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Income Tax Appellate Tribunal, B BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM :
1. These two appeals of the Revenue are directed against the separate orders of the Learned Commissioner of Income Tax (Appeals), Chennai-19 [hereinafter referred to as the “Ld.CIT(A)”], dated 26.03.2025 and 27.03.2025, in the case of M/s.Hariway Lines Private Limited and M/s. Rishi Enterprises respectively. The said appellate orders arise out of the separate assessment orders, both dated 28.03.2024, passed u/s.143(3) of the Income-tax Act, 1961 [hereinafter referred to as the “Act”], by the Assistant Commissioner of Income Tax, Central Circle-2(4), Chennai [hereinafter referred to as the “AO/Assessing Officer”], for the Assessment Year 2022-23.
Since the identical issue is involved in both these appeals and as both the parties have advanced similar arguments, we have heard them together and are disposing of the same by this consolidated order for the sake of convenience and uniformity. With the consent of both the parties, the appeal in M/s.Hariway Lines Private Limited, has been taken as a lead case for the purpose of factual analysis, as it has been confirmed by both the parties that the issue involved as well as the orders of the authorities below are identical in both the cases, except for the variation in the quantum of addition made. Accordingly, the findings and adjudication rendered by us in the case of M/s.Hariway Lines Private Limited in ITA
:-3-: I.T.A. Nos.:1657 & 1662/Chny/2025 No.1657/CHNY/2025 shall apply mutatis mutandis to the appeal in in the case of M/s.Rishi Enterprises.
2.1 At the outset, we find that there is a delay of 05 days in filing the appeal No.1662/Chny/2025 and the revenue explained the reasons for delay in filing the appeals. The revenue has filed affidavits stating the reasons for delay in filing the appeals is due to concerned files have been misplaced and took time to trace out the records since the staff attending the case has been transferred out during this period of annual general transfers. Hence, the appeals could not be filed before the limitation period. After considering the affidavits filed by the revenue and also hearing both the parties, we find that there is a reasonable cause for the revenue in not filing appeals on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeals and admit the appeals filed by the revenue for adjudication.
3. In view of the above, we shall first take up the case of Revenue in .
4. The Revenue has raised the following grounds of appeal: -
The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Ld.CIT(A) erred in deleting the addition of Rs.15,80,14,988/- on account of disallowed wages claimed based on the seized material found during the :-4-: I.T.A. Nos.:1657 & 1662/Chny/2025 course of search and the sworn statements recorded thereto and the findings of the assessment.
3. The Ld.CIT(A) failed to appreciate that no corroborative evidences were furnished by the assessee to justify the claim of wages made.
4. The Ld.CIT(A) failed to appreciate that the AO had relied upon the sworn statements of Sh Balasekar & the Loose sheets seized vide ANN/MK/HW/B&D/F&S/1&2 containing details of impugned withdrawals for the additions in the assessments.
5. The Ld.CIT(A) failed to appreciate the legal presumption laid down in Section 132(4A) & section 292C which affirm the evidentiary value of any material seized during the course of search for the purposes of search assessments.
6. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.
The brief facts are that the assessee is a private limited company engaged in the business of engineering and construction activities, including the execution of various contractual works. The assessee is also engaged in the manufacture, supply, and erection of road safety products such as road signs, road reflectors, road markings, pavement markings, crash barriers, overhead gantry boards, roller barrier guardrail systems, and other allied items.
6. For the impugned assessment year, the assessee filed its return of income u/s.139(5) of the Act on 31.12.2022 declaring a total income of Rs.22,53,46,606/-. The said return was selected for compulsory scrutiny, and accordingly, a notice u/s.143(2) of the Act was issued on 17.06.2023, consequent to the search and seizure action conducted u/s.132 of the Act.
7. A search and seizure action u/s.132 of the Act was carried out on 12.10.2022 in the case of the assessee and its group concerns, including
:-5-: I.T.A. Nos.:1657 & 1662/Chny/2025 M/s.Rishi Enterprises. During the course of the said search conducted at the business premises of the assessee situated at No. 254, Periyar Nagar, Rajagopalapuram Post, Pudukkottai – 622 003, certain books of account and documents were found and seized vide Annexures ANN/MK/HW/B&D/F&S/1 and 2.
8. The said materials were found in the possession of one Shri Balasekhar, from whom a statement was recorded u/s.132(4) of the Act. In the course of the said statement, Shri Balasekhar admitted that he being the author of the seized notebooks and further stated that the entries contained therein represented details of cash receipts and cash payments relating to the assessee group. He further deposed that the said records had been maintained by him from 01.04.2020 onwards under the specific directions of Shri M. Pandithurai, Managing Director of the assessee company, for the purpose of maintaining a track of all the cash receipts and payments pertaining to the assessee group.
9. The AO upon examination of the seized notebooks, observed that the cash inflows recorded therein corresponded to cash withdrawals made from the bank accounts of the assessee as well as from the accounts of M/s. Rishi Enterprises. It was further noted that such cash withdrawals were entrusted to Shri Balasekhar for safe custody and subsequent disbursement. The AO observed Shri Balasekhar also stated in his statement that the said cash withdrawals had been accounted for as wages in the books of account of the assessee company.
:-6-: I.T.A. Nos.:1657 & 1662/Chny/2025
The AO further noted that the seized notebooks contained several entries under the narration “MD Personal” or “MD Per”. In his statement, Shri Balasekhar clarified that all such entries marked as “MD Personal” represented amounts handed over to the Managing Director of the assessee company Shri M.Pandithurai, Managing Director or for any personal purposes as instructed by him.
It was further deposed by Shri Balasekhar that, as a regular practice, he used to obtain debit vouchers for cash disbursed to any one from his custody; however, no such vouchers were obtained in respect of cash handed over to Shri M. Pandithurai. On this basis, the AO inferred that the cash payments bearing the narration “MD Personal” represented withdrawals by the Managing Director for his personal use and were not incurred for the business purposes of the assessee company. The AO further recorded that, during the course of the search, a sum of Rs.5,44,190/- in cash was found at the residential premises of Shri M.Pandithurai. In his statement recorded on 14.10.2022, Shri M.Pandithurai admitted that the said cash had been withdrawn from the bank account of the assessee company for his personal use.
In connection with the accounting of wages, a statement u/s.132(4) of the Act was also recorded from Smt.A.Ramya, Accounts Staff, on 14.10.2022. In her statement, Smt.Ramya stated that she was working in the Accounts Department under the supervision of Shri Stanley Jones, Manager (Accounts).
:-7-: I.T.A. Nos.:1657 & 1662/Chny/2025 She further stated that her responsibilities included entering details relating to purchases, bank transactions, loan accounts, and divisional expense vouchers in Tally software, as well as assisting in the day-to-day accounting functions of the office. She also deposed that the divisional expense entries were made based on the details furnished by Shri Stanley Jones, and that no supporting documentary evidence was available with her for verification of such entries.
Further, Shri Stanley Jones, Manager (Accounts), in his statement recorded during the search proceedings, deposed that the wages were paid in cash and accounted for under the head labour wage expenses. He admitted that such wage payments were supported only by self-prepared vouchers and that no independent supporting documents were available to substantiate such wage expenditure.
Upon detailed examination of the seized notebooks, the AO noted that the cash payments/debit entries marked “MD Personal” aggregated to Rs.34,68,28,000/- during the previous year relevant to the A.Y.2022-23. The 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. Accordingly, the AO issued a show-cause notice to the assessee as to why the said debit entries should not be treated as cash siphoned off from the books of M/s.Hariway Lines Pvt. Ltd. and M/s.Rishi Enterprises, and consequently disallowed as non-business expenditure.
:-8-: I.T.A. Nos.:1657 & 1662/Chny/2025 15. The assessee objected to the proposal of the AO by submitting that the seized notebooks maintained by Shri.Balasekhar, who is a trusted custodian of the assessee, were merely in the nature of cash scroll books maintained for his own convenience, and not cash books forming part of the regular books of account of the assessee. It was contended that Shri.Balasekhar functioned only as a cash keeper and custodian, and that the cash, prior to its disbursement towards labour and wage payments, was kept in his safe custody. It was further submitted that Shri.Balasekhar had no knowledge of the ultimate utilization of the said cash, as his role was confined to recording the inflow and outflow of cash and ensuring its safe custody. The assessee explained that the notings and narrations found in the seized notebooks, such as “MD Personal”, “Hari Office”, and “Paid to Office”, were only descriptive references made by Shri.
Balasekhar for the limited purpose of identifying the recipients or destinations of cash.
The assessee also brought to the attention of the AO the retracted statement of Shri. M.Pandithurai dated 05.12.2022, wherein, in response to Question No.9, Shri.Pandithurai clarified that the debit entries in the seized cash scroll book maintained by Shri.Balasekhar, marked as “MD Personal”, represented cash handed over to him for onward wage disbursements and site maintenance expenses incurred at various project locations for Hariway lines Pvt. Ltd. and Rishi Enterprises. Shri Pandithurai further deposed in the sworn statement that with respect to the entries recorded as “MD Personal”, the end
:-9-: I.T.A. Nos.:1657 & 1662/Chny/2025 use is known to him only. It was, therefore, submitted that the debit entries or cash payments denoted as “MD Personal” did not pertain to personal expenditure of the Managing Director, but were wholly and exclusively related to the assessee’s business operations. The assessee further stated that the unspent cash will be returned by Shri Pandithurai or by the office supervisors to Shri Balasekhar for safe custody in the locker.
