2003 (10) TMI 35 - HC - Income Tax

Court affirms tax assessment decision based on amended provisions

The High Court upheld the decision of the Income-tax Appellate Tribunal, dismissing the appeal challenging the invocation of section 263 of the Income-tax ... Assessee had written off bad debts by debiting the profit and loss account but instead of making a corresponding credit entry in the account of the debtor, he had made an entry under the head 'Provisions for doubtful debts', and this was approved by the Assessing Officer – Held that the assessee did not comply with the provision of section 36(1)(vii) which had been amended with retrospective effect from April 1, 1989. Thus there is no force in this appeal and it is dismissed - Commissioner of. Income-tax hence rightly issued a notice under section 263 as according to him the assessee while debiting the profit and loss account has not given the necessary credit in the account of the party - we may mention that under section 263 of the Income-tax Act, the Commissioner of Income-tax can correct both errors of fact and errors of law. Issues:1. Challenge to the judgment of the Income-tax Appellate Tribunal.2. Invocation of provisions of section 263 of the Income-tax Act.3. Compliance with section 36(1)(vii) regarding bad debts.Analysis:1. The appeal under section 260A of the Income-tax Act challenged the judgment of the Income-tax Appellate Tribunal. The appellant, a company registered under the Indian Companies Act, contested the Commissioner of Income-tax's decision to invoke section 263 of the Income-tax Act. The Tribunal dismissed the appeal, leading to the current challenge before the High Court.2. The Commissioner of Income-tax invoked section 263 based on two primary reasons. Firstly, the Commissioner believed that the profits under section 80-I should have been computed after deducting profits under section 80HH, which the Assessing Officer failed to do. Secondly, the Assessing Officer did not disallow and add back the provision for bad debts amounting to Rs. 11,98,000. The Commissioner found these errors prejudicial to the interests of the Revenue, justifying the invocation of section 263.3. The High Court analyzed the compliance with section 36(1)(vii) concerning bad debts. The court referred to the Explanation inserted by the Finance Act, 2001, which clarified that provisions for bad and doubtful debts made in the accounts of the assessee should not be considered as bad debts for the purpose of section 36(1)(vii). The court noted that the assessee had written off bad debts in the profit and loss account but failed to make a corresponding credit entry in the debtor's account, instead recording it under 'Provisions for doubtful debts.' This non-compliance with the amended provisions of section 36 led the Commissioner to issue a notice under section 263.4. The High Court, citing a Supreme Court case, emphasized the retrospective effect of amendments to tax laws. In this case, the court held that the assessee's failure to comply with the amended provisions of section 36(1)(vii) from April 1, 1989, rendered the appeal baseless. The court dismissed the appeal, highlighting the importance of adhering to tax laws and regulations.5. Lastly, the High Court clarified the Commissioner of Income-tax's authority under section 263 to correct errors of fact and law, emphasizing that the jurisdiction is not limited to correcting legal errors only. The court reiterated that the impugned order must be prejudicial to the Revenue for the Commissioner to intervene.