The Delhi Bench of the Income Tax Appellate Tribunal has delivered a pivotal ruling clarifying the distinct legal boundaries between disallowance of bogus expenditures under Section 37(1) and taxation of unexplained expenditures under Section 69C of the Income Tax Act. This decision prevents the misuse of revisionary powers under Section 263 to impose higher tax rates under Section 115BBE without satisfying the statutory conditions for unexplained expenditure.
Background & Facts
The Dispute
The assessee, a proprietor of Avitex India, declared income of INR 5,12,820 in his return for Assessment Year 2018-19. The Assessing Officer (AO) reopened the assessment under Section 147 after alleging that purchases of INR 11,47,500 from M/s. Soni Textiles were bogus accommodation entries. The AO disallowed these purchases under Section 37(1), holding them as non-genuine business expenses, and assessed total income at INR 16,60,320.
Procedural History
- 18.10.2018: Assessee filed original return declaring income of INR 5,12,820
- 29.03.2022: Notice issued under Section 148 for reassessment
- 24.02.2023: AO passed reassessment order disallowing purchases under Section 37(1)
- 18.03.2025: Pr. CIT issued show cause notice under Section 263 seeking to set aside the reassessment order
- 27.03.2025: Pr. CIT passed order setting aside the AO’s order and directing invocation of Section 69C and Section 115BBE
- 27.11.2025: Hearing before ITAT Delhi
- 29.01.2026: Tribunal pronounced order
Relief Sought
The assessee sought quashing of the Pr. CIT’s revision order under Section 263, arguing that the AO’s disallowance under Section 37(1) was a plausible view and that Section 69C was inapplicable since the source of payment was not in dispute.
The Legal Issue
The central question was whether the Pr. CIT could invoke Section 69C and Section 115BBE under Section 263 revision proceedings when the AO had already disallowed the same expenditure as bogus under Section 37(1), without finding any unexplained source of funds.
Arguments Presented
For the Appellant
The assessee’s counsel argued that Section 69C applies only where the source of expenditure is unexplained, not where the transaction itself is found to be fictitious. The AO had not questioned the source of payment - cheques were drawn from the assessee’s account - and had merely held the counterparty as non-existent. Reliance was placed on Shashikant Bhavajjibhai Rajpara v. PCIT and Vijubha Jitubha Jadeja v. PCIT (both ITAT Rajkot), which held that Section 69C cannot substitute Section 37(1) disallowance. The revision order was thus ultra vires and prejudicial to the assessee’s rights.
For the Respondent
The Revenue contended that the purchases were unexplained expenditures since the counterparty was bogus, and therefore Section 69C was correctly invoked. It argued that Section 37(1) disallowance was inadequate to deter tax evasion and that Section 69C with its 60% tax rate under Section 115BBE was a more appropriate deterrent. The Pr. CIT’s action was framed as correcting an erroneous and prejudicial order.
The Court's Analysis
The Tribunal examined the statutory language of Section 69C, which mandates that the expenditure must be one for which the assessee offers no explanation about its source, or the explanation is unsatisfactory. The Court emphasized that Section 69C targets unexplained outflows, not fictitious transactions. In this case, the AO did not find the source of payment unexplained; rather, it found the counterparty non-existent. The payment was made via cheque from the assessee’s account, indicating traceable origin.
"The provisions of Section 69C are applicable where assessee incurred any expenditure for which he has failed to offer any Explanation or the Explanation given was not found satisfactory by the AO."
The Tribunal distinguished between two distinct legal categories: (1) disallowance of non-genuine expenses under Section 37(1), and (2) taxation of unexplained money under Section 69C. The former addresses the legitimacy of the transaction; the latter addresses the origin of funds. The Pr. CIT erred in conflating the two.
The Tribunal affirmed the reasoning of the Co-ordinate Bench in Shashikant Bhavajjibhai Rajpara, noting that invoking Section 69C where Section 37(1) applies is legally untenable. The revision order was therefore not only erroneous but also beyond the scope of Section 263, which permits correction of errors prejudicial to revenue - not substitution of one legal provision for another.
The Verdict
The assessee won. The Tribunal held that Section 69C cannot be invoked under Section 263 revision proceedings when the AO has already disallowed the expenditure as bogus under Section 37(1), provided the source of payment is not in question. The revision order was quashed, and the original assessment order was restored.
What This Means For Similar Cases
Disallowance Under Section 37(1) Is Not a Gateway to Section 69C
- Practitioners must argue that Section 69C requires a missing or unsatisfactory explanation of the source of funds, not merely a fake vendor
- Revenue authorities cannot use Section 263 to upgrade a Section 37(1) disallowance into a Section 69C addition to trigger Section 115BBE
- AO’s failure to question the source of payment precludes application of Section 69C, even if the counterparty is non-existent
Revisionary Powers Under Section 263 Are Not a Tool for Tax Enhancement
- Section 263 permits correction of errors that are erroneous and prejudicial to revenue - not re-assessment on new grounds
- Where the AO has taken a plausible view under a specific provision, revision cannot be used to substitute it with a harsher provision
- Practitioners should challenge revision orders that introduce new legal bases not raised or considered in the original assessment
Documentation of Payment Source Is Critical for Defense
- Maintain clear records of payment mode (cheque, bank transfer) to rebut allegations of unexplained expenditure
- If payments are traceable, argue that Section 69C is inapplicable regardless of vendor authenticity
- In appeals, cite Shashikant Bhavajjibhai Rajpara and Vijubha Jitubha Jadeja as binding precedents on Co-ordinate Benches
