2025 (5) TMI 2087 - AT - Income Tax

Addition of Liabilities written back and an amount double addition made on account of the ICDS adjustment - submission of assessee is that during the year under consideration the company had credited as provision of liability no longer required written back as reflected in the note no. 24 other income of the audited financial statement filed by the assessee. HELD THAT - Going over the chart as well as submission made by the assessee we are of the view that CPC had erroneously made adjustment u/s 41(1)(a) of the Act without appreciating the fact that the same was already credited and offered to tax in the profit and loss account. We find substance in the argument of assessee is that impugned addition amounted to double addition. Accordingly the appeal of the assessee is hereby allowed and addition as liability returned back is hereby directed to be deleted. Appeal filed by the assessee is allowed.

Summary

The core legal question considered in this appeal is whether the addition of Rs. 5,51,81,527/- made by the Assessing Officer (AO) under section 41(1)(a) of the Income Tax Act, on account of liabilities written back, constitutes a double addition when the said amount has already been credited and offered to tax in the profit and loss account of the assessee for the relevant assessment year.

The Tribunal's analysis focuses exclusively on this issue of double taxation arising from the addition of liabilities written back, specifically whether the AO's addition under section 41(1)(a) was justified or erroneous.

Section 41(1)(a) of the Income Tax Act provides that if any amount previously allowed as a deduction or expenditure is subsequently recovered or found to be no longer payable, such amount shall be deemed to be the income of the assessee in the year of recovery or reversal. The legal framework thus requires that any liability written back, which had earlier been claimed as an expense or deduction, must be added back to income in the year it is reversed.

In this case, the AO/CPC had made an addition of Rs. 5,51,81,527/- on account of liabilities written back under section 41(1)(a). The assessee challenged this addition on the ground that the said amount had already been credited to the profit and loss account as "other income" and offered to tax, thus the AO's addition resulted in double taxation.

The Tribunal examined the audited financial statements and the detailed breakup of the amount credited as "other income" under note no. 24, which disclosed a total of Rs. 6,02,76,922/- as provision for liabilities no longer required written back. The impugned amount of Rs. 5,51,81,527/- formed part of this total and was specifically reflected under various heads such as credit note reversal, miscellaneous liabilities, liability for leave travel concession, wages, transit fees, and ex-gratia, among others.

Further scrutiny of the profit and loss account schedules showed that these amounts were included in the total income and thus were already subjected to tax. The tax audit report corroborated this position by listing these amounts under section 41(1)(a) as income chargeable to tax, indicating that the assessee had complied with the statutory requirement of offering the written back liabilities to tax in the relevant year.

The Tribunal noted that the AO/CPC failed to appreciate this fact and erroneously made a further addition of Rs. 5,51,81,527/- despite the amounts being already reflected in the profit and loss account and offered to tax. This resulted in a double addition of the same income, which is impermissible under the law.

The Tribunal considered the submissions of the assessee's counsel, who had placed reliance on the audited financial statements, the detailed breakup chart, and the tax audit report to demonstrate that the impugned sum was not liable for a fresh addition. The Revenue's argument supporting the AO's order was considered but found unpersuasive due to the clear documentary evidence establishing prior inclusion of the amount in income.

Applying the legal provisions to the facts, the Tribunal concluded that the addition under section 41(1)(a) by the AO was unwarranted and amounted to double taxation. The Tribunal held that once the liabilities written back are credited to the profit and loss account and offered to tax, no further addition under section 41(1)(a) is justified for the same amount.

Accordingly, the Tribunal allowed the appeal and directed deletion of the addition of Rs. 5,51,81,527/- made by the AO on account of liabilities written back.

The significant holding of the Tribunal can be summarized as follows:

"We find substance in the argument of the Ld. Counsel of the assessee is that impugned addition amounted to double addition. Accordingly, the appeal of the assessee is hereby allowed and addition of Rs. 5,51,81,527/- as liability returned back is hereby directed to be deleted."

This decision establishes the core principle that an addition under section 41(1)(a) of the Income Tax Act for liabilities written back cannot be made if the same amount has already been credited to the profit and loss account and offered to tax in the relevant assessment year. It reinforces the prohibition against double taxation of the same income and underscores the necessity for the AO to carefully verify the accounts and tax returns before making such additions.