It was further contended that the nature of the assessee’s business is inherently labour-intensive, involving substantial expenditure on labour and wages. The manufacturing of road safety products and their installation over extensive stretches of road require the deployment of a large local workforce available nearby the work sites to ensure hassle free execution of contracts.
Consequently, wage costs constitute a major component of the assessee’s operational expenditure. The assessee explained that the accounting entries are not passed on a day-to-day basis, as the available accounting personnel are primarily engaged in banking and project-related activities throughout the year. The books of account are generally updated and finalized only at the close of the statutory period for filing returns of income.
It was also explained that maintenance of vouchers at the site level is both impracticable and unsafe, as such decentralized documentation may lead to defalcations. Hence, vouchers are maintained centrally at the head office, and self-made vouchers are prepared only for statutory compliance, including obligations under various labour laws. It was submitted that all projects
:-10-: I.T.A. Nos.:1657 & 1662/Chny/2025 executed by the assessee were governmental contracts, the work had actually been performed, and the expenditure incurred was genuine and verifiable.
Therefore, treating such expenditure as bogus would result in the assessment of a notional rather than real income, contrary to the settled principle of law that only real income is taxable.
The assessee further submitted that no incriminating or parallel set of books of account indicating fictitious or bogus entries were found during the course of search. The seized cash scroll books merely reflected cash movements relating to business expenditure and could not be construed as parallel books evidencing bogus transactions. It was contended that no material had been unearthed during the search indicating the incurrence of any non- business or personal expenditure. Considering the nature of the assessee’s activity and the necessity of engaging a large workforce for both manufacturing and installation work, the movement of cash from the head office handled by Shri.M.Pandithurai for safety reasons and recorded by Shri. Balasekhar under heads such as “MD Personal”, was purely for business exigencies.
The assessee also submitted that the proposed disallowance of Rs.34.68 crores on account of alleged bogus wage payments would result in an unrealistic and impracticable profit ratio of 32.67%, which is inconceivable in the line of business, particularly in government contract works. It was emphasized that the statements relied upon by the AO did not contain any admission of bogus or non-genuine expenses; they only referred to the maintenance of self-
:-11-: I.T.A. Nos.:1657 & 1662/Chny/2025 made vouchers for wage disbursements. The assessee relied on various judicial precedents to submit that, even where some defects are found in the maintenance of vouchers, the entire expenditure cannot be disallowed; only an appropriate estimate of profit element, if any, could be made.
It was further pointed out that, to cover any possible discrepancies in wage documentation, the assessee had, on its own, voluntarily disallowed an amount of Rs.1,68,27,540/- which includes 10% of the total wages of Rs.9.84 crores, in the computation of income for the relevant assessment year.
Therefore, any further disallowance on the same account was unwarranted in the absence of corroborative material indicating inflation or booking of fictitious wage expenses.
On the basis of the above submissions, the assessee requested the AO to drop the proposed disallowance of Rs.34,68,28,000/- towards alleged bogus wage payments.
The AO not being satisfied with the explanation tendered by the assessee, proceeded to make an addition towards bogus wage payments in the hands of the assessee. The AO observed that the cash scroll book maintained by Shri Balasekar represented the de facto control record of the actual inflow and outflow of cash. The AO further observed that the cash payment/debit entries bearing the narration “MD Personal” signified cash withdrawals made by Shri M.Pandithurai for his personal purposes.
:-12-: I.T.A. Nos.:1657 & 1662/Chny/2025
The AO acknowledged that the assessee’s business operations necessitated engagement of a substantial workforce; however, the authenticity of the amounts claimed as deduction towards wages required detailed scrutiny.
During the course of assessment proceedings, the statements of Ms.Ramya and Shri Stanley Jones, Accounts Manager of the assessee company, were recorded, wherein it was deposed that the wage payments were made based on lists of workers provided, but that no corroborative supporting evidence was available to substantiate or verify the actual work performed by the labourers.
The AO also rejected the assessee’s contention that no incriminating material suggesting booking of bogus expenditure had been found during the course of search. According to the AO, the cash withdrawn and booked as wage payments in the assessee’s books of account and subsequently handed over to the Managing Director had not been utilised for payment of wages to the extent so recorded.
As regards the alternative plea of the assessee for restricting the disallowance to an estimated percentage of the alleged bogus wage payments, the AO rejected the same on the ground that there existed specific evidence indicating that the cash withdrawals, though accounted as wage payments, had in fact been diverted for other purposes by the Managing Director. The AO held that, in such circumstances, an estimation of disallowance at a nominal rate, ignoring the factual findings brought on record, would not be in the interest of :-13-: I.T.A. Nos.:1657 & 1662/Chny/2025 justice. Accordingly, the AO concluded that the wage payments recorded in the assessee’s books were bogus and required to be disallowed in full.
The AO noted that, for the A.Y.2022-23, the aggregate of debit entries bearing the narration “MD Personal” amounted to Rs.34,68,28,000/-, whereas the corresponding credit entries under the same head aggregated to Rs.8,42,00,000/-, which represents the amounts handed over to Shri Balasekhar by Shri Pandithurai directly. Thus, while quantifying the bogus wage disallowance, the AO granted credit for the latter sum and determined the net disallowable amount at Rs.26,26,28,000/- (Rs.34,68,28,000 – Rs.8,42,00,000).
The AO further observed that the said sum pertained to both M/s.Hariway Lines Private Limited and M/s.Rishi Enterprises, inasmuch as there was no clarity as to the entity to which each debit entry related. The AO, therefore, apportioned the total disallowance between the two concerns in the ratio of wages claimed by each to the total wages claimed by both entities combined. On such apportionment, the AO computed disallowances of Rs.17,48,42,528/- and Rs.8,77,85,471/- in the hands of M/s.Hariway Lines Private Limited and M/s.Rishi Enterprises respectively.
Since the assessee had suo moto disallowed a sum of Rs.1,68,27,540/- in its return of income, the AO made a net addition of Rs.15,80,14,988/- towards bogus wage disallowance in the hands of the assessee.
:-14-: I.T.A. Nos.:1657 & 1662/Chny/2025 29. It was further observed that the AO had made other additions on account of unaccounted scrap sales and bogus sub-contract expenses. However, since these issues are not the subject matter of dispute before us, we refrain from discussing the same.
Consequently, the assessment was completed u/s.143(3) of the Act vide order dated 28.03.2024, determining the total income of the assessee at Rs.41,00,78,594/-, which included, inter alia, an addition of Rs.15,80,14,988/- towards bogus wage payments.
Aggrieved of the above assessment order, assessee carried the matter before the Ld.CIT(A) who vide impugned order dated 26.03.2025 deleted the addition of Rs.15,80,14,988/- made by the AO towards bogus wage payments.
The assessee, in the course of appellate proceedings before the Ld.CIT(A) submitted that the assessee was engaged in the execution of contract works at several hundred sites located across the State of Tamil Nadu.
It was contended that the said business activity was highly labour-intensive in nature, being carried out with the assistance of locally available manpower at each site. It was further submitted that the execution and supervision of such works were directly monitored by Shri M.Pandithurai. It was submitted by the assessee that Shri Pandithurai travels and monitors the work, takes the money with him for onward disbursement for wages at various sites. Shri Pandithurai
:-15-: I.T.A. Nos.:1657 & 1662/Chny/2025 gets the required money periodically from Shri Balasekhar, who acts as custodian.
It was explained that, whenever cash was handed over to Shri M.Pandithurai, the same was recorded by Shri Balasekhar with the narration “MD Personal”. The assessee submitted that Shri Balasekhar was unaware of the subsequent utilization of such cash. It was, however, the consistent contention of the assessee that the amounts so handed over to Shri M.
Pandithurai were ultimately utilized for the purpose of making labour payments at various work sites and, therefore, the same could not be treated as having been expended for non-business purposes.
The assessee further submitted that Shri M.Pandithurai was undergoing medical treatment in Kerala at the time of the search and had been admitted for the said purpose on 10.10.2022. It was stated that, in order to cooperate with the Departmental authorities, Shri Pandithurai had to prematurely discontinue his treatment and attend to the search proceedings. Consequently, it was submitted that the statement recorded from Shri Pandithurai on 14.10.2022 was not made in a sound state of health and mind. The assessee pointed out that, after regaining normal health, Shri Pandithurai had, in his subsequent statement recorded on 05.12.2022, clarified the true facts of the matter. It was thus contended that the earlier statement dated 14.10.2022 could not be regarded as valid or reliable evidence, as it was made under circumstances of ill health and mental distress.
:-16-: I.T.A. Nos.:1657 & 1662/Chny/2025
The assessee also contended before the Ld.CIT(A) that the sworn statements of the accounting staff relied upon by the AO in fact corroborate the position that the cash withdrawn from the bank was utilized towards payment of wages to the labourers. Reliance was placed on the judgment of the Hon’ble Madras High Court in the case of CIT v. SPL Infrastructure Private Limited [2020] 427 ITR 213 (Mad), wherein it was held that a voluntary disallowance of 10% towards unverifiable expenses would be sufficient to meet any deficiency in the maintenance of vouchers. It was, therefore, submitted that, in the facts of the present case, the voluntary disallowance already offered by the assessee adequately covers any possible irregularities in documentation, and hence, any further disallowance on account of wage payments is unwarranted. The assessee submitted that it has offered a Net Profit ratio of about 12% in all the years, whereas the comparable industry margins are in between 6% to 8%, hence the assessee urged that there cannot be any scope for making an addition of whopping sum of Rs.15.80 Crores in the assessment.
