AKHTAR HUSSAIN ALI HASAN KHAN,MUMBAI vs. DCIT CENTRAL CIRCLE 8(1), MUMBAI

The brief facts of the case are that the assessee, an individual, is carrying on business in the name of M/s. Akhtar Enterprises and is engaged in resale of scrap, labour-related work and running pay-and-park sites. The assessee filed his return of income for A.Y. 2019-20 on 30.10.2019 declaring total income of ₹74,27,160/-. A search and seizure action under section 132 of the Income-tax Act, 1961 (“the Act”) was conducted on 09.10.2019 in the case of Prime Toll Group and, consequent thereto, the Assessing Officer issued notice under section 153A of the Act. In response, the assessee filed return of income declaring the same income of ₹74,27,160/-.

During the assessment proceedings, the Assessing Officer examined Employees’ Benefit Expenses of ₹93,26,219/- and Labour Charges of ₹47,80,905/-. The assessee explained that its business involved daily wage workers and site-based labour and the respective supervisors arranged the workers, maintained records and made payments in cash after obtaining their signatures. The assessee also produced wage registers containing names of workers, amounts paid and their signatures. The Assessing Officer, however, observed that the expenses were not supported by evidence and various details such as addresses, PAN, designation and nature of duties of the employees, PF/ESIC and profession-tax records, and supporting documents with respect to labour contracts and work executed had not been produced by the assessee.

It is also relevant to note that while discussing the inflation of expenditure, the Assessing Officer himself observed in para 4(i) of the assessment order that the assessee “might have managed to inflate its claimed expenses”. Thus, even according to the Assessing Officer, this was stated as a possibility and not as a definite finding based on any specific bogus employee, fictitious labour payment or specific inflated voucher. Nevertheless, considering the expenses as not being fully verifiable, the Assessing Officer disallowed 15% of the Employees’ Benefit Expenses and Labour Charges and made an addition of ₹21,16,068/- under section 37(1) of the Act.

The Assessing Officer further observed that the assessee owned Flat No.101, Flat No.104 at Sagar Heights and Gala No.378 having a total value of ₹1,00,84,530/- as appearing in the balance sheet. The assessee submitted that the properties which were not let out were being used for the purposes of business and for accommodation of its labourers/employees. The Assessing Officer did not accept the explanation and treated the properties as deemed let-out properties. The Assessing Officer estimated the annual value at 7% of the investment value at ₹7,05,917/- and, after allowing deduction of 30% under section 24(a) of the Act, he made an addition of ₹4,94,142/- under the head “Income from House Property”.

The assessee carried the matter in appeal before the learned CIT(Appeals). In the appellate proceedings, the assessee reiterated that the nature of its business required the assessee to engage daily wage workers and casual labour and the assessee had made substantial payments in cash. The assessee also submitted that the books of account were audited, the Assessing Officer had not rejected the books under section 145(3) of the Act, and the Assessing Officer did not find any specific employee, labour payment or voucher to be bogus. The learned CIT(Appeals) accepted that the Assessing

The assessee is in appeal before us against the order passed by the learned CIT(Appeals) to the extent the additions have been sustained.

We have heard both the sides and perused the material available on record. The dispute before us is with respect to the disallowance out of salary and labour expenses and the addition towards deemed rental income. The learned Counsel for the assessee submitted that the assessee is in a position to produce the relevant details and supporting evidence before the Assessing Officer and requested that one more opportunity may be granted for proper verification. He further submitted, without prejudice to the assessee’s contentions on merits, that the assessee is willing to accept a reasonable disallowance to the extent of 3% of the salary and labour expenses, subject to verification and consideration by the Assessing Officer.

We find that the Assessing Officer made the disallowance of 15% primarily because, according to him, the supporting documents produced by the assessee were not sufficient for complete verification. However, the Assessing Officer did not specified any particular employee or labour payment as bogus. In fact, while discussing possible inflation of expenses in para 4(i) of the assessment order, the Assessing Officer himself used the expression that the assessee “might have managed to inflate its claimed expenses”. The use of the words “might have” shows that the Assessing Officer proceeded on a possibility rather than recording a definite finding based upon verification of any particular transaction. At the same time, we cannot ignore the fact that the assessee is required to establish the genuineness and business purpose of the expenditure claimed by producing proper supporting evidence.

In these circumstances, in our view, the matter requires proper factual verification instead of sustaining an estimated disallowance merely on a percentage basis. Therefore, in the interest of justice, we are setting aside the issue relating to Employees’ Benefit Expenses and Labour Charges to the file of the Assessing Officer for fresh consideration. The assessee shall produce the wage registers, details of employees and labourers, nature of duties performed, details of sites where they worked, proof of payments and such other supporting evidence as may be available. The Assessing Officer shall examine the evidence and decide the allowability of the expenditure in accordance with law.

As regards the submission of the learned Counsel that the assessee is willing, without prejudice, to accept a disallowance of 3% of the salary and labour expenses, we find no reason or basis to accept the said percentage as correct. The assessee has not produced any material before us to show how the figure of 3% has been arrived at. The issue requires proper verification of the expenditure claimed. The Assessing Officer shall verify the evidence and

We also find it appropriate to restore the issue relating to deemed rental income of ₹4,94,142/- to the file of the Assessing Officer. The assessee has consistently claimed that the three properties were being used for the purposes of its business and for accommodation of employees/labourers. Since this claim requires factual verification, the assessee shall produce before the Assessing Officer the relevant evidence showing the actual use and occupation of the properties during the relevant previous year. The Assessing Officer shall verify whether the properties were in fact occupied for the purposes of the assessee’s business so as to fall within the exclusion contained in section 22 of the Act. If the assessee fails to establish such business use, the Assessing Officer shall compute the annual value in accordance with the provisions of the Act after considering the relevant material relating to fair rental value.

