2025 (4) TMI 129 - AT - Income Tax

Bogus expenses - bulk entries recorded in the books of accounts did not have proper narration and payment details led the AO to believe that they were bogus in nature - AO also noted that the corresponding credit entries were either in Cash account or Bills Expenses payable - Sundries account or certain other ledger accounts which further cast doubt on the genuineness of such expenses - HELD THAT - The assessee is noted to have explained before the lower authorities that such journal entries are passed at the end of the year for the purpose of transferring the amounts incurred during the year which may have been erroneously debited to wrong ledger accounts to the correct/appropriate ledger account which is relevant to the concerned expenditure or for the purpose of consolidating the entries under primary ledger accounts. After examining the above entries we agree with the Ld. CIT(A) that this explanation was tenable in as much as these journal entries passed to simply transfer the amounts debited under a wrong ledger to the correct ledger and thus cannot be construed to be booking of bogus expense. Accordingly the disallowance of the above bulk journal entries aggregating to Rs.36, 25, 56, 616/- added across AYs 2016-17 2017-18 2018-19 2019-20 2021-22 is held to be unsustainable on facts. Certain bulk expense entries was debited under site operating expenses account whose corresponding credit entries was not found - The assessee however brought to notice before the Ld. CIT(A) that these entries represented individual entries of sub-contract expenses in respect of which the corresponding credit was given to the concerned party accounts and the payments thereof were made to the parties through banking channel after due deduction of TDS u/s 194C of the Act. We find that the Ld. CIT(A) after considering the details furnished by the assessee noted that the AO had erroneously treated these bulk entries as bogus in nature without naming the details of corresponding credit entry. The Ld. CIT(A) is found to have recorded categorical finding of fact in respect of each of these entries and held that they were not bulk but individual entries which was credited to respective party s account to whom payments were made through banking channel after deducting appropriate tax at source. We therefore uphold the finding of the Ld. CIT(A) that the disallowance of the above expenses u/s 37. Bulk debit entries whose corresponding credit was to Bills and expenses payable - Sundries account which was shown by way of liability in the balance-sheet to be discharged in the succeeding financial years - Since there was no such debit of year-end bulk provision in the re-casted P L A/c filed u/s 153A of the Act the disallowance made by the AO was untenable on facts. Bulk debit entries which are noted to comprise of those entries where corresponding credit was made to Cash Account - CIT(A) did not dispute the AO s finding that the impugned sum was disallowable as the expenses was incurred in cash and not supported by invoices/vouchers. CIT(A) however took note of the fact that the assessee has already offered and disallowed sum u/s 37 in the return of income for A.Y 2016- 17 filed u/s 153A of the Act and therefore the aforesaid sum stood squarely covered and subsumed by the same. We are thus in agreement with the finding of the Ld. CIT(A) that no further disallowance in this regard was warranted. Bulk entries passed in respect of cash payments debited under the head Coolie Wages - We find ourselves in agreement with his conclusion that it was not a case that the assessee did not incur any expenses towards Coolie Wages at all so as to disallow the bulk entries of cash payment in its entirety. The above reasoning of the Ld. CIT(A) is found to be supported by his subsequent analysis that if the AO s reasoning is upheld then the disallowance would result in abnormally and unrealistically high net profit margins which again underlines the lack of rationale in the disallowance of bulk entries made by the AO. Assessee had also filed a grievance petition before the Pr. CCIT Chennai on 07.06.2022 regarding the high-pitched additions made in the impugned assessment orders to which the Member Secretary Local Committee on high-pitched scrutiny assessments