DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, LUDHAINA vs. HOMELAND CITY PROJECT LTD, NEW DELHI

Whether on the facts and in the circumstances of the case, the Id. CIT(A) erred in not appreciating that in terms of the provisions of Section 143(1)(a)(iv) of the Income Tax Act 1961 it is mandatory that during the course of processing of the income tax return the total income or loss of the assessee is computed after making adjustment for 'disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return' and that the audit report filed by the assessee, which remains un-amended or rectified till now, admittedly indicating the disallowance? 2 Whether on the facts and in the circumstances of the case, the learned CIT(A) has adjudicated on merits, gone beyond the audit report and admitted other material- an exercise impermissible under the inherently limited scope of processing under section 143(1)(a)?

Briefly the facts of the case are that while processing the return of income under section 143(1), the income of the assessee was assessed at a figure of Rs. 5,63,69,10,130/- by CPC, Bangalore after making disallowance of Rs. 5,63,70,00,000/- on account of Corporate Guarantee.

The assessee thereafter carried the matter in appeal before the Ld. CIT(A) and vide the impugned order, the Ld. CIT(A) has given a finding stating that the assessee has neither claimed the said amount as an expenditure or as an eligible deduction while filing its return of income and it is not forming part of any financial account i.e; neither of P&L Account nor of balance sheet and therefore the disallowance so made by the CPC was deleted and against the said findings, the Revenue is in appeal before us.

The relevant findings of the Ld. CIT(A) are contained at para 5.1 to 5.1.3 of the impugned order and the same read as under:

1 Ground of Appeal No. 1 to 3 are interlinked and are being taken up together for adjudication. In these grounds, the AR has contested the disallowance of Rs. 5,63,70,00,000/- u/s 37 of the IT Act 1961 by the CPC. 5.1.1 Summary of the facts highlighted by the appellant/AR during the appellate proceedings (i) As per AR, the reason for disallowance of Rs. 5,63,70,00,000/- made by the CPC as per annexure/other information in para 7(i) of order u/s 143(1) of the Act dt. 20.09.2021, has been given as "Amounts debited to the profit and loss account to the extent disallowable under section 37; (i) Amount of any liability of a contingent nature." [page 29 of order u/s 143(1) of the Act].

1 From the perusal of the financial statement of the assessee it is observed that it is found that the amount of Rs.5,63,70,00,000/- was not debited in P & L account, Further, from the perusal of the audit report it is observed that assessee has reported that the above said amount has been reported in para 21(g) "the particular of any liability of a contingent nature debited to the P & L account".

2 The assessee in submissions filed before the Ld.CIT(A) has stated that amount of Rs.5,63,70,00,000/- is the amount of corporate guarantee which has been reported in note 31 to the financial statements. The submissions of the assessee was further verified from the financial statement of the assessee. The assessee further stated that it is due to inadvertent mistake by the auditor that the corporate guarantee is mentioned in para 21(g). Further, from the perusal of the financial statement of the assesses it is again reiterated that the amount of Rs.5,63,70,00,000/- was not debited in P & L account. …

Keeping in view the aforesaid facts, it is requested that the appeal of the assessee may be decided on merits; Unquote

(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee). laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 2,—For the removal of doubts, it is hereby declared that for the purposes of subsection (I), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. —(Explanation 3. For the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" under Explanation I , shall include and shall be deemed to have always included the expenditure incurred by an assessee. ( i ) for any purpose which is an offence under, or which is prohibited by. any law for the time being in force, in India or outside India; or ( i i ) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation o f any law or rule or regulation or guideline, as the case may be, for the lime being in force, governing the conduct of such person; or (iii) to compound an offence under any law for the time being in force, in India or outside India. ] Unquote On the plain reading of section 37(1) of the Act, it is apparent that the section starts with the word 'Any Expenditure'. Thus it is a precondition for applicability of this section, that there should be an expenditure. This means an expenditure, which has been debited in the P & L Account and claimed as expenditure. Only then the following tests can be applied (a) Whether it is capital or revenue expenditure? (b) Whether it is wholly and exclusively incurred for the purpose of business or profession? (c) Whether it was for any purpose which is an offence or which is prohibited by law? (d) Allowability for the point of view of other sections of the Act.

The ld CIT/DR submitted that basis the tax filings done by the assessee by way of its return of income and tax audit report, the CPC has done the adjustment on account of corporate guarantee and which has been deleted by the ld CIT(A) and being aggrieved with the order of the ld CIT(A), the Revenue has preferred the present appeal. He relied on the intimation issued by the CPC.

