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Facts
The assessee's return for AY 2020-21 was processed under Section 143(1), leading to an adjustment for a contingent liability of Rs.7,82,85,769/- (Entertainment Tax) based on an inadvertent error in the Tax Audit Report, even though the assessee had not claimed this as an expense. The assessee's rectification application under Section 154 and subsequent appeal to CIT(A) were rejected, prompting this appeal before the Tribunal.
Held
The Tribunal ruled that the alleged error did not qualify as a 'mistake apparent from record' under the narrow scope of Section 154, thus dismissing the rectification appeal in limine as not maintainable. However, the Tribunal granted the assessee the liberty to file a fresh appeal against the original Section 143(1) order on its merits, with a favorable consideration for condonation of delay.
Key Issues
Whether an adjustment for contingent liability, erroneously reported in a Tax Audit Report but not claimed as an expense, constitutes a 'mistake apparent from record' rectifiable under Section 154 of the Income Tax Act, given the narrow scope of rectification.
Sections Cited
Section 154, Section 143(1), Section 44AB, Section 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
Before: SHRI KUL BHARAT & SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, AM :
The captioned appeal has been filed by the assessee against the first appellate order of the Ld. Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre (NFAC), Delhi [‘CIT(A)’ in short] dated 21.08.2023 arising from rectification order passed under section 154 of the Income Tax Act, 1961 (the Act) by the ADIT, CPC dated 19.09.2022 in relation to intimation dated 23.12.2021 processed by CPC under section 143(1) of the Income Tax Act, 1961 (the Act) concerning A.Y. 2020-21.
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The grounds of appeal raised by the assessee read as under:
i. The order u/s 154 of the IT Act passed by the Ld. AO- CPC is bad in law and wrong on the facts and is therefore unstainable in law. ii. That the ld CIT(A) has erred in sustaining the addition of contingent liability of Rs.7,82,85,769/- made by the Ld AO- CPC in order u/s 154 of the IT Act. iii. The Ld. CIT(A) did not consider the fact the appellant had neither claimed this contingent liability, being Entertainment Tax, as expenses in its Income and Expenditure account, nor collected or charged the same to its customers. iv. The Ld. CIT(A) erred in relying on several case laws which held that contingent liability could not be eligible for deduction u/s 37(1), even though the appellant did not claim the said contingent liability as an expense u/s 37(1). That the appellant craves leave to reserve itself the right to add, alter amend, or withdraw any of the grounds of appeal at/or before time of hearing.”
Briefly stated, the assessee is a registered society and is an association of Fashion Designers of India. For the Assessment Year 2020-21 in question, the accounts of the assessee were audited under section 44AB of the Act. The assessee filed its return of income for A.Y. 2020-21 declaring net income of Rs.28,54,280/-. The return filed by the assessee was processed under section 143(1) of the Act vide intimation dated 23.12.2021. The returned income was inter alia enhanced on account of contingent liability of Rs.7,82,85,769/- in respect of Entertainment Tax which may become payable to the Entertainment Tax officer, Delhi as reported in the financials of the assessee in the ‘Notes Forming Part of the Accounts’ for the year ended 31st March, 2020. The contingent liability has been added to the taxable income of the assessee by AO-CPC in the Annexure – Other information in clause 7(h) “Amount of liability of contingent nature” of Rs.7,82,85,769/-.
Aggrieved by the adjustment made towards contingent liability under section 143(1) of the Act by the CPC, the assessee filed rectification application under section 154 of the Act through e-filing portal on 15.07.2022. However, the AO – CPC passed
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order under section 154 of the Act dated 19.09.2022 confirming the additions made under section 143(1) intimation.
Aggrieved, the assessee preferred an appeal before CIT(A) against the aforesaid order passed under section 154 of the Act. The CIT(A) however, declined any relief.
Further, aggrieved, the assessee preferred appeal before the Tribunal.
In the course of hearing before the Tribunal, the assessee adverted the audited financials statement and pointed out that in the ‘Notes Forming Part of the Accounts’ for the year ended 31st March 2020 annexed thereto, the assessee has disclosed an amount of Rs.7,82,85,769/- towards contingent liability in respect of the Entertainment Tax which may be payable to the Entertainment Tax officer, Delhi. The contingent liability, as per the notes to accounts, has been challenged by the assessee and is pending for adjudication before Court of law. The learned Counsel further submitted that no expenditure has been claimed in the books of accounts towards such contingent liability at all and such liability has been disclosed only by way of ‘Notes to Accounts’ as a support item. The assessee has also not claimed such liability as expenditure in the return of income filed by it. However, the tax auditor while furnishing Audit Report under section 44AB of the Act in prescribed Form 3CB read with form 3CD has inadvertently mentioned such amount towards Entertainment Tax Liability of contingent nature as amount debited to Profit and Loss account in Row No.21(g) of the Tax Audit Report. Following the observations in Tax Audit Report, the CPC-AO has made adjustments to the returned income notwithstanding the fact that such expenditure was never claimed as expenditure at the first instance to warrant any adjustments on this account. The learned Counsel thus submitted that the Revenue has committed error in wrongfully making adjustment on account of contingent
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liability not claimed in the ROI while determining taxable income, solely on the basis of inadvertent error committed in the Tax Audit Report.
