ACIT-CENTRAL CIRCLE-1(3), NAGPUR vs. R.B.S.D. AND F.N. DAS (EXPORT FIRM), VIZIANAGARAM

On the fact and in the circumstances of the case, the Id. CIT(A) erred in deleting the addition of Rs.27,05,454/- as Brokerage and Commission Expenses without appreciating the fact that certain persons appearing in Brokerage and commission ledger are either related to assessee's employees or assessee himself. Further, most of them have no connection with the Brokerage and commission.

3 R.B.S.D. And F.N. Das ITA no.28/Nag./2024 and statutory notices were issued which were duly replied by the assessee. The Assessing Officer passed assessment order dated 06/06/2023, under section 143(3) r/w section 147 of the Act by making addition of ` 1,04,27,361, on account of disallowance towards payments to 6 different labour contractors under section 69C of the Act.

“4. Discussion and Decision:– ……… Ground no.3, is regarding addition of ` 1,04,27,361, u/s 69C being unexplained expenditure to contractors. The A.O., during the assessment proceedings noticed that the appellant has incurred expenditure of ` 1,04,27,361, towards mining expenses. These expenses are on account of extraction of manganese ore to following labour contractors–

1 D. Goving ` 18,67,222 ` 17,85,951 2 D.S. Prakash 3 Madhusudana Rao ` 17,65,227 4 P. Dhanunjaya Rao ` 18,41,270 5 P. Suresh ` 17,46,090 6 S. Satyanarayana ` 17,21,601 Total:– ` 1,04,27,361 During assessment proceeding appellant has submitted copy of bills issued by labour contractors, their Ledger account in the books of appellant, copy of form 16A downloaded from Traces site and bank statements showing payments to them after due deduction of TDS. However, the Id. AO held that the appellant has not furnished copy of agreement for work contract nature and proof of services provided and hence, the expenses incurred for labour contractors is bogus and added it u/s 69C of the Act. During appellate proceedings the appellant submitted that the Appellant is carrying on mining activities since 1944. The mines are open cast manual mine situated at Garividi, Dist.: Vizianagaram. As the mining activities are going on since 1944, the depth of the mine has reached over 250 Ft. To carry on such deep mining activities, huge teams of man-power in terms of labourers are required. The team of the management has appointed several labour contractors to carry out various mining activities. The work awarded to 4 R.B.S.D. And F.N. Das ITA no.28/Nag./2024 the labour contractor comprises of digging, carrying over burden making path stacking of ore and mutty, etc. The contractors are being appointed by the agent of the company who normally takes the stock situation of labour team, their financial condition and integrity of the contractor. After appointment work is awarded to different contractors for different pits so as to calculate the work done by them. The agent personally supervises the work of each contractor and verifying the same directs the contractor to prepare his work bill. The work bill is being verified by the mining Supervisor who transfers the said bill to the accounts Department. After receiving the bills, the accounts department verifies the rates, etc. and after deducting “Tax at Source" makes payment to the contractor. The village Garividi is a very small place, and it is very difficult to find labour contractors, so some time it also happens that some known persons of the appellant's firm/staff also engage in contract work and with their acquaintances form a labour team they execute the contract work. Appellant further submitted that the expenses on account of labour contractors are genuine business expenses, supported by bills issued by contractors, and their acceptance of it by showing contract receipts in Income Tax returns filed by them. The appellant has discharged its onus by providing copy of bills submitted by these contractors' showing details of work done by them. Appellant has also provided their complete name, address, and PAN numbers. Payments to them has been through banking channel after due deduction and payment of TDS. The AO has not found any defect in the documents produced by the appellant nor has the AO falsified these documents. It is also undisputed that the appellant has sold goods worth Rs. 23.78 crores during the relevant previous year. Without employing labourers through contractors such sales would not have been possible. The Id. AO has not doubted appellant's production and sales figures. The addition made by AO is solely based on surmise and conjecture without bringing any corroborative evidence on record which cannot be sustained. Therefore, the addition of Rs. 1.25.89,787/- made u/s 69C is directed to be deleted and ground No. 3 is hereby allowed.”

The Revenue being aggrieved is in appeal before the Tribunal.

