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Judgment
PER AMITABH SHUKLA, AM:
These cross appeals filed by the assessee as well as by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, New Delhi, dated 30.07.2025 arising out of assessment order dated 26.03.2025, passed u/s. 147 r.w.s. 144B of the Income Tax Act, 1961, pertaining to the Assessment Year 2023-24. The word ‘Act’ herein this order would mean Income Tax Act, 1961.
For the purposes of convenience, the appeal of the assessee and the Revenue were heard together and are being adjudicated by this common order. Considering the order of precedence, we would first take the appeal of the assessee.
ITA No.5836/Del/2025
The assessee has raised following grounds of appeals:-
01.Because the CIT(A) has failed to appreciate the facts and circumstances of the case and has arbitrarily upheld, that the salary paid to the employees is not salary, but is a payment of contractual nature ignoring the fact that the employees being on permanent role and there salary being subject to ESI & EPF, the salary paid is an allowable business expenditure, the same be allowed.
02.Because the CIT(A) has erred on facts and in law in holding that since the salary paid to the employees is in the nature of contractual payments, the provisions of section 40(a)(la) of the Act are applicable and, therefore, being failure to deduct tax at source, has arbitrarily upheld the disallowance to the extent of 20% of the salary paid / expenses claimed, having failed to deduct tax at source, such disallowance is contrary to the provisions of law, the disallowance made be deleted.
03.Because the CIT(A) has erred on facts and in law in upholding the disallowance of salary paid to employees holding its to be in the nature of contractual payments and tax at source should ought to have been deducted as per the provisions of section 194C; such failure to deduct tax, the provisions of section 40(a)(ia) are applicable, which finding of the CIT(A) is contrary to the provisions of law, the disallowance made by the AO and upheld by the CIT (A) be deleted.
04.Because the CIT(A) himself has accepted that the payment made to the employees is part of the salary and has himself reduced the disallowance from 30% as mandated under section 40(a)(ia) and as done by the AO to 20%, there being no basis for upholding the disallowance of 20% also, of the total salary paid, the order passed by the CIT(A) is contrary to the provisions of law, the disallowance made be deleted.
05.Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.85,00,000/- under section 68 of the Income-tax Act, 1961, overlooking the various evidences including the confirmatory letter and tax details as filed in response to notice under section 133(6) of the Act, and also the evidences attached thereto, the addition made by the AO and upheld by the CIT (A) being contrary to the provisions of law, the same be deleted.
06.Because the CIT(A) has failed to appreciate that all the ingredients necessary as laid down in section 68 being the identity, capacity and the genuineness of the transaction having been fulfilled, of which necessary evidences having been filed during the course of assessment and the appellate proceedings, there being no reason to disbelieve the same, the addition being contrary to the provisions of law, the same be deleted.
07.Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.56,115/- being 10% disallowance made by the AO out of the total staff welfare expenses, such addition being contrary to facts, be deleted.
08.Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.1,20,000/- being 30% of the professional fees paid applying the provisions of section 40(1)(ia) of the Act, which provisions are not applicable, the disallowance made be deleted.
09.Because the CIT(A) has failed to appreciate that the accounts having been tax audited and no defects in the same having been found and all the expenses having been incurred for the purpose of business, question of disallowance of any of the expenses does not arise, the disallowance made be deleted.
At the outset, ld. Counsel for the assessee submitted that the Ground of appeal No.8 regarding 30% disallowance on professional fees by applying provisions of section 40(1)(ia) and the additional ground of appeal regarding invalidity of notice u/s 143(2) of the Act are not pressed. Accordingly, the impugned grounds are dismissed as withdrawn.
The first issue raised by the assessee emanating from grounds of appeal no.1 to 4 are regarding the action of ld. AO in making an addition of Rs.20,32,84,329/- u/s 40(1)(ia) of the Act. The ld. Counsel for the assessee Shri Rakesh Garg, Advocate, took us through the brief factual matrix of the case. It was submitted that the assessee is in the business of providing labour workforce to various institutions, both to Central and State Governments and also to private organizations. The Return of Income for the year under consideration was filed at NIL income after setting off brought forward losses of the earlier years. The said return filed was selected for scrutiny under CASS for the reasons of low net profit shown by certain specific business codes including other services. The ld. AO noted that the assessee had claimed expenses of Rs.67,76,14,433/- on account of salary and wages. The ld. AO had asked the assessee to give necessary documentary evidences to support its claim of the respective recipients of salary and wages as its employees. Not satisfied with the evidences filed by the assessee, ld. AO held that the recipients were contractual persons and not regular employees of the assessee and hence provisions of section 194C r.w.s 40(1)(ia) of the Act were attracted. Accordingly, he proceeded to make the impugned disallowance of Rs.20,32,84,329/- being 30% of the claimed expenses of Rs.67,76,14,433/- on account of salary and wages. The ld. CIT(A) concurred with the findings of the ld. AO but partly confirmed the addition directing disallowance to the extent of 20% as against 30% determined by the ld. AO.
