2025 (11) TMI 1841 - AT - Income Tax

Appeal fails against deletion of bogus wage addition; private notings under s.145 insufficient to disallow genuine labour expenses

ITAT Chennai dismissed the Revenue's appeal and upheld the CIT(A)'s deletion of addition for alleged bogus wage expenditure for AY 2022-23. The AO had ... Addition on account of alleged bogus wage expenditure - AO noted that the cash payments/debit entries marked “MD Personal” during the previous year relevant to the A.Y.2022-23 - AO formed the opinion that these debit entries, though accounted as wages in the books, represented cash withdrawals utilized by Shri M.Pandithurai for his personal purposes. HELD THAT:- We find that while certain cash payment entries indeed contain the narration “MD Personal” or “MD Per”, there exists no corroborative or incriminating evidence whatsoever to substantiate the conclusion that such entries represented personal expenditure of the Managing Director. It is an admitted fact that the notebooks forming the basis of the AO’s conclusion were not part of the regular books of account of the assessee company, but rather cash scrolls maintained by a trusted custodian. It is a well-settled principle in law, supported by numerous judicial precedents, that private notings, or uncorroborated documents recovered during search cannot, by themselves, constitute conclusive evidence of undisclosed income or unrecorded expenditure unless independently supported by cogent material evidence. In the instant case, the Revenue has not demonstrated that any parallel or duplicate set of accounts was maintained by the assessee, which could lend evidentiary credence to the entries in question. Further, no clear cash trail, flow of funds, or movement of money has been brought on record to establish that the cash corresponding to the impugned entries were actually utilized by Shri M.Pandithurai for his personal benefit. AO has also not identified, examined, or brought on record the statement of recipients who took delivery of cash from Shri Balasekhar to demonstrate that the same were fictitious or non-existent. Rather the AO had devised his own formula on assumption of certain things and disallowed an amount of Rs. 15.80 crores on an apportionment basis without any conclusive finding on the aspect of incurring of non business expenditure to the magnitude of the disallowance. It is a trite proposition of law that additions cannot be sustained merely on the basis of suspicion, conjecture, or surmise. The Revenue bears the burden of establishing, through credible and corroborative evidence, that the expenditure claimed by the assessee is not genuine or has been incurred for non-business purposes. Mere notings such as “MD Personal”, without further substantiation, do not ipso facto lead to the inference of personal expenditure. We also note that Shri M.Pandithurai, Managing Director in his sworn statement recorded u/s.132(4) of the Act on 05.12.2022 had clarified that the noting made by Shri Balasekhar as “MD Personal” was for his own identification to the effect that the cash was handed over to MD personally. Assessee’s declared net profit ratio for the impugned assessment year works out to 12.04%, which is found to be consistent with the results shown in the preceding assessment years. The Revenue has not placed on record any cogent material or industry benchmark to substantiate that the line of business in which the assessee is engaged ordinarily yields a higher net profit ratio. As further noticed that, as assailed by the ld.AR consequent to the addition of Rs. 15,80,14,988/- made by the AO towards alleged bogus wages, the resultant net profit ratio would escalate to 22.88%, which, in our considered view also, is abnormally high and does not reflect the true and correct state of the assessee’s financial affairs. Such a result, if accepted, would distort the assessee’s profitability and lead to an unrealistic depiction of its business operations. We are of the considered opinion that the allegation of booking of bogus expenditure in the form of wages is devoid of factual foundation. The AO, notably, has not rejected the books of account maintained by the assessee u/s.145 of the Act, nor has he recorded any finding to the effect that the accounts are unreliable or incomplete. Having accepted the trading results and the revenue disclosed by the assessee which was duly audited by a Chartered Accountant, it is not open to the AO to selectively hold that the wage expenditure alone is bogus. The assessee is admittedly engaged in line of business which is labour intensive and executing projects across various locations by using the local work force, where the incurrence of substantial wage expenditure at sites is normal and inevitable for smooth operations. The AO has primarily been guided by the fact that a portion of the vouchers produced were self-made and not supported by external corroboration. However, it is a settled position of law that defects in voucher maintenance may, at best, justify a partial disallowance on an estimated basis, but cannot form the sole basis for treating the entire expenditure as fictitious or bogus. In the present case, the assessee has, on its own disallowed 10% of the total wages to cover up any anomalies out of the search findings. In light of the foregoing discussion and guided by the judicial precedent cited supra, we hold that the further disallowance of Rs. 15,80,14,988/- made by the AO is unsustainable in law as well as on facts. The Ld.CIT(A), in deleting the said addition, has rightly appreciated the factual matrix and legal principles applicable to the case. The factual findings rendered by the Ld.CIT(A) on this aspect are based upon a proper evaluation of facts on record During the course of the appellate proceedings before us, the Ld.DR could not controvert or dislodge these findings by bringing any contrary material on record. In the absence of such rebuttal, the findings of the Ld.CIT(A) assume finality. We, therefore, do not find any perversity, infirmity, or legal impropriety in the impugned order of the Ld.CIT(A) warranting our interference. The same is hereby upheld in toto. Accordingly, the grounds raised by the Revenue are found to be devoid of merit and are, therefore, dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether delay in filing the Revenue's appeals deserved to be condoned. 