Tribunal quashes CIT order under sec 263, finds AO decision not prejudicial. Assessee appeal allowed.

The Tribunal quashed the CIT's order under section 263, ruling that the AO's original decision was not erroneous or prejudicial to the Revenue's interest. The appeal by the assessee was allowed, with the Tribunal citing that the provision for doubtful debts had been appropriately accounted for in accordance with relevant judicial precedents. The order was pronounced on December 22, 2021.

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Issues Involved:
1. Validity of the CIT's order under section 263 of the Income Tax Act, 1961.
2. Allowability of the provision for doubtful debts as a deduction.
3. Applicability of judicial precedents cited by the assessee.

Detailed Analysis:

1. Validity of the CIT's Order under Section 263 of the Income Tax Act, 1961:
The appeal was directed against the CIT’s order dated 22.03.2018, passed under section 263 of the Income Tax Act. The CIT had issued a notice under section 263, questioning the allowability of a provision for doubtful debts amounting to Rs. 45,54,137, which was not added back to the total income by the AO. The CIT held that the AO's order was erroneous and prejudicial to the interest of the Revenue because the AO did not consider the allowability of the provision for doubtful debts. The Tribunal agreed with the CIT on this point, noting that there was no inquiry conducted by the AO regarding the provision for bad and doubtful debts.

2. Allowability of the Provision for Doubtful Debts as a Deduction:
The assessee argued that the provision for doubtful debts was debited to the profit and loss account and simultaneously reduced from the value of debtors in the balance sheet, effectively writing off the debts. The assessee relied on judicial pronouncements, including CIT v. M/s. Sandvik Asia Limited and Vijaya Bank v. CIT. The Tribunal found that the assessee had indeed charged off the provision for doubtful debts to the profit and loss account and reduced the same from the value of sundry debtors in the audited balance sheet. This action was deemed sufficient for the write-off of bad debts, as per the judgments cited.

3. Applicability of Judicial Precedents Cited by the Assessee:
The Tribunal noted that the CIT did not adequately explain why the decisions in CIT v. M/s. Sandvik Asia Limited and Vijaya Bank v. CIT were not applicable to the assessee's case. The Karnataka High Court in CIT v. M/s. Sandvik Asia Limited, following the Supreme Court's decision in Vijaya Bank v. CIT, held that debiting the provision for doubtful debts to the profit and loss account and reducing it from the total sundry debtors in the balance sheet suffices for a write-off. Therefore, the Tribunal concluded that the AO could not add back the provision for bad debts, and there was no prejudice to the Revenue.

Conclusion:
The Tribunal quashed the CIT’s order under section 263, holding that the AO’s original order was not erroneous or prejudicial to the interest of the Revenue. The appeal filed by the assessee was allowed, and the Tribunal pronounced its order on December 22, 2021.

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