2019 (10) TMI 468 - AT - Income Tax

Tribunal overturns tax authority's order, allows taxpayer appeals for AY 1997-98 & AY 1998-99

The Tribunal set aside the Principal Commissioner of Income Tax's order under section 263, allowing the assessee's appeals for AY 1997-98 and AY 1998-99. ... Revisionary jurisdiction under section 263 of the Income Tax Act - erroneous and prejudicial to the interests of revenue - when two views are possible - limits on exercise of section 263 - deduction for bad debts written off under section 36(1)(vii) - interaction of section 36(1)(vii) with section 36(1)(viia) and section 36(2)(v) - application of Supreme Court decision in Vijaya Bank to write off in accountsRevisionary jurisdiction under section 263 of the Income Tax Act - erroneous and prejudicial to the interests of revenue - when two views are possible - limits on exercise of section 263 - Validity of the Principal Commissioner's invocation of section 263 to set aside the Assessing Officer's order giving effect to the Tribunal's direction. - HELD THAT: - The Tribunal held that the statutory test for exercise of suo motu revision under section 263 requires that the AO's order be shown to be erroneous and prejudicial to the revenue. Following the Supreme Court decisions cited (including Malabar Industrial, Max India, Greenworld Corporation) the power under section 263 cannot be exercised merely because another view is possible or because the Commissioner disagrees with the view adopted by the AO. On the facts the AO gave effect to the Tribunal's direction and adopted a view which was permissible in law; two views were available on the question of allowance of deduction. Consequently the Pr.CIT's conclusion that the AO's order was erroneous and prejudicial was not sustainable and revision under section 263 could not be validly exercised. [Paras 6, 7]Order under section 263 setting aside the AO's order was set aside and the appeals allowed.Deduction for bad debts written off under section 36(1)(vii) - interaction of section 36(1)(vii) with section 36(1)(viia) and section 36(2)(v) - application of Supreme Court decision in Vijaya Bank to write off in accounts - Whether the assessee's treatment of amounts in its accounts falls within the scope of deduction under section 36(1)(vii) and the relevance of sections 36(1)(viia) and 36(2)(v) to that claim. - HELD THAT: - The Tribunal observed that the amendments and the CBDT Circular explain that section 36(1)(vii) provides deduction for debts written off in the accounts and section 36(1)(viia) deals with provisions for bad and doubtful debts, with the proviso to section 36(1)(vii) and section 36(2)(v) preventing double deduction where clause (viia) applies. Applying the precedents, notably Vijaya Bank, the Tribunal found that where an assessee has debited the P&L account and simultaneously reduced loans and advances in the balance sheet, that treatment falls within the principles laid down in Vijaya Bank and qualifies as write off under section 36(1)(vii). The Tribunal nevertheless recognised that the statutory interaction with clause (viia) and section 36(2)(v) is material to computation of allowable deduction where clause (viia) has been availed; those provisions operate to limit allowance to the excess of actual write off over the credit balance in the provision account. On the facts, the assessee had in earlier and later years treated the amount as write off under section 36(1)(vii) and the AO had accepted similar treatment in other assessment years, supporting that a permissible view existed. [Paras 6]The Tribunal held the statutory provisions (including the proviso and section 36(2)(v)) apply in principle and that the assessee's accounting treatment falls within the Vijay a Bank ratio, but the Pr.CIT's exercise of section 263 to reopen the AO's permissible view was not sustainable.Final Conclusion: The order passed by the Principal Commissioner under section 263 for AY 1997-98 was set aside because the Assessing Officer had adopted a view permissible in law (not shown to be unsustainable), and the same result applies mutatis mutandis to AY 1998-99; appeals allowed. Issues Involved:1. Invocation of provisions of section 263 of the Income Tax Act, 1961.2. Adequacy of enquiries and verification by the Assessing Officer (AO) regarding the claim for deduction under section 36(1)(vii).3. Applicability of section 36(2)(v) and proviso to section 36(1)(viia).4. Consideration of Supreme Court judgments in the context of section 263.5. Directions given by the Principal Commissioner of Income Tax (Pr. CIT) regarding deduction under section 36(1)(vii).6. Entitlement of the assessee to the claimed deduction as per Supreme Court judgments.Detailed Analysis:1. Invocation of Provisions of Section 263:The Pr. CIT invoked section 263, deeming the AO's order dated 27 March 2017 as erroneous and prejudicial to the interest of the Revenue. The Pr. CIT observed that the AO allowed an excess deduction of Rs. 127,00,63,672/- under section 36(1)(vii) without considering section 36(2)(v) and the first proviso to section 36(1)(vii).2. Adequacy of Enquiries and Verification by the AO:The assessee argued that the AO made adequate enquiries and verification regarding the deduction under section 36(1)(vii). The AO had examined and allowed similar deductions in previous assessment years (AYs 2011-12 to 2015-16). The Pr. CIT, however, contended that the AO did not make necessary inquiries and verification as required by law, justifying the invocation of section 263.3. Applicability of Section 36(2)(v) and Proviso to Section 36(1)(viia):The assessee claimed that section 36(2)(v) applies only to debts related to advances covered under section 36(1)(viia), which was not claimed by the assessee. The Pr. CIT disagreed, stating that the AO should have allowed the deduction under section 36(1)(vii) only after obtaining the required details and ensuring compliance with section 36(2)(v) and the proviso to section 36(1)(vii).4. Consideration of Supreme Court Judgments:The assessee relied on the Supreme Court judgments in Vijaya Bank v. CIT and Catholic Syrian Bank Ltd. v. CIT, arguing that these decisions supported their claim for deduction under section 36(1)(vii). The Pr. CIT noted that the Vijaya Bank decision did not consider the applicability of section 36(1)(viia) and section 36(2)(v), and thus was not fully applicable.5. Directions Given by the Pr. CIT:The Pr. CIT directed the AO to allow the deduction under section 36(1)(vii) only after obtaining the required details and ensuring that the bad debts written off exceeded the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia). The AO was also instructed to debit the bad debts to the provision account in accordance with section 36(2)(v).6. Entitlement of the Assessee to the Claimed Deduction:The Tribunal found that the assessee had debited the amount to the profit and loss account and reduced it from loans and advances in the balance sheet, fulfilling the conditions laid down in Vijaya Bank. The Tribunal also noted that the AO had consistently allowed similar deductions in previous years, and two views were possible on the matter. Therefore, the Tribunal held that the Pr. CIT's invocation of section 263 was not justified.Conclusion:The Tribunal set aside the Pr. CIT's order under section 263, allowing the assessee's appeals for AY 1997-98 and AY 1998-99. The Tribunal emphasized that when two views are possible, the AO's adoption of one view cannot be deemed erroneous or prejudicial to the interests of the Revenue. The Tribunal's decision was based on the principles established in the Supreme Court judgments and the consistent treatment of similar claims in previous years.