CPC’s Section 143(1) adjustment for contingent liability is erroneous if not debited to P&L

I. CPC’s Section 143(1) adjustment for contingent liability is erroneous if not debited to P&L account, as scope is limited to apparent errors.

II. CPC’s Section 143(1) adjustment for late PF payment is erroneous if assessee already self-disallowed the amount, leading to duplication.

I. CPC’s Section 143(1) Adjustment for Contingent Liability Disclosed but Not Debited to Profit & Loss Account is Erroneous.

Issue:

Whether the Centralized Processing Centre (CPC) can make an adjustment under Section 143(1)(a) of the Income-tax Act, 1961, by adding back a contingent liability merely because it is disclosed in the tax audit report (clause 21(g)), when the said amount has not actually been debited to the profit and loss account.

Facts:

• For Assessment Year 2020-21, the assessee (a HUF and proprietor of a pharma company) filed its return declaring income of Rs. 85.71 lakhs.
• The CPC processed the return under Section 143(1) and significantly enhanced the income to Rs. 5.09 crores, resulting in a demand of Rs. 2.13 crores.
• A major part of this adjustment was an addition of Rs. 4.20 crores. The CPC treated this amount, which was disclosed as a contingent liability under clause 21(g) of the tax audit report, as if it had been debited to the profit and loss account.
• The Commissioner (Appeals) noted that this amount was not actually debited to the profit and loss account. The disclosure in the audit report was solely for informational purposes.
• A revised tax audit report and auditor’s certificate corroborated the assessee’s claim that the amount was only disclosed as a contingent liability and not debited.

Decision I:

The court held in favor of the assessee. It ruled 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. The court reiterated that 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 a loss claimed without a required return. The adjustment made by the CPC in this case did not fall under any of these categories. Therefore, the adjustment made by the CPC under Section 143(1)(a) was erroneous and was rightly deleted by the Commissioner (Appeals).

Key Takeaways I:

• Limited Scope of Section 143(1)(a) Adjustments: Section 143(1)(a) permits only “prima facie” adjustments. These are strictly limited to:
  • Arithmetical errors in the return.
  • An incorrect claim, if such incorrectness is apparent from any information in the return.
  • Disallowance of loss carried forward or depreciation claimed if the return was furnished beyond the prescribed due date.
  • Disallowance of expenditure indicated in the audit report but not taken into account in computing total income.
• Contingent Liability Not Debited: A contingent liability is a potential obligation, not a definite one. If it has merely been disclosed in the tax audit report for informational purposes (e.g., under clause 21(g) related to contingent liabilities not provided for), and has not been debited to the profit and loss account, it cannot be added back as an “expenditure” under Section 143(1)(a).
• “Apparent from Information in Return”: For an adjustment to be made, the error or incorrect claim must be “apparent” from the face of the return or accompanying documents without requiring detailed scrutiny or interpretation. Adding back a contingent liability not debited requires an interpretation that goes beyond the limited scope of 143(1)(a).
• Role of Revised Tax Audit Report/Auditor’s Certificate: These documents effectively clarify the nature of the disclosure, supporting the assessee’s claim that the amount was not an expense.

II. CPC’s Duplication of Employee’s PF Contribution Disallowance is Erroneous Under Section 143(1)(a).

Issue:

Whether the Centralized Processing Centre (CPC) can make an adjustment under Section 143(1)(a) of the Income-tax Act, 1961, for late payment of employees’ contribution to PF under Section 36(1)(va), when the assessee has already self-disallowed the said amount while computing total income in the return itself.

Facts II:

• For Assessment Year 2020-21, the assessee filed a return declaring certain income.
• The CPC processed the return and raised a demand due to an adjustment on account of the late payment of employees’ contribution to PF.
• Crucially, the assessee had already disallowed this very amount while computing its total income in the return itself, reflecting the late payment.
• The said amount was also added back to the total income under Section 36(1)(va) by the assessee itself (meaning it was included in the taxable income after adjusting for disallowance).
• The CPC’s intimation, however, showed a duplication of this disallowance.
• The Commissioner (Appeals) accepted that the assessee had already disallowed the amount in the return, and the CPC’s disallowance resulted in a duplication.

Decision II:

The court held in favor of the assessee. It found that the Commissioner (Appeals)’s finding was based on a correct appreciation of facts, supported by a revised tax audit report and auditor’s certificate. Therefore, the adjustment made by the CPC under Section 143(1)(a) was erroneous and was rightly deleted by the Commissioner (Appeals).

Key Takeaways II:

• Section 36(1)(va) – Employee’s Contribution: This section allows deduction of employees’ contribution to welfare funds (like PF) if paid by the due date. Late payment leads to disallowance.
• Limited Scope of 143(1)(a) – Duplication Check: The CPC’s power under Section 143(1)(a) is restricted to making “apparent” adjustments. If the assessee has already made a disallowance in the return (by adding back an item), and the CPC makes the same disallowance again, it constitutes an “apparent” duplication that falls outside the permissible scope of Section 143(1)(a) adjustments.
• No Enhancement for Already Disallowed Amounts: The purpose of 143(1)(a) is to correct simple errors or apparent non-compliances, not to increase income by duplicating adjustments that the taxpayer has already correctly made.
• Importance of Return and Audit Report Data: The initial return, tax audit report, and any revised documents are crucial in demonstrating that the assessee has already correctly dealt with an item. The CPC must verify whether an item has already been accounted for in the income computation.
• Self-Correction by Assessee: If the assessee has self-corrected and disallowed an expense, the CPC should not make a redundant adjustment, as it leads to an inflated demand.
• Erroneous Adjustment: Both adjustments made by the CPC were held to be erroneous as they went beyond the limited scope of “apparent errors” permissible under Section 143(1)(a).