In view of the aforesaid submissions, the assessee prayed that the addition made by the AO towards alleged bogus wage payments be deleted in entirety.
Upon considering the submissions of the assessee, the Ld.CIT(A) deleted the addition of Rs.15,80,14,988/- made by the AO towards bogus wage payments holding as under: -
:-17-: I.T.A. Nos.:1657 & 1662/Chny/2025
“6.2.15 The undersigned has carefully examined the issue under consideration. The AO in the assessment order has primarily relied upon the cash scroll books maintained Shri Balasekhar , close relative of Shri. M. Pandithurai , Managing Director of the appellant company . No doubt the said cash scroll book maintained by Shri. Balasekar was a separate record distinct from the regular books of accounts of the appellant company. The primary purpose of this cash scroll book was to document the inflow and outflow of cash, which were handled directly by Shri. Balasekar, who acted as the custodian of cash for the group entities of the appellant. This record was not intended to replace the formal accounting system but was a practical method used by the appellant company to track the day-to-day handling of cash, particularly in a business that involved substantial cash transactions due to the nature of its operations. 6.2.16 The entries in this cash scroll book, specifically those marked as "MD Personal," have been a point of contention between the appellant and the AO. The appellant contends that these entries were not indicative of personal withdrawals by the Managing Director (MD) for non-business purposes, but rather were business related expenses, including payments towards wages and other site maintenance costs. 6.2.17 During the course of appellate proceedings, the AR asserted about the appellant’s business model which involves the manufacture, supply and installation of road safety products such as road signs, reflectors, markings, crash barriers, and related products. Upon receiving a work order, the appellant analyses the best approach for execution, often utilizing local labour for each project site across Tamil Nadu. The works are supervised by the company's Director, M. Pandithurai himself, who frequently visits the sites to ensure quality and timely completion. In cases where sub-contractors are involved, the appellant selects them from an approved panel and assigns the work after obtaining their consent. Payments to sub contractors are made after deducting TDS. At any given time, the appellant executes projects across hundred(s) of locations across the state of Tamilnadu with the assistance of local labour at each site. 6.2.18 In support of the appellant's position, Shri. M. Pandithurai, the Managing Director of the appellant company, clarified in his sworn statement recorded u/s 132(4) of the Act during the course of conclusion of the search proceedings that the cash withdrawn from the company's bank accounts was solely used for business-related purposes, including the payment of wages to laborers and workers on various construction sites, as well as other operational expenses necessary for the day-to-day running of the company. The relevant summary of such sworn statement recorded from Shri M Pandithurai
:-18-: I.T.A. Nos.:1657 & 1662/Chny/2025 during the completion of search proceedings is extracted here as under: • Shri. Balasekar was the person-in-charge for the cash locker at our office at Pudukkottai and he was acting as a Cash keeper and trusted custodian for the cash handed over to him for safe custody. • That the source for receipts in the cashbook is from bank withdrawals made of the appellant’s group concerns. [Deposition to Q.No.6 of the sworn statement dated 05-12 2022] • That huge sum of money is handed over to Shri. Balasekar for safe keeping purposes only as the accounts team is not capable of handling such a large sum of money. [Deposition to Q.No.7 of the sworn statement dated 05-12-2022 • That the end use of the disbursements remarked as ‘MD personal’ in the cash book is known only to Shri. M. Pandithurai and not to Shri. Balasekar. [Deposition to Q.No.8 of the sworn statement dated 05-12-2022] • That the amounts paid with a remark of ‘MD personal’ in the cash book is utilized for payment of wages, site maintenance at various locations of appellant group concerns. [Deposition to Q.No.9 of the sworn statement dated 05-12-2022] • Shri. Balasekar used certain identification marks and names such as "hari Office", "rishi office", paid to office, entries in the name of staff members and "MD Personal" to enable himself to identify the persons dealing with him. Though he makes the entries in the name of the person to whom monies were paid, he is not aware of the end use of the payments recorded as MD Personal"'. • His "MD Personal" remark was meant to convey the meaning "MD personal " [This term in Tamil vernacular language means that he had handed over the money in person to MD and cannot be interpreted that the money was paid for personal purposes]. Shri. M. Pandithurai asserted that the withdrawal of cash from the company’s accounts was a standard business practice for facilitating transactions, particularly in a cash-intensive industry like construction, where payments to workers often had to be made in cash at project sites. Further the labours who were engaged in the contract works were not of permanent nature, they were sourced locally for specific works only at respective sites.
:-19-: I.T.A. Nos.:1657 & 1662/Chny/2025
6.2.19 Shri. M. Pandithurai denied any personal use of the funds withdrawn from the business accounts, emphasizing that all withdrawals were directed towards the legitimate needs of the business. He further clarified that the entries marked as "MD Personal" did not relate to personal withdrawals for personal consumption but rather denoted funds that were utilized in connection with business operations, as these withdrawals were either paid as wages or used for other project-related expenses. 6.2.20 The appellant has consistently maintained that the cash scroll book was used as a record for the safe custody of cash and to track the actual cash transactions conducted by the company on a daily basis. The appellants contend that the entries marked "MD Personal" referred to cash used for legitimate business expenses. These entries, while not formalized through the company’s primary accounting system, represented cash being utilized for business expenses, particularly for labour wage payments and site maintenance, which are typical in the industry. The company’s practice of using cash withdrawals for such business payments is common in industries dealing with a large labour force and cash-intensive operations. The appellant asserted that this practice is aligned with industry norms and that there is no wrongdoing in using cash for such business purposes, which is often necessary for operations that cannot always be handled through bank transfers or cheque payments due to the nature of the workforce. 6.2.21 The undersigned is of the view that the appellant's business model involves the manufacture, supply, and installation of road safety products, including road signs, reflectors, markings, and crash barriers. Additionally, it encompasses other labour-intensive activities such as digging pits, installing poles, conducting metallic fabrication on-site, and performing painting work. These works are supervised by the company's Director, M. Pandithurai himself, who frequently visits the sites to ensure quality and timely completion. The MD in order to execute the works draws the cash from the custodian Shri. Balasekhar to incur the various expenses at numerous work sites which involves the engaging of local labourers. Hence, the narrations contained in the scroll book maintained by Shri. Balasekhar as “ MD Personal “ denotes that the cash was given to the MD personally for the incurring the expenses related to business activities. 6.2.22 Further after the execution of works at various sites the MD returns the excess cash drawn back to the cash custodian, Shri Balasekhar. This returned cash is also recorded in the cash scroll note book by Shri. Balasekhar as “ MD Personal Return” and credited to the cash book. The AO in the assessment order at para No. 5.16 has recognised this transaction by observing as under.