We have heard the rival submissions in the light of material available on records. The ld. Counsel for the assessee vehemently argued submitting that the addition made by the ld. AO is patently unwarranted. It was argued that the claimed expenses are genuine expenses and is in respect of employees available on the pay roll of the company. The ld. Counsel submitted that in most of the cases, salary and wages have been paid using banking channels and that the employees are subjected to ESI and EPF payments. It was submitted that in couple of cases, TDS has also been deducted. The ld. Counsel argued that in the past, no such additions have been made and that in the immediately in the following assessment year i.e. 2024-25, no addition has been made on this account. The ld. Counsel argued that its auditor have clearly verified that there is no case for invocation of provisions of section 194C in its case. The ld. Counsel argued that no discrepancies was identified in the books of accounts and that the addition was purely made on the guess work.
The ld. Counsel further submitted that the appellant assessee had filed a petition before the local High Pitched Assessment Committee which had concluded that the assessment was a High Pitched Assessment. The ld. Counsel vociferously argued that for the assessment year 2024-25 i.e. the next year, the return was filed on 16.08.2024 was also selected for scrutiny that was much before the return for AY.2023-24 was picked for scrutiny. In the assessment order for A.Y. 2024-25, the issue regarding disallowances made by the AO in the year under appeal have been discussed thread bare and no disallowance of any nature whatsoever has been made in the assessment. The retuned income has been accepted as such. Our attention was invited to following portion of the assessment order for A.Y.2024-25
"The assessee company was under scrutiny for the A.Y. 2023-24 and additions were made on the salaries, wages and incentives. A total expense amounting to Rs. 67,76,14,433/- was claimed towards salary, wages and incentives for the A.Y. 2023-24. During the assessment proceedings, the assessee had submitted that the manpower supplied by the company is engaged and employed by it directly on its payroll and not through labour supply contracts. The relationship between the assessee company and the employees/labour engaged is that of an Employer-Employee relation wherein the company makes the payment of salaries, wages and incentives directly to the employees/ labours through normal banking channel.
However, it was assumed in the assessment order that payment of Rs.67,76,14,433/- towards the salary, wages and incentive were liable to TDS u/s 194C of the Act and a sum equivalent to 30% was which works out to Rs.20,32,84,329/- was disallowed u/s 40(1)(ia) of the Act. The details and documents obtained with regard to the above issue was examined. The assessee has submitted that the relationship between the assessee company and the employees/labour engaged is that of an Employer-Employee relation wherein the company makes the payment of salaries, wages and incentives directly to the employees/ labours through normal banking channel. The same has been examined from the details obtained as under:
1.Offer/Appointment letters to the employees
2.ESI Return of contributions
3.Provident Fund Details and challans
4.Agreement copies for supply of Contractual labour/employees.
5.Other relevant details.
On going through the above details and the submissions made by the assessee, the expenses debited towards salary wages and incentives that fall within the scope of Salary income need not be treated as contractual payments and to employees or labours. Once the Employee -Employer relation is proved supported with documents such as pay structure, PF, ESCI details, the same need to be treated as expenses debited towards salary subject to TDS u/s 192 wherever, applicable.
The details of such salary expenditure with the financials and audit report have been obtained and examined.
Accordingly, the issue under verification with regard to large additions on account of disallowance of expenses u/s 40(1)(ia) stands examined."
The ld. Counsel further drew our attention to the observations of Ld. CIT(A) given in para-10.2 of his order and submitted that the ld. CIT(A) has confirmed the disallowance of ld. AO from 30% to 20% again on erroneous grounds of the expenses being unverifiable. It was contended that the addition made by the ld. AO and its part modification by the ld. CIT(A) are based upon incorrect facts of the case.
