Addition For Extrapolated Wages Restricted to Date of Survey Due to Lack of Evidence: ITAT Deletes ₹1.02 Cr Addition [Read Order]

Swati Industries (assessee), a firm engaged in the manufacturing of scaffolding items, faced additions following a survey conducted on its three business premises on 08.10.2018. The AO found that certain wages and salaries were paid outside the books of accounts and extrapolated these payments for the entire year.

The AO made an addition of Rs. 1,02,10,256/-, which was taxed as unexplained expenditure under Section 69C of the Income Tax Act and subjected to provisions of Section 115BBE of the Income Tax Act, 1961.

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Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the addition, confirming Rs. 76,20,756/- and Rs. 25,89,500/-.

The addition was upheld despite the assessee’s contention that the extrapolation was baseless and that payments to labourers of transporters and third parties for zinc plating were made through banking channels with TDS deductions.

Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT. The counsel for the assessee argued that the heavy materials used in the business required transporter’s labourers for loading and unloading, as evidenced by invoices, e-bills, and photographs submitted during the survey.

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The counsel further contended that the extrapolation of wages for the entire year was impermissible, citing the jurisdictional Punjab & Haryana High Court’s decision in V.M. Spinning Mills, which restricted additions to the period supported by evidence.

The counsel also relied on the Chandigarh Bench’s decision in Gurdip Cycle Industries, where extrapolation based on limited evidence was disallowed. The Counsel submitted that all inward and outward material transactions were duly accounted for in the books, and no inquiry was made during the survey to verify the labourer’s association with the assessee.

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The two-member bench comprising Rajpal Yadav (Vice President) and Krinwant Sahay (Accountant Member), observed that the assessee provided documentary evidence, including bills and photographs, demonstrating that the labourers belonged to third-party transporters.

The Tribunal held that additions could only be made for the period up to the survey date by relying on the V.M. Spinning Mills judgment, as no evidence indicated continued unrecorded payments thereafter.

The bench further acknowledged the availability of Rs. 1.60 crore surrendered during the survey, which covered the unrecorded wages up to 08.10.2018. It deleted the addition of Rs. 1,02,10,256/-. The appeal of the assessee was allowed.

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