2013 (12) TMI 1164 - HC - Income Tax

Whether wages paid to casual labour is not a business expense u/s 37 - Held that - The books of accounts of the assessee company, bills and vouchers are audited under section 44 AB of the Companies Act but no audit account showing expenditure incurred for engaging casual labours or labours is produced - There is nothing on record to show payment of employees provident fund or the employees state Insurance Contribution with regard to these employees - This amount was not properly explained by documentary supporting evidence. The question of granting exemption from addition of this expenditure under section 37 will arise only if the expenditure is shown to have been incurred or proved on account of payment for casual labour etc - The expenditure is not proved to have been incurred and therefore, it is disallowed - Such position without proof of expenditure being established, the benefit of section 37 cannot be granted - Decided against assessee.

Summary

Issues:
Challenge to disallowance of expenditure on payment of wages to casual employees/labors under Section 37 of the Income Tax Act.

Detailed Analysis:

The appellant, a Private Limited Company engaged in pesticide manufacturing, challenged the disallowance of Rs.19,42,390 incurred for wages to casual employees, added to their income by the Appellate Authority. The Assessing Officer disallowed Rs.3,50,000 of the total expenditure of Rs.50,84,778 due to lack of proper bills and vouchers. The Commissioner of Income Tax (Appeal) enhanced the disallowed amount to Rs.38,84,778, which was further reduced by 50% by the Income Tax Appellate Tribunal to Rs.19,24,358.

The main contention in the appeal was the allowance of the expenditure under Section 37 of the Income Tax Act. The appellant argued that the Tribunal's addition was made without considering Section 37, emphasizing the need for proper examination under this provision.

The High Court observed that the addition was primarily due to the lack of proper accounts, registers, bills, and vouchers for the labor expenses. Despite being a registered company audited under section 44 AB of the Companies Act, no audit account showing expenditure on casual labor was produced. The authorities found discrepancies in the documentation, including the absence of proof of payment for provident fund or insurance contributions for the employees, leading to the addition of the amount.

Regarding the applicability of Section 37, the Court highlighted that it cannot be viewed in isolation but in conjunction with other sections like Section 40 and related provisions on exemptions and deductions. The Court noted that the issue of allowing deductions under Section 37 is a mixed question of law and fact, which was not raised before the authorities earlier. The Court emphasized that without proper proof of expenditure, the benefit of Section 37 cannot be granted.

Ultimately, the Court dismissed the appeal, stating that no substantial question of law arose for consideration, as the expenditure on casual labor was not adequately proven, and the provisions of Section 37 were not raised in previous proceedings. The Court upheld the decision of the authorities based on the lack of proper documentation and proof of expenditure.