2022 (6) TMI 514 - AT - Income Tax

Claim of Expenditure on hawala business - Allowance of 10% of expenses incurred towards earning commission income received in respect of banking transactions and also in respect of loose papers found during the course of search proceedings - HELD THAT - Undisputedly assessee is engaged in the carrying on of the hawala business which is proved by the statement of the assessee and corroborated by the incriminating evidences found during the course of search from locker number 464 owned by the assessee. It is also the statement of the assessee. According to the provisions of Section 37 (1) of the act, any expenditure incurred by the assessee wholly and exclusively for the purpose of the business should be granted as deduction to the assessee from the income of business. However the explanation 1 provides that any expenditure incurred by the assessee, which is prohibited by law, is not considered as an expenditure incurred by the assessee wholly and exclusively for the purposes of the business and should not be granted as deduction to the assessee from the income of the business. Apparently, Hawala business carried on by the assessee is opposed to the public policy and is prohibited by the law. Expenditure incurred is in furtherance of hawala business. Assessee also did not submit any proof of incurring any expenditure. Income was also not assessed on net basis @ 0.30 %. No proof of incurring any expenditure is available on record. Therefore, naturally no expenditure is incurred by assessee. Therefore, the action of the learned CIT A in granting deduction of 10% of the gross income earned by the assessee is not in conformity with the provisions of Section 37 (1) of the act. Therefore, we reverse the order of the learned CIT A in allowing deduction at the rate of 10% as expenditure incurred. Accordingly, ground number 1 of the appeal of the learned AO Allowed. Addition based on the incriminating material found during the course of search - Admittedly, incriminating material found during search were for AY 2013-14 only. As on the date of the search, assessment year 2010 11 is a concluded assessment. Therefore, if any addition is required to be made in concluded assessment it has to be based on incriminating material found during the course of search. Admittedly, the seized material pertains to assessment year 2013-14 and not assessment year 2010 11. Therefore, in absence of any incriminating material the learned CIT A has correctly deleted the addition for assessment year 2010 11. Further, for assessment year 2011 12, no scrutiny assessment was pending. Therefore, it is also a concluded assessment as on the date of search. As no incriminating evidences are pertaining to this assessment year, the learned CIT A has correctly deleted the addition. - Decided in favour of assessee.

Summary

Issues:
1. Allowance of expenses incurred towards earning commission income and loose papers.
2. Deletion of addition of undisclosed income related to hawala business.
3. Ignoring the principle of extrapolation of income.
4. Disallowance of expenses under Section 37.
5. Deletion of addition based on incriminating material found during search.

Analysis:

Issue 1: Allowance of Expenses
The Deputy Commissioner of Income Tax challenged the order of the Commissioner of Income Tax (Appeals) regarding the allowance of 10% of expenses incurred for earning commission income and loose papers. The Assessing Officer (AO) computed undisclosed commission income based on bank entries and added amounts for assessment years 2010-11 and 2011-12. The Commissioner of Income Tax (Appeals) upheld the rate applied by the AO but allowed 10% of income as expenses under Section 37 of the Income Tax Act. However, the Tribunal reversed this decision, stating that since the hawala business is prohibited by law, no expenditure incurred in such business can be allowed as a deduction under Section 37.

Issue 2: Deletion of Undisclosed Income
The AO made additions of undisclosed income related to hawala transactions based on seized materials. The Commissioner of Income Tax (Appeals) deleted these additions, citing lack of evidence for the relevant assessment years during the search. The Tribunal agreed that the incriminating material found during the search pertained to assessment year 2013-14, not the years in question (2010-11 and 2011-12). As a result, the Tribunal dismissed the AO's appeal on this issue.

Issue 3: Ignoring the Principle of Extrapolation
The AO extrapolated income for assessment years 2007-08 to 2012-13 based on seized documents from 2013-14. The Commissioner of Income Tax (Appeals) deleted the estimated additions, stating that extrapolation requires a basis, which was lacking in this case. The Tribunal upheld this decision, emphasizing the need for supporting evidence for extrapolation.

Issue 4: Disallowance of Expenses under Section 37
The Tribunal reversed the Commissioner of Income Tax (Appeals) decision to allow 10% of income as expenses incurred by the assessee, given the nature of the hawala business being against public policy and prohibited by law. The Tribunal ruled that no expenditure incurred in such business can be considered allowable under Section 37.

Issue 5: Deletion of Addition based on Incriminating Material
The Tribunal upheld the deletion of additions made by the Commissioner of Income Tax (Appeals) based on incriminating material found during the search, as the material was only relevant to assessment year 2013-14, not the years under consideration. The Tribunal dismissed the AO's appeal on this ground as well.

In conclusion, the Appellate Tribunal partially allowed the appeals of the Assessing Officer, reversing the decision on the allowance of expenses and upholding the deletion of additions based on incriminating material.