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TMI Blog2024 (11) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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.93,97,572/- for arriving at the real income thereon. 3. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in failing to consider the notarized affidavits of the employees and labour contractors furnished as additional evidence which substantiate the additional claim of expenditure towards labour payments by corroborating and supplementing the entries of cash outflows in the names of the employees found in the seized material. 4. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the deduction of expenditure to the extent of Rs.9,39,757/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap." 3. The brief facts of the case are that the appellant company is engaged in the business of manufacturing of bulk drugs and pharmaceuticals, filed its return of income for assessment year 2018-19 under Section 139(1) of the Income Tax Act, 1961. A search and seizure operation under Section 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maintained by him in an excel work book - APRIL 19.29.04.19XZ. xls, found in the seized pen-drive, and further stated that the said cash receipts are not recorded in the books of accounts for the relevant assessment year and further, he has furnished the entity-wise and financial year-wise working of the said cash receipts. As per the details furnished by Shri R. Buchi Reddy, the total cash receipts from the sale of spent solvents / scrap for the financial years 2012-13 to 2020-21, in respect of the appellant and four other group companies, were worked out at Rs.63,61,27,585/- and the total cash receipts from the sale of spent solvents / scrap for the financial years 2015-16 to 2020-21 were worked out at Rs. Rs.18,76,02,606/-. The sworn statement recorded from Shri R. Buchi Reddy along with the Excel sheet data found in the pen-drive wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities. 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 demand payment of high remuneration in cash for handling and disposal of spent solvents/ scrap, the excess amount so collected, being in the nature of remuneration paid to workers for handling hazardous waste never reached the respective companies and accordingly, the same cannot be treated as income in the hands of the respective companies. However, he once again, to put a quietus to the issue and avoid prolonged litigation, reiterated his stand with regard to offering additional income in the hands of the respective companies in the relevant assessment year. The details of partywise and year-wise additional income offered towards unaccounted receipts from the sale of spent solvents / scrap is as follows: A.Y MSN Laboratories Pvt Ltd MSN Pharmachem Pvt Ltd Maithri Laboratories Pvt Ltd MSN Organics Pvt Ltd MSN Life Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y accepting the additional income declared by the appellant towards unaccounted cash receipts from the sale of spent solvents / scrap of Rs.93,97,572/-. 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 incurred by the appellant and other group companies against the said unaccounted cash receipts. The expenditure so incurred by the appellant and the group companies is represented through cash outflow entries in the names of various employees at the head office appearing in the seized material. The aggregate amount of such cash outflows worked out to Rs. 66,80,52,108/- for AYs. 2011-12 to 2021-22 and the same represented the expenditure incurred by the appellant and other companies for handling and disposal of spent solvents / scrap. The appellant further contended that, out of the cash outflow as recorded in the same seized material, an amount of Rs.17,63,52,315/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed 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, considering the evidence filed during the course of appellate proceedings and also taking support from the financials of the MSN group of companies for the relevant financial years, the appellant and other companies have historically incurred an average of 11% of their turnover on salary and wages. Therefore, considering the disposal of such hazardous material associated with risk and challenges, the LD.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. 2018-19 as handling expenses. 7. Aggrieved by the order of the LD.CIT(A), the assessee is in appeal before us. 8. The Learned Counsel for the assessee Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 that the amount received from sale of spent solvents / scrap has not been accounted in the books of account for the relevant assessment year. In fact, Shri R. Buchi Reddy, Cashier, who received the amount has clearly admitted in a statement recorded under Section 132(4) of the Act during the course of search that the said receipts are not accounted for in the books of accounts of the appellant company. The statements of Shri R. Buchi Reddy have been confirmed by Shri MSN Reddy, the managing director of the assessee company in his sworn statement recorded on 27.04.2021 and the affidavit filed on 05.07.2021 during the course of search. Further, the appellant had also offered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout 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 disbursal of spent solvents / scrap, and according to MSN Reddy, the management did not pay any attention to the financial aspects of the disposal of spent solvents / scrap, but their only interest is the early disposal of the said material, considering the hazardous nature and environmental issues involved in handling and disbursal of the said material. Further, it is also an admitted fact that the appellant and other group companies have admitted additional income received from sale of spent solvents / scrap for the respective assessment years and filed returns in response to notices issued under Section 153A of the Act and paid taxes. Therefore, the issue of the additional clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erments 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 name of various employees. 10.2. It is an admitted fact that income cannot be earned without any expenditure. In order to earn any income, expenditure needs to be incurred. The only difference is that the quantum of expenditure may vary based on the nature of the income. In some cases, higher expenditure may be incurred and in some cases, expenditure may be less but it all depends upon the nature of income. But it cannot be said that there is no expenditure required to be incurred to earn any income. Going by the above analogy, it is true that for handling hazardous waste like spent solvents / scrap, there needs to be various expenditures, such as handling charges, packing, sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andling 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 the entries contained in the seized document, coupled with the affidavits filed by the employees, in our considered view, the purpose of maintaining data in the Excel sheet by the cashier is only for internal control at his end regarding the source from sale of spent solvents / scrap and the disbursal of the said cash to various persons at his end. Once the cash is disbursed by him to the head office employees for the purpose of further disbursal of the said cash to the workers by them and the said fact is noted in the Excel workbook by him, it has served the purpose, and there is nothing more to be recorded by him. This explains the reasons why there is no evidence of mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), 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 even though the prosses of collecting and disposal of hazardous waste requires careful attention in handling the material. The appellant also needs to take steps for quick disposal of such hazardous material. The process of collecting and disposal of spent solvents / scrap requires various other expenditure like transportation, packing, and other necessary items for safe handling of hazardous waste without any environmental impact. If we consider the other expenditure required for the disposal of spent solvents / scrap, in our considered view, the AO needs to consider transportation, packing, and other materials necessary for handling the disposal of spent solvents / scrap. Al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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