ITAT Hyderabad Clarifies Scope of Section 69C, Section 69A and Section 80IA in KLSR Infratech Limited Vs DCIT

1. Background and Case Overview

The Income Tax Appellate Tribunal, Hyderabad Bench, in the case of KLSR Infratech Limited Vs DCIT (ITAT Hyderabad), delivered a consolidated decision covering seven appeals for AYs 2015-16 to 2020-21. The assessee is an infrastructure contractor engaged in execution of infrastructure-related contracts and projects and had claimed deduction under Section 80IA(4) of the Income Tax Act 1961 in the relevant years.

The Tribunal primarily addressed three recurring issues:

  • Additions for unexplained expenditure under Section 69C based on entries in a diary seized from the residence of the Managing Director.
  • Treatment of additional income arising from withdrawal of labour expenditure as unexplained money under Section 69A, taxed under Section 115BBE.
  • Eligibility of interest on Fixed Deposits (FDRs), maintained as margin/security for bank guarantees needed for infrastructure contracts, for deduction under Section 80IA(4).

The Tribunal took AY 2017-18 (ITA No.1808/Hyd/2025) as the lead year, and applied its findings, with necessary modifications, to the remaining assessment years.

2. Issue 1 – Addition Under Section 69C on the Basis of Seized Diary

2.1 Facts: Seizure of Diary and AO’s Addition

During a search and seizure operation on 27.09.2018, the department seized a diary identified as Annexure A/KLSR/RES/07 from the residence of Shri K.L. Sreedhar Reddy, Managing Director of the assessee company.

Key points:

  • The diary contained rough notings of names and amounts.
  • Shri K.L. Sreedhar Reddy, in his statement (in reply to Q. No. 28), stated:
    • The diary was 8–10 years old.
    • It recorded payments relating to site expenses, including labour payments.
  • For AY 2017-18, the Assessing Officer (AO) initially worked out the relevant notings at Rs.2,60,19,000 and treated this entire figure as unexplained expenditure under Section 69C.

The assessee explained that:

  • The diary was a personal record maintained by the Managing Director.
  • Cash was withdrawn from disclosed bank accounts of the assessee, passed to responsible personnel for site expenses, labour, suppliers and related business payments, and ultimately recorded in the regular books.

2.2 CIT(A)’s Partial Relief and Telescoping

On appeal, the CIT(A) examined the diary and the supporting records and arrived at the following findings for AY 2017-18:

  • Rs.1,57,00,000 in the diary represented cheque payments, duly:
    • Reflected in the assessee’s books.
    • Supported by ledgers and payment vouchers.
  • This portion was accepted as fully explained.
  • The balance Rs.1,03,19,000 was treated as unexplained expenditure.

Separately:

  • The AO had also alleged bogus sub-contract expenses, relying on cash withdrawals of Rs.17,82,35,640 from bank accounts of dependent sub-contractors.
  • Following ASR Engineering & Projects Ltd. v. DCIT, Central Circle-1(3), Hyderabad, ITA Nos. 1132/Hyd/2019 & Ors., dated 30.08.2019, the CIT(A) sustained an addition of 5% of these withdrawals, i.e., Rs.89,11,782, treating this as cash available with the assessee.
  • This amount was telescoped against the diary-based cash entries of Rs.1,03,19,000, leaving a net addition of Rs.14,07,218 under Section 69C.

Thus, the surviving Section 69C addition before the Tribunal for AY 2017-18 was Rs.14,07,218.

The Tribunal emphasised that Section 69C operates in two distinct stages:

  1. Primary requirement: The Revenue must first prove that the assessee has actually incurred an expenditure.
  2. Secondary requirement: Only if such expenditure is established, and the assessee fails to satisfactorily explain the source, can the amount be taxed as unexplained expenditure.

The Tribunal noted:

  • The AO’s case rested mainly on:
    • The notings in the seized diary, and
    • The statement of the Managing Director.
  • The statement merely indicated that the diary related to site/labour expenses, but did not automatically prove:
    • That each cash entry was a fresh, extra-contractual payment, or
    • That such expenditure was outside the regular books.

The assessee had submitted:

  • Details and reconciliation of cash entries aggregating to Rs.1,03,19,000, claiming they were funded from recorded cash withdrawals and were part of the normal business cash cycle.
  • The AO did not demonstrate that corresponding cash withdrawals were unavailable for these entries.

Crucially, the entries:

  • Did not clearly identify:
    • The exact nature of every payment,
    • The specific project,
    • The end recipient, or
    • Whether it was the assessee’s own expenditure or expenditure linked to dependent sub-contractors.

2.4 Relevance of the Same Diary Containing Accounted Entries

The Tribunal attached weight to the CIT(A)’s admission that:

  • Cheque payments of Rs.1,57,00,000 recorded in the same diary were fully accounted in the books.

This indicated:

  • The diary was not inherently a record of only unaccounted transactions.
  • Failure to match every cash entry one-to-one with the books does not, by itself, prove unrecorded expenditure.

The Tribunal held that the AO was required to:

  • Point to specific items of expenditure represented by the impugned cash entries which:
    • Were actually incurred by the assessee, and
    • Were omitted from the regular books.

No such concrete, corroborative material had been produced.

2.5 Judicial Support: Lubtec India and Anil Bhalla

The Tribunal relied on the following authorities:

  • CIT v. Lubtec India Ltd. (2009) 311 ITR 175 (Delhi)
    The Delhi High Court held that Section 69C can be applied only where there is a definite factual finding that expenditure has been incurred. Without establishing that basic fact, no addition under this provision is permissible.