The Ld. AR supported the order and the findings of the Ld. CIT(A) and submitted that the Ld. CIT(A) has taken due cognizance of the revised Tax Audit Report(TAR), the guidance note issued by the ICAI, Financial statement wherein the said amount has not been claimed in the P&L Account and the return of income wherein there is no separate deduction which has been claimed and therefore he has passed a well reasoned and speaking order and no interference is called for. It was submitted that it was merely a mistake on the part of the Tax Auditor which has lead CPC to make the adjustment which has been rightly been highlighted and thereafter, the revised tax audit report has been issued which has been duly taken into consideration by the Ld. CIT(A). It was accordingly submitted that no interference is called for as far as the findings of the Ld. CIT(A) and reliance was placed on the written submission which read as under: 1. “The assessee is a private limited company and return declaring loss of Rs. 96,121/- has been e-filed.

That vide order u/s 143(1) of the Act Dt. 20.09.2021 the income of the assessee has been assessed at Rs. 5,63,69,10,130/- by the CPC after making disallowance of Rs. 5,63,70,00,000/-.

Reporting by the Tax Auditor in the Tax Audit Report on the basis of which disallowance has been made although the same has not been mentioned in the reasons, has been misinterpreted by the CPC.

1 In Annexure-5 [Tax Audit Report Form 3CD] the particulars of contingent nature has been reproduced as under: Any liability of contingent nature- 21g Sr. Nature of Liability Amount No. 1 Corporate Guarantee 5,63,70,00,000/-

2 Corporate guarantee reported as contingent liability by the Tax Auditor has not been debited to the P&L account as alleged by CPC The kind attention of your goodself is drawn to the fact that the amount of Rs. 5,63,70,00,000/- has not been debited to the Profit and Loss account but the same has only been reported in Note 31 on the Notes to financial statements and the same is reproduced as under:- Sr. Particulars March 31,2020 No. (Amount in Rs.) i) Claims against the company not - acknowledged as debt ii) Outstanding Bank Guarantee - iii) Other money for which he company is 5,63,70,00,000/- contingently liable (Corporate Guarantee)

4 The Tax Auditor vide clarification dated 21.07.2022 has clarified the above stated issue as under and has also issued revised tax audit report which has been placed on record during the course of appellate proceedings before the CIT(A):- “1.that in the Tax Audit report in Form-3CD the corporate guarantee has been reported in para 21(g) as “particulars of any liability of a contingent nature”. 2.That the above said amount has been reported in para 21(g) due to inadvertent mistake as according to the Guidance note on Tax Audit under Section 44AB of the Income Tax Act, 1961, “the particulars of any liability of a contingent nature debited to the P&L account” is required to be reported in clause 21(g) of the Tax Audit Report for which the kind attention of your goodself is drawn to Guidance note on Tax Audit under section 44AB of the Income Tax, 1961. 9 3.It is further brought on record that the corporate guarantee has only been reported by statutory auditor in the notes on account of the statutory audit report as contingent liabilities and commitments but the same has not been debited in the P&L account. 4.In view of the above stated facts, the reporting of corporate guarantee in para 21(g) being the “particulars of any liability of a contingent nature” has only been reported due to inadvertent mistake as the amount of corporate guarantee has not been debited to the P&L account.”

5 The Remand report of the AO vide letter dated 03.01.2024 in which the AO has accepted the fact that the corporate guarantee has not been debited to P&L account:- “Kindly refer to your office letter NO. 981 Dated 17.10.2023 on the subject cited above.

In this regard it is submitted that the CPC Bengaluru disallowed the amount of Rs. 5,63,70,00,000/- while processing the return of income u/s 143(1) vide order dated 20.09.2021 while treating the same as amount of contingent liability debited to the P &L account to the extend disallowable under section 37. 2.1 From the perusal of the financial statement of the assessee it is observed that it is found that the amount of Rs. 5,63,70,00,000/- was not debited in P&L account. Further, from the perusal of the audit report it is observed that assessee has reported that the above said amount has been reported in para 21(g) “the particular of any liability of a contingent nature debited to the P&L account”.

2 The assessee in submissions filed before the Ld. CIT(A) has stated that amount of Rs. 5,63,70,00,000/- is the amount of corporate guarantee which has been reported in note 31 to the financial statements. The submissions of the assessee was further verified from the financial statement of the assessee. The assessee further stated that it is due to inadvertent mistake by the auditor that the corporate guarantee is mentioned in para 21(g). Further, from the perusal of the financial statement of the assessee it is again reiterated that the amount of Rs. 5,63,70,00,000/- was not debited in P&L account.

