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Issues involved:
1. Legality of intimation under section 143(1)(a) and its back-dating. 2. Disallowance of claim of late delivery damages and penal interest. 3. Treatment of liabilities as contingent liabilities and disallowance under section 143(1)(a). Issue 1: Legality of intimation under section 143(1)(a) and its back-dating: The appellant challenged the legality of the intimation under section 143(1)(a) claiming it was back-dated to precede the notice under section 143(2). The appellant argued that the back-dating was to show compliance with the statutory timeline. However, the Department contended that the notice under section 143(2) had a stricter timeline for service compared to the intimation under section 143(1)(a). The Tribunal referred to a judgment by the M.P. High Court, which held that issuing an intimation under section 143(1)(a) after the notice under section 143(2) is not in line with the law. As the notice under section 143(1)(a) was issued before the notice under section 143(2), the Tribunal found no fault in its issuance and rejected the appellant's claim of back-dating without substantial evidence. Issue 2: Disallowance of claim of late delivery damages and penal interest: The appellant contested the disallowance of late delivery damages and penal interest under section 143(1)(a). The appellant argued that these liabilities had accrued during the previous year based on the mercantile system of accounting, even though they were not reflected in the accounts. The AO treated these liabilities as contingent liabilities due to management's expectation of recovery or waiver. The CIT(A) upheld the disallowance, citing auditors' notes and management's opinion. However, the Tribunal disagreed, emphasizing that liabilities can accrue even without accounting entries, especially under the mercantile system. The Tribunal noted that the real nature of liabilities can only be determined through a detailed assessment considering contractual terms, correspondence with customers/banks, and the right to recovery. As such, the Tribunal held that the disallowance under prima facie adjustment was improper and ordered the additions to be deleted. Issue 3: Treatment of liabilities as contingent liabilities and disallowance under section 143(1)(a): The Department argued that the appellant did not make provisions for late delivery damages and penal interest in the accounts, indicating a lack of admission of liability. The Department supported the disallowance under section 143(1)(a) as contingent liabilities. However, the Tribunal disagreed, stating that the liabilities had indeed accrued during the year, even though not accounted for, based on contractual obligations. The Tribunal emphasized that mere expectations of recovery or waiver should not classify accrued liabilities as contingent. The Tribunal highlighted the need for a thorough assessment to determine the nature of liabilities, considering all relevant factors. Consequently, the Tribunal concluded that the adjustments made by the AO were not appropriate under section 143(1)(a) and ordered the disallowances to be deleted. In conclusion, the Tribunal allowed the appeal, overturning the disallowances of late delivery damages and penal interest made under section 143(1)(a). The judgment emphasized the importance of assessing accrued liabilities beyond accounting entries and considering contractual obligations to determine the true nature of liabilities.
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