HC Remands Disallowance on Pension Bonds Due to Contradictory Claims and ITR Error.

Issue

Whether a disallowance of a “fair value adjustment” on pension bonds, claimed as a deduction under Section 43B, should be sustained, especially when the assessee’s arguments are contradictory (claiming it is both a notional entry and an interest payment) and the amount was incorrectly reported in the ITR form.

Facts

The assessee-company, responsible for pension liabilities, issued bonds to a Master Pension and Gratuity Trust.
It claimed a deduction under Section 43B for a “fair value adjustment as per IND AS-109” related to interest on these bonds.
The Assessing Officer (AO) disallowed this claim.
The assessee’s arguments were contradictory:
1. It claimed the entry was purely notional as required by IND AS-109, was not real income, and was excluded from the computation of total income.
2. It also claimed that it was an interest payment on the bonds.
The assessee admitted that the amount had been inadvertently and incorrectly reported in its ITR Form-6.

Decision

The High Court set aside the disallowance and remanded the matter back to the Assessing Officer for fresh verification.
The court noted the clear contradiction in the assessee’s arguments and the admitted error in the ITR filing.
The remand directs the AO to specifically verify the assessee’s primary contention: that the amount was a notional accounting entry, not real income, and was properly adjusted in the final computation of total income (despite the ITR form error).

Key Takeaways

Contradictory Claims Lead to Remand: A taxpayer cannot simultaneously argue that an item is a “notional entry” for accounting purposes and a “real payment” for deduction purposes. Such contradictions necessitate a fresh factual verification.
IND AS vs. Tax Act: Accounting entries required by IND AS (like fair value adjustments) are not automatically deductible under the Income-tax Act. Their real nature and taxability must be examined separately.
Computation vs. ITR Form: The court’s remand shows that the final computation of total income (which accompanies the return) holds legal weight. The AO has been directed to verify this computation, which may allow the assessee to overcome the incorrect reporting in the ITR form itself.

Disallowance for Late Pension Contribution Remanded for Verification of Payment Proof.

Issue

Whether a disallowance under Section 43B for alleged late payment of pension and gratuity contributions can be sustained when the assessee provides documentary proof (bank statements, Tax Audit Report) showing the payment was made on time.

Facts

The Assessing Officer (AO) disallowed the assessee’s contribution to a pension and gratuity trust under Section 43B.
The AO’s ground was that the payment was not made on or before the due date for filing the income tax return (as per Section 139(1)).
The assessee provided evidence to the contrary, including:
1. Bank account statements showing the payment was made via RTGS.
2. The Tax Audit Report (Form 3CD), which correctly reported the amount in Clause 26B(a)—the specific clause for amounts paid before the ITR due date.

Decision

The High Court remanded the matter back to the Assessing Officer.
The AO was directed to verify the claim in light of the specific evidence (bank statements and Form 3CD) submitted by the assessee.
The court further directed the AO to delete the addition if the evidence of timely payment is factually confirmed.

Key Takeaways

Documentary Proof is Paramount: For a Section 43B claim, which is based on “actual payment,” providing concrete proof like bank statements showing the RTGS transfer is critical and decisive.
Tax Audit Report as Corroboration: The correct reporting of a payment in the Tax Audit Report (Form 3CD) serves as strong, contemporaneous evidence that the payment was made within the stipulated time, and it should not be ignored by the AO.
Remand for Verification: When an AO makes a disallowance by apparently overlooking verifiable evidence, the correct judicial remedy is to remand the case with a specific direction to examine that evidence.

IN THE ITAT HYDERABAD BENCH ‘A’

Telangana Power Generation Corporation Ltd.

Deputy Commissioner of Income-tax

Ravish Sood, Judicial Member
and MANJUNATHA G, Accountant Member

IT Appeal No.724 (Hyd.) of 2024
[Assessment year 2021-2022]

JULY 25, 2025

M Chandramouleswar Rao, CA for the Appellant. B. Bala Krishna, CIT-DR for the Respondent.

