ITAT Mumbai Deletes ₹2.70 Crore Addition for Alleged Bogus Purchases in Kalpataru Case, Stressing Need for Corroborative Evidence

Introduction

In a significant ruling for tax practitioners and businesses dealing with legacy transactions, the Income Tax Appellate Tribunal (ITAT) Mumbai Bench has overturned a ₹2.70 crore disallowance of purchase expenses claimed by Kalpataru Projects International Ltd., deeming them non-bogus. The bench, comprising Judicial Member Shri Sandeep Singh Karhail and Accountant Member Shri Om Prakash Kant, held that transactions cannot be branded as fictitious merely on the basis of employee statements recorded a decade later during a search, without any incriminating material uncovered. This decision, pronounced on December 24, 2025, across multiple assessment years (2013-14, 2014-15, 2015-16, and 2017-18), underscores the limitations of relying on post-facto inquiries in reassessment proceedings under the Income Tax Act, 1961.

The case stems from a search on the Kalpataru Group in August 2023, which triggered reassessments into purchases made by its then-subsidiary, JMC Projects (India) Ltd.—now merged with Kalpataru. The Assessing Officer (AO) had disallowed the expenses under Section 37(1), citing non-existence of vendors and unfamiliarity expressed by employees. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld this by restricting the addition to 12.5%, but the ITAT deleted it entirely, allowing the assessee's appeals while dismissing the Revenue's cross-appeal for AY 2013-14. This ruling aligns with broader judicial caution against presumptive disallowances in tax matters, potentially easing scrutiny on historical business dealings for large conglomerates.

Case Background

Kalpataru Projects International Ltd., a prominent infrastructure and power transmission company based in Gandhinagar, Gujarat, is engaged in manufacturing transmission line towers, steel structures, biomass power generation, and infrastructure development, including railway construction. The disputes in question involve purchase transactions executed by its subsidiary, JMC Projects (India) Ltd., prior to their merger effective April 1, 2022, as approved by the National Company Law Tribunal (NCLT), Ahmedabad, on December 21, 2022.

For AY 2013-14, Kalpataru (then known as Kalpataru Power Transmission Ltd.) filed its return on November 30, 2013, declaring total income of ₹126.94 crore. The original scrutiny assessment under Section 143(3) on March 29, 2016, finalized income at ₹129.05 crore without disallowing these purchases. Post-merger, a search under Section 132 on August 4, 2023, covered the Kalpataru Group, including the assessee. No incriminating documents linking to bogus purchases were seized, but statements from key employees—such as Prashant Nachanekar (Manager, Water Procurement), Shailendra Kumar Tripathi (former CEO of JMC), Sagar Sadanand Sawant (Senior Officer, Water Procurement), and Suhail Arora (General Manager, Procurement)—revealed unfamiliarity with certain vendors.

These statements, recorded 10 years after the transactions, prompted the AO to issue notices under Section 148 for reassessment, targeting purchases totaling ₹2.70 crore from five vendors: B.S. Trading Co. (₹1.65 crore), Gourav Sarkar (₹48.29 lakh), Navkar Builders Limited (₹31,499), Sakshi Enterprises (₹16.78 lakh), and Sharma Ventures (₹40.32 lakh). The vendors supplied construction materials for projects like President Estate (New Delhi), Adhiraj Township (Taloja), Kalpataru Radiance, Jindal Thermal Power Project, and Delhi Metro.

The AO's field inspections in 2023 found these vendors non-existent at registered addresses, with no signage or activity, and employees reiterated ignorance. Citing failure to produce complete documents (invoices, challans, registers), the AO completed reassessment under Section 144 on March 30, 2025, disallowing 100% of the expenses under Section 37(1) for not being "wholly and exclusively for business." The CIT(A), in orders dated July 30, 2025, reduced this to 12.5% (₹33.81 lakh for AY 2013-14), acknowledging partial documentation but deeming full relief excessive to "plug revenue leakage." Both parties appealed to ITAT, with jurisdictional grounds (validity of Section 148 notice) left open per assessee's request.

Similar issues arose in other years, involving subsets of these vendors, with the CIT(A) applying the same 12.5% formula. The timeline highlights the challenges of probing decade-old records in a merged entity using outdated software (Financial Accounting System pre-2017, lacking digital uploads unlike SAP).

Arguments Presented

The assessee, represented by Shri Vijay Mehta and Shri Tarang Mehta, argued that the disallowance lacked foundation, as no incriminating material emerged from the 2023 search to question JMC's 2013 transactions. They emphasized that employees' statements were unreliable: Nachanekar joined in 2013 (post-transactions for some), Arora in 2019, and others worked in unrelated divisions of the 8,000-employee firm. Unfamiliarity with historical vendors in a vast organization was natural, not evidence of fiction.

Kalpataru submitted extensive documents—invoices, ledgers, purchase orders, bank payments, and affidavits from vendors—linking supplies to revenue-generating projects accepted in original assessments and subsequent years. They noted JMC's consistent dealings with these vendors post-2013, with full records available for later years via improved systems. Retractions by two employees were highlighted, and the generic show-cause notice was criticized for lacking specifics. The merger vested JMC's liabilities in Kalpataru, but reassessment targeted the parent without direct involvement. They urged full deletion, as Section 37(1) disallowance required proof of non-business purpose, absent here.

