2025 (11) TMI 1478 - AT - Income Tax

Appeal succeeds against double disallowance under sections 37(1), 143(1)(a) and invalid 43B adjustment for provisions

ITAT Hyderabad-AT allowed the assessee's appeal on both issues. On the disallowance under s. 37(1), it held that since the assessee had already disallowed ... Disallowance u/s 37(1) - intimation issued by CPC u/s 143(1)(a) - HELD THAT:- As evident that the assessee had on its own disallowed the said sum in its computation of income while filing the return. Therefore, the adjustment made by CPC under section 143(1)(a) of the Act has led to double disallowance, which is not sustainable. Accordingly, the addition is directed to be deleted Disallowance u/s 43B - provision was standing in the books of the demerged company - HELD THAT:- We find that the assessee has adequately demonstrated through Note No. 29 of the audited accounts that the provision stood in the books of the demerged company as on 01.04.2018 and was transferred pursuant to the scheme of demerger. No fresh provision was created during AY 2019-20. The adjustment under section 43B of the Act presupposes that a provision is created in the relevant year without actual payment. Since the provision in question pertains to earlier years, no addition can be sustained in the present year. We therefore hold that the disallowance under section 43B of the Act is unsustainable and the same is deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether an adjustment under section 143(1)(a) resulting in a disallowance already reflected as an add-back in the assessee's own computation (loss on sale/discard of fixed assets) amounts to an unsustainable double disallowance. 2. Whether a provision for leave encashment / similar employee liability transferred pursuant to an NCLT-approved scheme of demerger (i.e., a pre-existing provision standing in the books of the demerged company as on the appointed date) can be disallowed under section 43B in the year of transfer where no fresh provision was created in that year. 3. Whether the broader contention that adjustments made by CPC under section 143(1)(a) are beyond the permissible scope of that provision required adjudication in view of deletions on merits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Double disallowance of loss on sale/discard of fixed assets (disallowance under section 37(1) repeated by CPC) Legal framework: Section 37(1) permits deduction of business expenditures not falling under specific heads; assessments/intimations under section 143(1)(a) may reflect adjustments made by CPC. Taxable income is determined by the computation filed with the return; add-backs in that computation reflect the assessee's concession/non-allowance. Precedent Treatment: No specific judicial precedents were invoked by the Tribunal or parties in the judgment. The Tribunal proceeded on record evidence and standard principles that a tax adjustment should not effectuate double disallowance. Interpretation and reasoning: The Tribunal examined the assessee's computation of income (paper-book) and observed that the sum of Rs. 13,22,458 representing 'loss on sale/discard of fixed assets' had already been disallowed by the assessee (i.e., added back) in the computation accompanying the return. CPC nonetheless made an identical disallowance under section 37(1) in the intimation, producing a duplicate reduction of the taxable income. The Tribunal treated the computation as part of the assessee's return and concluded that there was no justification for a second addition by CPC, which resulted in an impermissible double disallowance. Ratio vs. Obiter: Ratio - where an assessee's return/computation already discloses an add-back/disallowance of a particular amount, a like-amount addition by CPC in an intimation under section 143(1)(a) that duplicates the same disallowance is not sustainable; such duplication must be deleted. Obiter - none significant on this point beyond the factual application. Conclusion: The Tribunal deleted the addition of Rs. 13,22,458 under section 37(1) as resulting in double disallowance. Issue 2 - Disallowance under section 43B of a provision transferred on demerger (provision for leave encashment / similar liability of Rs. 10,41,545) Legal framework: Section 43B concerns allowable deductions only on actual payment of certain specified items and disallows deduction if a provision is created in the relevant year but not paid in that year; general tax principle is that a deduction claim may be impacted by timing and the year of creation/payment of provisions. Demerger effected pursuant to an NCLT-approved scheme results in transfer of assets and liabilities as per the scheme; the appointed date determines which year a particular provision/ liability arose. Precedent Treatment: The judgment does not cite binding authority distinguishing transferred provisions; the Tribunal relied on documentary evidence (Note No.29 of audited accounts) to determine factual position and then applied statutory logic to section 43B. Interpretation and reasoning: The Tribunal examined Note No.29 of the audited financial statements and concluded that the provision of Rs. 10,41,545 pre-existed in the books of the demerged company as on 01.04.2018 and was transferred to the assessee pursuant to the demerger. No fresh provision was created by the assessee in AY 2019-20. Since section 43B is engaged where a provision is created in the relevant year and not paid (thus attracting disallowance), a provision that relates to earlier years and has only been carried forward/ transferred under a demerger cannot be disallowed under section 43B in the year of transfer. The Tribunal treated the audited note as adequate demonstration of the provenance and vintage of the provision and found the addition unsustainable on that basis. Ratio vs. Obiter: Ratio - a provision standing in the books of a demerged entity as at the appointed date and transferred pursuant to an NCLT-approved scheme, which was not newly created in the year under assessment, is not amenable to disallowance under section 43B in the year of transfer; documentary evidence showing the provision's pre-existence will negate the premise for a section 43B addition. Obiter - the Tribunal did not explore broader principles of corporate restructuring beyond application to the facts. Conclusion: The Tribunal deleted the addition of Rs. 10,41,545 under section 43B, holding it unsustainable because the provision related to earlier years and was merely transferred under the demerger. Issue 3 - Validity and scope of CPC adjustments under section 143(1)(a) Legal framework: Section 143(1)(a) permits processing of returns and issuance of intimation reflecting certain adjustments; the scope and limits of CPC's power to make substantive disallowances were raised as a legal issue by the assessee. Precedent Treatment: The parties raised the point; the Tribunal considered the legal contention but did not decide it on merits because the underlying adjustments were deleted on factual grounds. Interpretation and reasoning: The assessee argued that detailed factual verifications required for disallowance of profit & loss items fall outside the limited scope of adjustments permissible under section 143(1)(a). The Tribunal observed that since both contested additions were deleted on their factual merits (double disallowance and pre-existing transferred provision), the broader legal contention regarding the scope of section 143(1)(a) became academic in the present appeal. Ratio vs. Obiter: Obiter - no adjudication on the legal scope of CPC's powers under section 143(1)(a) was made; the Tribunal explicitly refrained from deciding that legal issue as academic in view of the merits decision. The statement that the point is academic is obiter and not binding precedent. Conclusion: The Tribunal declined to adjudicate the legal ground on the scope of section 143(1)(a) because deletions on merits rendered the question academic. Additional procedural/contentions addressed Natural justice/adequacy of reasoning: The assessee contended that the CIT(A) failed to adjudicate submissions in a reasoned manner and that adjustments were mechanically confirmed. The Tribunal's disposal on the merits (deletions) implicitly resolves the grievance as to those specific additions; no separate finding on breach of natural justice or mechanical decision-making beyond the merits analysis was recorded. Remand alternative argued by Revenue: The Departmental Representative sought remand for verification. The Tribunal, having found documentary evidence on record adequate for both contested adjustments (computation and audited note), resolved the issues on the record and did not remand. Final Disposition The Tribunal allowed the appeal by deleting the two impugned additions - Rs. 13,22,458 under section 37(1) (double disallowance) and Rs. 10,41,545 under section 43B (transferred pre-existing provision) - and did not decide the broader legal challenge to the scope of CPC adjustments under section 143(1)(a) as it was rendered academic.