:-20-: I.T.A. Nos.:1657 & 1662/Chny/2025
“Out of the above, it is considered that, the total debit entries to the tune of Rs.34,68,28,000/- remarked as 'MD Personal' on the debit side is the amount withdrawn from the accounts of both entities M/s Hariway Lines Pvt Ltd and M/s Rishi Enterprise. Similarly, the total credit entries to the tune of Rs.8,42,00,000/- remarked as 'MD Personal' on the credit side is the amount brought into the running balance by the MD Shri M Pandithurai in both the entities. In view of this, the total credit entries to the tune of Rs.8,42,00,000/-remarked as 'MD Personal' on the credit side is therefore, given credit for the purposes of final quantification for deciding the wage disallowances. Hence, as discussed above, net disallowable amount on account of bogus wage expenses is quantified to Rs.26,26,28,000/- (346828000-84200000)” Based on the above, it is evident that the MD was withdrawing cash from the custodian to cover business expenses incurred at multiple sites across the state of Tamil Nadu. 6.2.23 Despite the appellant’s clear explanation, the AO, in the assessment order, assumed that the cash withdrawals marked as "MD Personal" were used for personal expenses unrelated to the business. However, no concrete evidence that substantiates this assumption was brought on record by the AO. Furthermore, the AO has not brought on record the application of such money that is alleged to be utilised for personal expenses. In the absence of any such findings, about the application of money received marked as “MD personal” by Shri. Pandithurai, the findings of the AO can only be speculative. The AO’s conclusion appears to be based on a misinterpretation or assumption without considering the full context of the company’s operations. It is important to note that the absence of formal documentary evidence such as third-party invoices for all such payments does not automatically render the expenditures non- business related. In industries such as the appellant’s, especially those involving large numbers of workers at construction sites, self- made vouchers and informal cash records are a common practice. These self made vouchers were generated in the field when paying wages and were backed by the labour records and the workforce list provided by the appellant, which were duly maintained for regulatory purposes. 6.2.24 The AO has failed to present any concrete evidence or documentation revealing that the cash withdrawals marked as "MD Personal" were actually diverted for personal use. No additional evidence has been furnished that links these withdrawals to personal investments or expenditures of the MD. On the contrary, the appellant has provided a reasonable explanation, including statements from the MD and staff members, supporting the legitimacy of the expenditures
:-21-: I.T.A. Nos.:1657 & 1662/Chny/2025 related to the business operations. Moreover, it is pertinent to note that the appellant has already voluntarily disallowed a portion of the wages amounting to Rs. 1,68,27,540/- which is inclusive of Rs.74,70,000/- towards the disallowance of sub contract payments, in an effort to address any discrepancies and as a precautionary measure. 6.2.25 Further, as brought out by the AR, the AO in the assessment order at para 5.17 has disallowed an amount of Rs.17.48 Crores as bogus wage expenditure as against the amount of Rs. 9,84,67,795/- actually claimed by the appellant company in its profit and loss account. Obviously, the disallowance of Rs. 17.48 crores in the assessment order constitutes about 177% of the actual claim of Rs. 9.84 Crores. The appellant’s AR claimed that if the AO had properly reviewed and considered the actual wages of Rs. 9,84,67,795/- claimed by the appellant, there would have been no need to apply an apportionment formula to determine the alleged bogus wages. The AR contended that the AO's decision to make additions beyond the actual wages claimed indicates that the assessment was done in a mechanical manner without considering the specific facts and circumstances of the case. Additionally, the appellant provided a written submission detailing the nature of the industry in which it operates, emphasizing the necessity of a large workforce to undertake contract works across various parts of Tamil Nadu. The appellant also pointed out that the typical profit margin in its industry ranges from 6% to 8%, while for the assessment year 2022-23, the appellant achieved a higher net margin of 12.04%, reflecting its operational efficiencies. 6.2.26 At this juncture it is significant to bring on record the judicial decisions relied upon by the appellant upon this issue viz.. (i) In the case of CIT vs SPL Infrastructure Pvt Ltd (2020) 427 ITR 213 /274 Taxman 292(Mad) (HC), the jurisdictional Madras High Court has, on the alleged issues of bogus sub-contract workers payments, observed that the assessee had voluntarily disallowed 10% of such expenditure to buy peace of mind and after such disallowances, the Net profit shown stands at 3.83% was much better as compared to previous three years and only marginally less than the previous two years of 2005-06 and 2006-07, which were at the rate of 4.20% and 3.94%. Accordingly, it has held that no further disallowance was called for and it was not necessary to interfere in the judgement of the ITAT. The High court has also observed that they fail to understand as to why the Revenue has filed these Appeals to drag cases further in the High Court incurring the loss of man hours and cost of litigation. Such unnecessary litigation on the part of the Revenue Authorities deserves to be strongly deprecated, but, the Revenue Authorities do not seem to be seeing the sense behind this and keep on filing Appeals under Section 260A of the Act, as a matter of routine exercise.
:-22-: I.T.A. Nos.:1657 & 1662/Chny/2025
(ii) The Hon’ble jurisdictional Chennai Tribunal in the case of Shri Irulandi Thevar Vetrivel vs The ACIT, Central Circle-2, in to 136/Chny/2024, has held that estimated profit at the rate of 10% of the contractual receipts from infrastructure projects would be reasonable enough and there is no further need to make any further disallowances. 6.2.27 In the case at hand, the appellant company is engaged in the business executing contracts pertaining to road furniture and allied infrastructure. Generally, in contract business, the Act recognises 8 % profit margin in small business. The AR specifically brought to the attention of the undersigned that the net margin of the appellant would reach 22.88% after considering the disallowance made by the AO in the assessment order. The profit margin of about 23% is much higher than the percentage prescribed in Act (As per the provisions of section 44AD of the Act, the income of the taxpayer is presumed to be 8% of the turnover or gross receipts of the business.) The attempt of the AO to disallow the entire direct wages / direct expenses is not justifiable without appreciating the nature of the work the appellant has under taken which is purely labour oriented one. It is appropriate to bring on record that the appellant’s own disallowance in the return of income filed amounting Rs. 1,68,27,540/- which includes a sum of Rs. 93,57,540/- out of the total wages debited to Profit and loss account of Rs. 9,84,67,794/- and Rs. 74,70,000/- on account of disallowance of sub contract payments. The disallowance of the estimated wages constitutes 9.5% of the total wages claimed. The attempt of the AO to make a further disallowance of Rs. 15.80 Crores results in an impossible profit margin of 23%. 6.2.28 Further the AO, in para 5.17 of the assessment order has apportioned the disallowance of Rs. 26.26 Crores between the appellant company and M/s. Rishi Enterprises (a constituent firm of the appellant company) based upon the ratio of individual wages claimed to total wages is not justifiable as this method resulted in an estimated disallowance of an amount which exceeded the actual claim. The comparison drawn by the AO is devoid of any factual basis and fails to consider the unique nature of the work performed by both entities. It is not grounded in any logical analysis and appears to be based purely on assumption. Such an approach is inappropriate, as it overlooks the specific operational dynamics and requirements of the appellant's business, which should have been duly considered in making an accurate assessment. In view of the detailed discussion above, the undersigned is of the considered view that the estimated disallowance of Rs.15,80,14,988/- contemplated by the AO, as against the actual wages claim of Rs. 9,84,67,795/-,in the profit and loss account is inconsistent with the principles of fair taxation. This disallowance represents 177% of the total wages claimed, which is excessive and not supported by concrete evidence, thereby violating the fundamental principles of equity and fairness in taxation.
:-23-: I.T.A. Nos.:1657 & 1662/Chny/2025 Accordingly all the ground raised by the appellant upon this issue are hereby treated as allowed and the AO is directed to delete disallowance of Rs. 15,80,14,988/- made for the AY 2022-23.”
38. Aggrieved by the above order of the Ld.CIT(A), Revenue is in appeal before us.
The Ld.DR, appearing on behalf of the Revenue, vehemently supported the findings and conclusions drawn by the AO. It was contended that the debit entries recorded in the seized note books under the narration “MD Personal” clearly represent cash withdrawals utilized by Shri M.Pandithurai for his personal purposes, and therefore, the said amounts cannot be regarded as business expenditure.
The Ld.DR further submitted that the wage expenses are supported merely by self-made vouchers and are not corroborated by any independent or third-party evidence. This, according to the Ld.DR, establishes that the wage payments recorded by the assessee are not genuine but are, in fact, bogus entries introduced to inflate the expenditure and suppress the taxable income.
In light of the above submissions, the Ld.DR contended that the Ld.CIT(A) erred in deleting the addition made by the AO on account of bogus wage payments. The Ld.DR, therefore, prayed that the order of the Ld.CIT(A) be set aside and that the order of the AO be restored by allowing the appeal filed by the Revenue.
:-24-: I.T.A. Nos.:1657 & 1662/Chny/2025 42. Per contra, the Ld.AR appearing on behalf of the assessee vehemently contended that none of the parties whose statements were recorded by the Investigation Wing had, at any point, admitted that the assessee was engaged in the practice of booking bogus wage expenses through withdrawal of cash from the bank accounts. The Ld.AR further submitted that there was neither any discovery of parallel books of account nor any incriminating material found during the course of search or assessment proceedings that could substantiate or corroborate the conclusion drawn by the AO regarding the alleged bogus wage payments. The Ld.AR further submitted that Shri Balasekhar is the trusted custodian for safe keeping of the cash and whenever cash was paid to Shri Pandithurai, it was remarked as “MD Personal” in the cash scroll book maintained by him, which implies cash was handed over “in person” to the Managing Director Shri Pandithurai, who utilize the said money for onward wage disbursement and site expenses at various site locations across Tamil Nadu. The Ld.AR submitted that the Managing Director personally travels all the locations to monitor and supervises the work. Further, Shri Pandithurai used to return the unspent cash took for wage disbursements back to Shri Balasekhar which is again noted by Shri Balasekhar as “MD Personal” as the said money was personally handed over to him by MD, this fact was rightly appreciated by the AO in the assessment order. According to the Ld.AR, this proves that the explanation of the assessee relating to utilization of cash towards wage disbursement, site maintenance and other expenses by Shri Pandithurai is :-25-: I.T.A. Nos.:1657 & 1662/Chny/2025 genuine and no adverse inference is necessary merely for the narration coined and noted by Shri Balasekhar for his own understanding.
It was further argued by the Ld.AR that the statement of Shri M.Pandithurai, which formed the sole basis for the impugned addition, had subsequently been retracted on 05.12.2022 in the statement recorded u/s.132(4) with detailed factual explanation and reconciliation. Therefore, the initial statement, being retracted with cogent reasoning, cannot be relied upon and carries no evidentiary value in the eyes of law.
The Ld.AR also invited our attention to the fact that, after the impugned addition on account of alleged bogus wages on proportionate method without any concrete basis, the resultant net profit ratio of the assessee stands at an abnormal level of 22.88%, which is wholly unrealistic and unachievable in the line of business in which the assessee is engaged. This, according to the Ld.AR demonstrates the arbitrary nature of the addition made by the AO. The Ld.AR further submitted that the assessee had voluntarily disallowed an amount of Rs.1,68,27,540/- which includes 10% of the total wages of Rs.9.84 crores to cover up any anomalies of the search findings and other factors, hence further disallowance is unwarranted. It was also brought to our attention that the assessee was offering net profit in the range of 12% in all the years is more than the net profit offered by the peers in the industry. According to the Ld.AR, considering the offer of higher net profit ratio by the assessee, any further addition on presumption without any concrete basis is unwarranted.