ORDER

Manjunatha G., Accountant Member.- This appeal has been filed by the assessee against the order dated 18.06.2024 of the learned Addl./JCIT(A)-5, Mumbai, relating to the assessment year 2021-2022.

2. Briefly stated facts of the case are that, the assessee, ‘Telangana Power Generation Corporation Limited’ is a Government undertaking, engaged in the business of electricity generation. The assessee has filed it’s return of income for the assessment year 2021-2022 on 14.03.2022, declaring total income of Rs.56,63,77,167/-. The return was processed under section 143(1) of the Act by the Assessing Officer-CPC on 22.09.2022 and determined the total income of the assessee at Rs.1,05,44,86,080/- by making addition towards disallowance of employee’s share of contribution to EPF for Rs.59,11,767/-, disallowance of contribution to pension and gratuity trust under section 43B of the Act for Rs.21,92,43,000/- disallowance of Rs.36,54,146/- under section 43B of the Act towards taxes and duties and addition of Rs.25,93,00,000/- towards “interest on Pensions Bonds” claimed as deduction as per IND AS-109 adjustments.

3. Aggrieved by the assessment order passed by the Assessing Officer-CPC, the assessee preferred an appeal before the learned CIT(A) and challenged the additions/ adjustments made by the Assessing Officer-CPC. The learned CIT(A) for the reasons stated in the appellate order dated 18.06.2024, rejected the explanation of assessee and upheld the additions made by the Assessing Officer towards various adjustments made in the order passed under section 143(1) of the Act.

4. Aggrieved by the order of the CIT(A), the assessee is now, in appeal before The Tribunal.

5. The first issue that came-up for our consideration through ground number 2 of assessee’s appeal is, disallowance of fair value adjustment as per IND As-109 towards interest on pension bonds payments claimed under section 43B of the Act for Rs.25.93 crores.

6. The facts with regard to the impugned dispute are that, under the Andhra Pradesh Electricity Reform Act, 1998 and the Andhra Pradesh Electricity Reform (Transfer Scheme) Rules, 1999, the responsibility of discharging the past liabilities for the period prior to 01.02.1999 towards pension and gratuity of the employees and pensioners of the erstwhile APSEB [Andhra Pradesh State Electricity Board] was entrusted to APGENCO [Andhra Pradesh Power Generation Corporation Limited]. The Assessee, TGGENCO, which in-turn, issued bonds to the trustees of the Andhra Pradesh State Electricity Employees Master Pension and Gratuity Trust [Master Trust]. Pursuant to the reorganization under the A P Reorganisation Act, 2014 and division of the State of Andhra Pradesh, the liability in respect of the employees and pensioners who come under the purview of the concerned drawing offices in Telangana State, has become the liability of the assessee [TGGENCO] Master Trusts. The assessee-TGGENCO’s liability relating to the above bonds as per section 53 of AP Reorganization Act, 2014 is worked-out on population ratio basis between APGENCO and TGGENCO respectively. The Ministry of Corporate Affairs notified IND-AS from financial year 20162017. The assessee being a corporate entity following IND AS-109 had accounted pension bonds at amortized cost and the difference between actual liability and fair value of the bonds has been brought in the books of accounts duly reducing the retained earnings. The additional liability created as per IND AS fair value is to be amortized over the life of the bonds. In order to bring down the difference to zero over the life of the bonds, the present year share of Rs.25.93 crores is reversed by crediting to the Profit and Loss A/c and by debiting to the the liability account. Since, it is a notional entry created to make adjustment with INDAS, the same needs to be eliminated from the income tax calculation. In terms of the position explained above, the assessee in the computation has deducted Rs.25.93 crores from the Head “Business Income”. The Assessing Officer CPC while processing the return of income, has not allowed the reduction made for Rs.25.93 crores towards IND AS-109 adjustments. In appeal, the learned CIT(A) sustained the addition.

