The assessee company filed an appeal against the order passed by the Additional/Joint Commissioner of Income Tax (Appeals) for Assessment Year 2020–21, whereby adjustments made through intimation under section 143(1) of the Income-tax Act, 1961 were upheld. The adjustments resulted in enhancement of the returned income from ₹52,32,430 to ₹2,30,50,770.

The adjustments comprised two major components: (i) an addition of ₹1,75,00,000 on account of bank guarantee reported as a contingent liability in column 21(g) of Form 3CD, and (ii) disallowance of ₹3,18,342 under section 40A(3) in respect of electricity expenses paid in cash.

With regard to the bank guarantee, the Commissioner (Appeals) upheld the adjustment on the basis that the amount was reported by the tax auditor in Form 3CD as a contingent liability debited to the profit and loss account. Before the Tribunal, the assessee contended that the reporting in Form 3CD was erroneous and that a revised tax audit report had been prepared to rectify the mistake. It was further submitted that the bank guarantee was not claimed as an expenditure and was purely contingent in nature.

The Tribunal observed that the adjustment under section 143(1) was made solely on the basis of the tax audit report filed by the assessee, without examination of the underlying facts. It was noted that determination of the true nature of the bank guarantee required verification of accounting entries, nature of liability, and linkage with earlier or subsequent years. The Tribunal held that such issues could not be adjudicated without factual verification at the assessment level.

As regards the disallowance under section 40A(3), the assessee submitted that the electricity expenses were paid in cash due to lack of banking facilities in nearby areas and that the payments were made to a State Government undertaking, falling within the exceptions provided under Rule 6DD. The Tribunal found that the record lacked clarity on why certain electricity payments were made in cash while others were made through banking channels, and whether the payments pertained to different locations with varying access to banking facilities.

Considering the above, the Tribunal held that both issues required proper verification and examination of facts. Accordingly, the Tribunal set aside the appellate order and remanded the issues relating to the bank guarantee adjustment and the disallowance under section 40A(3) to the file of the Assessing Officer. The Assessing Officer was directed to pass a fresh order in accordance with law after providing reasonable opportunity of being heard to the assessee and considering all relevant material.

The appeal was thus partly allowed for statistical purposes.

Source Link- https://itat.gov.in/public/files/upload/1767853297-aP4Rhk-1-TO.pdf

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