Case Law Details
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
Aggrieved by the CPC’s intimation, Mahesh Mohanbhai Patel (HUF) filed an appeal before the CIT(A), National Faceless Appeal Centre (NFAC), Bengaluru. The assessee also sought condonation of delay in filing the appeal, which the CIT(A) accepted, citing reasonable cause due to illness during the COVID-19 pandemic.
Before the CIT(A), the assessee mounted a robust challenge against both additions:
- Regarding the Contingent Liability of $4,20,39,630/-: The assessee vehemently argued that this amount was not a real expenditure and was never actually debited to the profit and loss account. It was merely a contingent liability disclosed in the tax audit report under clause 21(g) for informational purposes, as a matter of compliance with audit requirements, and not as an actual expense impacting the income computation. To substantiate this, the assessee submitted a revised Tax Audit Report, an Auditor’s certificate clarifying the inadvertent mention in the original report, and copies of its audited financial statements. These documents were presented to demonstrate that no actual debit entry for this contingent liability existed in the profit and loss account.
- Regarding the PF Disallowance of $3,16,017/-: The assessee submitted that it had already suo motu (on its own) disallowed this amount in its original return of income while computing the total income. The CPC’s disallowance, therefore, resulted in a clear duplication, effectively adding the same amount twice. This contention was also supported by the revised tax audit report and the auditor’s certificate.
To further buttress its arguments, the assessee placed reliance on judicial precedents from various ITAT benches:
Dwarkadish Spinners Ltd. (ITA No. 4782-83/Del/2012) – ITAT Delhi: This case was cited to support the principle that contingent liabilities, which are merely disclosed in the tax audit report but not actually debited to the profit and loss account, cannot be treated as an expenditure for addition.
Kay Bee Industrial Alloys Pvt. Ltd. (ITA No. 1032/Kol/2011) – ITAT Kolkata: This precedent similarly held that mere disclosure of a contingent liability in the tax audit report, without it being an actual debit in the financial statements, does not warrant an addition to income.
CIT(A)’s Affirmation: Deletion of Both Additions
The CIT(A), after a thorough examination of the profit and loss account, the revised tax audit report, and other submitted documents, concurred with the assessee’s contentions. The CIT(A) explicitly concluded that no actual amount was debited towards the contingent liability of $4,20,39,630/- in the profit and loss account. The disclosure under clause 21(g) was found to be purely for informational purposes and not part of the income computation.
Regarding the disallowance of $3,16,017/- for employees’ PF, the CIT(A) accepted that the assessee had indeed already disallowed the amount in its return of income, and the CPC’s disallowance was a clear duplication. The revised tax audit report and the auditor’s certificate further corroborated these facts. Relying on the judicial precedents cited by the assessee, the CIT(A) deleted both additions and allowed the appeal, providing significant relief to the HUF.
Revenue’s Appeal to ITAT: Challenging the Deletions
Aggrieved by the CIT(A)’s order, the Revenue, through the ACIT, filed an appeal before the ITAT, challenging the deletion of both additions. The Revenue’s grounds of appeal specifically stated that the CIT(A) erred in law and on facts by deleting the addition of contingent liability and the disallowance related to the late payment of employees’ PF contribution.
ITAT’s Deliberation: Concession by Revenue and Upholding Fairness
During the hearing before the ITAT, no one appeared on behalf of the assessee. However, the learned Departmental Representative (DR) for the Revenue made a crucial concession. The DR “fairly conceded that the submissions of the assessee before the lower authorities were correct in facts.” The DR explicitly admitted that the additions were made primarily on the basis of disclosures in the tax audit report and not on any real entries in the books of account or the profit and loss account. Given these admissions, the DR left the matter to the discretion of the Bench.
The ITAT, after carefully considering the orders of the lower authorities, the materials in the paper book, and the submissions recorded before the CIT(A), proceeded with its independent assessment.
