THE JOREHAUT TEA LIMITED,KOLKATA vs. A.D.I.T., CPC, BANGALORE, BANGALORE

The only issue raised by the assessee is against the order of Ld. CIT(A) confirming the addition of Rs. 30,71,740/- as made by the AO on account of contingent liability which was neither treated as an expense nor debited in the profit and loss account.

Facts in brief are that the assessee filed return of income on 08.02.2021 declaring total income of Rs. 10,37,140/- which was processed u/s 143(1) of the Act. The auditors of the assessee showed contingent liability in the tax audit report para 2.1 (g) under the head “particulars in the tax audit report under the head particulars of any liability of a contingent liability” Rs. 30,71,740/-on account of legal matters. The said liability was not charged into profit and loss account, however the intimation received u/s 143(1) of the Act the same was added to the income of the assessee.

The Ld. CIT(A) dismissed the appeal of the assessee by observing and holding as under:

After hearing the rival contentions and perusing the material on record, we find that the auditors of the assessee has appended a note no. 2 to the accounts for the year ended 31.03.2020 which states that contingent liability was not provided for sales tax matter Rs. 86,53,882/- (previous year Rs. 8,53,882/-) and for legal matters Rs. 30,71,740/- (previous year Rs. 30,71,740/-). We note that the auditors of the assessee company reported this contingent liability pursuant to the requirement in the tax audit report in para 21(g) in respect of legal matters. We have also examined the profit and loss account of the assessee and find that the said account was nowhere charged in the profit and loss account as has been stated in note no. 2 that contingent liability is not provided for legal matters. This is only for the reporting purposes and has nothing to do actual accounting of the assessee which may come on the assessee in the future years. In our view, a contingent liability which has not provided in the books of account cannot be added to the income of the assessee has it has no bearing on the income of the current year. Accordingly, we reverse the order of Ld. CIT(A) and direct the AO to delete the addition.