The ld. CIT-DR, Shri Mahesh Kumar, vehemently argued in favour of the ld. AO. Inviting reference to the cross appeal filed by the Revenue in ITA No.6034/Del/2025, it was argued that the relief given by the ld. CIT(A) per se was inadmissible. It was stated that the assessee had not given sufficient details to the ld. AO to establish an employee employer relationship and that therefore a case of contractual relationship between the assessee and the recipients of salary and wages was clearly evident. Mere PF & ESI payments was not sufficient to establish an employee employer relationship. The ld. DR argued that the AO has recorded that the payments were made in cash which again alluded towards the expenses being unsubstantiated and unverifiable. The ld. DR submitted that the conclusions drawn by the Local High Pitched Committee regarding the assessment order being qualifying as High Pitched order would not have much bearing on the case as the said body was merely an administrative entity. On the aspect of no addition having been made in the subsequent year on this point also was stated to have little relevant with the controversy at hand simply because principles of res judicata do not apply to direct tax statute and facts of each year are independent. The ld. CIT-DR thus submitted that the calculation of disallowance of 30% was in conformity with the provisions of section 40(1)(ia) of the Act.
Before proceeding further, we deem it appropriate to briefly recapitulate the statutory provisions governing of section 40(a)(ia) and section 194C of the Act.
Section 40(a)(ia)
40.Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",—
(a)in the case of any assessee—
(i)any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—
(A)outside India; or
(B)in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid:
Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.
Explanation.—For the purposes of this sub-clause,—
(A)"royalty" shall have the same meaning as in Explanation2 to clause (vi) of sub-section (1) of section 9;
(B)"fees for technical services" shall have the same meaning as in Explanation2 to clause (vii) of sub-section (1) of section 9;
(ia)thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :
Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.
Explanation.—For the purposes of this sub-clause,—
(i)"commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H;
(ii)"fees for technical services" shall have the same meaning as in Explanation2 to clause (vii) of sub-section (1) of section 9;
(iii)"professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J;
(iv)"work" shall have the same meaning as in Explanation III to section 194C;
(v)"rent" shall have the same meaning as in clause (i) to the Explanation to section 194-I;
(vi)"royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
Section 194C
Payments to contractors.
194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
(i)one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii)two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.
(2)Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3)Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—
(i)on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or
(ii)on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.
(4)No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.
(5)No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds one lakh rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.
(6)No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.
(7)The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.
Explanation.—For the purposes of this section,—
(i)"specified person" shall mean,—
(a)the Central Government or any State Government; or
(b)any local authority; or
(c)any corporation established by or under a Central, State or Provincial Act; or
(d)any company; or
(e)any co-operative society; or
(f)any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
(g)any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
(h)any trust; or
(i)any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
(j)any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
(k)any firm; or
(l)any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—
(A)does not fall under any of the preceding sub-clauses; and
(B)has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;
(ii)"goods carriage" shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;
(iii)"contract" shall include sub-contract;
(iv)"work" shall include—
(a)advertising;
(b)broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c)carriage of goods or passengers by any mode of transport other than by railways;
(d)catering;
(e)manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A, 34[but does not include—
(A)manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer; or
(B)any sum referred to in sub-section (1) of section 194J.]
We have noted that the ld. Assessing Officer on pages 4, 5, 7, 10, 15 and 17 dealt the issue as under:-
“….During the year under consideration, the assessee has claimed expenses of Rs.67,76,14,433/- in respect of salaries, wages & incentives. During the assessment proceedings, the assessee was requested to furnish the details of salary and wages paid, employee wise break-up of total Salaries, wages and incentives of Rs.67,76,14,433/- and mode of payment.
To substantiate the said claim the assessee, the assessee provided only state -wise list of the payment made towards wages. The wages expenses includes payment made both in cash and through bank transfers. The assessee did not clearly segregate the detailed breakdown of cash payments and bank transfers. In the absence of proper documentary evidence, the genuineness of the claim remains unverified. Therefore, as show cause notice was issued to show cause as to why10% of the expenses claimed of Rs.67,76,14,433/- should not be disallowed and added to the total income during the year under consideration.
