Salary and wage payments booked in accounts: can disallowance be tagged "unexplained expenditure" u/s69C and taxed u/s115BBE?

The dominant issue was whether an ad hoc disallowance of salary and wages debited in the books could be treated as "unexplained expenditure" under s. 69C so as to trigger s. 115BBE. The ITAT held that s. 69C applies only where the source of expenditure is not explained; when payments are recorded in the books and the AO does not allege any expenditure outside the books, the deeming fiction cannot be invoked. At most, the claim may be examined under s. 37(1) for business nexus. Consequently, s. 69C was held inapplicable to the salary/wage disallowance. Separately, the disallowance of workman and staff welfare expenses was upheld as there was no disagreement on that issue.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether there was a valid rejection of books of account under section 145(3) when the Assessing Officer only declined to accept the cash book for explaining cash deposits, but otherwise computed income on the basis of the returned accounts with specific additions/disallowances.

(ii) Whether the addition in respect of cash deposited during the demonetization period could be sustained on an "average sales" presumption, and whether the matter required fresh verification of quantitative stock records and actual cash availability as on the date of deposit.

(iii) Whether an ad hoc disallowance out of "compensation to employees/salary and wages" could be treated as "unexplained expenditure" attracting the deeming fiction of section 69C, where the expenditure was debited in the books and the source of payment was not found to be outside the books.

(iv) Whether an ad hoc disallowance of a percentage of "workmen and staff welfare expenses" for lack of supporting explanation/documents called for interference.

2. ISSUE-WISE DETAILED ANALYSIS

A. Section 145(3) - rejection of books of account

Legal framework (as applied in the judgment): The Tribunal examined whether the assessment was framed by rejecting books under section 145(3) and proceeding on best judgment basis, or whether it was an assessment based on the accounts with item-wise additions/disallowances.

Interpretation and reasoning: The Tribunal found that the Assessing Officer's observation was limited to not accepting the cash book for the purpose of explaining the cash deposits. The assessment otherwise proceeded by considering the return, profit and loss account and allowing/disallowing specific expenditure claims, rather than estimating income under a best judgment framework.

Conclusion: There was no rejection of books "as such" under section 145(3); the ground challenging section 145(3) action was dismissed.

B. Cash deposit during demonetization - sustainability of addition and need for verification

Interpretation and reasoning: The Tribunal noted that the addition was made by applying an average daily sales figure and treating the excess portion of a particular deposit as unexplained, without verifying actual sales and without examining how much cash could have been available from prior recorded sales after considering past bank deposits. The Tribunal emphasized that a petroleum retailer maintains quantitative records (opening stock, purchases, sales, closing stock) on a day-to-day basis; once quantitative sales are recorded and not shown to be defective, sales figures cannot be discarded merely on presumption. The Tribunal also observed that increased sales during the demonetization window could not be ruled out as a matter of fact, but the factual position required verification against the quantitative stock register and related cash flow.

Conclusion: The issue relating to the cash deposit addition was set aside to the Assessing Officer for fresh examination/verification of the daily quantitative records and actual cash availability for the relevant dates, with opportunity of hearing to the assessee. The connected question of applicability of section 69A to such addition was also left to be decided afresh along with the re-examination.

C. Salary/wages disallowance - applicability of section 69C to an ad hoc disallowance

Legal framework (as applied in the judgment): The Tribunal focused on section 69C as a deeming provision triggered by absence of explanation (or unsatisfactory explanation) regarding the source of expenditure; it contrasted this with a disallowance of business expenditure claimed in the profit and loss account.

Interpretation and reasoning: The Tribunal held that where expenditure is debited in the books of account and the source of payment is reflected through the books, the statutory trigger-unexplained "source of such expenditure"-is not satisfied. The disallowance arose because the Assessing Officer restricted the claim by an ad hoc approach based on comparative increase, not because the source was found to be unrecorded or outside the books. The Tribunal treated the controversy as a pure legal issue on the inapplicability of section 69C to such disallowance, and (since the quantum of disallowance was not pressed before the Tribunal) declined to remand merely to reconsider section 69C.

Conclusion: Section 69C was held inapplicable to the salary/wages disallowance made on an ad hoc basis where the expenditure stood recorded in the books and source was not in dispute; the issue was decided in favour of the assessee on applicability of section 69C.

D. Workmen and staff welfare expenses - ad hoc disallowance for lack of substantiation

Interpretation and reasoning: The Tribunal recorded a categorical finding that no reply/explanation/documents were furnished to justify the claim and that the assessee did not bring any supporting material on record. In these circumstances, the percentage disallowance made for want of substantiation was found justified on the facts.

Conclusion: The disallowance out of workmen and staff welfare expenses was confirmed and the relevant ground was dismissed.

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