2020 (9) TMI 336 - HC - Income Tax

Genuineness of expenditure - Allegation of Bogus expenditure claimed towards service charges and towards employees contribution to Provident Fund and ESI remitted beyond the due date - AO held that the assessee had resorted to this modus operandi for inflation expenditure by showing the same under the head service charges and the transaction was disbelieved - HELD THAT - AO should not have used the expression modus operandi to mean that the assessee had adopted dubious tactics to inflate its expenditure. We have come to such conclusion because of the nature of material placed by the assessee before the AO, CIT(A) and in the paper book filed before the Tribunal. AO while rejecting the assessee's contention has not disbelieved any of these documents. The payments effected in cash were sought to be substantiated by the assessee by producing vouchers. If the AO was of the view that the vouchers are fabricated documents, then all of such employees should have been examined and statements should have been recorded and if the same was done, the assessee is entitled to an opportunity of cross examination. This having not been done, the assessment order is flawed on this aspect. AO has referred to statements of four persons and on reading of selected portions of the statement, as extracted in the assessment order, does not lead to the inference that the entire transaction is bogus. The assessee's explanation is that tips were being given to the room boys and they alone were benefited and the other employees/workers raised objection and the matter was discussed in several meetings and ultimately, a settlement was arrived at between the employees union and the assessee management. Due credence should be given to the Memorandum of Settlement dated 02.08.2012 recorded in the presence of the Labour Officer. If according to the Assessing Officer, this statement is also a bogus document, then he ought to have recorded such a finding. However, law prohibits him from doing so because of the binding effect of the settlement on the management and the workmen. Therefore, in our considered view, the settlement could not have been brushed aside. CIT(A), though accepts the documents produced by the assessee, holds that there is no justification for payment in cash for temporary employees. In our view, this finding is not sufficient because vouchers have been produced, register has been produced, where the concerned temporary employees have signed. Therefore, to out rightly reject these vouchers and register, is incorrect. Tribunal erred in observing that the orders of the CIT(A) to the extent it grants relief to the assessee are on presumption. This finding is incorrect because the relief granted by the CIT(A) was in respect of payments, which were verifiable. Tribunal ought not to have interfered with the relief granted by the CIT(A) and the CIT(A) ought to have interfered with the orders passed by the Assessing Officer in its entirety and not restricted the same to a partial relief. - Decided in favour of assessee.

Summary

Issues:
Appeal against the order of the Income Tax Appellate Tribunal regarding the assessment years 2013-14 and 2014-15 - Disallowance of service charges claimed by the company - Discrepancies in the assessment orders - Validity of evidence presented by the assessee.

Analysis:
The appeals were filed under Section 260A of the Income Tax Act, 1961 by a company in the Hospitality Business against the order of the Income Tax Appellate Tribunal 'B' Bench, Chennai. The substantial questions of law raised in the appeals included the conclusion of the Tribunal on the lack of evidence to prove the claim, the disallowance of genuine expenditure as service charges, and the failure to examine the collection of service charges by the company. The assessee challenged the assessment orders before the Commissioner of Income Tax (Appeals) who partly allowed the appeals. However, the Tribunal dismissed the appeals filed by the assessee and allowed those filed by the Revenue, leading to the current appeal before the High Court.

The primary issue revolved around the service charges paid by the assessee to its employees. The Assessing Officer raised concerns about the nature of these charges, leading to a detailed examination of the evidence provided by the assessee. The CIT(A) partly allowed the appeals based on the evidence presented, but the Tribunal questioned the validity of the relief granted by the CIT(A). The High Court analyzed the material placed before the authorities and concluded that the Assessing Officer's rejection of the assessee's contention was flawed. The Court highlighted the documents, including annual accounts, payment vouchers, and settlement agreements, as crucial evidence supporting the assessee's claim.

The High Court criticized the Tribunal's observation that the relief granted by the CIT(A) was based on presumption, emphasizing the verifiability of the payments through presented vouchers and registers. The Court stressed the importance of statutory forms and the presumption of validity attached to them. It found fault with the Tribunal's interference with the relief granted by the CIT(A) and emphasized that the CIT(A) should have scrutinized the entire assessment orders instead of providing only partial relief. Ultimately, the High Court allowed the appeals, answering the substantial questions of law in favor of the appellant-assessee, without imposing any costs.