:-26-: I.T.A. Nos.:1657 & 1662/Chny/2025
It was further submitted that the total amount of wages debited to the Profit and Loss Account during the relevant assessment year was only Rs.9.84 crores, whereas the AO, without proper verification or basis, proceeded to make an addition of Rs.15.80 crores on account of alleged bogus wage expenditure.
Such an addition exceeding the total claim itself, the Ld.AR contended, clearly manifests non-application of mind on the part of the AO and renders the addition unsustainable both in law and on facts.
Supporting the findings of the Ld.CIT(A), the Ld.AR submitted that the order passed by the Ld.CIT(A) is a well-reasoned and speaking order, duly considering all relevant facts, evidences, and legal principles, and therefore does not suffer from any perversity or infirmity warranting interference.
Accordingly, the Ld.AR urged that the Ld.CIT(A) has rightly deleted the addition made by the AO towards the alleged bogus wage payments, and the same deserves to be upheld.
We have heard the rival contentions, perused the material available on record, and examined the orders of the lower authorities. We note that the assessee is engaged in the engineering and construction activities, including the execution of various contractual works. The assessee is also engaged in the manufacture, supply, and erection of road safety products such as road signs, road reflectors, road markings, pavement markings, crash barriers, overhead gantry boards, roller barrier guardrail systems, and other allied items.
:-27-: I.T.A. Nos.:1657 & 1662/Chny/2025 A search and seizure operation u/s.132 of the Act was conducted at the business premises of the assessee and its group concerns. During the course of such proceedings, certain notebooks authored and maintained by one Shri Balasekhar were found and seized. The said notebooks contained notings of cash receipts and payments.
It is an undisputed position that the inflow entries recorded in these seized notebooks represented cash withdrawals from the bank accounts of M/s.Hariway Lines Private Limited and M/s.Rishi Enterprises. The outflow side of the said notebooks contained various cash payment entries with descriptive narrations. Among these, certain entries were marked as “MD Personal” or “MD Per.” The debit entries carrying such narration form the subject matter of the present dispute, though there are credit entries under the same narration.
It was revealed during the course of investigation that Shri Balasekhar is a close relative of Shri M.Pandithurai and was acting as a trusted custodian of the cash belonging to the assessee and its group entities. In his statement recorded u/s.132(4) of the Act, Shri Balasekhar categorically deposed that entries bearing the narration “MD Personal” denote cash handed over to Shri M. Pandithurai. In his initial statement dated 14.10.2022, Shri M.Pandithurai admitted that the cash found at his premises represented withdrawals from the bank accounts of M/s.Hariway Lines Private Limited and was intended for his personal use. However, in his subsequent statement recorded u/s.132(4) of the Act dated 05.12.2022, he retracted the earlier version, explaining that the cash
:-28-: I.T.A. Nos.:1657 & 1662/Chny/2025 received from the custody of Shri Balasekhar was utilized exclusively for the business requirements of the assessee concern.
The AO, however, rejected the subsequent explanation and concluded that the debit entries in the seized notebooks bearing the narration “MD Personal” represented cash utilized by Shri M. Pandithurai for his personal purposes. Since the cash payments were sourced from the bank withdrawals of the assessee and M/s.Rishi Enterprises which had been recorded as wage payments in their regular books of account the AO held that the wage expenditure so claimed was bogus.
On analysis of the seized material, the AO observed that the aggregate of the debit entries bearing narration “MD Personal” amounted to Rs.34,68,28,000/-. After giving credit for corresponding inflows aggregating to Rs.8,42,00,000/- with the same narration, the net disallowable amount was determined at Rs.26,26,28,000/-. The AO then proceeded to apportion this amount between the two entities in a proportion of wages of the respective entities with the total wages, disallowing Rs.17,48,42,528/- in the case of M/s.
Hariway Lines Private Limited and Rs.8,77,85,471/- in the case of M/s. Rishi Enterprises. Considering that the assessee had suo moto disallowed a sum of Rs.1,68,27,540/- in its return of income (including Rs.74,70,000/- towards sub- contract payments), the AO proceeded to make a net addition of Rs.15,80,14,988/- towards alleged bogus wage expenditure in the hands of the assessee.
:-29-: I.T.A. Nos.:1657 & 1662/Chny/2025
In first appeal, the Ld.CIT(A) deleted the addition made by the AO. The Ld.CIT(A) observed that despite the assessee’s detailed explanation, the AO had proceeded on an assumption that the cash withdrawals recorded as “MD Personal” were expended for non-business, personal purposes of the Managing Director. However, no tangible or corroborative evidence was brought on record by the AO to substantiate such an inference for the amount of disallowance made in the assessment. Further, no material has been adduced by the AO to demonstrate the application of the alleged funds for any personal expenditure of Shri M.Pandithurai. In the absence of such concrete findings, the conclusions of the AO are purely speculative and not based on any cogent evidence.
The Ld.CIT(A) further noted that the AO has failed to appreciate the nature of the assessee’s business operations, which involve extensive on-site labour deployment where payments are often made in cash, supported by self- made vouchers and field records. The absence of formal third-party documentation cannot, by itself, render such expenditure non-genuine.
The Ld.CIT(A) also recorded that no evidence was adduced by the AO to establish any nexus between the impugned withdrawals and the personal expenditure of the Managing Director. On the contrary, the assessee’s explanation was supported by statements of responsible employees and the Managing Director himself, which indicated that the payments were made towards legitimate business activities. Moreover, the assessee had already
:-30-: I.T.A. Nos.:1657 & 1662/Chny/2025 made a voluntary disallowance of Rs.1,68,27,540/- in its return of income as a prudential measure to cover any possible discrepancies.
In view of the above, the Ld.CIT(A) held that the AO’s conclusion was based on mere presumption and surmise, without any substantive material to establish diversion of funds for non-business purposes, and accordingly deleted the addition. Being aggrieved by the relief granted by the Ld.CIT(A), the Revenue is in appeal before us. The solitary issue for adjudication, therefore, is whether the Ld.CIT(A) was justified in deleting the addition of Rs.15,80,14,988/- made by the AO on account of alleged bogus wage expenditure.
We have carefully perused the assessment order, the findings of the Ld.CIT(A) and the material placed on record. The primary issue under consideration pertains to the addition of Rs.15,80,14,988/- made by the AO on account of alleged bogus wage expenditure. The said addition was premised on certain debit / cash payment entries reflected in the seized notebooks recovered during the course of search and seizure operations from the desk of one Shri Balasekhar. The AO noted that the impugned entries contained narrations such as “MD Personal” or “MD Per”, and on that basis, concluded that the corresponding cash payments represented personal expenditure incurred by Shri M. Pandithurai, Managing Director of the assessee company.
Proceeding on this inference, the AO held that the funds of the company were diverted for non-business and personal purposes of the Managing Director and, consequently, disallowed the corresponding wage expenditure as bogus.
:-31-: I.T.A. Nos.:1657 & 1662/Chny/2025
Upon a careful and independent examination of the seized material, 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.
The 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 :-32-: I.T.A. Nos.:1657 & 1662/Chny/2025 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.
As held consistently by various judicial fora, any notings in a diary or scroll book not forming part of the regular books of account, unless duly corroborated by material evidence, cannot form a valid basis for making additions under the Act. Suspicion, however strong, cannot replace proof; nor can mere nomenclature in an unverified document be deemed conclusive evidence of diversion of funds. In the light of the foregoing discussion, we find that the AO’s inference of personal diversion of funds to such magnitude and consequent disallowance of wage expenditure is devoid of factual or legal foundation. The :-33-: I.T.A. Nos.:1657 & 1662/Chny/2025 addition rests entirely on a tenuous inference drawn from the mere presence of the words “MD Personal” in the seized notings, unaccompanied by any corroborative evidence. In the absence of proof of actual diversion of the alleged quantum of funds, or any supporting material substantiating the AO’s conclusions, we find no justification to treat the impugned wage expenditure as bogus. We, therefore, find ourselves in full agreement with the well-reasoned findings of the Ld.CIT(A), who has correctly appreciated the facts and applied the settled principles of law in deleting the addition of Rs.15,80,14,988/-.