vide letter dated 27.09.2022 acceded to the assesssee s prayer that the additions made were indeed high-pitched. These surrounding facts and circumstances are found to further support the assessee s plea that the entire bulk expenses debited under the head Coolie Wages cannot be said to be bogus. Action of the AO by referring to the quantum of cash withdrawals made from the bank accounts by the assessee in AYs 2018-19 2019-20 - As bulk entries passed in the books of accounts was accounting anomaly and cannot be said to constitute debit of bogus expenses in its entirety. To that extent we are in agreement with the appellate order of Ld. CIT(A). In case these bulk entries are not held to be bogus then these bulk entries ought to be disallowed either u/s 40A(3) since these expenses were incurred in cash or because the assessee had violated the provisions of Section 40(a)(ia) of the Act by not deducting tax at source on such expenses - As rightly noted by the Ld. CIT(A) the expenditure incurred in cash amounted only to Rs.37, 61, 67, 612/- (in AYs 2016-17 to 2019-20) and Rs.70, 21, 08, 640/- (in AY 2020-21) out of the aggregate disallowance of Rs.118, 97, 84, 974/- 132, 76, 18, 020/- for A.Ys 2016-17 to 2019-20 and AYs 2020-21 2021-22 respectively. Accordingly the provisions of Section 40A(3) of the Act had no relevance and applicability to the extent of bulk entries of Rs.143, 91, 26, 742/- 81, 36, 17, 362 62, 55, 09, 380 . Out of the remaining sum the Ld. CIT(A) rightly noted that the expenditure to the extent of Rs.2, 35, 90, 984/- debited under the heads Fuel Expenses-Diesel account and Repairs and maintenance-vehicles / equipment account in A.Y 2016-17 had already been disallowed by the assessee in the return filed u/s 153A of the Act and therefore no further disallowance in this regard was called for. The Ld. CIT DR also did not dispute this factual aspect. So far as the balance sum is concerned we find that it comprised only of the cash payments made on account of Coolie Wages . According to us the Ld. CIT(A) had rightly held that the provisions of Section 40A(3) had no application in this regard. Applicability of Section 40(a)(ia) - We find that both the AO and the Ld. CIT DR were unable to adduce any reasons as to why the said provision would apply to such expenditure. Understandably the wages paid to the labour would not exceed the tax exemption limit and therefore the TDS provisions had no application. Also the provisions of Chapter XVII-B would not apply to expenses on fuel diesel staff welfare expenses etc. Thus the contention of the Revenue that the bulk entries ought to be otherwise disallowed u/s 40A(3) and 40(a)(ia) of the Act is rejected. Rejection of the books of accounts of the assessee and the estimation of profits - As the assessee had re-aligned and re-casted the Profit Loss Account for AYs 2016-17 to 2019-20 primarily because there was improper recording of the expenditure incurred towards purchases of gravel and aggregates under the coolies and wages . It is further noted that the assessee himself also adopted the average proportion of various heads of direct expenses as specified by NHAI for effecting re-alignment of expenses and thereafter reported higher profits in each of these AYs 2016-17 to 2019-20 in the returns filed u/s 153A of the Act. It is thus evident that the books of accounts of the assessee in relation to his contracts business are not correct and complete and income cannot be correctly deduced from the said accounts. We find merit in the findings rendered by the Ld. CIT(A) while rejecting the books of accounts of the assessee by invoking Section 145(3). Estimating the profits of the assessee - CIT(A) is noted to have estimated the profit at 12.5% of the contractual receipts - We note that the years involved in these cases were 1980s 1990s. We agree with the Ld. AR that the economics of road construction tax structure infrastructure and overall economic scenario was vastly different and hence the estimation exercise undertaken in these decisions cannot be considered as a comparable barometer for the years in question before us. Having regard to the foregoing we thus hold that the profit of the assessee is to be estimated at 10% of the contractual receipts.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

