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Facts
Standard HR Solutions, an HR consultancy firm supplying manpower to Mahindra & Mahindra, challenged additions made for AY 2011-12. The additions concerned disallowance of bonus and gratuity shown payable/paid, and a discrepancy between receipts in its ITR and Form 26AS. The CIT(A) had upheld these additions.
Held
The Tribunal upheld the disallowance of Rs. 71,375/- for gratuity paid to an unapproved fund. However, it remitted two issues back to the AO for fresh decision: the disallowance of Rs. 13,49,827/- for bonus and gratuity shown payable, and the addition of Rs. 68,03,907/- due to receipts discrepancy, citing the need for reconciliation and considering the Supreme Court's decision in Checkmate Services Pvt. Ltd.
Key Issues
1. Whether gratuity paid to an unapproved fund is allowable as an expense. 2. Whether bonus and gratuity shown payable but not claimed as expense can be disallowed. 3. Whether an addition can be made based on a discrepancy between receipts in Form 26AS and the Profit & Loss Account without proper reconciliation.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI AVDHESH KUMAR MISHRA
A.Y.2011-12 Standard HR Solutions Income Tax Officer, 207, Jeevan Apartments, Ward 22(2), 16A, Okhla Jamia Nagar, Vs. New Delhi PAN: ABHFS1794F (Appellant) (Respondent) Appellant by Sh. Pranav Yadav, Adv. Respondent by Ms. Maninder Kaur, Sr. DR Date of Hearing 24/09/2024 Date of Pronouncement 29/11/2024 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal for the Assessment Year (hereinafter, the ‘AY’) 2011- 12 filed by the assessee is directed against the order dated 23.03.2017 passed by the Commissioner of Income Tax (Appeals)-10, New Delhi [hereinafter, the ‘CIT (A)’].
Following grounds are raised in this appeal: -
“1. On the facts and circumstances of case and in law, the order passed by the Commissioner of Income Tax (Appeal) is bad-in-law and arbitrary. 2. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in confirming the 1 addition of Rs. 71,375/- made by the assessing officer on account of Gratuity.
On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs. 634757/- made by the assessing officer on account of Bonus.
4. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs.7,15,070/- made by the assessing officer on account of Gratuity Payable.
5. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs.6803907/- made by the assessing officer on account of alleged short income credited. The appellant craves leave to add, later, modify or delete one or more ground of appeal before or at the time of hearing of appeal.” 2.1 In nutshell, the appellant/assessee is agitated on two issues; namely, (i) disallowance of bonus & gratuity shown payable/paid in the Balance Sheet/Profit& Loss Account and (ii) Lesser receipts shown in the ITR vis-à-vis the receipts as per the Form 26AS of the appellant/assessee.
3. The brief facts of the case giving rise to this appeal are that the appellant/assessee, a partnership firm, is engaged in the business of supplying manpower to Mahindra & Mahindra across the country. It is a HR Consultancy firm. It entered into a contract of supply of manpower to Mahindra & Mahindra from 01.12.2005. Later on, the contract was modified as per the terms of agreement dated 09.09.2008. The Form 26AS of the appellant/assessee shows that its receipts/ receivables, during the relevant year from Mahindra & Mahindra, are Rs.5,78,40,774/- as the TDS had been done on the sum of Rs.5,78,40,774/-; whereas the appellant/assessee has shown the receipts aggregating to Rs.4,51,66,996/- in its Profit & Loss Account. However, the appellant/assessee has claimed the credit of TDS on the sum of Rs. 5,78,40,774/-. The appellant/assessee filed its Income Tax Return on 29.09.2011 declaring income of Rs.4,72,488/-. After scrutiny, the assessment was completed making following additions/disallowances: i. Income Tax debited to P & L account not offered for tax Rs.1,76,616/- ii. Interest on late payment of service tax Rs.2,03,907/- treated as penal in nature. iii. Gratuity debited to P & L account deposited in unapproved gratuity fund Rs.71,375/- iv. Bonus and gratuity shown payable in the balance sheet not paid before filing the ITR 13,49,827/- (6,34,757 + 7,15,070/-) v. Discrepancy between receipts as per 26AS and P & L account Rs. 68,03,907/- 3.1 Aggrieved, the appellant/assessee filed appeal before the Ld. CIT(A), who upheld the additions made on account of gratuity, bonus and discrepancy in gross receipts.
