2019 (7) TMI 1589 - AT - Income Tax

Tribunal invalidates Tax Commissioner's order under Section 263, rules in favor of assessee appeal

M/s. Small Industries Development Bank of India Versus Commissioner of Income- Tax-3, Mumbai

M/s. Small Industries Development Bank of India Versus Commissioner of Income- Tax-3, Mumbai - TMI Issues Involved:1. Validity of the order passed under Section 263 of the Income Tax Act.2. Whether the Assessing Officer (AO) erred in allowing the claim for bad debts written off.3. Applicability of the principle of merger under Explanation (c) to Section 263(1).Issue-Wise Detailed Analysis:1. Validity of the Order Passed Under Section 263 of the Income Tax Act:The group of four appeals by the assessee challenges the order passed under Section 263 by the Commissioner of Income Tax (CIT) for assessment years 2007-08 and 2008-09. The assessee contends that the order under Section 263 is void ab initio and bad in law. The CIT revised the assessment order, noting discrepancies in the bad debts claimed by the assessee, particularly focusing on the period before 01.04.2001 when the income was not chargeable to tax. The assessee argued that all conditions under Section 36(1)(vii) r.w.s. 36(2) were met, and the claim was rightly allowed. The CIT, however, held that the AO did not apply his mind and incorrectly restricted the disallowance to Rs. 15.87 crore without considering an additional Rs. 17.91 crore, thus making the order erroneous and prejudicial to the revenue's interest.2. Whether the Assessing Officer (AO) Erred in Allowing the Claim for Bad Debts Written Off:The AO, while completing the assessment under Section 143(3), made a detailed investigation and raised sufficient inquiries regarding the bad debts. The AO disallowed Rs. 15.87 crore of bad debts, which pertained to the period before 01.04.2001. The assessee argued that the AO had applied his mind and allowed the claim after thorough examination. The CIT, however, found that the AO did not verify the allowability of bad debts under clause (c) of Section 36(1)(vii)(a) and directed a fresh assessment after detailed verification.3. Applicability of the Principle of Merger Under Explanation (c) to Section 263(1):The assessee argued that the assessment order had merged with the CIT(A)'s order, precluding the CIT from revising the assessment under Section 263. The CIT(A) had already considered the bad debts claim, and thus, the revisional jurisdiction under Section 263 could not be invoked. The Tribunal agreed, stating that the CIT failed to address the objection regarding the pending appeal before the CIT(A). The Tribunal cited several judgments, including CIT vs. Paul Brothers and CIT Vs K Sera Sera Productions Ltd, emphasizing that the CIT's powers under Section 263 do not extend to matters already considered and decided in an appeal.Conclusion:The Tribunal quashed the order passed by the CIT under Section 263, finding it invalid as it failed to address the pending appeal before the CIT(A) and did not meet the twin conditions of being erroneous and prejudicial to the revenue's interest. Consequently, the subsequent actions taken by the lower authorities in order to give effect to the quashed order were also deemed invalid. The appeals by the assessee were allowed, and the orders passed by the AO in giving effect to the CIT's order were declared invalid.