2020 (10) TMI 1011 - AT - Income Tax

Tribunal quashes PCIT's order on book profit & bad debts but upholds referral to TPO.

Bank of India Versus JCIT (OSD) – 2 (1) (1), Mumbai

The Tribunal quashed the PCIT's order under Section 263 regarding adjustments for computation of book profit under Section 115JB and deduction of bad ... Revision u/s 263 - Disallowance under Section 14A of the Act r.w.r. 8D and applicability of Section 115JB - In computing the book profits u/s 115JB profits of foreign branches was wrongly excluded and certain provisions were omitted to be added back, deduction u/s 36(1)(vii) in respect of bad debts written off was incorrectly allowed and disallowance made as per Rule 8D was not considered in computing the book profits - HELD THAT:- Issue of applicability of book profits to the nationalised banks was agitated by the assessee before the CIT(A) and CIT(A) has already passed an order on 21.06.2017 in favour of the assessee that the provisions of Section 115JB of the Act does not apply to the assessee - in the show cause notice, similar issue was raised by ld. PCIT and passed an order on 27.03.2018, therefore, in our considered view, ld. PCIT cannot invoke the provisions of Section 263 of the Act in this matter. With regard to issue of deduction claimed under Section 36(1)(vii) and 36(1)(viia) of the Act, assessee has filed detailed submissions before the Assessing Officer and the Assessing Officer has considered the submissions even though he has not discussed it in his order under Section 143(3) -material submitted before us clearly indicate that assessee has made elaborate submissions on this issue and the Assessing Officer has satisfied himself that assessee is eligible to claim deduction under Section 36(1)(vii) and 36(1)(viia) and, therefore, in our considered view, ld. PCIT cannot form another view on the same issue in which the Assessing Officer has already satisfied himself and passed an order which clearly indicates that the Assessing Officer has verified and investigated the matter in detail. Even in this issue, the provisions of Section 263 of the Act cannot be invoked. With regard to the third issue raised in the show cause notice, i.e. disallowance under Rule 8D which was not considered in computing the book profits, we notice that the ld. PCIT himself dropped this issue and has not directed any revision to the Assessing Officer. Issues raised in the show cause notice issued under Section 263 of the Act do not survive. Therefore, in our considered view, the order passed under Section 263 of the Act deserves to be quashed. Large international transactions during this year - AO failed to refer this case to the TPO - In this case,the transactions undertaken by the assessee are domestic as well as international transactions and the issues involving domestic and corporate issues were already verified by the Assessing Officer and also the order of ld. CIT(A) merged with the assessment order, therefore, in our considered view, the Assessing Officer should have referred the international transactions to the TPO to verify the international transactions whether the transaction are at arm’s length. Since the Assessing Officer failed to follow the due procedure, and the fact that the Revenue Department created specialized cell to deal with the complicated and complex issues arising out of transfer pricing mechanism, the assessment by this special officer (TPO) is an additional assessment of ‘ALP’ of international transactions and it can be assessed separately without disturbing the regular assessment carried out by Assessing Officer under Section 143(3) - we are retaining the directions of ld. PCIT in his order relevant only to reference to TPO with a further direction to the Assessing Officer to refer the case to TPO and any adjustment recommended by the TPO alone may be assessed separately and merge the same in the draft assessment order if there is any adjustment to be made, it may be assessed to tax as per law. Appeal of the assessee is partly allowed. Issues Involved:1. Adjustments for computation of book profit under Section 115JB.2. Disallowance under Section 14A in accordance with Rule 8D.3. Deduction of bad debts written off under Section 36(1)(vii).4. Non-reference of the case to the Transfer Pricing Officer (TPO) under Section 92CA.Detailed Analysis:1. Adjustments for Computation of Book Profit under Section 115JB:The Principal Commissioner of Income Tax (PCIT) observed that while computing book profit, the reduction of Rs. 813.47 crores towards 'Profit of foreign Branches' was claimed. Additionally, various provisions and contingencies amounting to Rs. 5693.63 crores were debited, but only Rs. 1232.08 crores were added back. The PCIT noted that adjustments as per Explanation 1 to Section 115JB were not carried out, leading to underassessment of book profit by Rs. 1438.76 crores. The PCIT directed that these adjustments be made to the book profit computation.2. Disallowance under Section 14A in Accordance with Rule 8D:The PCIT observed that the assessee had claimed exempt income of Rs. 65.47 crores, and the Assessing Officer (AO) made a disallowance under Section 14A at 1% of the exempt income. The PCIT noted that Rule 8D was not applied, which was mandatory post its introduction. However, the PCIT did not direct any revision on this issue in the final order.3. Deduction of Bad Debts Written Off under Section 36(1)(vii):The PCIT noted that the AO allowed a deduction of Rs. 3834.28 crores for bad debts written off without reducing the opening credit balance of Rs. 2039.27 crores in the provision for bad and doubtful debts account. The PCIT held that the actual deduction allowable should be Rs. 1759.01 crores, rendering the assessment order erroneous and prejudicial to the interests of the Revenue. The PCIT directed the AO to allow the deduction as per the correct computation.4. Non-Reference of the Case to the Transfer Pricing Officer (TPO) under Section 92CA:The PCIT observed that the case was selected for scrutiny due to large international transactions and specific domestic transactions, which required mandatory reference to the TPO. The AO failed to make this reference, leading to an assessment without proper inquiry. The PCIT held that this failure rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The PCIT directed the AO to refer the case to the TPO for determination of arm’s length price.Tribunal's Findings:1. Adjustments for Computation of Book Profit under Section 115JB:The Tribunal noted that the issue of applicability of Section 115JB to the assessee, a nationalized bank, was already decided by the CIT(A) in favor of the assessee. Thus, the PCIT could not invoke Section 263 on this matter, as the assessment order had merged with the CIT(A)'s order.2. Disallowance under Section 14A in Accordance with Rule 8D:The Tribunal observed that the PCIT himself dropped this issue and did not direct any revision. Therefore, this issue did not survive.3. Deduction of Bad Debts Written Off under Section 36(1)(vii):The Tribunal found that the AO had considered detailed submissions from the assessee and allowed the deduction after proper inquiry. The Tribunal held that the PCIT could not form another view on the same issue where the AO had already satisfied himself. Thus, the invocation of Section 263 by the PCIT on this issue was not justified.4. Non-Reference of the Case to the Transfer Pricing Officer (TPO) under Section 92CA:The Tribunal agreed with the PCIT that the failure to refer the case to the TPO was against the provisions of Section 92CA and CBDT instructions. The Tribunal upheld the PCIT's direction to refer the case to the TPO for determination of arm’s length price.Conclusion:The Tribunal quashed the PCIT's order under Section 263 on the issues of adjustments for computation of book profit under Section 115JB and deduction of bad debts under Section 36(1)(vii). However, the Tribunal upheld the PCIT's direction to refer the case to the TPO under Section 92CA. The appeal by the assessee was partly allowed.