The Ld. Authorized Representative (hereinafter ‘AR’) contended that the bonus of Rs.71,375/- debited to Mahindra & Mahindra and credited to the Bonus payable account. Thus, these contra entries had neutral tax effect. Since the bonus of Rs.71,375/- debited to the Profit & Loss account had paid even without receiving this amount from Mahindra & Mahindra; therefore, this claim should be allowed as expense. The Ld. AR placed on the decision of the Hon’ble Bombay High Court in the case of Calibre Personnel Services Pvt. Ltd. 2015(2) TMI 587. With respect to disallowance of bonus and gratuity shown payable aggregating to Rs.13,49,827/- (6,34,757 + 7,15,070/-), the Ld. AR submitted that the entire liability under the head ‘bonus and gratuity shown as payable’ had not been claimed as expenses during the relevant year. Hence, this sum shown as payable could not be disallowed and added back into the income of the appellant/assessee.
4.1 As far as the addition of Rs.68,03,907/- due to the difference between receipts as per 26AS and receipts credited in Profit & Loss account, it was submitted by the Ld. AR that the amount has been taxed on hypothetical basis as the appellant/assessee had recorded each receipt in its books of account and there was nothing unaccounted receipts from Mahindra & Mahindra. The appellant had not received a single penny in cash/non-banking channel. Further, it was submitted that the difference was due to debit notes/bills raised by 4 Mahindra & Mahindra and or the appellant/assessee, which also got revealed from the copy of ledger account of the appellant/assessee in the books of account of Mahindra & Mahindra, which was made available by the AO,to the appellant/assessee.
4.2 Further, the Ld. AR submitted as under: “6.3. If the amount of Rs.68,03,907/- added by A.O. as alleged undisclosed income on account of alleged excess credit by Mahindra and short debited by appellant is accepted, the books of accounts of assessee would show receivable of Rs.73,10,370/- (Rs.506463 +Rs.6803907) as against receivable of Rs.35,48,330/- shown by Mahindra thus increasing the difference to Rs.1,08,58,700/-. Thus, by making addition, the account with Mahindra has not been reconciled/tallied. On the contrary, the A.O, has enhanced the difference between the balance shown in the books of Mahindra and the appellant in respect of each other. This can be better understood by the following: Effect of addition made by Α.Ο. Amount (Rs.) Balance of Mahindra as per appellant's books 5,06,463/-(Dr.) as on 31.03.2011 Add: Increase in amount receivable from Mahindra As per the A.O.'s addition 68,03,907/-(Dr.) Revised balance recoverable from Mahindra as per A.O.'s methodology 73,10,730/- (Dr.) Balance of appellant as per Mahindra's ----------------------- books as on 31.03.2011 35,48,330/-(Dr.)
Remarks
From the above, it is apparent, the A.O.'s action of making addition is misconceived. Due to addition made by A.O., the account of appellant with Mahindra has not resulted into reconciliation. Instead, the difference has been enhanced to Rs.1,08,58,700/-.
6.4. The appellant has duly accounted for the various amounts (of reimbursement as well as professional/service charges) on accrual basis and in accordance with method of accounting regularly employed by the appellant. No discrepancy or defect has been pointed by A.O, in the books of accounts of the appellant. The same methodology has been accepted in the assessments made u/s 143(3) for the earlier years. Without appreciating the facts of the case correctly, he has on the basis of conjecture and surmises, made additions in the case of appellant. It is a case where Mahindra have not accounted for the bills raised by the appellant on accrual basis. The various bills raised by the appellant have either been accounted for late by the Mahindra or has not been fully recorded in their books. For their discrepancy, adverse inference cannot be drawn in the hand of the appellant particularly when there is no case for any amount being not credited by the appellant in its books. On the contrary, the amounts credited by the assessee in its books by debiting the account of Mahindra is more than what Mahindra has correspondingly credited to assessee's account.