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“29. We have gone through order of the learned CIT(A) as well as details submitted before us. We also find that the assessee is carrying on mining activities since the year 1944. The mines are open cast manual mine situated at Garividi, Dist. Vizianagaram. As the mining activities are going on since 1944, the depth of the mine has reached over 250 FT to carry on such deep mining activities, huge teams of man-power in terms of labourers are required. The team of the management has appointed several labour contractors to carry out various mining activities. The work awarded to the labour contractor comprises of digging, carrying over burden, making path, stacking of ore and mutty, etc. The contractors are being appointed by the agent of the company who normally takes the stock situation of labour team, there financial condition and integrity of the contractor. After appointment, work is awarded to different contractors for different pits so as to calculated the work done by them. The agent personally supervises the work of each contractor and verifying the same directs the contractor to prepare his work bill. The work bill is being verified by the mining supervisor who transfers the said bill to the accounts department. After receiving the bills, the accounts department verifies the rates, etc. and after deducting "Tax at Source" makes payment to the contractor. The village Garividi is a very small place, and it is very difficult to find labour contractors, so some time it also happens that some known persons of the assessee's firm/staff also engage in contract work and with their acquaintances from a labour team they execute the contract work. We are also gone through the assessment order, entire addition was made by the Assessing Officer under section 69C of the Act. The provisions of section 69 of the Act reproduced as under:-

SECTION 69C.

6 R.B.S.D. And F.N. Das ITA no.28/Nag./2024 Unexplained expenditure, etc. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the 2448[Assessing Officer), satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. From the plain reading of section 69C it is clear that there are two conditions for invoking section 69C. First is, that the assessee has incurred any expenditure in the relevant previous year, and second is that the assessee does not offer any explanation about source of such expenditure. If both the conditions are fulfilled then only section 69C can be applied. But in the present case 1) Assessee is a partnership firm carrying on business of Mining of Manganese Ore minerals. It maintains regular books of accounts which are audited u/s 44AB of I.T. Act. 2) A Survey u/s 133A of IT act was conducted at premises of the assessee on 25.08.2021. Assessee filed return of income on 13.02.2022 declaring total income of Rs. 18,01,81,210/-. Case was selected for scrutiny and notice under section 143(2) and 142(1) were issued which were duly replied by the assessee. In the assessment order passed u/s 143(3) the AO has made entire addition additions U/s. 69C which are in dispute in appeal. In the present case though the assessee has incurred expenditure during the year but all these expenses are duly recorded in books of accounts and they have been incurred from the regular business income of the assessee. The AO has neither during entire assessment proceeding nor in the assessment order doubted about the source of such expenditure. In view of the above we are opinion that the second limb of section 69C is not attracted in the present case, therefore we are deleted the addition made U/s. 69C."

of the department were dismissed. Hence, ground no.5, raised by the Revenue is dismissed.

31. It is pertinent to mention here that the grounds raised by the Revenue harp upon the applicability of provisions of section 69C of the Act to all the additions made by the Assessing Officer. Thus, it is important to examine at the very behest as to whether the charging provisions of section 69C of the Act is at all applicable as to the facts and circumstances of the case. It is deemed expedient to refer to the provisions of section 69C of the Act which are reproduced elsewhere in the order. Here the Assessing Officer has unequivocally noted that the expenditure is recorded in the regular books of account. It is not the case that the Assessing Officer has found out some expenditure which is not reflected in the regular books of account. Thus, where the expenditure is already reflected, the source of incurring such 7 R.B.S.D. And F.N. Das ITA no.28/Nag./2024 expenditure need not be explained, as the same is evident by analysis of the books of account. Accordingly, application of provisions of section 69C of the Act fails at the very threshold. The learned D.R. could not satisfactorily explain the anomaly but he prayed before the Bench to apply the provisions of section 37 f the Act. His request is not acceptable since the same is contrary to the grounds of appeal raised by the Revenue and he is not permitted to change the colour and contour off the Revenue. Consequently, there is no merit in the additions generated under section 69C of the Act.“

9. Since the issue before us is squarely covered by the aforesaid decision of the Tribunal rendered cited supra, we decline to interfere with the order passed by the learned CIT(A) which is hereby upheld by dismissing the grounds no.1, 2 and 3, raised by the Revenue.

10. Insofar as grounds no.4, 5 and 6, raised by the Revenue are concerned, which relates to addition of ` 27,05,454, made under section 37 of the Act by disallowing brokerage and commission paid on account of brokerage and commission, the Assessing Officer noted that the assessee failed to furnish any details regarding how the percentage of Brokerage & Commission is fixed. He also noticed that the assessee has not provided any copy of agreement, nature and proof of services provided of the same. Also during the search and seizure action partner of the firm Shri Manvendra Mor in his statement admitted the same expenditure as additional income of M/s RBSSD & FN Das for the relevant year. Such statements are reproduced by the Assessing Officer in his assessment order vide Page-21. Thus, the Assessing Officer held that the explanation by the assessee with regard to expenses in respect of Brokerage & Commission is not satisfactory. As the assessee has claimed this amount of ` 27,05,454, in P&L account and not given proper justification, the same was disallowed under section 37 of the Act.