- Contingent Liability: The Tribunal found it to be an “undisputed fact” that the addition of $4,20,39,630/- was made solely based on the disclosure under clause 21(g) of the tax audit report, without any corresponding debit in the profit and loss account. This was corroborated by the financial statements and the revised audit report dated February 18, 2022, along with the Auditor’s certificate confirming the inadvertent reporting in the original tax audit report. The ITAT emphasized that the scope of adjustment under Section 143(1)(a) is limited to “arithmetical errors, incorrect claims apparent from any information in the return, or disallowance of loss claimed without required return.” The adjustment made by the CPC in this case, requiring verification beyond the return itself (i.e., checking if an actual debit existed), clearly did not fall under these permissible categories.
- PF Disallowance: The ITAT confirmed that the assessee had already suo motu disallowed the amount of $3,16,017/- while computing its total income, as evidenced by the statement of total income on record. The CPC’s action was indeed a “duplication” of this disallowance, which was “clearly apparent from the intimation.” The Tribunal found the CIT(A)’s finding on this point to be based on a correct appreciation of facts, further supported by the revised tax audit report and auditor’s certificate.
Judicial Precedents Reinforcing ITAT’s Decision:
The ITAT’s decision was squarely supported by the judicial precedents cited by the assessee before the CIT(A):
1. Dwarkadish Spinners Ltd. (ITAT Delhi): This precedent firmly established that contingent liabilities, merely disclosed in the tax audit report but not actually debited to the profit and loss account, cannot be subject to addition as an expenditure. The ITAT applied this principle directly to the $4.20 crore addition, confirming that the CPC’s action was beyond the scope of a summary assessment.
2. Kay Bee Industrial Alloys Pvt. Ltd. (ITAT Kolkata): This case reiterated the same principle, reinforcing that a disclosure in the audit report, without a corresponding financial transaction impacting the profit and loss, does not warrant an addition to the taxable income.
These precedents collectively underscore the principle that a summary assessment under Section 143(1)(a) is meant for obvious errors and discrepancies, not for issues requiring detailed verification of facts beyond what is prima facie apparent from the return and accompanying documents.
Conclusion: Revenue’s Appeal Dismissed
In view of the detailed discussion, the undisputed facts, the Revenue’s concession, and the binding judicial precedents, the ITAT found “no infirmity” in the order passed by the CIT(A). Both adjustments made by the CPC under Section 143(1)(a) were deemed “erroneous” and were “rightly deleted” by the first appellate authority.
Consequently, the appeal filed by the Revenue was dismissed. This ruling serves as a reminder to the tax authorities, particularly the CPC, to adhere strictly to the limited scope of adjustments permissible under Section 143(1)(a) and to avoid making additions that require complex factual verification or result in duplicate taxation.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal by the Revenue is directed against the order dated 28.03.2024 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Bengaluru [hereinafter referred to as “CIT(A)”], under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for the Assessment Year 2020–21 arising out of the intimation dated 29.11.2021 passed by the Centralised Processing Centre, Bengaluru [hereinafter referred to as “CPC”].
Brief Facts of the Case
2. The assessee is a HUF, proprietor of Deep Pharma, who filed its return of income for A.Y. 2020–21 declaring a total income of Rs.85,70,990/-. The return was processed under section 143(1) by the CPC, Bengaluru, vide intimation dated 29.11.2021, wherein the total income was enhanced to Rs.5,09,26,630/- and demand of Rs.2,13,00,550/- was raised. The increase in income was due to two adjustments made in the intimation under section 143(1)(a):
(i) Addition of Rs.4,20,39,630/- treating the same as contingent liability debited to the Profit and Loss Account based on disclosure under clause 21(g) of the tax audit report.
(ii) Disallowance of Rs.3,16,017/- on account of late payment of employees’ contribution to PF, which the assessee contended was added twice – once by itself and again by CPC.