Further, it is observed that there was a huge payment made of Rs.3,70,34,572/-against labour payments. It is evident that the assessee must have engaged multiple labour suppliers/sub-contractors for providing such huge quantity of labour. The payment made to these suppliers fall within the ambit of contractual payments, necessitating TDS deduction. Thus, the assessee was required to deduct the tax at source under section 194C of the Act while making payment. Therefore, a show cause notice was issued to the assesse to show cause as to why 30% of Rs. 67,76,14,433/-paid to labours should not be disallowed u/s.40(1)(ia) of the I T Act for failure to deduct TDS as per section 194C of the Act and added to the total income of the assessee.
B: Salary&WagesPayable:-
During the year under consideration the assessee has claimed liability of Salary & Wages Payable of Rs.3,48,13,500/-.In this respect, the assessee was requested to submit the details in the format mentioned above at para A. However, the assessee provided only list of 2,628 labours including name and amount and Aadhar no. &PAN of some labours. However, the assessee failed to furnish the supporting documents/documentary proofs to substantiate the liability. In absence of plausible explanation and documentary evidence, the genuineness of the liability remains unverified. Therefore, a show cause notice was issued to show cause as to why Salary & Wages Payable of Rs.3,48,13,500/- should not be treated as unexplained cash credit u/s.68 of the I T Act and added to total income of the assessee for the relevant year.
C: OtherExpenses:-
During the assessment proceedings, the assessee was requested to provide the details of the following expenses claimed in the P & L account with documentary evidence and explanation for the expenses incurred vide notice u/s.142(1) dated 16.01.2025.
Sr. No. Particulars Amount(in Rs.) 1 Staff welfare expenses 5,61,149 2 Uniform expenses 1,77,650 3 Canteen Expenses 9,35,026 4 Conveyance 2,35,944 5 Tour &Travelling 2,17,365 6 Legal expenses 1,76,857 7 Business promotion expenses 1,10,323 8 Vehicle running & maintenance expenses 2,26,509 9 Power & fuel 3,10,461 10 Office Rent 3,71,110/- 11 Professional fee 4,00,000/- Total 37,22,394/- The assessee has provided only copies ledger accounts of all the expenses. The relevant extract is as under:-
No documentary evidences such as invoices/ bills/ vouchers, copy of bank statement highlighting the said payments, copy of agreement made for rent payments, receipts of payments made, copy of TDS if any deducted were submitted by the assessee.
The onus is on the assessee to provide necessary evidence and documentation to support the claims made in the return of income. Due to the lack of complete and authenticated documentation, the genuineness of the expenses claimed remains unverified. Therefore, as how cause notice was issued to show cause as to why10% of the expenses of Rs. 29,51,284/-(excluding office rent and professional fees) should not be disallowed and added to total income of the assessee for the relevant year.
Further, it is observed that the assessee made payment of Rs.3,71,110/-towards office rent and Rs.4,00,000/- towards professional fees. The payment made towards rent of Rs.3,71,110/- and professional fees Rs.4,00,000/- fall within the ambit of payments necessitating TDS deduction.Thus, the assessee was required to deduct the tax at source under section 194I of the Act while making payment towards office rent and 194J of the Act while making payment towards professional fees.
Therefore, a show cause notice was issued to show cause as to why 30% of Rs.3,71,110/- towards office rent and 30% Rs.4,00,000/- towards professional fees should not be disallowed u/s.40(1)(ia) of the I T Act………………………. ………………………………………………………………………………………… ………………………………………………………………………………
A: Salaries, wages and incentives:
In response to show cause notice, the assessee provided a month-wise list of labrours, however the assessee failed to provide the complete muster roll/payroll, PAN of the labours. Further, the assessee did not provide any documentary evidences such as pay slips, cash disbursement records/vouchers, signatures of the labours while making payments, detailed records of each labours/employee, mode of payment to each employee, TDS certificate, if any deducted, if payment made through bank the same is highlighting in the copy of bank statement etc. Further, the assessee submitted that the employees do not fall under taxable income limit; therefore, no TDS has been deducted.
The assessee vide reply dated 03-03-2025, submitted that the payment towards wages and incentives/awards were made through cash and Bank as mentioned in para 3.4 above. However, in reply to SCN, the assessee submitted that the said payment was made through bank only. Despite this revised claim, the assessee failed to furnish adequate supporting documentary evidences or any verifiable records to establish the genuineness of the payments. The mere submission of a list of labours, without corroborative proof does not substantiate the expenditure.
