Only a partial answer, and it might require someone who knows about Ethereum Classic (i.e. the ETC chain) to confirm...
This option was added during the addition of support for the Expanse network (EXP), under Parity issue #2369. However, I believe it's probably actually related to ECIP-1010, which is Ethereum Classic's (mainnet) delay of the Difficulty Bomb.
For the only relevant block of code - i.e. the code that uses
bombDefuseTransition), and handles ECIP-1010 - see
So really this is a test option that allows Ethereum Classic test networks to simulate the Difficulty Bomb changes in ECIP-1010. (I think.)
Edit (9th May 2017):
As per this answer to a follow-up question, it looks like setting the
bombDefuseTransition option in the genesis file will deactivate the Difficulty Bomb, as you suspect. So, while it was added for Expanse support, it's a general option that will work with any private chain.