2025 (7) TMI 1486 - AT - Income Tax

Disallowance of labour expenses made by the AO relying on the statement recorded during the search - disallowance was made on the ground that cash withdrawn from the bank was not used for business but for personal and illegal purposes - Reliance on statement of employees subcontractors and loose sheets found during the search - HELD THAT - It is true that there are some gaps and suspicious patterns regarding the working of the assessee and genuineness of the expenses. But there is no conclusive proof that the full amount withdrawn was misused. It would therefore not be fair to treat the entire amount of Rs.16.57 crore as non-business in nature. Therefore to balance the interests of justice we are of considered view that disallowances of certain percentage of alleged bogus expenses will serve justice to both the assessee and the revenue. Accordingly we hold that some portions of the cash withdrawals were not properly explained. At the same time the entire withdrawal and the alleged expenses cannot be disallowed. Therefore to cover any possible leakage or irregularity we restrict the disallowance to 10% of the total cash withdrawals on an ad hoc basis. Accordingly disallowance is restricted to Rs.1, 67, 35, 000 (10% of Rs.16, 57, 35, 000) and the Balance amount of addition is deleted. Decided partly in favour of assessee. Disallowance of expenditure on subcontractor - Revenue has alleged that this payment was not genuine and was routed back to the assessee through the bogus subcontractors - HELD THAT - We conclude that the disallowance is not supported by legally acceptable evidence. The survey statement of Shri Jogeshwar Rao in the absence of incriminating material and without opportunity for cross-examination cannot be the basis of addition. The loose sheets relied upon are of doubtful evidentiary value and were used selectively. On the other hand the assessee has provided documentary proof of the subcontract and its execution. We therefore hold that the addition is not justified. Disallowance of nongenuine purchases - primary ground for disallowance was the alleged non-availability of LR/Weighment slips entry in/out register - HELD THAT - The assessee has produced substantial evidence in support of the purchases including tax invoices e-way bills ledger accounts and confirmations. The supplier M/s Triveni Enterprises has admitted to the sales and explained the missing documents. The missing weighment slips and delivery records are operational documents and not statutory requirements. Given the passage of time the absence of such documents cannot be used to discredit the entire transaction. CIT(A) himself has accepted that supplies were directly sent from the manufacturer and hence those documents were understandably not available at the godown. The same logic should apply to the balance amount as well particularly in the absence of any finding that goods were never received or that payment was returned in cash. There is no concrete evidence on record to show that the purchases were bogus. The revenue has not demonstrated any inflation in pricing alternate source of procurement or contradictions in stock records. The case rests purely on presumptions and incomplete analysis. In view of the above we find that the disallowance of Rs. 17.84 crore lacks legal and factual merit. The actions of the Revenue authorities suffer from inconsistency in approach selective application of seized evidence and shifting grounds of assessment without proper justification. Accordingly the disallowance is deleted. Disallowances of purchases - HELD THAT - Lack of complete paperwork is a procedural deficiency but it cannot alone be construed as evidence of bogus purchases specially in the absence of any incriminating material found or brought on record suggesting false purchases. It is also significant to note that in the subsequent assessment year purchases from the same supplier have been accepted as genuine by the Department which supports the continuity and authenticity of the business relationship. Therefore we hold there is no concrete material establishing that the impugned purchases were not genuine or that any unaccounted transactions took place. The consistent stand of both the assessee and the supplier absence of contrary evidence and the acceptance of similar transactions in later years collectively support the assessee s position. Accordingly we find that the disallowance sustained by the ld. CIT(A) is not warranted. Addition on account of payments made to bogus sub-contractors at Manvi and Sindhanur - assessee argued that there was no illegality in having the returns filed by one consultant who was known to Shri Subhash and all subcontractors filed their income tax returns under section 44AD of the Act declaring income at 8% which is a permissible and lawful method of income declaration - HELD THAT - Assessee s own arguments are inconsistent. On one hand they claim all sub-contractors were genuine and work was executed. On the other they claim the disputed amount was actually a loan. This contradiction weakens the credibility of their defense also. Further the affidavits submitted in support were not notarized and produced at very end of the assessment proceeding. The affidavits were directly obtained from the same individuals who denied doing any work therefore the affidavit required inquiry by the AO but not due to time constraint it did not happen. Assessee s claim that payments were made through banking channels and TDS was deducted does not alone prove the genuineness of work done especially when the recipients deny rendering services. Despite the AO s investigation pointing out to a widespread pattern of accommodation entries and bogus subcontracting the lack of clarity on how the specific disallowance was calculated for the sub-contractors is a material gap in the assessment order also. As such the AO relied heavily on general observations and statements but did not directly tie the disallowed amount to identified parties. Therefore considering the inconsistencies in the AO s approach the lack of specificity in quantifying the disallowance and the contradictions in the assessee s stand we are of the view that a full disallowance cannot be sustained. However given over all materials on record and absence of work documentation the possibility of manipulation use of accommodation entries cannot be ruled out. Therefore we deem it appropriate to uphold a 10% ad hoc disallowance out of the total disallowances made by the AO in order to give render justice.

