Addition on account of lesser amount considered as claw back payment unsustained

AB Insurance Brokers Pvt Limited Vs DCIT (ITAT Kolkata)

ITAT Kolkata held that addition on account of lesser amount considered as claw back payment unsustained as in case, a higher amount is to be considered as claw back payment, then a higher amount is to be allowed as a deduction not character of income

Facts- The assessee has preferred the present appeal contested that CIT(A) has erred in confirming the addition of Rs. 15,41,574/-. It is alleged that though the assessee company has filed reconciliation showing total claw back payment of Rs. 1,47,44,486/- from HUFC Standard Life Insurance Co. Ltd., however, the confirmation received from HUFC Standard Life Insurance Co. Ltd. confirming that total claw back payment of Rs. 1,62,86,060/-. The assessee failed to reconcile the differential claw back of Rs. 15,41,574/- (Rs. 1,62,86,060/- less Rs. 1,47,44,486/-). As such the amount of Rs. 15,41,574/- is treated as undisclosed income of the assessee company for the year under consideration and the same is added to the total income of the assessee company.

Conclusion- The meaning of expression “claw back” is that it is a contractual provision that requires an employee to return money already paid by an employer sometimes with a penalty. In other words, whatever incentive HDFC Standard Life Insurance Co. Ltd. has given to the assessee, it was taken back to the extent of Rs.1,62,86,060/- instead of debiting a higher amount for claiming as an expenditure. The assessee has debited Rs. 1,47,44,486/-. Thus the assessee has debited lesser expenditure of Rs.15,41,574/-. The ld. Assessing Officer without understanding the whole contractual obligations of the parties made the addition. In case, a higher amount is to be considered as claw back payment, then a higher amount is to be allowed as a deduction not character of income. Therefore, we allow this ground of appeal and delete the addition of Rs. 15,41,574/-.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The present two appeals are directed at the instance of assessee against the separate orders of ld. ITA Nos. 241-242/KOL/2022 A.Ys. 2015-2016 & 2018-2019 AB Insurance Brokers Pvt. Limited Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 20^th December, 2021 passed for assessment years 2015-16 and 2018-19.

2. As far as the first-fold of grievance is concerned, it is common in both the years. The grievance of the assessee is that the ld. CIT(Appeals) has erred in confirming the disallowance of Rs.9,77,407/- and Rs.10,85,821/- in A.Y. 2015-16 and 2018-19
respectively.

3. The Registry has reported that both the appeals are time-barred. However, we find that these appeals have been filed on 09.05.2022, therefore, the period consumed by the assessee in filing these appeals was a COVID period and both the appeals are not to be treated as time-barred.

4. As far as the first-fold of grievance is concerned, we find that the assessee failed to make the payments of EPF & ESIC within the due date provided under these Acts. The revenue authorities have disallowed employees’ contributions, which were deducted by the assessee from the salaries of the employees’ but could not be deposited within the time limit. The Hon’ble Supreme Court has recently settled the position of law in the case of Checkmate Services Pvt. Limited –vs.- CIT (2022) 143 ITA Nos. 241-242/KOL/2022 A.Ys. 2015-2016 & 2018-2019 AB Insurance Brokers Pvt. Limited taxman.com 178 (SC). The Hon’ble Supreme Court has held that if the payment of employees’ contribution is not made within the due date provided under these Acts, then the assessee will not be entitled for the deduction.

5. In view of the above, the first-fold of grievance is rejected in both the years.

6. In the result, the appeal being ITA No. 242/KOL/2022 is dismissed.

7. In A.Y. 2015-16, i.e. ITA 241/KOL/2022, the assessee has raised one more grounds of appeal. The grievance of the assessee is that the ld. CIT(Appeals) has erred in confirming the addition of Rs. 15,41,574/-. The facts on this ground as recorded by the ld. Assessing Officer read as under:-

“5. Addition on account of claw back:-

On perusal of 26AS details, it is noticed that the assessee company has claimed to have paid claw back of Rs. 71,66,174/- to HDFC Standard Life Insurance Co. Ltd. To verify the genuineness of said claw back, letter was issued to HUFC Standard Life Insurance Co. Ltd. through e-mail. In response HUFC Standard Life Insurance Co. Ltd. confirmed on 28.12.2017 through e-mail that an amount of Rs. 1,62,86,060/- was clawed back in the case of AB Insurance Brokers Pvt. Ltd.

5.1. During the course of assessment proceedings, the A/R of the assessee company filed reconciliation as under:-

5.2. The reconciliation of the assessee is considered. Though the assessee company has filed reconciliation showing total claw back payment of Rs. 1,47,44,486/- from HUFC Standard Life Insurance Co. Ltd., however, the confirmation received from HUFC Standard Life Insurance Co. Ltd. confirming that total claw back payment of Rs. 1,62,86,060/-. The assessee failed to reconcile the differential claw back of Rs. 15,41,574/- (Rs. 1,62,86,060/- less Rs. 1,47,44,486/-). As such the amount of Rs. 15,41,574/- is treated as undisclosed income of the assessee company for the year under consideration and the same is added to the total income of the assessee company. Penalty proceedings u/s 271(1)(c) of the I.T. Act, 1961 is initiated separately for furnishing inaccurate particulars of income.

[Addition Rs. 15,41,574/-“.

This finding has been approved by the ld. CIT(Appeals).

8. The ld. Counsel for the assessee submitted that both the authorities failed to appreciate the meaning of expression “claw back”. If the Insurance Company has retained higher amount than one shown by the assessee, then instead of addition, ld. Assessing Officer ought to have granted further relief to the assessee.

9. On the other hand, ld. D.R. relied upon the orders of revenue authorities.

10. We have duly considered the rival contentions and gone through the record carefully. The business of the assessee is to arrange insurance policies for big Industrial Houses. The Insurance Company would provide an incentive to the assessee in the year. The assessee could not fulfil the promise of solicit the insurance policies, according to the expectation of the Insurance Companies, therefore, they have directed the assessee to pay back out of the incentives paid to the The meaning of expression “claw back” is that it is a contractual provision that requires an employee to return money already paid by an employer sometimes with a penalty. In other words, whatever incentive HDFC Standard Life Insurance Co. Ltd. has given to the assessee, it was taken back to the extent of Rs.1,62,86,060/- instead of debiting a higher amount for claiming as an expenditure. The assessee has debited Rs. 1,47,44,486/-. Thus the assessee has debited lesser expenditure of Rs.15,41,574/-. The ld. Assessing Officer without understanding the whole contractual obligations of the parties made the addition. In case, a higher amount is to be considered as claw back payment, then a higher amount is to be allowed as a deduction not character of income. Therefore, we allow this ground of appeal and delete the addition of Rs. 15,41,574/-.

11. In the result, ITA 241/KOL/2022 is partly allowed.

12. We summarize the result as under:-

ITA No. 242/KOL/2022 is dismissed, whereas ITA No.241/KOL/2022 is partly allowed.

Order pronounced in the open Court on May 29^th, 2023.