Demystifying the Boundary Between Section 37 and Section 69C: ITAT Ahmedabad Quashes Revisional Action on Bogus Purchases

The intersection of business disallowances and unexplained expenditures has long been a fertile ground for litigation under the Income Tax Act 1961. Tax authorities frequently attempt to recharacterize routine disallowances of business expenses into unexplained expenditures to trigger punitive tax rates. A recent judicial pronouncement by the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, in the case of Mitesh Shah Vs ITO, provides critical clarity on this contentious issue.

The Tribunal unequivocally ruled that an alleged bogus purchase, which represents an expenditure not genuinely incurred, cannot be mechanically reclassified as an unexplained expenditure under Section 69C merely to attract the draconian 60% tax rate prescribed under Section 115BBE. Furthermore, the ITAT struck down the revisional jurisdiction invoked by the Principal Commissioner of Income Tax (PCIT) under Section 263, reinforcing the principle that a plausible view taken by an Assessing Officer (AO) cannot be substituted just because the revenue department prefers a higher tax yield.

This comprehensive analysis delves into the factual matrix, the statutory framework, the arguments presented, and the far-reaching implications of this landmark decision.

Factual Matrix of the Dispute

The dispute originated from the income tax return filed by the assessee for the Assessment Year (AY) 2019-20.

The Original Assessment and Reopening

For AY 2019-20, the assessee declared a total income of ₹17,23,300. Subsequently, the income tax department received specific intelligence suggesting that the assessee was the beneficiary of accommodation entries disguised as purchases. The alleged quantum of these fictitious transactions was a staggering ₹40,80,71,780.

Acting on this information, the department initiated reassessment proceedings under Section 147 read with Section 144B of the Income Tax Act 1961. During the scrutiny, the AO meticulously examined the nature of the transactions. Concluding that the purchases were indeed non-genuine accommodation entries, the AO disallowed the entire claim of ₹40,80,71,780.

Crucially, the AO categorized this disallowance under Section 37 of the Act, which governs the allowability of general business expenditures. Consequently, the total assessed income was re-determined at ₹40,97,95,080. Aggrieved by this massive quantum addition, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], which remained pending.

The Revisional Intervention by the PCIT

While the quantum appeal was pending, the PCIT reviewed the assessment records and invoked his revisional powers under Section 263. On 18-03-2026, the PCIT passed an order declaring the AO's assessment as both erroneous and prejudicial to the interests of the Revenue.

The PCIT's primary grievance was not the amount of the disallowance—which remained undisturbed at ₹40.80 crore—but the statutory provision applied by the AO. According to the PCIT, the AO committed a grave error by disallowing the amount under Section 37. The PCIT posited that since the purchase transactions were bogus and unexplained, the amount should have been brought to tax as unexplained expenditure under Section 69C.