We note that it is an undisputed fact that Shri Balasekhar, from whose possession the impugned notebooks were seized, was not aware of the end utilization of the funds noted as “MD Personal” as he is only a custodian for safe keeping of funds. His role, as evident from the statements and supporting circumstances, was confined merely to that of a trusted custodian entrusted with the safekeeping of physical cash and its disbursement on behalf of the assessee. The Revenue has not brought on record any material evidence to suggest that Shri Balasekhar, apart from being the author of the impugned notebooks, had any knowledge or involvement in the utilization or ultimate application of the cash disbursed by him. If indeed Shri Balasekhar was aware of the end use of the cash payments, it would reasonably follow that all the debit entries in the impugned notebooks, particularly those bearing the narration “MD Personal”, would have been accompanied by specific details identifying the ultimate purpose of alleged personal expenditure. The absence of such :-34-: I.T.A. Nos.:1657 & 1662/Chny/2025 particulars reinforces the inference that the said individual was merely recording cash transactions without any understanding of their final destination or utilisation. In view of the foregoing, we are of the considered opinion that the sworn statement of Shri Balasekhar does not carry any evidentiary value for the purpose of establishing that the assessee has debited bogus wage expenses in its books of account. Further, it is pertinent to note that neither Shri Balasekhar nor any employee of the accounting staff of the assessee company has deposed to the effect that the assessee was engaged in the practice of inflating or fabricating wage expenses. Moreover, the mere fact that debit vouchers were obtained by Shri Balasekhar when cash was disbursed to staff, and not directly from Shri M.Pandithurai, at the time of disbursement of cash by him, cannot, in isolation, constitute conclusive proof that the debit entries or cash payments bearing the narration “MD Personal” represented personal expenditure of Shri M.Pandithurai. Thus, we do not countenance the conclusion drawn by the AO that merely for not obtaining debit vouchers from Shri M.Pandithruai by Shri Balasekhar when money was handed over to him, represent that the same were utilized for non business purpose. In the absence of corroborative evidence linking such entries to personal use, the presumption drawn by the AO remains unsubstantiated and cannot be sustained in law.
We observe that during the course of search proceedings conducted at the residential premises of Shri M. Pandithurai, a sum of Rs.5,44,190/- in cash was found and seized. In the course of the statement recorded u/s.132(4) of the :-35-: I.T.A. Nos.:1657 & 1662/Chny/2025 Act on 14.10.2022, Shri M.Pandithurai deposed that the said cash represented withdrawals made from the bank account of the assessee company, purportedly for his personal purposes. Further, in response to Question No.8 of the said statement, Shri M.Pandithurai referred to certain entries bearing the notings “MD Personal” and clarified that such entries pertained to personal expenditure incurred by him on the respective dates and were not in any manner connected with the execution of contract works undertaken by the assessee company. In this factual backdrop, it is pertinent to note that the assessee has placed on record documentary evidence before the authorities below to demonstrate that Shri M.Pandithurai before the start of the search, was admitted as an in-patient at a hospital in Palakkad, Kerala, on 10.10.2022, where he was undergoing medical treatment for various ailments including anxiety, depression and insomnia at the relevant point of time. We also note that Shri Pandithurai had duly intimated the Authorized Officers of the search in writing about his health condition along with Doctors certificate for various ailments and also for taking psychiatric medicines. We also take note of the fact that the copy of letter addressed to DDIT(Inv) explaining his health conditions along with the certificates issued by the Doctors and Hospital were furnished before the lower authorities. It is further on record that Shri M.Pandithurai discontinued his treatment and appeared before the search team, whereupon his statement was recorded on 12.10.2022 and 14.10.2022.
:-36-: I.T.A. Nos.:1657 & 1662/Chny/2025 64. In the above circumstances, it becomes evident that on the date of recording of his statement, Shri M.Pandithurai was under medical treatment and was not in a position of complete physical or mental composure. It is a well- settled proposition of law that a statement made by any person who is not in a sound state of health, either physically or mentally, cannot be treated as a reliable piece of evidence unless it is positively established that such person was in a fit and conscious condition to depose. Statements recorded under duress, coercion, illness, or impaired health conditions cannot, in law, be regarded as voluntary or possessing probative value.
It is equally trite that a statement recorded under such circumstances, without corroborative supporting material, cannot form the sole basis for drawing any adverse inference or for making additions in the hands of the assessee. In the present case, apart from the statement of Shri M.Pandithurai, no corroborative evidence whatsoever has been brought on record by the Department to substantiate that the alleged sum of Rs.26,26,28,000/- was in fact withdrawn or utilised by him for his personal benefit.
In light of the foregoing discussion, we are of the considered opinion that the statement recorded from Shri M.Pandithurai on 12.10.2022 and 14.10.2022, having been made under circumstances indicative of impaired physical and mental condition, is devoid of evidentiary value and cannot be made the basis for drawing any adverse inference against the assessee. Accordingly, such statement deserves to be disregarded for all practical purposes.
:-37-: I.T.A. Nos.:1657 & 1662/Chny/2025
We further observe that on 05.12.2022, Shri M.Pandithurai, in a subsequent sworn statement recorded u/s.132(4) of the Act, retracted his earlier statement regarding the utilization of cash for personal purposes. He clarified therein that the amounts recorded in the cash book with the remark “MD Personal” were, in fact, utilized towards the payment of wages and for site maintenance expenses incurred at various locations pertaining to the assessee’s group concerns. The relevant questions put to Shri M.Pandithurai and his corresponding responses are reproduced below: - “Q. No.
In your response to question number 5, you have stated that Mr. Balasekar is acting as a cash custodian, and you have further elaborated on the nature of the entries in the cash notebook seized vide ANN/MK/HW/B&D/F&S/1&2. Please explain the source of the receipts recorded by Mr. Balasekar in the cash notebook seized vide ANN/MK/HW/B&D/F&s/1&2. Ans: Sir, the source of the receipts is withdrawal from bank accounts of Hariway Lines Pvt Ltd and Rishi Enterprises and balance returned by me which are noted by him in said code words. Q. No.
As stated in your previous responses, you have stated that the receipts in the cash notebook are cash withdrawals from bank accounts of Hariway Lines Pvt Ltd and Rishi Enterprises. Please explain why a separate cash notebook has been maintained with Mr. Balasekar for recording bank withdrawals other than the cash book of the respective businesses maintained in Tally. Ans: Sir, when the amounts are withdrawn accountants from the bank, the accountants are not capable of storing such huge sums of money. Hence, as instructed by me, the same is handed over to Mr. Balasekar for safekeeping. Thereafter, he disburses the same on the request of company persons tor the various expenses. Q. No.
As deposed by you in response to previous questions 5, 6 and 7, it is stated that the Mr. Balasekar is not aware of the end use of the payments found in the cash notebook seized vide ANN/MK/HW/B&D/F&S/18&2. In this context, please explain who knows the end use of the disbursements and debit entries in the cash :-38-: I.T.A. Nos.:1657 & 1662/Chny/2025 notebook maintained by Mr. Balasekar against the remark 'MD Personal', which is seized vide ANN/MK/HW/B&D/F&S/ 1&2. Ans: Sir, wherever the entries are recorded against the remark MD Personal' and in the said code words, the end use is known to me only. Q. No.
As deposed by you in the response to question number 8 above, it is stated that end use of the debits having the remark 'MD Personal' is known to you. In this context, please explain the end use of the payments remarked as 'MD Personal', which is known to you as deposed by you. Ans: Sir, I submit that such funds were utilized by me for wage disbursements, site maintenance at various locations for Hariway Lines Pvt Ltd and Rishi Enterprises. However as stated earlier, I will reconcile and furnish the details within two weeks’ time.”
It is evident from the above that Shri M.Pandithurai had categorically retracted his earlier statement concerning the alleged utilization of cash disbursed to him by Shri Balasekhar. Notwithstanding such a categorical retraction, the AO, while framing the assessment, chose to place reliance upon the initial statement recorded during the course of investigation, completely disregarding the subsequent retraction in the sworn statement recorded u/s.132(4) of the Act. The AO has neither brought on record any corroborative evidence nor made any independent verification to substantiate that the retraction was an afterthought or otherwise incorrect. We observe that the Revenue has failed to place any cogent material or evidence to demonstrate that the retraction dated 05.12.2022 was false, fabricated, or made with any ulterior motive. It is a settled position in law that a statement which has been retracted cannot, by itself, form the sole basis for an adverse inference unless such retracted statement is duly supported by independent and tangible
:-39-: I.T.A. Nos.:1657 & 1662/Chny/2025 evidence. In the absence of any such supporting material, reliance by the AO on the original statement, while ignoring the subsequent retraction, cannot be sustained in law. Accordingly, we are of the considered view that the action of the AO in holding that the wage expenditure claimed by the assessee was bogus, merely on the basis of the earlier statement, which was subsequently retracted, is devoid of any legal or factual justification. We, therefore, set aside the finding of the AO on this issue and hold that the disallowance of wage expenditure made by treating the same as bogus is unsustainable. In support of the aforesaid proposition, we place reliance upon the decision of the Coordinate Bench of this Tribunal in the case of DCIT v. Chelladhurai Rajasingh [ITA No.130/Chny/2024, order dated 28.08.2024], wherein this Tribunal, after due consideration of the settled legal principles, categorically held that no addition can be sustained solely on the basis of a statement which has subsequently been retracted, observing as under: –
“4.4 We have heard both the parties and perused the relevant statements and retraction affidavits and also the other material placed on our record. The main thrust of the Revenue's argument was that the impugned addition made by the AO was justified as it was made on the basis of statement given by the assessee in the course of search u/s 132(4) of the Act, which is an important piece of evidence in itself and that his subsequent retraction, being an afterthought, was of no relevance. In order to adjudicate this contention, it is first relevant to examine the extant provisions of Section 132(4) of the Act, which reads as follows: "(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.