Further, the assessee did not provide any documentary evidence in respect of incentives/awards of Rs.6,76,36,908/-
Further, it is observed that, during the year under consideration, the assessee has made payment of Rs. 67,76,14,433/- towards salary and wages and given the scale of operations of Rs. 67,76,14,433l-, it is evident that the assessee must have of labours. The payment made to these suppliers fall within the ambit of contractual payments, necessitating TDS deduction. Thus, the assessee was required to deduct the tax at source under section 194C of the Act while making payment. For the better understanding, provision of section 194C of the Act and section 40(a)(ia) are reproduced as under: ………………………………………………………………………………………… ………………………………………………………………………………
The reliance is placed on the decision of the Hon’ble High Court of Jharkhand in the case of CIT v. Md. Tabarak (2015)61 taxmann.com 94 (Jharkhand) dated 18.03.2015.The relevant extract is as under:-
“….. (XII)We are not in agreement with the arguments canvassed by the counsel for the respondent-assessee mainly for the reasons that section 40(a) (ia) to be read with section 194C of the Income Tax Act, 1961 have not been incorporated to increase the morality of the assessee. In a taxing Statute, once there is a breach of section, the consequences are bound to follow happen. Looking to the provisions of Section 194C of the Income Tax Act, 1961 if the amount is paid in pursuance of the contract - which may be oral also, Section 194 C of the Income Tax Act,1961 is applicable. In the facts of the present case when aforesaid huge amount is paid towards vehicle hire charges in one year and also towards loading and unloading charges huge amounts is paid in cash. TDS ought to have been deducted be for making such payments by the respondent to his sub contractors and as this TDS has not been deducted, the amount paid towards vehicle hire charges and amount paid towards loading and unloading charges which are at Rs. 98,76,419/- and at Rs. 12, 76,700/- is not deductable from the taxable amount u/s 40(a)(ia) of the Income Tax Act. ….”
When such a huge amount of Rs.67,76,14,433/-was paid towards labour payment in one year, TDS ought to have been deducted before making such payments by the assessee to his sub-contractors. Further, the assessee submitted that the relationship between the Assessee and the labours engaged is that of the Employer & Employee, wherein the Assessee makes payment of salaries, wages & incentives to them. However, no written employment contract or written offer of employment have been submitted by the assessee. The burden of proof lies with the assessee to substantiate the claim; however, the assessee could not prove the employer –employee relationship.
In view of the above discussion, in absence of plausible explanation and documentary evidences, 30% of the labour payment of Rs. 67,76,14,433/-which comes to Rs.20,32,84,329/-paid to labour is disallowed u/s.40(1)(ia)of the IT Act for failure to deduct TDS as per section 194C of the Act…..”
At the outset, we have noted that there appears to be some confusion regarding the quoting of the correct provisions of the Act. From the perusal of order of ld. AO, it transpires that in view of non-furnishing of sufficient documents to establish an employer employee relationship for the expenses qua salary and wages, he held the view that the assessee had fallen into mischief of section 194C r.w.s. 40(a)(ia) of the Act. The ld. AO has quoted the section as 40(1)(ia) and not 40(a)(ia). The ld. AO and the ld. CIT(A) apparently have been misquoting the section. The statutory prescription of 40(a)(ia) postulates that an assessee will be liable for disallowance of 30% in respect of amounts on which TDS was ought to have been deducted and was not deducted. Section 40(1)(ia) does not have any linkage to any such controversy seminal to present case.
Coming to the issue of disallowance, we have noted that the ld. AO has categorically brought on records in his order, (supra) that the assessee was not forthcoming with requisite details and evidences to establish a clear employee employer relationship between the assessee and recipients of salary and wages. Before the ld. CIT(A) also, no such evidence was adduced. A perusal of the assessment order and the appellate order, however alludes that the lower authorities are into some kind of confusion regards proper understanding of the facts of the case. They appear to be oscillating between twin thoughts of expenses being unverifiable and disallowance liable to be made for non-deduction of TDS. Both the above views operate in different parameters. Whereas, for unverifiable expenses in terms of non-production of vouchers, bills, etc., an assessing authority is entitled to draw conclusions and make disallowance on reasonable estimate basis, the same is not the case with disallowance to be made u/s 40(a)(ia). The statutory prescription contained u/s 40(a)(ia) clearly postulates that a disallowance @30% shall be made in case an assessee fails to deduct TDS on items prescribed in chapter XVII B of the Act. Section 194C forms part of said chapter XVII B of the Act. To this extent, the estimation drawn by ld. CIT(A) in restricting the addition from 30% to 20% has not been found to supported by the contemporaneous statutory prescription.