3 Further as per our data base on ITBA portal no such demand is reflected for AY 2020-21 (Copy enclosed)

Keeping view the aforesaid facts, it is requested that the appeal of the assessee may kindly be decided on merits.”

Findings of CIT(A): - “5.1.3 I have considered the reasoning given in the intimation order u/s 143(1) of the Act, submissions & documents submitted by the appellant, remand report submitted by the AO, facts of the case and legal position. (i) The only issue involved is the disallowance of Rs. 5,63,70,00,000/- made by the CPC, Bangalore. As per annexure/other information in para 7(i) of order u/s 143(1) of the Act dt. 20.09.2021, the reason has been given as "Amounts debited to the profit and loss account to the extent disallowable under section 37; (i) Amount of any liability of a contingent nature." [page 29 of order u/s 143(1) of the Act]. The key submission of the AR is that this amount has not been debited in the P&L account. Therefore, it cannot be disallowed u/s 37 of the Act. It was further argued that it was a mistake by the auditor. Further argument of the AR was that no opportunity was granted before making adjustment u/s 143(1) of the Act. The AR has also cited certain case laws. (ii) The basic issue involved was factual in nature i.e, whether this amount Rs.5,63,70,00,000/- has been claimed as amount of any liability of a contingent nature as expenditure and debited in the P & L account or not………. ……….However in the present case, it is observed as well as confirmed by the AO in remand report that there is no claim and expenditure. It is quite logical, that if no 10 expenditure has been debited in P&L account i.e. not claimed as an expenditure, question of disallowing it would not arise. Also, it is not covered by any other deeming provisions of the Act. Under these circumstances I am of considered view that the disallowance made by the CPC is not sustainable as it has never been claimed as expenditure/deduction. In fact, it is not forming part of any financial account i.e. neither of P&L account nor or Balance sheet, as submitted by the appellant. Therefore the disallowance of Rs. 5,63,70,00,000/- made by the CPC, Bangalore is deleted.”

Further, the CIT(A) has reproduced the copy of the Balance Sheet and profit and loss account at pages 23 & 24 of the order and then passed a well-reasoned order.

Lastly, it is submitted that it was just a mistake of the Auditor in the Tax Audit Report and for which, the assessee cannot be penalized as per settled law by Hon’ble Punjab & Haryana High Court in the case of Sh. Manoj Ahuja, reported in 150 ITR 696 and of Chandigarh Bench of ITAT in the case of Habrol Cooperative Agricultural Service Society Vs ITO, in ITA No. 158/Chd/2024. Therefore, the CIT(A) had rightly deleted the uncalled for addition.”

We have heard the rival contentions and purused the material available on record. The CPC Bangalore disallowed the amount of Rs. 5,63,70,00,000/- while processing the return of income u/s 143(1) vide order dated 20.09.2021 while treating the same as amount of contingent liability debited to the P &L account to the extend disallowable under section 37 of the Act. The basis of the said disallowance is reporting by the Tax auditor in Para 21(g) of the tax audit report which requires reporting of particulars of any liability of contingent nature debited to the profit/loss account.” Therefore, the particular of any liability of contingent nature is required to be reported provided that it is debited in the profit/loss account. The tax auditor have admitted their mistake and has issued a clarification dated 21/07/2022 that it was an inadvertent mistake and that the corporate guarantee has only been reported by statutory auditor in the notes to the accounts of the statutory audit report as contingent liabilities and commitments but the same has not been debited in the P&L account. During the appellate proceedings, the matter was again referred to the Assessing officer for necessary verification and in his remand report dated 03/01/2024, the Assessing officer has stated that from the perusal of the financial statement of the assessee, it is found that the amount of Rs 5,63,70,00,000/- was not debited in the profit/loss account. In light of the same, there cannot be any dispute that the said amount was neither debited in the profit/loss account nor claimed in 11 the return of income. In view of the same, we see no reason to interfere with the findings of the ld CIT(A) wherein he has taken into consideration not just the submissions of the assessee but the remand report of the AO as well as the financial statements of the assessee and held that the disallowance made by the CPC is not sustainable as it has never been claimed as expenditure/deduction nor forming part of any financial account i.e. neither of P&L account, nor Balance Sheet, as submitted by the appellant. The order of the ld CIT(A) is accordingly confirmed and the grounds of appeal taken by the Revenue are dismissed.

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 17/12/2024. परेश म. जोशी िव"म िसंह यादव (PARESH M. JOSHI) ( VIKRAM SINGH YADAV) "ाियक सद" / JUDICIAL MEMBER लेखा सद"/ ACCOUNTANT MEMBER

""थ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"ीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File