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"Ground no. 4 is regarding addition of Rs. 27,05,454/- made under section 37 of IT Act by disallowing brokerage and commission paid to Shri DVN Divya, Shri BVG Sudhakar, Shri Sharat Mor, Shri Pranav Mor, Mrs. Vandana Mor. During the assessment proceedings, appellant has submitted copy of bills issued by all the above parties alongwith their Ledger accounts in the books of appellant, bank statement showing payments. made to them copy of form 16A downloaded from Traces site with their PAN, complete name, address commission paid and TDS thereon. However, the Id. AO held that in the statement recorded during survey/search Shri Manvendra Mor, partner of appellant, had agreed to offer this amount as additional Income hence, the expenses incurred for Commission & Brokerage paid is bogus and added it u/s 37 of the Act. During appellate proceedings, the appellant submitted that Shri DVN Divya, Shri BVG Sudhakar, Shri Sharat Mor, Shri Pranav Mor, Mrs. Vandana Mor looks after follow up of orders and recovery of outstanding amounts from debtors. All are neither related to the appellant nor employees of the appellant group. Payment to them has been made after due deduction of TDS at applicable rate and supported by bills etc. Appellant submitted that the AO has nowhere in the assessment order doubted about genuineness of the expenditure of Rs. 27,05,454/-. AO has also not falsified the various documents submitted by appellant in support of the expenditure. The sole basis of this addition is statement of Shri Manvendra Mor recorded at the time of search wherein he admitted to offer this amount as additional income. Appellant further submitted that the statement of Shri Manvendra Mor was not voluntary, and it was taken under influence and by coercion. Appellant has relied on CBDT Circular No. 285/2/2003-IT(INX) dated March 3, 2003 and certain judicial pronouncements to argue that the assessment should have been made based on evidences and not on the basis of confessional statements. The appellant has discharged its us by providing copy of bills submitted by commission agents giving details of services provided their complete name, address, and PAN numbers. It is seen that the payments to them have been made through banking channel after due TDS. The A.O. has not found any defect in the documents produced by the appellant nor has the A.O. falsified these documents. The sole basis of disallowance is statement of Shri Manvendra Mor wherein he admitted to offer this amount as income. Apart from the statement of Shri Manvendra Mor there is no evidence on record that the expenditure of Commission and brokerage is bogus. In fact in answer to question No. 40 related to Commission expenses of Rs. 27,05,454/- Shri Manvendra Mor has stated that these expenses are genuine and the persons have given services. Therefore, the reliance of AO on statement of Shri Manvendra Mor to disallow expenditure of Rs. 27,05,454/- is misconceived and incorrect.

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3.4) CBDT has issued an instruction to its field officers vide F. No. 286/2/2003- IT (INV) dated March 10, 2003 in following words- "Instances have come to the notice of the Board where appellants have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations. Such confessions, if not based on credible evidence, are later retracted by the concerned appellant while filing returns of income. In these circumstances, on 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 Departments. 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 or thereafter while framing the relevant assessment orders." Hon'ble Madras High Court in CITK. Bhuvanendran (303 ITR 235) has held that the statement recorded from the appellant was as subsequently retracted and rebutted. Furthermore the statement was not relatable to any seized material. Therefore, even the statement could not be the basis for making any addition. Similarly, in M Narayan & Bros. v. ACIT (243-CTR 588) the Hon'ble Madras High Court considered the circular issued by CBDT dated 10th March 2003 and held that when the appellant had explained his statement as not correct in the context of the materials produced, the Tribunal would not be justified in its conclusion that the statement made would clothe the assessment with legality. Considering facts of the case the disallowance of Commission and brokerage of Rs. 27,05,454/- is not based on any material gathered at the time of survey or during the assessment proceedings but it is a preposition based on presumption. It is therefore, directed to delete the addition of Rs. 27,05,454/- made u/s 37 of the Act. Hence ground No. 4 is allowed."

10 R.B.S.D. And F.N. Das ITA no.28/Nag./2024 Das Export Firm, ITA no.234/Nag./2023, for A.Y. 2020-21, vide order dated 30/10/2024, wherein the Tribunal has deleted the identical addition. The relevant portion of the order of the Co–ordinate Bench is reproduced below for reference:– “23. The learned counsel for the assessee during the appellate proceedings argued that the assessee has discharged its onus by providing copy of bills submitted by commission agent giving details of service provided, his complete name, address, and PAN details. The payments to him have been made through banking channel after due TDS. The Assessing Officer has not found any defect in the documents produced by the assessee nor has the Assessing Officer falsified these documents. The sole basis on disallowance is statement of Shri Manvendra Mor, there is no evidence on record that the expenditure of Commission and brokerage is bogus. In fact, in answer to question 40 related to Commission expenses of 15,28,680, Shri Mor, has stated that these expenses are genuine and the person has given service. Therefore, the reliance of Assessing Officer on statement of Shri Manvendra Mor, to disallowed expenditure of the 15,28,680, is misconceived and incorrect.

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