ITAT Mumbai Strikes Down ₹2.70-Crore Reassessment Against Kalpataru Based On Employee Statements

The Mumbai Bench of the Income Tax Appellate Tribunal has deleted a Rs 2.70-crore income tax addition made against Kalpataru Projects International Ltd, holding that purchases cannot be treated as bogus only on the basis of employee statements recorded years later, without any incriminating material being found in a search.

The bench, comprising Accountant Member Om Prakash Kant and Judicial Member Sandeep Singh Karhail, said that “ 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 nongenuine and bogus.”

The reassessment was initiated against Kalpataru Projects after a search carried out on the Kalpataru Group on August 4, 2023. During the search, the tax department questioned purchases aggregating Rs 2.70 crore made between 2013 and 2017 by JMC Projects (India) Ltd, a subsidiary that later merged with Kalpataru with effect from April 1, 2022

Relying mainly on statements of certain employees recorded during the search and a field inspection report stating that some vendors were not traceable at their registered addresses, the Assessing Officer disallowed the entire purchase amount under Section 37(1) and added it back to Kalpataru's income

Kalpataru challenged the addition. It told the tribunal that the search did not yield a single document or piece of evidence to show that the purchases were fake. It also pointed out that the statements relied upon were recorded nearly ten years after the transactions, from employees who either joined the company much later or were never involved in procurement during the relevant period

The company further said that the purchases were linked to actual construction and infrastructure projects executed by JMC. The revenues from those projects had already been accepted by the tax department and were never disputed

The Commissioner of Income Tax (Appeals) agreed with Kalpataru on most factual aspects. He recorded that the statements only showed employees' unfamiliarity with old vendors and that the field inspection was conducted years after the transactions. Still, he chose to retain 12.5 percent of the disallowance, saying it was required to “plug the leakage of revenue”

The Tribunal did not accept this.

It noted that the search was conducted a decade after the assessment years in question and that none of the employee statements showed the transactions to be a sham. The tribunal said it was unreasonable to expect employees of a large organisation with over 8,000 staff to remember details of historical vendors across multiple divisions

It also rejected the reliance on the field inspection report, observing that vendors not being found at a given address years later could not, by itself, disprove transactions carried out much earlier.

Pulling up the appellate authority, the tribunal said that after recording detailed findings in favor of the assessee, sustaining an ad hoc disallowance had no legal basis. It held that when purchases are linked to genuine business activity and no incriminating material is found during search, even a partial disallowance under Section 37(1) is impermissible

The ITAT deleted the entire Rs 2.70-crore addition for Assessment Year 2013-14 and extended the same relief to Assessment Years 2014-15, 2015-16 and 2017-18 as well

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