Summary

ISSUES:

Whether the disallowance of labour expenses amounting to Rs. 16,57,35,000/- on account of cash withdrawals and alleged bogus labour payments was justified.Whether the disallowance of subcontract expenses of Rs. 80,14,67,379/- paid to a subcontractor company was sustainable given allegations of accommodation entries and bogus transactions.Whether the disallowance of purchases amounting to Rs. 17,84,58,955/- from a steel supplier was justified on grounds of missing weighment slips, delivery receipts, and other supporting documents.Whether the disallowance of purchases amounting to Rs. 9,17,41,460/- from another supplier was warranted due to absence of supporting transport documents.Whether the disallowance of purchases of Rs. 95,00,000/- and Rs. 20,00,000/- from two suppliers based on seized loose sheets and alleged cash receipts was correct.Whether the deletion of addition of Rs. 1,34,13,000/- on account of payments to alleged bogus subcontractors was justified.Whether the Revenue was justified in restricting or deleting additions made by the CIT(A) on various grounds including bogus subcontractors and non-genuine purchases.

RULINGS / HOLDINGS:

On the disallowance of Rs. 16,57,35,000/- labour expenses, the Tribunal held that the entire amount could not be disallowed solely on the basis of statements and loose sheets; a 10% ad hoc disallowance of Rs. 1,67,35,000/- was upheld as reasonable, balancing interests of justice.The disallowance of Rs. 80,14,67,379/- paid to the subcontractor company was set aside, as the addition was primarily based on a survey statement under section 133A without incriminating documents, and denial of cross-examination violated principles of natural justice; documentary evidence supporting genuine work was accepted.The disallowance of Rs. 17,84,58,955/- from the steel supplier was deleted, as missing weighment slips and delivery receipts were not mandatory statutory documents, and the loose sheets relied upon were of doubtful evidentiary value and selectively applied.The disallowance of Rs. 9,17,41,460/- from another supplier was deleted in full, as no incriminating material suggested bogus purchases, and absence of some transport documents was explained by direct supply arrangements and procedural deficiencies.The disallowances of Rs. 95,00,000/- and Rs. 20,00,000/- from two suppliers were deleted, as the loose sheets were not conclusive evidence, payments were made through banking channels, and no inquiry was made from the parties involved.The deletion of Rs. 1,34,13,000/- addition on account of alleged bogus subcontractors was set aside in part; a 10% ad hoc disallowance was upheld due to lack of clarity in AO's quantification, inconsistencies in assessee's defense, and evidence of accommodation entries.General grounds of appeal by Revenue and assessee that did not raise substantive issues were dismissed as infructuous.

RATIONALE:

The Tribunal applied the statutory provisions under the Income Tax Act, including sections 37, 132, 133A, 131, and 44AB, and principles of natural justice. It emphasized that statements recorded during survey under section 133A do not carry the same evidentiary weight as those recorded under search under section 132(4) or under section 131(1), especially when not supported by incriminating material or corroborative evidence.The Tribunal noted that reliance solely on loose sheets or unverified seized documents without independent corroboration is insufficient to sustain additions. It also recognized that absence of certain operational documents like weighment slips or delivery receipts, particularly in complex supply chains and remote project sites, cannot be the sole basis for disallowance.The Tribunal underscored the importance of opportunity for cross-examination when adverse inferences are drawn from third-party statements, holding denial of such opportunity as violation of natural justice and weakening the revenue's case.While acknowledging some suspicious patterns and gaps in documentation, the Tribunal adopted a balanced approach by restricting disallowances to reasonable ad hoc percentages (10%) to address possible irregularities without penalizing the assessee for the entire amounts.The Tribunal also highlighted procedural irregularities such as shifting bases of addition by authorities without affording the assessee opportunity to respond, selective application of evidence against certain parties, and acceptance of documentary evidence including work orders, invoices, audited accounts, and government certificates supporting genuineness of transactions.The Tribunal dismissed general or technical grounds not substantiated with arguments or evidence as infructuous, focusing on substantive merits.