1.2 Whether cash debit entries in seized cash scroll books bearing narration 'MD Personal' justified full disallowance of corresponding wage expenditure as bogus. 1.3 Whether uncorroborated private cash notings and statements recorded u/s 132(4), subsequently retracted, could form the sole basis for addition without independent evidence of personal diversion of funds. 1.4 Whether disallowance of wage expenditure exceeding the total wages debited, without rejection of books u/s 145, and resulting in abnormal profit ratio, was sustainable. 1.5 Whether findings in the lead case applied mutatis mutandis to the connected appeal involving identical facts and issue. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay in filing appeals Interpretation and reasoning 2.1 The Tribunal noted delays of 5 and 6 days in filing the two appeals. The Revenue filed affidavits explaining that the files had been misplaced and tracing took time due to transfer of the concerned staff during the period of annual general transfers, resulting in inability to file within the prescribed limitation. 2.2 After hearing both parties and considering the affidavits, the Tribunal found the explanation reasonable and treated the cause as bona fide. Conclusions 2.3 Delay in both appeals was condoned and the appeals were admitted for adjudication. Issue 2 - Whether 'MD Personal' entries in seized cash scroll justify treating wage expenditure as bogus Legal framework (as discussed) 2.4 The Tribunal examined the evidentiary value of documents seized in search and of statements u/s 132(4), including the principle that uncorroborated private notings and retracted statements cannot, by themselves, justify additions without supporting material. Reliance was also placed on CBDT Instructions discouraging additions based solely on confessions without evidence. Interpretation and reasoning 2.5 Seized notebooks authored by the cash custodian contained cash inflow and outflow entries relating to the group; some debit entries bore the narration 'MD Personal' / 'MD Per'. It was undisputed that inflow entries corresponded to cash withdrawn from bank accounts of the two entities and recorded as wages in regular books. 2.6 The Tribunal noted that the notebooks were not part of the regular books of account but 'cash scrolls' maintained by a custodian for tracking physical cash movements, distinct from formal accounting records. 2.7 The Assessing Officer treated entries marked 'MD Personal' as withdrawals for personal use of the Managing Director and, on that basis, held the corresponding wage expenditure to be bogus. He quantified total 'MD Personal' debits at Rs. 34.68 crore, allowed credit for 'MD Personal' credits of Rs. 8.42 crore and apportioned the net figure of Rs. 26.26 crore between the two entities, leading to a net addition of Rs. 15.80 crore in the lead case. 2.8 The Tribunal found that no parallel or duplicate set of books indicating bogus or fictitious wages was discovered. No evidence was produced to show that the alleged cash had in fact been deployed for personal expenditure or non-business purposes. 2.9 The Tribunal accepted that the business was highly labour-intensive, involving execution of numerous contract sites with local labour and substantial cash-based wage payments, making cash withdrawals and field-level self-made vouchers a normal feature of operations. 2.10 It was noted that the custodian, in his statement, only confirmed that 'MD Personal' meant cash handed over personally to the Managing Director and that he did not know the end-use; there was no assertion that the cash was for personal expenditure or for bogus wage booking. 2.11 The Managing Director, in a subsequent sworn statement dated 05.12.2022, explained that 'MD Personal' entries reflected cash taken for wage disbursements and site maintenance expenses at various locations for the group entities, with any unspent cash returned and recorded as 'MD Personal Return'. 2.12 The Tribunal held that mere nomenclature 'MD Personal' in a private scroll, without concrete evidence of personal use or diversion, did not ipso facto establish that the underlying wage expenditure was bogus. 2.13 The Tribunal emphasized that the Assessing Officer neither traced any actual personal spending corresponding to the alleged diversion, nor examined any alleged recipients to show fictitious labour or sham payments. The entire theory rested only on interpretation of the narration. Conclusions 2.14 The seized cash scrolls and the notings 'MD Personal', in the absence of corroboration, could not be treated as conclusive evidence of bogus wages. The disallowance based solely on these notings was unsustainable. Issue 3 - Reliance on statements u/s 132(4), their retraction, and lack of corroborative evidence Legal framework (as discussed) 2.15 The Tribunal discussed Section 132(4) and case law holding that an admission is an important piece of evidence but not conclusive; a retracted statement cannot, by itself, justify an addition unless supported by independent material. It cited a Coordinate Bench decision and High Court authorities (including Nageshwar Enterprises, Chetnaben J. Shah, S.S.R.D. Somany Sikshan Sansthan) and CBDT Instructions that emphasize the need for evidence beyond coerced/confessional statements. Interpretation and reasoning 2.16 The initial statement of the Managing Director during search acknowledged that cash found at his residence and entries marked 'MD Personal' related to his personal use. Subsequently, on 05.12.2022, in a sworn statement u/s 132(4), he retracted the earlier version, stating that such cash was used for wage disbursements and site maintenance at various locations for the group entities. 