Contingent Liabilities Not Debited to P&L Account Can’t Be Added Solely on Audit Report Disclosure

ACIT Vs Mahesh Mohanbhai Patel (HUF) (ITAT Ahmedabad)

Ahmedabad, May 8, 2025 – The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has dismissed an appeal filed by the Assistant Commissioner of Income Tax (ACIT) against Mahesh Mohanbhai Patel (HUF), upholding the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to delete two significant additions made by the Centralised Processing Centre (CPC), Bengaluru. The Tribunal’s ruling, pronounced on May 8, 2025, reaffirmed that adjustments under Section 143(1)(a) of the Income-tax Act, 1961, must be limited to apparent errors and cannot involve complex verifications or duplicate disallowances.

Case Origin: CPC’s Automated Assessment and Substantial Demand

The case originated from the assessment year 2020-21, for which Mahesh Mohanbhai Patel (HUF), proprietor of Deep Pharma, had filed its return of income declaring a total income of $85,70,990/-. However, when the return was processed by the CPC under Section 143(1) of the Act via an intimation dated November 29, 2021, the total income was significantly enhanced to $5,09,26,630/-, leading to a demand of $2,13,00,550/-.

The substantial increase in income was attributed to two specific adjustments made by the CPC:

1. Contingent Liability Addition: An amount of $4,20,39,630/- was added to the income. The CPC treated this sum as a contingent liability that had been “debited to the Profit and Loss Account,” based on a disclosure made under clause 21(g) of the tax audit report.

2. Duplicate PF Disallowance: A disallowance of $3,16,017/- was made on account of the late payment of employees’ contribution to the Provident Fund (PF). The assessee, however, contended that this amount had already been disallowed by itself in its original return of income, and the CPC had made a duplicate addition.

Assessee’s Appeal to CIT(A): Challenging Errors and Seeking Rectification