Accordingly, we set aside the findings of the learned CIT(Appeals) on the aforesaid issues and restore the same to the file of the Assessing Officer for de- novo consideration.

In the result, the appeal of the assessee is allowed for statistical purposes.

We find that the facts with respect to the disallowance of Employee Benefit Expenses and Labour Charges and the addition towards deemed rental income for A.Y. 2020-21 are similar to those in A.Y. 2019-20. The nature of business, the basis taken by the Assessing Officer for making the disallowance and the properties in respect of which deemed rental income has been computed are the same. We therefore restore these issues to the file of the Assessing Officer on the same terms and with the same directions as given by us while deciding the corresponding grounds for A.Y. 2019-20, subject to the figures relevant to this assessment year.

We also observe that in the Grounds of Appeal for both assessment years before us, the assessee has also raised a ground challenging the validity of the assessment on the plea that the assessment order was passed without there being any incriminating material found during the course of search for the year under consideration. However, at the time of hearing before us, the learned Counsel for the assessee did not advance any arguments in support of this ground. Therefore, the ground challenging the validity of the assessment for want of incriminating material is dismissed as not pressed.

In the combined result, both the appeals of the assessee are allowed for statistical purposes.

The brief facts of the case are that the assessee, an individual, carries on business in the name of M/s. Garib Nawaz Corporation and is engaged in resale of scrap, labour work and running pay-and-park sites. The assessee filed his return of income for A.Y. 2020-21 declaring total income of ₹61,21,220/-. A search and seizure action under section 132 of the Income-tax Act, 1961 (“the Act”) was conducted on 09.10.2019 in the case of Prime Toll Group, pursuant to which the Assessing Officer initiated assessment proceedings.

During the assessment proceedings, the Assessing Officer observed that the assessee had claimed Employee Benefit Expenses of ₹2,16,77,450/- and Labour Charges of ₹3,05,09,379/-, amounting to ₹5,21,86,829/-. The assessee submitted that the nature of its business required engagement of daily wage workers at pay-and-park sites and other work locations and payments were made in cash through supervisors who maintained the records. The assessee furnished

The Assessing Officer further observed that the trial balance of M/s. Garib Nawaz Corporation for the period 01.04.2019 to 07.10.2019 found during the search had a negative cash balance of ₹31,98,007/-. The assessee explained that certain labour expenses which were actually payable had wrongly been posted through the cash account without recording the corresponding liability, resulting in a negative cash balance. The assessee submitted that after correcting the entries, the cash balance as on 07.10.2019 was positive. The Assessing Officer did not accept the explanation since the assessee had not furnished supporting evidence and reconciliation. He therefore made an addition of ₹31,98,007/- under section 69C of the Act.

The assessee carried the matter in appeal before the learned CIT(Appeals). As regards Employee Benefit Expenses and Labour Charges, the learned CIT(Appeals) observed that the Assessing Officer had neither rejected the books of account under section 145(3) of the Act nor specified any particular employee, labour payment or voucher as being bogus. At the same time, in view of the deficiencies in the evidence, CIT(Appeals) restricted the disallowance from 15% to 10% of the aggregate expenditure and sustained an addition of ₹52,18,683/-.

As regards the addition under section 69C, the learned CIT(Appeals) held that the trial balance found during the search showed negative cash of ₹31,98,007/- and the assessee had failed to furnish a proper reconciliation

The assessee is in appeal before us against the order passed by the learned CIT(Appeals) to the extent the additions have been sustained.

We have heard both the sides and perused the material available on record. As regards the disallowance out of Employee Benefit Expenses and Labour Charges, we find that the Assessing Officer made a disallowance of 15% because the expenditure, according to him, was not fully verifiable. The learned CIT(Appeals), while accepting that no specific bogus expenditure had been specified, restricted the disallowance to 10%. However, we do not find any clear basis for taking either 15% or 10% as the correct disallowance. A percentage cannot take the place of actual verification of the expenditure.

The learned Counsel for the assessee submitted before us that, without prejudice to the assessee’s contentions, the assessee was willing to accept a disallowance of 3%. We find no basis to accept even this percentage, since no material has been placed before us to show how the figure of 3% has been arrived at. In our view, the issue requires verification rather than substitution of one estimated percentage by another.

We therefore restore this issue to the file of the Assessing Officer. The Assessing Officer shall verify the evidence and supporting documents produced by the assessee and examine the genuineness of the expenditure and its nexus with the business. The Assessing Officer shall make disallowance, if any, only to the extent the expenditure is found, upon such verification, to be unsupported, non-genuine or not incurred for the purposes of business. The Ld.AO shall give

We are therefore restoring this issue also to the file of the Assessing Officer for de-novo consideration.

Accordingly, we set aside the findings of the learned CIT(Appeals) on the aforesaid issues and restore both the issues to the file of the Assessing Officer for de-novo consideration.

In the result, the appeal of the assessee is allowed for statistical purposes.