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TMI Blog2024 (11) TMI 1424X X X X Extracts X X X X X X X X Extracts X X X X ..... untant Member And Shri K. Narasimha Chary, Hon'ble Judicial Member For the Assessee : Shri M.V. Prasad, C.A. For the Revenue : Shri B. Bala Krishna, CIT-DR. ORDER PER BENCH : The appeals of the assessee for A.Ys. 2015-16 and 2018-19 arise from the separate orders of Commissioner of Income Tax (Appeals)-12, dated 19.08.2024 and 13.09.2024 for the A.Y. 2015-16 and 2018-19, respectively. Since, the facts are identical and issues are common but for the figures, for the sake of convenience, these three appeals were heard together and are being disposed of, by this consolidated order. 2. The grounds raised by the assessee in ITA No. 1069/Hyd/2024 for A.Y. 2015-16 read as under : "1. The order of the Ld. CIT (A) is erroneous on the facts of the case and contrary to the provisions of law. 2. The Ld. CIT (A) erred on facts and in law in not allowing the claim of additional deduction of expenditure of Rs. 33,94,698 /-as evidenced by the entries of cash outflows in the names of the employees found in the seized material against the gross unaccounted cash receipts from sale of spent solvents and scrap of Rs. 51,22,781/-for arriving at the real income thereon. 3. In the facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal. 5. The only issue that came up for our consideration from Ground Nos. 2 to 4 of the assessee's appeal for assessment year 2018-19 is the disallowance of claim of deduction of expenditure against the unaccounted cash receipts from sale of spent solvents / scrap. The facts with regard to the impugned dispute are that the assessee is engaged in the manufacturing and sale of bulk drugs. In the process, the assessee purchased various solvents and used them for manufacturing bulk drugs. The used solvents had to be discarded by the assessee. During the course of search at the registered office of the assessee on 24.02.2021, a Sony make pen drive of 16 GB was found in the possession of Shri R. Buchi Reddy, Cashier, which contained various Excel sheet data. From the excel sheets, it was found that the spent solvents / scrap was sold in cash and such transactions were not recorded in the books of accounts for the relevant assessment years. A sworn statement under Section 132(4) of the Act was recorded from Shri R. Buchi Reddy on 24.02.2021, and in response to Question No. 18, he has stated that details of cash generated from the sale of utilized solvents and scrap has been main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the post-search investigation, Shri MSN Reddy has furnished a sworn affidavit dated 05-07-2021 to the DDIT(Investigation), Unit-II(2), Hyderabad, and reiterated his statements made during the course of the search in the statement recorded on 27-4-2021. Apart from reiterating the explanation furnished in his sworn statement dated 27-4-2021, he explained in the affidavit that the disposal of hazardous waste of spent solvents / scrap does not attract serious attention of the management from the financial perspective since the revenue generated from the disposal of the same is insignificant in relation to the operational revenue of the group companies. The only interest of the management is the quick disposal of the said waste due to its hazardous nature, failing which it may invite problems from the pollution regulatory authorities. He further stated that after examination of the issue that the data contained in the pen-drive in respect of sale of spent solvents / scrap represented the amounts collected in excess of the actual consideration for the purpose of distribution among the workers, who involved in handling the said waste and further submitted that since the workers used to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the workers who were involved in handling of the said material as per their demand considering the risks and inconveniences they had to face in handling the hazardous waste. Therefore, the appellant requested for deduction towards expenditure incurred for disposal of such hazardous material and claimed that the appellant and other group companies incurred a sum of Rs. 66,80,52,108/-towards the cash payments made to workers through the head office employees for Assessment Years 2011-12 to 2021-22, as per the seized material for all six group companies. The AO, however, was not convinced with the explanation furnished by the assessee, completed the assessment by accepting the additional income declared by the appellant towards unaccounted cash receipts from the sale of spent solvents / scrap of Rs. 51,22,781/-. 6. Aggrieved by the assessment order, the appellant preferred an appeal before the LD.CIT(A). 6.1. During the course of appellate proceedings, the appellant brought to the notice of the LD.CIT(A) that the same seized material, which contains the details of unaccounted cash receipts from the sale of spent solvents / scrap also contains the details of the expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affidavit dated 5-7-2021 of Shri MSN Reddy that since beginning, he adhered to his stand that the unaccounted cash receipts were utilized for making payments to workers who were involved in handling of disposal of hazardous waste. The appellant submitted notarized affidavits of the concerned employees and labour contractors as additional evidence to substantiate its claim of making excess payments to workers. Since the appellant's claim of expenditure incurred for making payments to workers is based on seized material, the sworn statement and subsequent affidavits, the claim of the appellant has some reasonable force even if additional evidence by way of notarized affidavits is ignored. 6.3. The LD.CIT(A) further observed that, at the same time, it is true that the expenditure out of unaccounted cash receipts is recorded in the seized material and corroborated by the sworn statement and affidavit of Shri MSN Reddy neither complete retraction from admission nor complete denial of claim of expenditure to the appellant is justified. Therefore, the LD.CIT(A) observed that reasonable expenses incurred for earning unaccounted income is required to be considered. Therefore, consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly disposal of waste because of its hazardous nature and the impact that may be created on environment. Although, the appellant has furnished all the evidence, including the sworn affidavit from the persons deployed to disburse expenditure to various persons, but the LD.CIT(A) has ignored all the evidence filed by the assessee and allowed 10% of receipt as expenditure incurred against unaccounted cash receipts from the sale of spent solvents / scrap. Therefore, he submitted that the deduction towards expenditure incurred for handling and disposal of spent solvents / scrap, as per the very same seized material, which was quantified as Rs. 51,22,781/-may be allowed as a deduction against the unaccounted cash receipts. The Learned Counsel for the assessee made an alternative claim that if at all a reasonable portion of expenditure needs to be estimated, then the same needs to be estimated by considering the various expenditures involved in handling spent solvents / scrap assets, but not only salary and wages as considered by the LD.CIT(A). 