Court prompts the importance of vouchers and documentation for claiming exemption

To claim the expenditure of payment to casual labors maintenance of proper records and vouchers is a must. The High court on the 22nd February ruled against the assessee company. Agreeing with the Tribunal and lower authorities – with regard to,  lack proper books of account and vouchers. Taking note of all these factors, it is held that the expenditure was not proved to have been incurred, hence disallowed. To this the assessee contented that he was claiming the expenditure as per the law stated under section 37(1) of the Income Tax Act.   

However the court stated – as  far as applicability of section 37 is concerned, section 37 cannot be read in isolation, the applicability of section 37 is to be taken note of with reference to various other sections like section 40 and certain other provisions in the Act with regard to exemptions and deductions that be the position without proof of expenditure being established, the benefit of section 37 cannot be granted.

Allowability of [Labour expenses] – Assessment year 2007-08 – Assessee, a private company, was engaged in business of manufacture of pesticide on job work basis – It claimed deduction on account labour expenses – No proper books of account and vouchers had been produced to justify said expenses – Moreover, expenditure could not be proved to have been incurred – Whether, therefore, benefit of section 37 could not be granted to assessee – Held, yes [In favour of revenue]

Facts of the Case

• The assessee, a private limited company, was engaged in the business of manufacture of pesticide on job work basis. It claimed deduction on account of expenditure incurred on labour.
• The Assessing Officer examined the wage register and other bills and vouchers with regard to labour engaged on casual basis. Since proper bills and vouchers had not been maintained, said expenditure had been disallowed.
• The Commissioner (Appeals) found that the addition should have been made on the higher side and after considering various aspects of the matter, addition was enhanced.
• The Tribunal found that the enhancement was made on presumption and he reduced the same by 50 per cent.
• On further appeal, the assessee submitted that said expenditure was allowable had the same been examined after appreciating provisions of section 37.

Held for the Case

1. The concurrent findings recorded by the authorities show that proper books of account with regard to expenditure on this count were never produced or established and huge amount was sought having been incurred with regard to labour payment. As this amount was not properly explained by documentary supporting evidence, the action has been taken.
2. As far as applicability of section 37 is concerned, section 37 cannot be read in isolation, the applicability of section 37 is to be taken note of with reference to various other sections like section 40 and certain other provisions in the Act with regard to exemptions and deductions, etc., as are contemplated in various provisions of Act. The question of allowing this deduction with reference to section 37 or any other provision of Act is mixed question of law and fact and cannot be raised for the first time in these proceedings.
3. From the orders passed by the assessing authority, the Commissioner (Appeals), Appellate Tribunal, it is seen that no such specific assertion has been made seeking exemption with reference to section 37. On the contrary after the order was passed by the Tribunal, a miscellaneous application was filed which has been decided. This was an application under section 254(2) and in this application also, it was never said that the deduction of the expenditure incurred with regard to reference to section 37 has not been considered. That being so, there was no reason to interfere into the matter. That apart 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. On the contrary, the finding recorded by the Tribunal goes to show that with regard to this item, no proper books of account and vouchers, etc., has been produced and taking note of all these factors, it is held that the expenditure was not proved to have been incurred, it was disallowed. If that be the position without proof of expenditure being established, the benefit of section 37 cannot be granted.

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