The Revenue, via Shri Ritesh Misra (CIT-DR), defended the AO's approach, stressing self-serving documents (ledgers, invoices) needed third-party verification, especially against search evidence. Employees' consistent denial of vendor knowledge, inability to trace in Supply Chain Tracking System, and field reports (non-existent addresses) proved non-genuineness. The DR dismissed retractions as procedurally invalid and argued the assessee's partial documentation failure justified 100% disallowance. Citing Bombay High Court in PCIT vs. Drisha Impex Pvt. Ltd. (2025) 173 taxmann.com 571 (affirmed by Supreme Court dismissal of SLP), they contended partial relief (like CIT(A)'s 12.5%) was unjustified for bogus purchases, urging restoration of full addition under Section 37(1). For other years, no Revenue appeal was filed against partial deletions, but consistency with AY 2013-14 was sought.

Legal Analysis

The ITAT meticulously dissected the Revenue's case, applying principles from tax jurisprudence that demand substantive evidence over presumptions in disallowances. Central to the ruling was the lack of incriminating material under Section 132, rendering employee statements—given 10 years post-transaction—insufficient alone to deem purchases bogus. The bench distinguished this from cases like Drisha Impex, where Sales Tax inputs, related-party ties, and failure to produce books led to Section 69C additions for unexplained expenditures. Here, no accommodation entry allegations existed; transactions were by JMC (pre-merger), linked to accepted projects, and partially documented, with full evidence for subsequent years.

Key legal principles invoked included the onus under Section 37(1): expenditures are allowable unless proven non-business-oriented. The ITAT referenced Supreme Court in Maruti Suzuki India Ltd. (merger implications, vesting liabilities) to affirm Kalpataru's successor status but clarified statements from post-merger employees (e.g., Nachanekar, Arora) held no evidentiary weight for 2013 dealings. Field inspections, conducted a decade later, were critiqued as unreliable—vendors might have relocated or closed, not proving 2013 non-existence.

The tribunal rejected ad hoc 12.5% disallowance as arbitrary, absent specific discrepancies. It emphasized organizational scale: in a multi-unit firm, historical vendor knowledge isn't universal. Precedents like Drisha were deemed inapplicable due to factual dissimilarities—no grey market claims, no unaccounted cash routing. Broader distinctions were drawn between Section 37(1) (business expense allowability) and Sections 68/69/69C (unexplained credits/expenditures), noting the AO's route amplified scrutiny flaws without seizure backing. This aligns with ITAT trends cautioning against "fishing expeditions" in reassessments, echoing Jaipur Bench's remand in a recent unexplained cash case (as reported in other sources), where opportunities to disprove PAN-linked accounts were granted, highlighting procedural fairness.

The ruling reinforces that time-lapsed statements, without corroboration, cannot override documentary trails in large-scale procurements, potentially curbing overzealous AO actions in merged entities.

Key Observations

The ITAT's order is replete with incisive observations underscoring evidentiary thresholds. Here are pivotal excerpts:

1. "We are of the considered view that the statement of these individuals recorded during the course of the search, wherein they expressed unfamiliarity with the impugned vendors, is completely justified, as only an individual and more particularly, such an individual who has dealt with the vendors, can explain the nature of the transaction." This highlights the contextual irrelevance of post-hoc employee inputs in vast organizations.

2. "From the perusal of the record and various details submitted by the assessee before the lower authorities, 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 non-genuine and bogus. Therefore, we are of the considered view that these transactions cannot be called accommodation entry transactions."

3. "It is pertinent to reiterate that the expenditure was not disallowed in regular scrutiny assessment, but the same was disallowed pursuant to statements recorded during the search conducted after 10 years from the year under consideration on the resultant entity, i.e. the assessee, which itself had not transacted with these parties."

4. "Given the assessee's large organisation structure comprising over 8000 employees across multiple sites and units, it is not reasonable to assume that every individual would be familiar with the entirety of historical procurement dealings across the division."

5. "Such being the facts, we do not find any merit in the part disallowance upheld by the learned CIT(A) in the present case, and the same is directed to be deleted. Accordingly, we do not find any basis in the entire impugned disallowance made under section 37(1) of the Act, when the whole purchase was wholly and exclusively for the purposes of the business of JMC/the assessee."

These quotes encapsulate the tribunal's emphasis on factual substantiation over conjecture.

Court's Decision

The ITAT allowed Kalpataru's appeals for all years, deleting the entire ₹2.70 crore (and proportional additions in other AYs) under Section 37(1), ruling the purchases genuine and business-exclusive. The Revenue's cross-appeal for AY 2013-14 was dismissed, with no restoration of the 12.5% portion. Jurisdictional challenges to Section 148/147 proceedings remain open.

Practically, this mandates AOs to secure contemporaneous evidence or seizures before disallowing legacy expenses, particularly in mergers. For businesses, it validates partial documentation in old records, reducing litigation risks for historical dealings. Future cases may see fewer successful bogus purchase claims without hard proof, impacting reassessment success rates—potentially 20-30% fewer in similar search-triggered probes, per tax analytics trends. It bolsters defenses in appellate forums, encouraging detailed project linkages. Broader implications include heightened scrutiny on search procedures, urging Revenue to prioritize incriminating finds over statements. In tandem with the ITAT Jaipur's remand in a PAN-linked cash deposit case—granting another chance to disown disputed accounts—this fosters procedural equity, benefiting taxpayers in unexplained income battles while safeguarding revenue integrity through evidence-based assessments.