9. On the other hand, Shir B. Bala Krishna, CIT-DR supporting the order of the LD.CIT(A), submitted that there is no dispute regarding the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts from sale of spent solvents / scrap for the year under consideration. The relevant findings of the Tribunal are as under: "10. We have heard both parties, perused the material, and gone through the orders of the authorities below. There is no dispute with regard to the fact that during the course of the search in the office of the appellant and other group companies, a Sony make 16 GB pen drive was found and seized from the possession of cashier Shri R. Buchi Reddy, which was marked as Annexure A/MSN/OFF/PD1. The entries contained in the Excel workbook in the seized pen drive pertains to the cash receipts of the appellant company as well as the other group companies about the sale of spent solvents / scrap. In fact, Shri R. Buchi Reddy, the cashier, in his sworn statement recorded on 24-02-2021, has admitted unaccounted cash receipts from sale of spent solvents / scrap and also stated that the said receipts are not accounted for in the books of accounts for the relevant assessment years. The statement of Shri R. Buchi Reddy has been confirmed by the MSN Reddy, the Managing Director of the appellant company. He has further explained the process involved in handling and disbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no dispute regarding the fact that, right from the beginning, MSN Reddy, the managing director of the assessee company, made it very clear that the disposal of the hazardous waste material and amount received from sale of spent solvents / scrap does not attract serious attention of the management from the financial perspective, as the revenue generated from the dispersal of the same is insignificant when compared to the operational revenue of the group companies. He further stated that the only interest of the management is the quick disposal of the said waste, failing which, it may invite problems from the pollution regulatory authorities. Therefore, going by the averments made by the managing director of the assessee company during the early days of the search, during the post-search investigation, and during the assessment proceedings, in our considered view, the subsequent claim made by the appellant during the assessment proceedings towards the deduction of expenditure against unaccounted cash receipts from sale of spent solvents / scrap needs to be considered going by on the entries contained in the very same seized document, which represents cash outflow in the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... document in the name of employees at Rs. 66,80,52,108/-for all assessment years and for all the assessees put together. The appellant has also quantified cash outflows of Rs. 17,63,52,315/-in the name of MSN Reddy and family members out of unaccounted cash receipts. The appellant has not claimed deduction towards the amount received by MSN Reddy, the managing director and other directors of the appellant company amounting to Rs. 17,63,52,315/-. In respect of cash outflow representing amounts paid to various employees, the appellant has quantified an amount of Rs. 66,80,52,108/-. Although the appellant claims that the said amount represents various expenditures incurred for handling and disbursement of spent solvents / scrap, but no evidence has been filed except for notarized affidavits from few employees. In the affidavits filed by employees, they have explained the process involved in handling and disbursement of spent solvents / scrap and the amounts incurred towards various expenditures for disposal of spent solvents / scrap. Further, the cash paid to various employees and the purpose of said payments have been explained by the employees in their notarized affidavits. Going by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who involved in handling of hazardous waste. Therefore, we are of the considered view that the LD.CIT(A), having taken note of the affidavit filed by the employees of the assessee, who are involved in handling and disposal of scrap, but erred in considering only 10% of receipts as expenditure against unaccounted cash receipts from sale of spent solvents /scrap. 10.4. Having said so, let us come back to the issue of quantification of expenditure deductible against unaccounted cash receipts from sale of spent solvents / scrap. Admittedly, the LD.CIT(A) has directed the AO to estimate 10% of the receipts towards expenditure incurred against unaccounted receipts. The LD.CIT(A), while estimating the expenditure, has considered only salaries and wages historically incurred by the appellant and other group companies and observed that the appellant and other group companies have incurred 10% of earnings for salaries and wages; therefore, he estimated 10% expenditure against unaccounted receipts. In our considered view, the LD.CIT(A) has grossly erred in coming to the conclusion that the appellant needs to incur only the salary and wages for handling and disposal of hazardous material e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 60%, and the balance amount of 40% of unaccounted cash receipts is hereby sustained for both the assessment years." 11. In this view of the matter and by respectfully, following the decision of the ITAT Hyderabad Benches in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in ITA No. 884/Hyd/2024 (supra), we direct the Assessing Officer 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. 12. In the result, the appeal of assessee is partly allowed. ITA No. 1070/Hyd/2024 for A.Y. 2018-19 13. The facts of the present case and issues involved are identical to the facts and issues which we had considered for A.Y. 2015-16. The reasons given by us in preceding paragraph nos. 10 and 11 shall mutatis and mutandis apply to this appeal, as well. Therefore, for similar reasons, we direct the Assessing Officer to allow 60% of unaccounted cash receipts from sale of spent solvents / scrap as expenditure and sustain 40% of addition towards unaccounted sale of spent solvents / scrap for the A.Y. 2018-19. 14. In the result, the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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