If Expenditure is not Claimed in P&L Account, Disallowance is not Applicable

Everest Blower Systems Pvt. Ltd. Vs DCIT (ITAT Delhi)

The ITAT Delhi in Everest Blower Systems Pvt. Ltd. vs. DCIT addressed the issue of disallowance of expenses under Section 37 of the Income Tax Act, 1961. The appeal challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)], which upheld the disallowance of a contingent liability of ₹3,07,75,963. This amount comprised a guarantee of ₹1,37,16,613 and capital commitments of ₹1,70,59,350. The Centralized Processing Centre (CPC) had earlier disallowed the expenditure based on the Tax Audit Report, alleging it was a contingent liability improperly claimed as an expense.

The assessee contended that no such contingent liability was claimed as an expense in its Profit and Loss Account for the assessment year 2021-22. Supporting evidence was provided, including the Profit and Loss Statement for the year ending March 31, 2021. Upon review, the department’s representative (DR) confirmed that the alleged contingent liability had not been debited as an expense in the books of accounts. The ITAT found merit in the assessee’s argument, ruling that since the contingent liability was not claimed as an expense, its disallowance under Section 37 of the Act was unwarranted. Accordingly, the appeal was allowed, and the earlier order of the CIT(A) was set aside.

This case highlights the importance of accurate verification of financial records before disallowing expenses. The tribunal emphasized that contingent liabilities, when not claimed as expenses, cannot be subject to disallowance under Section 37. The ruling underscores procedural fairness in tax assessments and reinforces the necessity of ensuring clarity in financial documentation to avoid unnecessary disputes.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)/Additional/Joint Commissioner of Income Tax (Appeals)-10, Mumbai (hereinafter referred to as ‘the CIT(A)’) dated 30.04.2024, for assessment year 2021-22.

2. The solitary issue in appeal is against disallowance of expenses u/s. 37 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) being the contingent liability of Rs. 3,07,75,963/- comprising of, Guaranty Rs.1,37,16,613/- and Capita Commitments Rs.1,70,59,350/-.

3. Shri Shailesh Gupta, appearing on behalf of the assessee submitted that the Centralized Processing Centre(CPC)/has erred in disallowing expenditure on account of contingent liability u/s. 37 of the Act, whereas the assessee has never claimed the contingent liability as expenditure in its books of accounts. He referred to Profit and Loss Statement for the year ended 31^st March 2021 at page 33 of the paper book to support his contentions. He submitted that against the intimation u/s. 143(1) of the Act, the assessee filed appeal before the CIT(A). The CIT(A) without examining the records dismissed appeal of the assessee.

4. The ld. DR vehemently supported the impugned order. He stated that disallowance has been made on the basis of Tax Audit Report. However, the ld. DR sought time to verify from the records as to whether; the assessee has debited expenditure of contingent liability in P&L Account. The time sought by the ld. DR was allowed. The DR after verifying the records made a statement that as per the P&L Account for the year ended 31.03.2019 placed in the paper book, the assessee has not claimed contingent liability as expenditure.

5. Both sides heard. The short issue in appeal is with regard to disallowance of contingent liability u/s. 37 of the Act. The contention of assessee is that the assessee has not claimed contingent liability in the nature of Guaranty Rs.1,37,16,613/- and Capital Commitments Rs.1,70,59,350/- in the P&L Account. A perusal of Profit and Loss Account for the year ended 31^st March 2021 relevant to the assessment year 2021-22 shows that such expenditure has not been debited by the assessee. This fact has been verified by ld. DR. Once the expenditure has not been claimed by the assessee in the P&L Account, there is no question of disallowance of the same.

6. We find merit in appeal by the assessee, hence, the same is allowed.

Order pronounced in the open court on Tuesday the 19^th day of November, 2024.