We have further noted that the action of the Ld. AO in making the disallowance invoking provisions of section 40(a)(ia) while also alluding towards unverifiable expenses is not correct. Through his addition of Rs.20,32,84,329/-, the ld. AO has estimated that 30% of the total claimed expenses of Rs.67,76,14,433/- are hit by the provisions of section 40(a)(ia) of the Act. The action of the AO is legally impermissible since the provisions of section 40(a)(ia) of the Act mandate that the yardstick of 30% disallowance would only apply on those specific amounts on which TDS was ought to have been deducted but not deducted. No such exercise has been done by the ld. AO.
The argument of the ld. Counsel for the assessee that it is entitled for nil disallowance since no such addition was made by the Department in subsequent assessment year i.e. AY 2024-25 has been examined at length. At the outset, we concur with the arguments of the ld. CIT-DR that principle of res judicata do not apply to direct tax statute, where each year is independent to preceding or succeeding years. We have further noted from the extract of assessment order for AY 2024-25 (supra) that the Ld. AO has not proceeded to make any additions akin to those made in AY 2023-24, by recording that the assessee had provided specific details offer/appointment letters, ESI returns, Provident Fund details and challans, agreement for contractual labour employees, etc. Assessment order for the year under consideration alludes that no such specific details was filed before the lower authorities.
The argument of the appellant assessee of no disallowance being now permissible considering the fact that the Local High Pitched Assessment Committee has held the assessment to be falling in the category of an High Pitched Assessment is also bereft of any meritorious consideration. Local High Pitched Assessment Committee is purely an administrative body created by the Income Tax Department to attend to taxpayer grievances and is not an appellate authority. It does not find any mention in section 246 of the Act.
Upon careful consideration of the facts of the case, we have noted that the ld. AO in the absence of requisite details and evidences forthcoming from the assessee to justify its claim of expenses of salary and wages proceeded to make an estimated disallowance of 30% u/s 40(a)(ia) of the Act. The ld. AO as per the legal mandate ought to have identified specific cases in which TDS was required to have been deducted but was not deducted. We have noted that detailed enquiries or investigation into the matter have not been conducted and thus the order passed is a sketchy and non-speaking order. While drawing the conclusions, the ld. AO has based reliance upon a mixed set off facts and assumptions. The ld. CIT(A) on his part has also based his decision on conjectures and surmises without realizing that the provisions of section of 40(a)(ia) of the Act are firm and do not allow any assumptions. Accordingly, we are of the considered view that in the interest of justice, it would be appropriate to remit the matter back to the ld. Assessing Officer for assessment de novo. We therefore set-aside the order of the lower authorities and direct the ld. AO to do assessment de novo after properly inquiring into the facts of the case. Disallowance if any u/s 40(a)(ia) should be based up-on specific instances and amounts upon which TDS was liable to be deducted. The ld. AO would be required to be conduct a detailed enquiries into the records of the assessee, before concluding that no employer employee relationship existed between the appellant assessee and the recipient of salary and wages. The assessee on its part shall be duty bound to present all or any evidences deemed necessary in support of its arguments. The ld. AO shall give due opportunity of being heard to the assessee before concluding his proceedings. The assessee shall be bounden to comply with all the statutory notices issued by the Ld AO. Considering the peculiarities and complexities of the case and with a view to prevent any unnecessary wait by the appellant assessee, we further direct the Ld AO to conclude his assessment proceedings within 180 days of the receipt of this order. Accordingly, grounds of appeal no.1 to 4 of the assessee’s appeal are allowed for statistical purposes.
