ITAT Kolkata Deletes Income Tax Additions for Tax Audit Report Error and Covid-Era PF Delay

Background of the Dispute

The Kolkata Bench of the Income Tax Appellate Tribunal in the case of Trinity Tradex Pvt Ltd Vs ITO examined two core issues arising from assessments for Assessment Years 2020-21 and 2021-22:

  1. Addition to income on account of a “contingent liability” of ₹9,41,558, and
  2. Disallowance of ₹80,007 relating to delayed remittance of employees’ contribution to provident fund.

Both appeals were filed by the assessee against separate orders passed by the CIT(A) for the respective assessment years. As the facts and legal issues were substantially the same in both years, the Tribunal disposed of them through a common order, applying its reasoning for one year mutatis mutandis to the other.

Appeals and Issues Considered

The assessee challenged two categories of additions:

  • First addition: ₹9,41,558 brought to tax as a contingent liability based on a disclosure made in the tax audit report.
  • Second addition: ₹80,007 disallowed on the ground of delayed deposit of employees’ contribution to provident fund beyond the due date prescribed under the relevant Provident Fund law.

The CIT(A) had affirmed both additions, prompting the assessee to approach the ITAT.

Issue 1: Addition of ₹9,41,558 on Account of Contingent Liability

Facts Leading to the Addition

  • The assessee filed its return of income accompanied by a tax audit report.
  • In the tax audit report, the tax auditor erroneously showed a Bank of Baroda bank guarantee amounting to ₹9,41,558 as a contingent liability.
  • While processing the return, the CPC Bengaluru treated this figure as an item liable to tax and added ₹9,41,558 to the total income, even though:
    • The amount represented a bank guarantee, and
    • It had not been claimed as an expenditure in the assessee’s profit and loss account.

The Assessing Officer proceeded with this adjustment, and the CIT(A) sustained the addition.

Assessee’s Stand

The assessee argued that:

  • The disclosure in the tax audit report was a purely clerical or reporting mistake on the part of the auditor.
  • The bank guarantee from Bank of Baroda was not an expense and therefore could not be treated as a deductible or disallowable item.
  • As no deduction was claimed in the profit and loss account, there was no basis for adding the amount as income.

The assessee contended that merely because a figure appeared in the tax audit report in a particular column, it did not automatically convert into taxable income, especially when the underlying nature of the item was not in the nature of expenditure or claim.

Tribunal’s Analysis and Decision on Contingent Liability

The Tribunal carefully considered the material and submissions and recorded the following key findings:

  • The figure of ₹9,41,558 related to a bank guarantee issued by Bank of Baroda.
  • This amount had been incorrectly tagged as a contingent liability in the tax audit report due to an error by the tax auditor.
  • The assessee had not claimed this amount as an expense in the profit and loss account.

On these facts, the Tribunal held that:

An amount which is neither debited as an expenditure nor claimed as a deduction in computing income cannot be added back merely due to an erroneous classification in the tax audit report.

Accordingly, the ITAT: