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Facts
The assessee's return of income was processed under Section 143(1), leading to an addition of Rs. 29,27,24,520/- under Section 37 by CPC, Bengaluru, for a contingent liability disclosed in Form 3CD. The Ld. CIT(A) subsequently deleted this addition.
Held
The Income Tax Appellate Tribunal (ITAT) upheld the decision of the Ld. CIT(A), confirming the deletion of the addition. The ITAT reasoned that the contingent liability, though reported in the tax audit, was not debited to the Profit and Loss Account and does not represent an actual expense or liability for accounting purposes.
Key Issues
Whether an addition can be made under Section 37 for a contingent liability merely reported in Form 3CD but not debited to the Profit and Loss Account, especially when processed under Section 143(1).
Sections Cited
143(1), 37
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Income Tax Appellate Tribunal, “C” BENCH, KOLKATA
Before: Shri Rajesh Kumar, AM & Shri Pradip Kumar Choubey, JM]
ORDER Per Shri Rajesh Kumar, AM
The appeal filed by the assessee is against the order of Ld. CIT(A), Addl/JCIT(A)-7, Mumbai dated 06.02.2024 for AY 2022-23 arising out of intimation order passed u/s. 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) by DCIT, CPC, Bengaluru dated 26.07.2023.
2. At the outset, we observe on the basis of the appeal folder that there is a delay of 27 days in filing the appeal by the revenue. The condonation petition was moved by the revenue. After perusing the condonation of delay petition, we are of the view that the delay is under bona fide and genuine reasons and accordingly, the delay is condoned and the appeal is admitted for adjudication.
The only issue raised by the revenue in deletion of addition of Rs.29,27,24,520/- by Ld. CIT(A) as made by the Assessing Officer on account of disallowance u/s. 37.
The facts in brief are that the assessee filed the return of income on 05.11.2022 declaring total income at nil which was processed u/s. 143(1) on 26.07.2023 determining the total income at Rs.29,27,24,520/-. In the said intimation u/s. 143(1), the CPC, Bengaluru made an addition of Rs.29,27,24,520/- u/s. 37 of the Act on account of contingent liability shown at Sl. No. 21B in the audit report in Form No. 3CD.
In the appellate proceeding, the Ld. CIT(A) after appreciating the facts deleted the addition by observing and deleting as under:
“I have considered the submissions of the appellant and the adjustments made by the AO, CPC. On perusal of the Schedule 5,6,7,8,9,10 & 11 of the Balance Sheet as on 31/03/2022 reflecting the liabilities of the appellant, it is seen that the contingent liabilities are not appearing in these schedules. The Auditor in the notes to accounts of the audited accounts has certified at the note no 31 that the contingent liabilities have not been recorded in the book of accounts. On going through the Profit and Loss account it is seen that no such liability has been debited to the profit and Loss account. It is therefore clear that the contingent liability of Rs.29,27,24,520/- was not debited to the Profit and Loss account. The appellant has relied on the following decisions in support of its claim that contingent liability which has not been debited to the Profit and Loss account in the relevant assessment year cannot be added u/s 37.
Decision of the Hon. ITAT, Delhi Bench 'B', New Delhi in the case of M/s. Dwarikadish Spinners Ltd. Vs DCIT, Circle-10(1), New Delhi in and 4783/DAL/2012, dated 06/12/2013.
Decision of Hon. ITAT 'A' Bench, Kolkata in the case of M/s Kay Bee Industrial Alloys Pvt. Ltd. Vs DCIT, Circle-4, Kolkata in dated 21/12/2011 On perusal of the decisions its is seen that the facts of the above cases are identical in the appellants case and hence the decision are applicable. In view of the foregoing discussion the action of the AO, CPC in adding the contingent liability of Rs.29,27,24,520/- without verifying the Profit and Loss account and Balance Sheet of the appellant was not justified. Hence the AO is directed to delete the addition of contingent liability of Rs.29,27,24,520/-. The above grounds are allowed.”
After hearing both the parties and perusing the material on record including the impugned appellate order passed by the Ld. CIT(A), we note that the Ld. CPC, Bengaluru has added the amount of contingent liability stated in the tax audit report which was notdebited to the P&L Account. Therefore, we do not find any infirmity in the order of the Ld. CIT(A). Ld. CIT(A) after appreciating the facts correctly passed a very reasoned and detailed order and deleted the same. We have also examined the P&L Account and audited Balance Sheet of the assessee and find that no such amount has been debited in the P&L Account. In our opinion, the contingent liability is only a responsibility casts on the auditor of the assessee to state the estimated amount of liability which the assessee may or may not incur towards the commitment in future, therefore, that has nothing to do with the historical accounting of the assessee as reflected in the books of account of the assessee. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A( and we uphold the same by dismissing the appeal of the revenue.
In the result, appeal of the revenue stands dismissed.