The next issue raised by the appellant assessee through its grounds of appeals no.5 and 6 are regarding the addition of Rs.85,00,000/- u/s 68 of the Act. The ld. Counsel for the assessee took us through the brief factual matrix of the case. The ld. AO had noted that the assessee had received an amount of Rs.85 lakhs as unsecured loan from one Apex Construction. Subsequently, on being queried, it was submitted that the said loan was actually taken from one Mrs. Urmil Aggarwal spouse of one of the partners in the entity Apex Constructions and was erroneously shown in books as being received from Apex Constructions. According to the facts recorded by the ld. AO on page-17 of his order, the assessee had provided a copy of its bank statement indicating receipt and repayment of the impugned loan. In response to notice u/s 133(6) Mrs. Urmil Aggarwal provided a copy of her return and bank statement. From perusal thereof, the ld. AO noted that Mrs. Aggarwal was having, during the year, a meager income of Rs.7,29,629/- which included a salary of Rs.82,000/-. The ld. AO thus proceeded to conclude that Mrs. Aggarwal did not had sufficient creditworthiness to have advanced the loan and proceeded to make the addition. The ld. CIT(A) concurred with the findings of the AO that Mrs. Urmil Aggarwal was having deficient creditworthiness so as to advance the said loan of Rs.85 lakhs and confirmed the addition.
Heard both the parties. Perused the material available on records.
The ld. Counsel reiterated his arguments made before the lower authorities. It was contended that the identity, creditworthiness and genuineness of transaction was evenly established in this case and the addition was therefore unwarranted.
The ld. DR placed reliance upon the orders of the lower authorities.
We have noted that the assessee has not been able to adduce adequate evidences to demonstrate sufficient creditworthiness of Mrs. Urmil Aggarwal to have advanced the said unsecured loan of Rs.85 Lakhs either before the ld. AO or before the ld. CIT(A). While perusing the contents of assessment order for AY 2024-25 relied upon by the assessee qua disallowances of salary and wages, we have noted the following observations of the ld. AO on page-5 and 6 of his order.
“…….During the A.Y. 2023-24, unsecured Loan of Rs. 10,00,000/-was received from M/s Apex Construction and Rs. 75,00,000/- was received from Mrs. Urmil Aggrawal through banking channels. Out of which, loan amounting to Rs. 10,00,000/- was repaid to M/s Apex Construction & Rs. 50,00,000/- was repaid to Mrs. Urmil Aggrawal through banking channels and the remaining unsecured loan of Rs. 25,00,000/- was outstanding as on 31.03.2023, which was duly repaid during the relevant A.Y. 2024-25. The copy of ledger is obtained and examined in this regard.
The receipt and repayment of above referred unsecured loan is done through banking channels. The copy of Bank Statements of the Assessee is obtained along with the copy of Bank Statements of Mrs. Urmil Aggrawal for the relevant periods and a copy of reply dated 10.03.2025, already furnished u/s 133(6) to the department by the representative of Mrs. Urmil Aggrawal, during earlier Scrutiny Assessment of the Assessee for the A. Y. 2023-24 is obtained and examined. (As per the submission made u/s 133(6) Mrs Urmil Aggarwal is no more The unsecured loan provided by Mrs. Urmil Aggarwal was sourced from the proceeds received upon maturity of Fixed Deposit Receipts (FDRs). Relevant Bank Statements evidencing the FDR maturity credit is obtained and examined. xxxxxxxxx
In view of the above explanations supported with documents, the issue with regard to Unsecured loans stands examined.
The total receipts reported in the ITR have been examined w.r.t Financial statements and documents Further the expenses debited in the P and L account appear to be normal and necessary to run the business nature.
In view of the above it is fair to conclude that the assessee has explained the issue under verification with supporting details and documents. Accordingly the case needs to be concluded accepting the income returned without any variation…..”
Contrary to the above, we have noted the following findings given by the ld. AO while making the impugned addition in pages 7 and 17 of his assessment order for AY 2023-24;
“…..D:UnsecuredLoan:
During the assessment proceedings, it is observed that during the year under consideration, the assessee has taken an unsecured loan of Rs.85,00,000/- from Apex Construction. In this respect, vide letter dated 07.03.2025, the assessee submitted that the said un-secured loan is owed to Mrs. Urmil Aggarwal, spouse of one of the partners in M/s. Apex Construction and erroneously posted to M/s. Apex Construction in the books, instead of Mrs. Urmil Aggarwal. However the assessee did not provide the documentary evidences such as copy of bank statement highlighting the said receipts and payments, ITR with financials of Mrs. Urmil Aggarwal to substantiate the genuineness and creditworthiness of the said loan. Therefore the assessee was requested to show cause as to why the unsecured loan of Rs. 85,00,000/- should not be treated as unexplained cash credit u/s.68 rws. 115BBE of the IT Act and added to total income of the assessee for the relevant ………………………………………………………………………………… …………………………………………………………………………………
D:UnsecuredLoan:
In respect of un-secured loan of Rs.85,00,000/- taken from Mrs. Urmil Aggarwal during the year consideration, the assessee provided copy of Bank Statement of the assessee highlighting the receipt and repayment of unsecured loan. In reply to the information sought u/s.133(6) of the Act, Mrs. Urmil Aggarwal provided the copy of returnofincomeandbankstatement.Onperusalofthereturnofincomei.e.IT R-2,of Mrs. Urmil Aggarwal, it is observed that during the year under consideration, total income of Mrs. Urmil Aggarwal was Rs.7,29,629/- which includes salary of Rs.82,000/-.Therefore, the creditworthiness of the said party having meager income of Rs. 7,29,629/- remains unproven. The onus is on the assessee to prove the genuineness of the transaction and creditworthiness of the lender alongwith documentary evidence and plausible explanation. However, the assessee failed to do so. Therefore, un-secured loan of Rs.85,00,000/- is treated as unexplained cash credit u/s.68 rws. 115BBE of the I T Act and added to total income of the assessee for the relevant year….”