3. Aggrieved, the assessee preferred an appeal before the CIT(A). The assessee also sought condonation of delay in filing the appeal, which was accepted by the CIT(A) citing reasonable cause due to illness during the COVID-19 pandemic. Before the CIT(A), the assessee contended that the amount of Rs.4,20,39,630/- was not a real expenditure but a contingent liability merely disclosed in the tax audit report under clause 21(g) for disclosure purposes and was never debited to the profit and loss account. To support its contention, the assessee filed the revised Tax Audit Report, Auditor’s certificate clarifying the inadvertent mention and Copies of audited financial statements. As regards the disallowance of Rs.3,16,017/-, the assessee submitted that the same was already disallowed suo motu in the return of income, and the CPC made a duplicate disallowance under two different heads in the intimation. The assessee also placed reliance on some judicial precedents including –
– Dwarkadish Spinners Ltd. (ITA No. 4782-83/Del/2012) – ITAT Delhi
– Kay Bee Industrial Alloys Pvt. Ltd. (ITA No. 1032/Kol/2011) – ITAT Kolkata
4. The CIT(A), after examining the profit and loss account and revised tax audit report, concluded that no actual amount was debited towards contingent liability. The disclosure under clause 21(g) was found to be for informational purposes only and not part of income computation. On the disallowance of Rs.3,16,017/-, the CIT(A) accepted that the assessee had already disallowed the amount in the return, and the CPC disallowance resulted in duplication. The revised tax audit report and auditor’s certificate corroborated this. Relying on the decisions cited by the assessee, the CIT(A) deleted both additions and allowed the appeal.
5. Aggrieved by the order of CIT(A) preferred an appeal before us raising following grounds:
a) The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.4,20,39,630/- made by the AO on account of Contingent liability debited to P&L A/c.
b) The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.3,16,017/- on account of late payment of employees’ contribution to the Provident Fund.
c) The appellant craves leave to add, amend, alter, delete or substitute any of the above grounds before or at the time of hearing of the appeal.
6. During the course of hearing before us, no one appeared on behalf of the assessee. However, the learned Departmental Representative (DR) fairly conceded that the submissions of the assessee before the lower authorities were correct in facts. The DR admitted that the additions were made primarily on the basis of disclosures in the tax audit report and not on any real entries in the books of account or profit and loss account. The DR left the matter to the discretion of the Bench.
7. We have carefully considered the orders of the lower authorities, the materials placed in the paper book, and the submissions recorded before the CIT(A). It is an undisputed fact that the addition of Rs.4,20,39,630/- was made solely on the basis of disclosure under clause 21(g) of the tax audit report, without there being any corresponding debit in the profit and loss account. This fact is corroborated by the financial statements and the revised audit report dated 18.02.2022 furnished by the assessee. The copy of the Auditor’s certificate indicating the facts that the amount was inadvertently reported in the original tax audit report and the same is rectified in the revised form 3CD – annexure to the tax audit report in form 3CB. The coordinate benches in Dwarkadish Spinners Ltd. (supra) and Kay Bee Industrial Alloys Pvt. Ltd. (supra) have held that contingent liabilities which are not debited to the profit and loss account cannot be added merely on the basis of disclosure in the audit report. Further, under section 143(1)(a), the scope of adjustment is limited to arithmetical errors, incorrect claims apparent from any information in the return, or disallowance of loss claimed without required return. The adjustment made in the present case does not fall under any of these categories, as it requires verification beyond the return itself.
8. Regarding the disallowance of Rs.3,16,017/- for employees’ PF, the assessee had already disallowed the same while computing total income. We have also noted from the statement of total income placed on the record (paper book page No. 31) that the said amount is added to the total income by the assessee as disallowable u/s 36 of the Act. The CPC’s duplication of the same disallowance is clearly apparent from the intimation. The CIT(A)’s finding is based on correct appreciation of facts and supported by the revised tax audit report and auditor’s certificate.
9. In view of the above discussion and binding judicial precedents, we find no infirmity in the order passed by the CIT(A). Both the adjustments made by the CPC under section 143(1)(a) were erroneous and rightly deleted by the first appellate authority.
10. In the result the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 8th May, 2025 at Ahmedabad.
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