2.17 The Tribunal noted uncontroverted medical evidence that the Managing Director had been hospitalized for anxiety, depression, insomnia and other ailments immediately prior to and during the search period, had to discontinue treatment to attend the search, and had informed the authorities in writing of his condition along with medical certificates. 2.18 In these circumstances, the Tribunal held that the initial statement was given when the deponent was not in a sound physical and mental state, thereby diminishing its reliability and voluntariness. Absent corroborative material, such a statement could not form the sole basis for adverse inference. 2.19 The subsequent retraction was given in a sworn statement u/s 132(4), with a detailed explanation of business usage of the cash. The Assessing Officer ignored this retraction and continued to rely exclusively on the earlier statement without conducting any further verification, cross-examination, or bringing any independent evidence to show that the retraction was false or an afterthought. 2.20 The Tribunal held that where a statement is retracted and there is no corroborative incriminating material, additions cannot be sustained solely on the basis of the original statement. Mere suspicion or untested admissions, particularly in circumstances of impaired health, are insufficient. 2.21 Regarding the custodian's statement, the Tribunal held that since he was admittedly unaware of the end-use of funds and only recorded movements of cash, his statement could not demonstrate that wages were bogus or funds misapplied personally by the Managing Director. Conclusions 2.22 Statements recorded u/s 132(4) from the Managing Director, in the circumstances of impaired health and subsequent sworn retraction, lacked sufficient evidentiary value to sustain the disallowance in the absence of corroborative material. 2.23 The custodial witness's statement, limited to physical handling of cash and not to its ultimate use, did not support the Revenue's allegation of bogus wages. 2.24 Accordingly, additions based solely on such statements and uncorroborated notings were held to be unsustainable. Issue 4 - Sustainability of disallowance exceeding total wages and resulting in abnormal profit, without rejection of books Interpretation and reasoning 2.25 The Tribunal recorded that total wages debited in the Profit and Loss Account for the relevant year were about Rs. 9.84 crore, whereas the Assessing Officer disallowed Rs. 17.48 crore as bogus wages in the lead case (apportioned from the net alleged diversion figure), resulting in a net addition of Rs. 15.80 crore after giving effect to the assessee's own disallowance. 2.26 The Tribunal noted that this implied disallowance of about 177% of the wages actually claimed, which is arithmetically and logically untenable. A disallowance cannot exceed the expenditure debited. 2.27 The Tribunal also noted that the assessee's declared net profit ratio was around 12.04%, consistent with past years and higher than typical industry margins (6-8%). If the impugned addition were sustained, the net profit ratio would rise to about 22.88%, which the Tribunal characterized as abnormally high and unrealistic for the nature of the business. 2.28 It was observed that the Assessing Officer had not rejected the books of account u/s 145, had accepted turnover and trading results, and had not recorded any finding that the books were incomplete, incorrect, or unreliable. Having accepted the audited accounts and revenue, the Assessing Officer could not selectively treat the entire wage expenditure as bogus absent concrete evidence. 2.29 The Tribunal accepted that the assessee's business was inherently labour-intensive, requiring significant on-site wage expenditure. The principal objection of the Assessing Officer related to the nature of vouchers (self-made, not third-party). The Tribunal held that defects in vouchers, at most, justify reasonable estimated disallowance or profit addition, not complete disallowance of wages. 2.30 The Tribunal noted that the assessee had already, on its own, disallowed about 10% of the wages and certain subcontract payments (aggregating Rs. 1.68 crore) to cover possible documentation deficiencies. 2.31 The Tribunal referred to the jurisdictional High Court decision in CIT v. SPL Infrastructure Pvt. Ltd., which upheld that once the assessee voluntarily disallowed about 10% of unverifiable expenditure and declared a reasonable profit, no further disallowance was warranted on mere suspicion. Conclusions 2.32 A disallowance exceeding the total wages claimed is inherently unsustainable and reflects non-application of mind. 2.33 In the absence of rejection of books u/s 145 and in light of consistent and comparatively higher profit ratios, blanket disallowance of alleged bogus wages was unwarranted. 2.34 Considering the voluntary disallowance of around 10% of wages and lack of concrete evidence of inflated or fictitious wages, no further disallowance was justified. The deletion of Rs. 15,80,14,988/- by the first appellate authority was upheld. Issue 5 - Applicability of findings to the connected appeal (mutatis mutandis) Interpretation and reasoning 2.35 The Tribunal recorded that the facts, nature of seized material, basis of disallowance, and reasoning adopted by the Assessing Officer in the second appeal were identical to those in the lead case, differing only in quantum and apportionment. 2.36 Since the entire addition in both appeals arose from the same seized notebooks, same 'MD Personal' notings, same statements, and the same method of apportionment, the legal and factual analysis in the lead case fully governed the connected appeal. Conclusions 2.37 The reasoning and conclusions adopted in the lead case were applied mutatis mutandis to the connected appeal. 2.38 The disallowance of alleged bogus wage expenditure in the second case was also held unsustainable, and the Revenue's appeal therein was dismissed.