HMSHOST HOSPITALITY SERVICES BHARATH PRIVATE LIMITED,BANGALORE vs. DCIT, CIRCLE-3(1)(1), BANGALORE, BANGALORE

The learned Departmental Representative supported the order of the CIT(A). It was submitted that in the tax audit report, the auditor had . mentioned that gratuity provision of ₹8,05,914 was disallowable under section 43B of the Act. The assessee in the return had disallowed only ₹4,73,343.00 only. Thus, the CPC was therefore justified in making an addition of the balance ₹3,32,571 while processing under section 143(1). The ld. DR submitted that provision for gratuity is not allowable as deduction and hence the action of the CPC and the CIT(A) require to be upheld.

We have considered the rival submissions and perused the records. The fact remains that the assessee created a total provision of ₹8,05,914. Out of this, the assessee had already disallowed ₹4,73,343 in the computation of income. The balance of ₹3,32,571 was reflected under Other Comprehensive Income. This amount was not routed through the profit and loss account before comprehensive income. The computation of total income was based on the loss before comprehensive income. Therefore, the balance provision of ₹3,32,571 was never claimed as deduction by the assessee. All these facts can be verified from pages 229 and 122 of the paper books where profit and loss account and computation of income are placed. Hence, the action of CPC in making an adjustment under section 143(1) is not sustainable. It is a settled position of law that no disallowance can be made of expenditure which was never claimed. By making this adjustment, CPC has in effect disallowed an amount which did not form part of the income computation. This has resulted in double disallowance of the gratuity provision. We find that the assessee’s computation was correct and the adjustment of ₹3,32,571 was not allowable. In view of the above discussion, we hold that the action of CPC in making the addition . of ₹3,32,571 and the order of the CIT(A) confirming the same cannot be sustained. The addition is directed to be deleted. Hence, the ground of appeal of the assessee is hereby allowed.

The facts of the case in brief are that the assessee filed its return of income for the relevant assessment year. While processing the return, CPC made an adjustment of ₹20,90,74,357 on the ground that there were inconsistencies between the ICDS adjustments disclosed in the ITR and those mentioned in the Tax Audit Report. Subsequently, in the rectification order dated 28.11.2023, CPC restricted the adjustment to ₹99,73,014. This sum was treated as excess depreciation claimed on tangible fixed assets under ICDS V.

Before the learned ld. CIT(A), the assessee submitted that the effect of ICDS V had already been considered in the return of income. The assessee had suo-moto disallowed depreciation as per the Companies Act amounting to ₹2,81,42,024 and claimed depreciation allowable under the Income Tax Act amounting to ₹1,81,69,010. The net effect of ₹99,73,014 was already reflected in the computation and shown in Schedule BP of the ITR. It was argued that CPC had taken into account only the increase in profit but ignored the decrease in profit . and, therefore, made a double disallowance. The assessee also submitted that a detailed reply had been filed against the proposed adjustment, but CPC passed the intimation and rectification order without considering the same. The learned CIT(A), however, upheld the action of CPC and sustained the addition of ₹99,73,014.00 only.

Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.

Before us, the learned Authorised Representative reiterated that the adjustment was mechanical and unwarranted. He pointed out that the reconciliation of depreciation was clearly shown in the return of income and the assessee had already disallowed Companies Act depreciation and claimed only Income Tax Act depreciation. He submitted that no further adjustment was necessary and sustaining the addition would amount to a double disallowance. He accordingly prayed for deletion of the impugned addition.

The learned Departmental Representative supported the orders of the authorities below. He contended that there was a mismatch between the ITR and the Tax Audit Report and, therefore, CPC was justified in making the adjustment. According to him, the assessee had failed to demonstrate proper reconciliation and the disallowance sustained by the CIT(A) was correct.

We have carefully considered the rival submissions and perused the records. It is evident that the assessee had already made the . necessary adjustment in the return by disallowing depreciation as per Companies Act and claiming depreciation as per the Income Tax Act. The net impact of ₹99,73,014 was duly considered in the computation of income. CPC, however, made an adjustment by considering only the increase in profit without giving credit to the corresponding decrease in profit. Such an approach clearly leads to double disallowance, which cannot be sustained. It is further seen that the assessee had explained this position in its reply, but CPC as well as the learned CIT(A) did not take note of the same. This fact can be verified from pages 194 and 149 of the paper books where necessary details are placed. In our considered view, once the net effect of ICDS V adjustment has already been accounted for in the return of income, no further addition can be made. The adjustment sustained by the learned CIT(A) is not justified. We therefore direct the deletion of the addition of ₹99,73,014.00 made by the CPC and confirmed by the ld. CIT-A. Hence, the ground raised by the assessee is allowed.

In the result, the appeal of the assessee is allowed.