2016 (2) TMI 1378 - HC - Income Tax

Addition of 1.6% of an expenditure u/s 37(1) - onus to prove the genuineness of expenditure - whether tribunal right in law in restricting the addition to 1.6% in respect of wages instead of 10.3% and 6.6% adopted by the assessing authority ? - HELD THAT - One of the vital basis for the decision of the Tribunal and when this Court has by the aforesaid Judgment in 2015 (7) TMI 536 - KARNATAKA HIGH COURT has set aside the said order of the Tribunal and has remanded the matter wherein held that on careful perusal of the order passed by the Tribunal, we are of the opinion that the order of the Tribunal cannot be sustained inasmuch as the Tribunal has not applied its mind judiciously to the facts and circumstances of the case. In view of the same, interest of justice requires that the matter has to be re-dealt by the Income Tax Appellate Tribunal, Bangalore. Thus we find that similar course deserves to be adopted even in the present matter .

Summary

Issues:
1. Interpretation of section 37(1) of the Income Tax Act, 1961 regarding expenditure.
2. Determination of wages percentage for disallowance and burden of proof for genuineness of expenditure.

Issue 1: Interpretation of section 37(1) of the Income Tax Act, 1961 regarding expenditure:
The appeal challenged the Order of the Income Tax Appellate Tribunal, Bangalore Bench 'B', regarding the restriction of disallowance to 1.6% of total wages paid for assessment years 2002-03 and 2003-04. The Tribunal justified the restriction based on the lower percentage of total wages compared to a previous assessment year. The Tribunal held that the order of the Commissioner of Income Tax (Appeals) was correct and in accordance with the law. However, it was noted that a previous decision of the Tribunal was set aside by the High Court, leading to a similar course of action in the present matter.

Issue 2: Determination of wages percentage for disallowance and burden of proof for genuineness of expenditure:
The case involved stevedoring operations and loading/unloading work at the port, where labor payments were made through various means. The Assessing Officer allowed some payments but disallowed a portion related to cash payments. The Appellate Commissioner enhanced the tax liability, questioning the genuineness of payments made to subcontractors. The Tribunal partially allowed the appeal, restricting the addition to a specific amount. However, the High Court found that the Tribunal did not address crucial points raised by the Appellate Commissioner, leading to the order being set aside for a fresh disposal. The High Court emphasized the need for the Tribunal to apply its mind judiciously before reaching a conclusion, ensuring a fair hearing for both parties.

In conclusion, the High Court set aside the impugned order and directed the matter to be restored to the Tribunal for reconsideration in accordance with the law. The Court highlighted the importance of a thorough examination of the facts and circumstances before arriving at a decision. The substantial questions of law raised in the appeal were kept open due to the remand order, ensuring a comprehensive review by the Tribunal. The appeal was allowed with no costs awarded, maintaining fairness and due process in the legal proceedings.