No addition for contingent liability stated in tax audit report but not debited to P&L

Addition deleted for contingent liability stated in tax audit report but which was not debited to the P&L Account

In a recent judgment, ITAT Kolkata upheld the order of CIT(A) deleting the addition made by CPC for contingent liability stated in tax audit report but which was not debited to the P&L Account. Contingent Liability has nothing to do with the historical accounting of the assessee which is reflected in the books of account.

ABCAUS Case Law Citation:
4507 (2025) (04) abcaus.in ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition made by CPC Bengaluru vide intimation order passed u/s. 143(1) of the Income Tax Act, 1961 (the Act) for contingent liability stated in tax audit report but which was not debited to the Profit & Loss Account.

The respondent assessee was a Private Limited Company. The assessee filed the return of income declaring total income at nil which was processed u/s 143(1) of the Act. In the intimation u/s 143(1), the CPC, Bengaluru made an addition u/s 37 of the Act on account of contingent liability shown at Sl. No. 21B in the audit report in Form No. 3CD.

In appellate proceedings, the CIT(A) observed that the perusal of the Schedules to the Balance Sheet reflecting the liabilities of the appellant, did not include the contingent liabilities. In fact, the Auditor in the notes to accounts of the audited accounts had certified at the note no 31 that the contingent liabilities had not been recorded in the book of accounts. The examination of the Profit and Loss account also confirmed that amount of contingent liability had been debited to the profit and Loss account.

The CIT(A) further observed that the assessee had relied on the decisions of ITAT Kolkata and ITAT Delhi in support of its claim that contingent liability which had not been debited to the Profit and Loss account in the relevant assessment year cannot be added u/s 37 of the Act.

The CIT(A) further noted that in the said decisions of the Co-ordinate Benches, the facts of the cases were identical to the case in hand case and hence the decision were applicable.

In view of the above the CIT(A) held that the action of the AO, CPC in adding the contingent liability without verifying the Profit and Loss account and Balance Sheet of the appellant was not justified. Hence the AO was directed to delete the addition of contingent liability.

The Tribunal after hearing both the parties opined that there was no infirmity in the order of the CIT(A) who after appreciating the facts correctly passed a very reasoned and detailed order and deleted the same. 

The Tribunal also examined the P&L Account and audited Balance Sheet of the assessee and came to the conclusion that no such amount had been debited in the P&L Account. 

The Tribunal opined that the contingent liability is only a responsibility casts on the auditor of the assessee to state the estimated amount of liability which the assessee may or may not incur towards the commitment in future, therefore, that had nothing to do with the historical accounting of the assessee as reflected in the books of account of the assessee. 

Accordingly, the appeal of the Revenue was dismissed.

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