:-40-: I.T.A. Nos.:1657 & 1662/Chny/2025
Explanation.--For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act." 4.5 From a bare reading of the aforesaid provision, it is noted that Section 132(4) of the Act empowers the authorized officer to examine on oath any person who is found to be in possession or control of any books of account, documents, money etc. Such a statement made by that person may thereafter be used in evidence in any proceedings under the Act. Evidence is a mode or means to prove a fact-in-issue. Statement is an oral testimony of relevant fact; and an admission of a fact-in-issue is an important piece of evidence, provided it has been voluntarily given without any inducement, promise, threat or coercion. Once a statement recorded of a person who is in possession of any valuable thing or control of books found during search then it can be used as evidence in any proceedings under the Act and the presumption would be that it has been given by that person voluntarily. The burden to prove that the statement was incorrect based on mistake of fact or that it was not voluntarily obtained, but due to threat, coercion, promise etc., is upon the maker of statement. In this context, the Hon'ble Apex Court in the case of Pullengole Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) has held that although an admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It was held that, it is open to the assessee who made the admission to show that it is incorrect based on mistake of fact. An oral statement on a relevant fact is a piece of evidence, and the weight to be attached to it must depend on the factual circumstances in which it was made. It is open for the assessee to show the contents/facts stated therein to be erroneous or untrue, based on mistake of fact. Hence, the position which emerges is that a statement u/s 132(4) of the Act by itself cannot be reason enough to justify an addition, if the assessee is able to show that the facts admitted by him was purely based on wrong assumption of facts and able to adduce evidence/material to show that he was wrong on the facts he admitted. So, when an admission u/s 132(4) of the Act has been retracted on the aforesaid reasons, then the AO should cross-examine the person again to ascertain the correct facts. The AO ought to conduct proper investigation into the affairs of the assessee and gather corroborative material which would negate such retraction and prove that the facts admitted originally is correct and thus retraction can be discarded. Otherwise, an addition made solely on the basis of a statement which has been subsequently retracted, and is not backed by corroborative evidence, may not be sustainable. For this, we may gainfully refer to the Instruction F.No.286/2/2003-IT (Inv. II), dated 10-3-2003 issued by the CBDT to the Assessing Officers: "Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of search and seizure and survey operations. Such :-41-: I.T.A. Nos.:1657 & 1662/Chny/2025 confession, if not based upon credible evidence, are later retracted by the concerned assessee while filing returns of income. In these circumstances, such confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. Similarly, while recording statement during the course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income . Any action on the contrary shall be viewed adversely. Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations of thereafter while framing the relevant assessment orders." 4.6 This view was again reiterated by the CBDT in their Circular No. F.NO.286/98/2013-IT (INV.II)], dtd 18-12-2014 which read as follows: "Instances/complaints of undue influence /coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light.
2. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Board has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence.
In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the I.T.Act,1961 and/or recording a disclosure of undisclosed income under undue pressure/ coercion shall be viewed by the Board adversely.
These guidelines may be brought to the notice of all concerned in your Region for strict compliance.
5. I have been further directed to request you to closely observe /oversee the actions of the officers functioning under you in this regard.
:-42-: I.T.A. Nos.:1657 & 1662/Chny/2025
6. This issues with approval of the Chairperson, CBDT . 4.7 In view of the above position of law, we now proceed to examine the facts on the present case. It is noted that the impugned addition emanated from the statement given by assessee u/s 132(4) of the Act. The Investigating Officer is noted to have impounded a loose sheet ID marked ANN/HRV/RS/F/G/L which contained a stray noting which read as, "unAC- 4Cr-15%-Rs.5,00,000 per month". In relation to this stray noting, the assessee is noted to have admitted to undisclosed income of Rs.5.2 crores in the statement recorded u/s 132(4) of the Act. The assessee had explained that, he had earlier borrowed Rs.4 crores from Mr. Nandagopal and during the year he had repaid the principal along with interest amounting to Rs.5.2 crores to Mr. Nandagopal. The assessee had also explained that, this alleged borrowing was used for acquisition of land parcels. Later on, the Investigating Authorities are noted to have enquired into the veracity of this admission from Mr. Nandagopal named by the assessee. We observe that, upon enquiry, Mr. Nandagopal had categorically denied having lent any monies to the assessee and also explained that he was not a person of such means who could lend such a huge sum to the assessee. Hence, the testimony of the assessee is noted to have come into doubt. The assessee had further shown that, he had not acquired any such land parcels during the said period in his personal capacity and that the admission made in original statement was false and obtained under stress and pressure. The assessee, instead showed that, the details of land mentioned in his statement related to M/s JFIPL which were acquired in earlier years and not the relevant AY 2013-14. We thus find merit in the assessee’s contention that, the statement relied upon by the AO to justify the addition impugned, was neither backed by any cogent evidence nor was corroborated, and also suffered from factual- inconsistency. 4.8 It was brought to our notice that, the assessee had also furnished his retraction letter to this effect within a month before the authorities on 13.01.2015, copy of which has been placed at Pages 28 to 38 of Paper Book. We find that, another retraction letter along with affidavit was submitted on 10.03.2015 which is found placed at Pages 39 to 46 of paper Book. It is noted that, neither the Investigating Officer nor the Assessing Officer re-examined the assessee upon submission of such retraction to ascertain the correct facts. Moreover, the Revenue was also unable to bring on record any material or evidence, found in the course of search, which would reveal details of any on-monies/unrecorded sales or bogus purchases or unrecorded cash etc. to justify or correlate with the alleged loan repayment being made by the assessee during the year. We thus find ourselves in agreement with the Ld. CIT(A) that, there was no incriminating documents or papers found from the assessee's premises, which indicated re-payment of any cash loan or would corroborate the original statement of the assessee, as the purported noting found in Annexure - ANN/HRV/RS/F/G/L is ex-facie dumb in nature. We also find force in the Ld. AR's contention that the AO has advocated an impossible proposition that large scale generation & payment of unaccounted monies took place without there being any corroborative evidence to support the :-43-: I.T.A. Nos.:1657 & 1662/Chny/2025 same. In the light of the infirmities discussed in the foregoing, we are of the view that some kind of material corroboration was required. Otherwise, such statement alone cannot be sufficient to fasten the assessee with any liability. Even though, on first blush, the original statement appeared relevant, but as noted in the foregoing on account of the infirmities and failure of the Revenue to corroborate the same with some independent evidence; coupled with the denial of the impugned transaction by Mr. Nandagopal and retraction made by the assessee, it is not prudent to rely on the same to draw adverse inference against the assessee. Hence, the Revenue’s plea that the impugned addition be upheld on the basis of the original statement of the assessee cannot be countenanced. 4.9 In this context, we gainfully refer to the decision of Hon’ble Gujarat High Court in the case of Pr.CIT Vs Nageshwar Enterprises (277 Taxman 86). In the decided case, on the basis of information received from Department of Revenue Intelligence (DRI), search action u/s 132 of the Act was conducted upon the residential premises of the partners of the assessee firm in which one of the partners admitted to importing goods from China/Japan at undervalued figures and stated that the differential was paid in cash to the sellers. The said statement was later on retracted by the partner stating that it was obtained under duress. The AO, however, by placing reliance on this statement made addition in the hands of the assessee firm. On appeal both the Ld. CIT(A) and this Tribunal deleted the addition as it was made merely on the basis of the statement which had been retracted and there was no corroborative material or evidence brought on record by the AO to justify the addition. The Hon’ble High Court is noted to have upheld the orders of the lower appellate authorities by observing as follows: "11. The ratio of this decision is that there is a statement recorded in the course of the search proceedings and such statement is retracted and the burden is on the maker of the statement to establish that the admission in his statement was wrong and that such statement was recorded under duress and coercion. It is further brought to our notice that the decision of the Rajasthan High Court was carried in appeal by the assessee before the Supreme Court and the Supreme Court has dismissed the SLP. There need not be any debate with the proposition of law as laid down in the decision of the Rajasthan High Court, but a close look at the decision of the Rajasthan High Court would indicate that the confessional statement was not the only piece of evidence. There was no material to corroborate the statement made by the assessee in the form of confession. In the case on hand, as noted above, there is no material except the confessional statement of the assessee recorded under section 108 of the Customs Act.
12. In view of the concurrent findings recorded by both, the CIT (A) as well as the Appellate Tribunal, we are of the view that we should not disturb the finding of facts . None of the questions as proposed by the Revenue could be termed as substantial question of law."
