2022 (4) TMI 536 - AT - Income Tax

Addition in respect of write off on deferred sales treated as contingent liability on account of bank guarantee - AO held that this amount in question was nothing but a contingent liability based on Auditors observations given in Form 3CD - HELD THAT - We find that the AO and the CIT(A) both have proceeded with wrong observations of the tax auditor given in the TAR (Tax Audit Report), which when corroborated with the claim made in the audited financial statement deserves to be deleted. The correct position on the claim made by the assessee is reflected in the audited financial statement forming part of the paper book, wherein it has claimed it as write off in respect of deferred sales relating to retention money on the invoices raised by it on various electricity companies. It is not the case of claim of contingent liability debited to the P L account as held by the authorities below. In view of appraisal of correct facts as oozing out from the material on record, we are inclined to delete the disallowance made by the ld. AO and confirmed by the ld. CIT(A). Accordingly, the appeal of assessee is allowed.

Summary

Issues:
Confirmation of addition of ?6,70,929 in respect of write off on deferred sales treated as contingent liability.

Analysis:
The appeal arose from an order by the Commissioner of Income-tax (Appeals) concerning the addition of ?6,70,929 in the assessment year 2012-13. The Assessing Officer disallowed the claim as a contingent liability based on the Tax Audit Report's observation. The assessee contended that the amount was actually a write-off on deferred sales, not a contingent liability. The audited financial statement supported this claim, showing the amount as a write-off in respect of 10% retention money on invoices raised by the assessee on various electricity companies.

The Tribunal found that both the Assessing Officer and the Commissioner of Income-tax (Appeals) had erred in relying solely on the Tax Audit Report's observation without considering the details provided by the assessee in the audited financial statement. The correct position was established from the financial statements, indicating that the amount in question was indeed a write-off related to deferred sales and not a contingent liability as presumed by the authorities. Therefore, the Tribunal decided to delete the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals), allowing the assessee's appeal.

In conclusion, the Tribunal held that the disallowance of the claim as a contingent liability was incorrect, as the audited financial statement clearly showed it as a write-off on deferred sales. The Tribunal, after a thorough review of the facts and records, concluded that the assessee's claim was valid and allowed the appeal, thereby overturning the decision of the lower authorities.