7. CA, M Chandramouleswar Rao, Learned Counsel for the Assessee, referring to the return of income filed for the year under consideration in Form ITR-6 submitted that, the assessee has wrongly reported the amount of interest payment on pension and gratuity fund under clause-10 sub clause (e) under any amount disallowed under section 43B in any preceding previous year, but, allowable during the previous year instead of clause-(33) of Form ITR-6. This fact has been explained to the learned CIT(A) by filing relevant details including computation of interest on Bonds 1 and 2 and the difference between actual liability created in the books of accounts and the liability to be created for the year ending 31.03.2021. Since there is a difference of Rs.25.93 crores, the same has been claimed as deduction in the statement of total income. The Assessing Officer-CPC and the learned CIT(A), without appreciating the relevant facts, has simply sustained the addition only on the ground that, the assessee has claimed the deduction on the basis of audit report submitted in Form 3-CD and, therefore, there is no irregularity in the Order of the Assessing Officer-CPC which is based on the return of income filed by the assessee. Since, the assessee wrongly reported in incorrect column in the ITR Form-6 and that, the matter may be remitted back to the file of Assessing Officer to verify the facts in light of deduction, in accordance with law.

8. Shri B. Bala Krishna, learned CIT-DR for the Revenue, on the other hand, supporting the order of the CIT(A) submitted that, the assessee itself has made wrong claim in ITR-6 for the year under consideration. The Assessing Officer-CPC processed the return and made adjustment in terms of assessee’s own ITR. Before the learned CIT(A), the assessee could not explain the issue with relevant details. Therefore, the learned CIT(A) has rightly upheld the reasons given by the Assessing Officer-CPC to make the disallowance. The assessee now claimed that, it is only a notional entry and not a real income and, therefore, cannot be taxed. But, these facts were not filed before the Assessing Officer-CPC. Therefore, the matter maybe remitted to the file of Jurisdictional Assessing Officer [in short “JAO”] for verification and to decide the issue in accordance with law.

9. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. The assessee claimed to have passed certain entries in the books of accounts towards interest on bonds in respect of pension and gratuity of employees and pensioners to bring on parity with the closing balance as per the bonds and entries made in the books of accounts in terms of IND AS-109 which is the mandatory from assessment year 2016-2017 onwards. The assessee claims that, it has reversed the entries by crediting to Profit and Loss account and debiting to liability account, to bring parity between the fair value of the bonds and entries made in the books of accounts. However, while filing the return of income, by an inadvertent error reported in the column, which is applicable to disallowance under section 43B of the Act. We find that, the assessee has reduced the amount of Rs.25.93 crores in the statement of total income, while computing income from business towards any amount allowable as deduction [IND AS-109] fair value adjustment and the same has been inadvertently reported in clause-10(e) of ITR Form-6, which is applicable for any amount disallowed under section 43B, in any preceding previous year, but, allowable during previous year upon payment. Since, the claim of the assessee is that, it is only a notional entry made in the books in terms of IND AS-109 and there is no actual income, which was rightly credited to Profit and Loss A/c and excluded while computing total income in the statement of total income, in our considered view, the Assessing Officer-CPC erred in disallowing the said amount only on the basis of incorrect reporting in Form ITR-6. Further, the facts are not very clear. One side, the assessee says that, it is only an entry passed in terms of IND AS-109, but, not of real income, on the other hand, assessee claims that, it is interest payment on bonds and the same has been paid on or before the due date for furnishing return of income. There is a contradiction in the arguments of the assessee and also there is an incorrect reporting in Form ITR-6. Therefore, in our considered view, the matter needs to be set-aside to the file of Jurisdictional Assessing Officer for verification in light of averments of assessee that, it is only a notional entry in terms of IND AS-109 and not real income and the same needs to be adjusted, while computing the total income. Thus, we set-aside the order of the learned CIT(A) and restore the matter to the file of Assessing Officer and direct the Assessing Officer to verify the claim of the assessee, in light of evidences that may be filed by the assessee, to justify its case and decide the issue in accordance with law.

