made via account payee cheques, TDS was deducted and deposited, and the vendor was GST-registered. The AO’s failure to verify at the correct address was a procedural default, not a failure of the assessee.
The Verdict
The appeal of the assessee is allowed. The disallowance of Rs.70,64,178/- under Section 37(1) is deleted. The AO is directed to allow the deduction in full, subject to verification of TDS credit in Form 26AS. The order dated 14.10.2025 of the NFAC and the order of the CIT(A) are set aside. The assessee’s return for AY 2023-24 is to be rectified accordingly within 45 days of the date of this order.
What This Means For Similar Cases
Documentary Evidence Can Overcome Verification Failures
- Practitioners must insist that disallowances under Section 37(1) cannot be sustained if the assessee has produced bank statements, invoices, TDS certificates, and vendor KYC
- AO’s verification at an incorrect address is a procedural flaw, not a ground for disallowance
- If the vendor’s address changes or the entity is later struck off, this cannot retroactively invalidate a transaction proven to have occurred during the relevant year
Burden on Assessee Has Reasonable Limits
- The assessee need not prove the continued existence or operational status of the vendor beyond the relevant assessment year
- Courts and Tribunals will not expect businesses to maintain proof of vendor viability for years after payment
- The principle from Ashok Surana now applies uniformly: once appropriate evidence is submitted, arbitrary disallowance on grounds of non-verifiability is illegal
Procedural Compliance by Tax Authorities Is Mandatory
- Assessing Officers must verify at the exact address provided in the return or documents
- Failure to do so renders any adverse order legally unsustainable
- Revenue authorities must distinguish between genuine verification failures and their own administrative errors
