2024 (11) TMI 1424 - AT - Income Tax

Disallowance of claim of deduction of expenditure against the unaccounted cash receipts from sale of spent solvents / scrap -appellant and other companies have historically incurred an average of 11% of their turnover on salary and wages considering the disposal of such hazardous material associated with risk and challenges CIT(A) has directed the AO to allow 10% of the gross amount realized on sale of spent solvent and scrap for the A.Y. 2015-16 as handling expenses - HELD THAT - Respectfully following the decision of the ITAT Hyderabad Benches in the case of MSN Pharmachem Private Limited 2024 (11) TMI 499 - ITAT HYDERABAD we direct the AO to allow 60% of the receipts as expenditure against unaccounted cash receipts from sale of spent solvents / scrap and sustain 40% of addition towards unaccounted sale of spent solvents and scrap. Appeal of assessee is partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue for consideration in this judgment was whether the assessee was entitled to claim deductions for expenditures against unaccounted cash receipts from the sale of spent solvents and scrap. Specifically, the Tribunal examined the extent to which such expenditures should be allowed as deductions, based on the evidence provided and the nature of the transactions.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents: The case revolves around the assessment of unaccounted income under Section 153A of the Income Tax Act, 1961, following a search and seizure operation. The legal framework requires that any undisclosed income discovered during such operations be accounted for, and the assessee may claim deductions for legitimate business expenditures incurred to earn such income.

Court's interpretation and reasoning: The Tribunal considered the evidence presented, including seized documents and affidavits from employees, to determine the legitimacy of the claimed expenditures. The Tribunal emphasized that income cannot be earned without incurring some form of expenditure and that the nature of the business (handling hazardous waste) necessitated certain costs.

Key evidence and findings: The evidence included seized Excel sheets from a pen drive, which documented both unaccounted cash receipts and corresponding cash outflows. Affidavits from employees corroborated the claim that these outflows were used to pay workers handling hazardous waste. The Tribunal found that the seized material should be read as a whole, rather than selectively, to accurately assess the situation.

Application of law to facts: The Tribunal applied the principle that expenditures directly related to earning income should be deductible, even if the income itself was initially unaccounted. Given the nature of the business and the evidence of expenditures, the Tribunal concluded that a significant portion of the unaccounted receipts should be considered as legitimate business expenses.

Treatment of competing arguments: The Revenue argued that the expenditures were an afterthought and lacked sufficient evidence. However, the Tribunal found the affidavits and seized documents credible enough to warrant deductions. The Tribunal noted that the affidavits had evidentiary value and were not effectively challenged by the Revenue.

Conclusions: The Tribunal concluded that 60% of the unaccounted cash receipts should be considered as expenditures incurred for business purposes, allowing the assessee to claim this percentage as a deduction. The remaining 40% of the receipts were to be treated as unaccounted income.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal stated, "It is an admitted fact that income cannot be earned without any expenditure. In order to earn any income, expenditure needs to be incurred."

Core principles established: The judgment reinforced the principle that legitimate business expenditures, even against unaccounted income, should be recognized if supported by credible evidence. It emphasized the need to consider the entirety of evidence, rather than selectively focusing on parts that support a particular narrative.

Final determinations on each issue: For both assessment years 2015-16 and 2018-19, the Tribunal directed the Assessing Officer to allow 60% of the unaccounted cash receipts from the sale of spent solvents and scrap as deductible expenditures. The remaining 40% was to be sustained as unaccounted income.

The appeals filed by the assessee were partly allowed, providing relief to the extent of the deductions recognized by the Tribunal.