10. The next issue that came-up through ground no.3 of assessee’s appeal is disallowance of payment made to contribution of pension and gratuity under section 43B of the Act for Rs.21,92,43,000/-.

11. The facts with regard to the impugned dispute are that, as per intimation under section 143(1) of the Act, an amount of Rs.21,92,43,000/- was disallowed treating that, the assessee has failed to make payment to the gratuity and pension trust on or before the due date provided under the respective Act or on or before the due date for filing the return of income. The Assessing Officer-CPC disallowed the said amount on the basis of ITR-6 filed by the assessee and Form-3CD issued by the Auditor. On appeal, the learned CIT(A) confirmed the addition made by the Assessing Officer on the ground that, the Assessing Officer-CPC has not made any adjustment in the intimation issued under section 143(1) of the Act.

12. CA, M Chandramouleswar Rao, Learned Counsel for the Assessee submitted that, the assessee has made the payment to Pension and Gratuity Trust on 03.04.2021 which is evidenced by the entries in the bank statement. In Form 3CD report, the fact of payment of the said amount is correctly reported in clause-26B(a) of the Act. Although, the assessee has rightly reported the said amount on actual payment, but, the Assessing Officer-CPC, while computing the income in intimation under section 143(1) of the Act, has incorrectly taken the amount already disallowed by the assessee and also the amount claimed by the assessee, as allowable in terms of section 43B of the Act. Therefore, he submitted that, the addition made by the Assessing Officer should be deleted.

13. Shri B. Bala Krishna, learned CIT-DR for the Revenue, on the other hand, supporting the order of the CIT(A) submitted that, once again it is the assessee who committed a mistake in filing ITR-6 and it is further supported by Form 3 CD issued by the Auditor, where the Auditor has quantified the amount disallowable under section 43B of the Act. The Assessing Officer has computed the income on the basis of ITR filed by the assessee. The learned CIT(A) has rightly sustained the addition and thus, the Order of the learned CIT(A) should be upheld.

14. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. The Assessing Officer disallowed a sum of Rs.21,92,43,000/- while issuing intimation under section 143(1) of the Act on the ground that, the said amount is not allowable in terms of section 43B of the Act, on account of non-payment of sum payable to Pension and Gratuity Trust on or before the due date provided under the respective Act or on or before the due date for filing the return of income under section 139(1) of the Act. Learned Counsel for the Assessee has filed relevant evidences including bank statements and as per the details filed by the assessee, we find that, the assessee has paid a sum of Rs.21,92,43,000/-on 03.04.2021 by transfer of funds through RTGS to GENCO Pension and Gratuity Trust, which is evident from Bank account statement of State Bank of India, Commercial Branch Hyderabad. We further note that, the assessee has also rightly reported the said amount in Form-3CD clause-26B(a), which applies to amount incurred in the previous year and was paid on or before the due date for furnishing return of income of the previous year under section 139(1) of the Act and reported sum of Rs.21,92,43,000/- towards employers contribution to superannuation fund. The assessee had also reported the not paid on or before the due date in sub-clause (b). The Assessing Officer-CPC while processing the return of income, has taken both the amounts together and made adjustment of Rs.21,92,43,000/-, even though, the assessee has paid the amount on 03.04.2021, which is much before the due date for furnishing return of income under section 139(1) of the Act or even before the due date for payment under the respective Act. The learned CIT(A) without considering the relevant facts, has simply sustained the addition made by the Assessing Officer. Thus, we set-aside the Order of the learned CIT(A) and restore the issue back to the file of Assessing Officer and direct the Assessing Officer to verify the claim of assessee, in light of evidences filed before us and also any other evidence that may be filed by the assessee before the Assessing Officer to explain the issue and delete the additions made towards contribution to Pension and Gratuity Trust account for Rs.21,92,43,000/-.

15. In the result, the appeal of the assessee is allowed for statistical purposes.