Thus, we have noted that there appears to be some confusion in facts of the case qua loan of Rs.85 lakhs reported in the two assessment years. In AY 2023-24, the assessee had said that reporting of loan from Apex Constructions was a mistake and entire Rs.85 lakhs had come from Mrs. Urmil Aggarwal. In AY 2024-25, it was however reported that in AY 2023-24, Rs.10 lakhs was received from Apex Construction and Rs.75 lakhs from Mrs. Urmil Aggarwal. We have also noted that the AO had not been provided with any credible details qua creditworthiness of Mrs. Urmil Aggarwal which happened to have been provided in AY 2024-25 proceedings (supra). Accordingly, in the interest of justice, we deem it appropriate to remit this issue also to the file of ld. AO for re-adjudication de novo. We therefore set-aside the order of the lower authorities and direct the ld. AO to do assessment de novo after properly inquiring into the facts of the case. The ld. AO would be required to be conduct a detailed enquiries into the loan of Rs.85 lakhs taken by the assessee as prescribed under section 68 of the Act. The assessee on its part shall be duty bound to present all or any evidences deemed necessary in support of its arguments. The ld. AO shall give due opportunity of being heard to the assessee before concluding his proceedings. The assessee shall be bounden to comply with all the statutory notices issued by the Ld AO. Considering the peculiarities and complexities of the case and with a view to prevent any unnecessary wait by the appellant assessee, we further direct the Ld AO to conclude his assessment proceedings within 180 days of the receipt of this order. Accordingly, grounds of appeal no.5 and 6 of the assessee’s appeal are allowed for statistical purposes.
The next issue contested by the appellant assessee to ground of appeal no.7 is regarding the addition of Rs.56,115/- being 10% of disallowance made by the ld. AO out of staff welfare expenses. The ld. AO has made the disallowance again raising the boogey of non-deduction of TDS as well as unverifiable expenses and proceeded to estimate the disallowance at 10% of the total claim u/s 37 of the Act.
The ld. Counsel reiterated his arguments taken before the ld. CIT(A).
The ld. DR has also relied upon the orders of the lower authorities.
Considering the overall facts of the case, we deem it appropriate to remit this issue also to the file of the ld. AO for readjudication de novo. He is directed readjudicate the matter by passing a speaking order in accordance with law and after giving adequate opportunity of being heard to the assessee. The assessee on its part shall be duty bound to present all or any evidences deemed necessary in support of its arguments. The ld. AO shall give due opportunity of being heard to the assessee before concluding his proceedings. The assessee shall be bounden to comply with all the statutory notices issued by the Ld AO. The ground of appeal no.7 is therefore allowed for statistical purposes.
The ground of appeal no.9 is general in nature and hence, dismissed.
ITA No.6034/Del/2025
Through ITA No.6034/Del/2025, the Revenue has filed cross appeal contesting the decision of the ld. CIT(A) in reducing the disallowance from 30% to 20% qua salary and wages. In view of the decision in assessee’s appeal (supra) on this issue of remitting the issue back to the ld. AO for assessment de novo, the appeal of the Revenue in ITA No.6034/Del/2025 is also to be treated as allowed for statistical purposes.
In the result, the appeal of the assessee vide ITA No.5836/Del/2025 is partly allowed and of Revenue in ITA No.6034/Del/2024 is allowed for statistical purposes.