ITAT Mumbai, December 24, 2025 : The Mumbai Bench of the Income Tax Appellate Tribunal has struck down a reassessment that resulted in an addition of ₹2.70 crore against Kalpataru Projects International Ltd, holding that purchases cannot be branded as bogus merely on the basis of employee statements recorded years after the transactions, especially when no incriminating material is found during a search.
The ruling came in a batch of appeals concerning Assessment Years 2013–14, 2014–15, 2015–16 and 2017–18. The Bench, comprising Om Prakash Kant, Accountant Member, and Sandeep Singh Karhail, Judicial Member, made it clear that disallowance of business expenditure under Section 37(1) of the Income Tax Act, 1961 cannot survive in the absence of adverse material unearthed during search proceedings.
The dispute arose from a search conducted on the Kalpataru Group on 4 August 2023. Following the search, reassessment proceedings were initiated in respect of purchases aggregating to ₹2.70 crore made by JMC Projects (India) Ltd during the relevant years. JMC Projects, which later merged with Kalpataru Projects International Ltd with effect from 1 April 2022, had undertaken several large construction and infrastructure projects during the period in question.
During reassessment, the Assessing Officer relied primarily on statements of certain employees recorded at the time of the search and a field inspection report which suggested that some vendors were not traceable at their registered addresses. On this basis, the entire purchase amount was treated as non-genuine and disallowed under Section 37(1).
Kalpataru challenged the addition, arguing that the search had not yielded a single incriminating document to suggest that the purchases were fictitious. It was pointed out that the employee statements were recorded nearly a decade after the transactions and from individuals who either joined the organisation much later or were not associated with procurement during the relevant period. The company also emphasised that the purchases were directly linked to execution of real projects, the revenues from which had already been accepted by the tax department without dispute.
The Commissioner of Income Tax (Appeals) largely agreed with the assessee’s factual submissions, noting that the employee statements only reflected lack of familiarity with old vendors and that the field enquiry had been conducted many years after the transactions. Despite these findings, the appellate authority sustained a 12.5 percent disallowance on an ad hoc basis, stating that it was necessary to “plug the leakage of revenue”.
The Tribunal firmly rejected this approach. It observed that the search was conducted almost ten years after the assessment years involved and that none of the statements relied upon by the Revenue established that the purchases were sham or fictitious. The Bench noted that in a large organisation employing more than 8,000 people across multiple divisions, it would be unreasonable to expect employees to recall vendor details from transactions carried out many years earlier.
The Tribunal also dismissed reliance on the field inspection report, holding that the mere fact that certain vendors were not found at their registered addresses long after the transactions could not, by itself, negate the genuineness of past purchases. Criticising the appellate authority, the Bench held that once it was accepted that purchases were linked to genuine business activity and no incriminating material was found during the search, even partial disallowance under Section 37(1) was impermissible in law.
Accordingly, the Tribunal deleted the entire addition of ₹2.70 crore for Assessment Year 2013–14. Applying the same reasoning, it granted identical relief for Assessment Years 2014–15, 2015–16 and 2017–18, effectively quashing the reassessment proceedings in their entirety. The appeals filed by Kalpataru were allowed, while the Revenue’s appeal for Assessment Year 2013–14 was dismissed.
The decision reinforces the principle that reassessment based on search proceedings must be supported by tangible incriminating material, and that retrospective suspicion, unsupported by evidence, cannot justify disallowance of genuine business expenditure.
Case Reference : Appearance: For the Appellant, Vijay Mehta and Tarang Mehta; for the Respondent, Ritesh Misra | Cause Title: Kalpataru Projects International Ltd v. Deputy Commissioner of Income Tax | Case No.: ITA No. 5962/MUM/2025 | Coram: Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member)