:-44-: I.T.A. Nos.:1657 & 1662/Chny/2025
4.10 We find that similar issue was also involved in the decision rendered by Hon’ble Gujarat High Court in the case of Chetnaben J Shah Vs ITO (288 CTR 579). In this case, it is noted that in the course of search, the assessee had admitted in the statement u/s 132(4) of the Act that it was regularly purchasing and selling shares which were not forming part of the regular books and disclosed a sum of Rs.10,50,000/- to have been earned over the years. In the course of assessment, the assessee retracted his statement and contended that it was taken under pressure. The assessee also stated that although during the course of search, books of accounts and loose papers were found and seized, but there was no evidence unearthed which showed that the assessee was involved in the purchase and sale of shares which yielded income of Rs. 10,50,000/-. The AO however did not agree with the objections put forth by the assessee and added the impugned sum as undisclosed income of the assessee. On appeal the appellate authorities noted that there was no evidence to support the very existence of this income except the so called statement u/s 132(4) of the Act. The appellate authorities accordingly deleted the addition. On appeal, the Hon'ble High Court answered the question in favour of the assessee by holding as follows: "6. We have heard learned Counsel for the respective parties and perused the records of the case. We are of the view that the CIT (Appeals) has rightly appreciated the case based on the sound principles of law and has also considered the statement made by the assessee at the relevant point of time. We are of the view that in light of the observations made by this Court in the case of Kailashben Manharlal Chokshi (supra), mere speculation cannot be a ground for addition of income . There must be a some material substance either in the form of documents or the like to arrive at a ground for addition of income. Considering the ratio laid down in the above decision and in the facts of the present case, we are of the view that the issue raised in this Appeal is required to be answered in favour of the assessee and against the Department." 4.11 Somewhat similar issue was also considered by Hon’ble Punjab & Haryana High Court in the case of CIT Vs S.S.R.D Somany Sikshan Sansthan (201 Taxman 313). In the decided case, an employee of the assessee had admitted in his statemen t u/s 132(4) of the Act that the salary expenses of assessee were inflated as the employees were required to refund portion of their salaries back to the assessee in cash. The said employee also later on retracted his statement by filing an affidavit. The AO however went by the original statement of the employee and disallowed salary expenses holding that assessee had inflated the same. On appeal the Ld. CIT(A) deleted the addition which was affirmed by the Hon'ble High Court by holding as follows: "7. The Tribunal while affirming the findings of CIT (A), after elaborate discussion had concluded that the Assessing Officer was not right in holding that the assessee had inflated the expenses under the head
:-45-: I.T.A. Nos.:1657 & 1662/Chny/2025
"salary to staff". The relevant findings recorded by the Tribunal in paras 13 and 14 of its order are as under :-- "13. We have heard the rival submissions and have gone through the material available on record . We find that the ld. CIT(A) has decided this issue after discussing all the facts in proper perspective and hence we reproduce below the finding of ld. CIT(A) from page Nos. 13 to 15 of his order :-- I have carefully considered the contention of the ld . counsel for the appellant and perused the relevant record. The Assessing Officer has made this addition mainly on the basis of statements of Mr. Surinder Miglani S/o Mr. Om Prakash Miglani, who was a lecturer of MBA with SSRD since August, 2005. This statement was recorded during the course of search. Though Mr. Miglani has retracted from his statement by filing affidavit before the Assessing Officer, this affidavit has not been accepted by the Assessing Officer on the ground that Mr . Surinder Miglani was not an assessee, who facing search action when his statement on oath was recorded . However, the Assessing Officer cannot be said to be justified in rejecting the sworn affidavit of Mr. Miglani on the above ground. Though I agree with the Assessing Officer that none can be allowed to retract from the statement made during the course of search, unless there was evidence to establish that such statement was recorded under duress etc ., in the case of appellant, though there is apparently no evidence of such duress etc ., this aspect is to be seen keeping in view the totality of the facts and circumstances. As brought out in the assessment order also, the statements of other 11 employees was also recorded during the course of search. Even the names of these persons are mentioned in para 10.2 of the assessment order. The Assessing Officer admits in the assessment order itself that all these statements were in favour of the appellant. However, he has rejected such evidence on the ground that the employees would speak in conformity with interest of their employees . However, again the Assessing Officer cannot be held to be justified in rejecting the evidence as above on this ground. Whereas he has based his entire assessment order on the basis of statement of one such employee, he has ignored the statement of other 11 similar employees . If the statements of all these 11 persons are considered, the adverse inference drawn by the Assessing Officer against the appellant is not sustainable. In addition to the above evidence, the Assessing Officer has himself mentioned that he was making addition on the basis of certain circumstantial evidence . Circumstantial evidence may be important for deciding an issue in the assessment proceedings in a normal case . However, in my opinion, when an assessee is subjected to search and all the important premises are covered,
:-46-: I.T.A. Nos.:1657 & 1662/Chny/2025 there could not be any scope for making such huge additions on the basis of circumstantial evidence. Finding of blank signed cheques books of the employees have been considered for adverse inference by the Assessing Officer. However, as brought out in para 10.2 of the assessment order itself, in the statement recorded during the course of search itself, Mr. Anil Sharma Accountant of SITM has duly explained the reasons for the same. What has been stated by Mr. Anil Sharma is the consistent stand on the appellant right from the date of search. Therefore, the conclusion drawn by the Assessing Officer that the amount from the respective bank accounts of the employees is first withdrawn by the appellant and then part of it is handed over to the employees after pocketing the balance is without evidence. Not even single seized document has been discussed which showed that the appellant did not retain part of cash withdrawn from the respective bank accounts of the employees. If the version of the Assessing Officer was correct, there should have been least some evidence found during the course of search in this regard. The increase in salary from assessment years 2005-06 to 2006-07, in itself would further not constitute conclusive evidence that the appellant claimed certain in genuine expenses under the head . Keeping in view the above discussion, I am not inclined to agree with the Assessing Officer that the appellant inflated expenses under the head "Salary". Though on the basis of statement of Mr. Surinder Miglani recorded during the course of search, adverse inference could be drawn against the appellant, as far as payment of salary to him alone is concerned, keeping in view the entirely of the facts and circumstances i.e., statement of 11 other employees recorded during the course of search and the subsequent affidavit of Mr. Miglani which has been rejected by the Assessing Officer not for some good and valid reasons, it would not be appropriate even to sustain addition even in respect of salary paid to Mr. Miglani. In view of the above, addition of Rs.14,33,132 made by the Assessing Officer is, therefore, deleted.
14. From the above, we find that ld. CIT(A) has decided this issue in proper perspective because the Assessing Officer has based his conclusion on the statement of one employee whereas 11 other employees have stated in the statements that they were getting full salary as debited by the assessee in its books. We also find that the statement of one employee of Shri Miglani was also retracted by him by filing an affidavit. Under these facts we find no good reason to interfere in the order of the ld. CIT(A) on this issue and hence we uphold the same. This ground of the revenue is dismissed."
8. No perversity or illegality could be pointed out by the learned counsel for the appellant in the aforesaid findings recorded by the Tribunal. The only endeavour of the learned counsel was to reappreciate the evidence
:-47-: I.T.A. Nos.:1657 & 1662/Chny/2025 so as to pursuade this Court to take a different view, which is not permissible." 4.12 Therefore, following the decisions and the Board Instructions (supra), we find ourselves in agreement with the findings of the Ld. CIT(A), that it was improper for the AO to make the impugned addition on the basis of the retracted testimony of the assessee. For the various reasons set out above, we therefore do not see any reason to interfere with order of the Ld. CIT(A) and accordingly dismiss this ground.”
We further observe that the 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.
It is 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 also take note of the fact that the assessee, during the relevant previous year, had debited a total wage expenditure of Rs.9,84,67,794/- in its Profit and Loss Account. In that view of the matter, the question of making a disallowance of Rs.15,80,14,988/-, which exceeds the total amount of wages
:-48-: I.T.A. Nos.:1657 & 1662/Chny/2025 debited, does not logically or arithmetically arise. This, by itself, renders the impugned addition unsustainable.
Having regard to the above, 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 similar circumstances, the Hon’ble Madras High Court in the case of CIT v. SPL Infrastructure Pvt. Ltd. [(2020) 427 ITR 213 / 274 Taxman 292 (Mad)]
:-49-: I.T.A. Nos.:1657 & 1662/Chny/2025 has held that where the assessee, in order to buy peace and avoid protracted litigation, had voluntarily disallowed 10% of the expenditure, no further disallowance was warranted. 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.
Before parting, we deem it appropriate to record our concurrence with the findings arrived at by the Ld.CIT(A). The Ld.CIT(A), after a careful appreciation of the material available on record, has rightly observed that the narrations appearing in the scroll book maintained by Shri Balasekhar under the heading “MD Personal” cannot, by themselves, be construed as indicative of any personal expenditure of the Managing Director. The Ld.CIT(A) has judiciously interpreted the said notings to signify that the amounts so withdrawn or disbursed in cash were intended for, and indeed utilized towards, the business exigencies of the assessee company, albeit through the Managing Director in his representative capacity.
The Ld.CIT(A) has further recorded a categorical finding that there is no cogent, credible, or corroborative evidence brought on record by the AO to substantiate the assumption that the magnitude of the cash payments made to :-50-: I.T.A. Nos.:1657 & 1662/Chny/2025 Shri Pandithurai represented amounts utilized for his personal purposes. In the absence of any direct or circumstantial evidence to that effect, the inference drawn by the AO remains in the realm of mere conjecture and surmise, which cannot, in law, form the basis of an adverse conclusion.
It is also pertinent to note that 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.
This appeal has been preferred by the Revenue in the case of M/s.Rishi Enterprises, wherein the Revenue has assailed the order of the Ld.CIT(A) deleting the addition of Rs.8,25,09,971/- made by the AO on account of alleged bogus wage expenditure.
We observe that the facts and the issue involved in the present appeal are identical to those considered and adjudicated by us in in the earlier part of this order. Therefore, following the :-51-: I.T.A. Nos.:1657 & 1662/Chny/2025 findings and reasoning recorded therein, which are applicable mutatis mutandis to the facts of the present case, we hold that the grounds raised by the Revenue in this appeal do not merit acceptance. Accordingly, all the grounds of appeal raised by the Revenue are dismissed.
In the result, both the appeals of the Revenue are dismissed.
Order pronounced in the court on 11th November, 2025 at Chennai.