On being enquired by the Bench towards narrow scope of jurisdiction in rectification proceedings under section 154 of the Act, the learned Counsel fairly volunteered withdrawal of the appeal, if so permitted by the Tribunal with a leave to file fresh appeal against the original order / intimation passed under section 143(1) of the Act before the CIT(A). The learned Counsel simultaneously insisted that the addition cannot be made when the expenditure has not been claimed at all while determining the taxable income.
The learned DR for the Revenue did not offer any fresh comment and relied upon the first appellate order in this regard.
We have carefully considered the rival submissions and perused the material available on record. The correctness of upward adjustment on account of ‘contingent liabilities on the basis of Tax Audit Report for the purposes of drawing intimation under section 143(1) r.w.s 154 of the Act is in controversy. It is the case of the assessee that the ‘contingent liabilities’ disallowed as inadmissible expenditure by the CPC under section 143(1) were never provided for in the Profit & Loss Account and was never claimed as expenditure for the purposes of determining the taxable income returned by the assessee. The adjustment has been carried out by the CPC-AO solely on the basis of incorrect reporting in “Tax Audit Report” where the Tax Auditor has committed inadvertent error and wrongly reported the contingent liabilities as expenses actually debited to Profit & Loss account which is untrue and inconsistent with the audited financial statement. It is thus the case of the assessee that an expenditure cannot be disallowed where it has not been claimed at the first instance while determining the taxable income. On realization of apparent human error, the
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confirmation from the Tax Auditor to this effect has been obtained and placed before the Tribunal in the course of hearing.
As noted in the preceding paragraph, the genesis of controversy has come to surface in the captioned appeal in pursuance of rectification proceedings under section 154 of the Act.
9.1 Section 154 of the Act provides for rectification of any mistake apparent from record. Hence, the scope and ambit of Section 154 is quite narrow.
9.2 A Patent, manifest and self-evident error is one which does not require elaborate discussion of evidence or arguments to establish it. An error cannot be said to be apparent on the face of record if one has to travel beyond the record to see whether the action is correct or not. An error apparent from record means an error which strikes one on mere looking and does not need any serious justification. It is trite that the power of rectification can be exercised only when the mistake which is sought to be rectified is an obvious and patent mistake which is apparent from record in distinction to a purported mistake which requires to be established by arguments and long drawn process of reasoning on points on which there may possibly be two opinions.
9.3 In the instant case, the assessee has preferred captioned appeal arising in the rectification proceedings before the lower authorities to establish the factum of apparent mistake. In view of the narrow and limited scope of section 154 of the Act, it is difficult to say that CPC-AO has committed apparent error per se within the scope of section 154 of the Act while adopting the figures towards inadmissible expenses debited to P&L account as certified by the Tax Auditor. In the wake of guidance provided by Tax Audit Report, the CPC do not appear to have committed any apparent error while making adjustment under section 154 of the Act. Any position to be taken contrary to the Tax Audit Report being in the realm of subjectivity is plainly
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opposed to the basic tenets of section 154 of the Act. Therefore without expressing our opinion on merits, we are convinced that alleged error sought to be pointed out on behalf of the assessee does not fall within the sweep of prima facie mistake of apparent nature envisaged under section 154 of the Act. The appeal of the assessee in rectification proceedings is thus not maintainable and hence requires to be summarily dismissed at the threshold as fairly accepted on behalf of the assessee owing to narrow scope of such proceedings.
9.4 However, on conspectus of all the facts and circumstances and having regard to the fact that plea of the assessee that such expenses/liability has not been claimed at the first instance and thus no disallowance is warranted has not been addressed on merits, we consider it expedient to grant liberty to the assessee in the interest of fair play to pursue appellate remedy against the original proceedings in accordance with law if so legally advised. It shall be open to the assessee to raise an appropriate plea for condonation of delay owing to lapse of time due to ongoing rectification proceedings before the appellate authorities. The first appellate authority shall take into account such bonafides while admitting belated appeal against order under Section 143(1) for adjudication on merits and shall take a benign view in the matter.
In terms of delineations noted above, the appeal of the assessee is dismissed in limine as infructuous.
Order pronounced in the open court on 08.02.2024
Sd/- Sd/- (KUL BHARAT) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Date:- .02.2024 Priti Yadav, Sr. PS*