2022 (11) TMI 716 - AT - Income Tax

Disallowance u/s 43B - leave encashment - Disallowance made on the basis of observation of tax audit report u/s 44AB of the Act and the assessee fail to give proper explanation on that count - HELD THAT It is found that the Ld. A.O has not raised the query on the said issue but suo-moto disallowed the claim of the expenditure. In our opinion, it has to be seen whether the assessee has paid this expenditure before the due date of filing of the return u/s 139(1) of the Act. If the same is paid within the due date filing of return there cannot be any disallowance on this count. AO cannot make addition only based on the figure picked from the Tax Audit Report which is contrary to the existing facts. Since in the present case, the actual disallowance has been added back to the computation by the assessee, we are of the opinion that, the addition/disallowance made u/s 43B is deserves to be deleted. Accordingly, we allow the Ground No. 1 of the assessee. Disallowance u/s 40A(7) - amount of provision for gratuity debited in the profit and loss account and which was credited to the provision of gratuity account - HELD THAT - We find force in the contention of the Ld. Counsel for the assessee that the Ld. AO as well as Ld. CIT(A) could not understand the tax audit report and made the addition which has been confirmed by the Ld. CIT(A). The Lower Authorities have disallowed total closing balance at the end of the previous year (i.e. 31/03/2015) u/s 40A(7) of the Act without understanding the tax audit report in proper sense. A.O. and the CIT(A) ought to have appreciated the tax audit report in proper sense the computation. The Lower Authorities ought to have appreciated the fact that the amount of provision for gratuity debited in the profit and loss account and which was credited to the provision of the gratuity account is only Rs. 24,27,081/- and should not have made disallowance u/s 40A(7) of the Act. Therefore, the Ground of the Assessee is deserves to be allowed.

Summary

Issues:
1. Disallowance under section 43B
2. Disallowance under section 40A(7)

Issue 1: Disallowance under section 43B
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2015-16. The assessee raised grounds of appeal regarding disallowances under sections 43B and 40A(7). The initial assessment order made disallowances under section 14A, section 43B, and section 40A(7). The CIT(A) partly allowed the appeal, upholding the disallowances under section 43B and section 40A(7). The appellant contended that the disallowances were unjust and arbitrary, emphasizing discrepancies between the tax audit report figures and actual payments made. The ITAT Delhi analyzed the balance sheet, profit and loss account, and tax audit report to determine the actual disallowable amount. It was observed that the AO and CIT(A) relied solely on the tax audit report figures without proper verification. The ITAT held that the disallowance made under section 43B was unjustified as the actual disallowable amount had been correctly added back by the assessee, leading to the decision to delete the disallowance under section 43B.

Issue 2: Disallowance under section 40A(7)
Regarding the provision for gratuity, the appellant argued that the disallowance made by the AO under section 40A(7) was erroneous. The appellant provided detailed accounts showing the actual amounts debited and credited, highlighting that the disallowance was based on incorrect interpretations of the tax audit report. The ITAT examined the ledger accounts and computations presented by the appellant, concluding that the disallowance under section 40A(7) was unwarranted. The ITAT emphasized that the authorities failed to comprehend the tax audit report accurately, leading to an incorrect disallowance. Consequently, the ITAT allowed the appellant's appeal on the grounds of the provision for gratuity under section 40A(7).

General Grounds:
Grounds 3 to 6, being general in nature, were not specifically adjudicated upon, and the appeal of the assessee was allowed in the final judgment pronounced on November 2, 2022, by the ITAT Delhi.