ITAT Rejects Machinery Hire Income Addition Based on Mere Notings

The Nagpur Bench of the Income Tax Appellate Tribunal (ITAT) held that additions cannot be sustained solely on the basis of uncorroborated loose papers found during a search, particularly when there is no evidence of actual receipt of income or identification of the alleged payer. A Bench comprising Judicial Member Anubhav Sharma and Accountant Member Khettra Mohan Roy deleted additions made against Zafiruddin Hafizuddin Syed for AYs 2020-21 and 2021-22 on account of alleged rental income from machinery.

The assessee, engaged in the business of construction and maintenance of roads on contract and sub-contract basis, was subjected to search proceedings as part of the Triconnect Group search conducted on 5 January 2023. During the search, a loose paper containing certain notings relating to machinery, rates and amounts was found. Relying on these notings, the Assessing Officer concluded that the assessee had earned rental income of Rs.7.69 lakh from machinery allegedly given on hire and brought the amount to tax under the head “Income from Other Sources”.

Before the authorities, the assessee explained that the document was merely an internal memorandum prepared by the accountant for monitoring machinery utilisation and calculating deployment costs in contract work. It was contended that no machinery had been let out on rent and that the notings did not represent actual receipts of income.

The Assessing Officer rejected the explanation and treated the figures recorded on the loose paper as rental income. The Commissioner (Appeals) also upheld the addition.

Before the Tribunal, the assessee argued that the addition was based entirely on a loose paper without any supporting evidence. It was submitted that the books of account were duly maintained and audited, had not been rejected by the department, and no evidence was found showing that any machinery was actually hired out or that any rent had been received.

“The addition has been made merely on the basis of loose paper notings without any corroborative evidence whatsoever.”

The Tribunal noted that the department had neither identified the alleged hirer nor brought any material on record to establish actual receipt of rental income. It observed that the loose paper did not disclose the identity of any payer and there was no evidence demonstrating that the machinery was ever let out on hire.

The Bench further observed that the assessee had executed contract works exceeding ₹20 crore during the relevant year and the machinery was reflected in the financial statements as being used in the business. In such circumstances, the explanation that the document represented internal workings for monitoring machinery utilisation could not be rejected merely on suspicion.

“It is settled position of law that loose paper in absence of any corroborative evidence found in the course of search is not sufficient to make addition at the hands of the assessee.”

Relying on judicial precedents, including the Bombay High Court’s decision in Supreme Industries Ltd., the Tribunal held that loose papers and unverified notings, without supporting evidence, do not constitute reliable material for making additions. Since no corroborative evidence of rental receipts was found and no payer was identified, the addition lacked legal foundation.

Therefore, the Tribunal directed the Assessing Officer to delete the addition of Rs.7.69 lakh for both assessment years and allowed the appeals filed by the assessee.

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