Whether the bulk entries recorded in the books of accounts by the assessee constituted bogus expenses and were therefore disallowable under Section 37 of the Income Tax Act.
Whether the rejection of the books of accounts by the Assessing Officer (AO) was justified and if the estimation of profits was appropriate.
The applicability of Sections 40A(3) and 40(a)(ia) of the Income Tax Act to the expenses incurred by the assessee.
The validity and impact of the retraction statements filed by the assessee and his employees.
Whether the estimation of profits at 12.5% by the CIT(A) was justified or should be revised.

ISSUE-WISE DETAILED ANALYSIS

1. Bulk Entries as Bogus Expenses

Legal Framework and Precedents: Section 37 of the Income Tax Act disallows expenses that are not genuine. The AO disallowed the bulk entries as they were considered bogus.
Court's Interpretation and Reasoning: The Tribunal found that the practice of recording bulk entries was an accounting anomaly rather than evidence of bogus expenses. The Tribunal emphasized the need to consider all relevant facts and circumstances, rather than solely relying on the manner of entry.
Key Evidence and Findings: The Tribunal noted that the assessee had provided explanations for the bulk entries, which were not considered by the AO. The CIT(A) found the explanations reasonable, highlighting the practical difficulties faced by the assessee.
Application of Law to Facts: The Tribunal agreed with the CIT(A) that the entire bulk entries could not be treated as bogus. Instead, it was necessary to examine the facts cumulatively to ascertain the genuineness of the expenses.
Treatment of Competing Arguments: The Tribunal considered the AO's arguments regarding the lack of narration and payment details but found them insufficient to disallow the entire expenses.
Conclusions: The Tribunal upheld the CIT(A)'s decision that the bulk entries were not entirely bogus, and the disallowance of the entire amount was unjustified.

2. Rejection of Books and Estimation of Profits

Legal Framework and Precedents: Section 145(3) of the Income Tax Act allows for the rejection of books if they are not reliable. The AO rejected the books and estimated profits.
Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the books were not entirely reliable due to the bulk entries. However, the estimation of profits required a more nuanced approach.
Key Evidence and Findings: The Tribunal noted that the assessee had re-aligned expenses and reported higher profits in returns filed under Section 153A.
Application of Law to Facts: The Tribunal found that the books were not correct and complete, justifying their rejection. However, the estimation of profits at 12.5% was excessive.
Treatment of Competing Arguments: The Tribunal considered the AO's estimation and the CIT(A)'s reliance on precedents but found them outdated and not reflective of the current economic scenario.
Conclusions: The Tribunal held that profits should be estimated at 10%, aligning with industry standards and NHAI benchmarks.

3. Applicability of Sections 40A(3) and 40(a)(ia)

Legal Framework and Precedents: Section 40A(3) disallows cash payments above a certain limit, and Section 40(a)(ia) disallows expenses without TDS.
Court's Interpretation and Reasoning: The Tribunal found that these sections were not applicable to the bulk entries as the expenses were genuine and supported by self-made vouchers.
Key Evidence and Findings: The Tribunal noted that the wages paid did not exceed the threshold for TDS, and the cash payments were within permissible limits.
Application of Law to Facts: The Tribunal agreed with the CIT(A) that the provisions of Sections 40A(3) and 40(a)(ia) were not attracted.
Treatment of Competing Arguments: The Tribunal dismissed the AO's arguments for disallowance under these sections due to lack of evidence.
Conclusions: The Tribunal held that the bulk entries could not be disallowed under Sections 40A(3) and 40(a)(ia).

4. Retraction Statements

Legal Framework and Precedents: Retraction statements are admissible if supported by valid reasons.
Court's Interpretation and Reasoning: The Tribunal found the retraction statements credible, considering the circumstances under which the original statements were made.
Key Evidence and Findings: The Tribunal noted the reasons for delay in filing retractions, including the COVID-19 pandemic and subsequent reconciliation of accounts.
Application of Law to Facts: The Tribunal accepted the retraction statements, finding the original statements were made under duress and misapprehension.
Treatment of Competing Arguments: The Tribunal rejected the AO's dismissal of retractions as afterthoughts, considering the explanations provided by the assessee.
Conclusions: The Tribunal held that the retraction statements were valid and should be considered.

SIGNIFICANT HOLDINGS

The Tribunal upheld the CIT(A)'s finding that the entire bulk entries could not be treated as bogus expenses.
The Tribunal rejected the AO's estimation of profits at 12.5% and held that a 10% estimation was more appropriate.
The Tribunal found that Sections 40A(3) and 40(a)(ia) were not applicable to the bulk entries.
The Tribunal accepted the retraction statements as valid, given the circumstances under which the original statements were made.
The Tribunal directed the AO to verify the profits reported by the assessee and ensure they align with the 10% estimation.

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