6.5. The opening balance as on 01.04.2010 of "Mahindra" in the books of appellant is Rs. 18,44,830- (Dr.), as against debit balance of Rs.96,63,595/- (Dr.) shown by Mahindra as recoverable from appellant. Thus, upto 31.03.2010, there was difference of Rs. 1.15.08.425/- due to amounts debited by appellant to Mahindra's account but not correspondingly credited by Mahindra to the appellant's account. The reason of excess credit by Mahindra to appellant's account during the year under appeal is apparently due to the fact that amounts which were already accounted by the appellant upto 31.03.2010, but were accounted for late by the Mahindra after 01.04.2010. This can be better understood by the following: Reconciliation statement of Mahindra Opening Balance as on 01.04.2010 Amount (Rs.) -Balance of Mahindra as per Assessee's Book 18,44,830/- (Dr.) -Balance of appellant as per Mahindra's Book 96,63,595/-(Dr.) ----------------------------- Difference 1,15,08,425/-”
On the contrary, the Ld. Senior Departmental Representative (hereinafter ‘Sr. DR’) argued the case vehemently. She submitted that the Gratuity of Rs.71,375/- claimed as expense had been paid to the unapproved Gratuity Account; thus, the same could not be allowed as per the law. She further contended that since the appellant/assessee had maintained its account on mercantile basis; therefore, its income/ expenditure had to be debited/credited to the Profit & Loss Account on accrual basis. Therefore, the receipt of amount/cash system could not determine the taxability of income in the hands of the appellant/assessee. Further, placing reliance on the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd.143 taxmann.com 178, she submitted that the disallowances of Gratuity of Rs.71,375/- debited to the Profit & Loss Account and Bonus and gratuity of Rs.13,49,827/- (6,34,757 + 7,15,070/-) shown payable in the Balance Sheet ofthe appellant/assessee, were justified and needed to be sustained.
5.1 She further submitted that the appellant/assessee had maintained its account on mercantile basis and therefore, its income had to be taxed on accrual basis. The Mahindra & Mahindra, as per contract, used to pass the bills raised by the appellant/assessee after proper verification having checks & balances embedded therein. Thereafter, it claimed the same as expenses in its account by debiting the sum in the account of the appellant/assessee and corresponding TDS thereon. The TDS Statement filed by Mahindra & Mahindra showing the details of TDS on the gross amount payable/paid to the appellant/assessee got reflected in Form 26AS of the appellant /assessee. Therefore, she contended that the justification offered by the Ld. AR was devoid of any merit. She further submitted that the appellant/assessee had not brought the details of running bills raised by it to Mahindra & Mahindra on the record. She contended that the appellant/assesseehad failed to produce its account reconciliation statement duly verified by Mahindra & Mahindra; therefore, its self- serving reconciliation statement should not be relied upon. For this 8 issue, she submitted that it required verification & reconciliation of receipts as per 26AS vis-à-vis receipts as per the books of account/ Profit & Loss Account of the appellant/assessee. Thus, the same might be remitted to the AO.
We have heard both the parties at length and have perused the material available on the record. The disallowance of Gratuity of Rs.71,375/- has been made on the reasoning that it was paid to an unapproved account. We find merit in the finding of lower Authorities; hence, the same is upheld based on the reasoning in the impugned order.
On the issue of disallowance of Bonus & gratuity of Rs.13,49,827/- (6,34,757 + 7,15,070/-) shown payable in the Balance Sheet ofthe appellant/assessee, we are of the considered view that this issue needs to be decided a fresh in view of the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra). We therefore, set aside this issue and remit the disallowance of Bonus & gratuity of Rs.13,49,827/- back to the file of the AO to be decided accordingly keeping in view the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra).
On the issue of addition of Rs. 68,03,907/-, we find merit in the submission of the Ld. Sr. DR that this issue requires verification & reconciliation of receipts as per 26AS vis-à-vis receipts as per the books of account/Profit & Loss Account of the appellant/assessee. We therefore, set aside this issue and remit the issue of addition of Rs. 68,03,907/- back to the file of the AO to be decided afresh after proper reconciliation and verification. The appellant/assessee should ensure compliances during the set-aside proceeding before the AO. The AO is also required to provide reasonable opportunities of being heard to the appellant/assessee before deciding the case on merit as above.
In view of the above, the grounds 2 to 5 are disposed off. Remaining grounds, being general, do not require specific adjudication.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in open Court on 29th November, 2024