2018 (3) TMI 2052 - AT - Income Tax

AO's failure to examine doubtful debts provision claim justified CIT's revision under section 263

Cochin International Airport Ltd. Versus The Assistant Commissioner of Income-tax, Corporate Circle-1 (1), Kochi.

ITAT upheld CIT's revision order u/s 263 against AO's assessment where AO failed to examine assessee's claim for provision of doubtful debts. Court held ... Revision u/s 263 - as per CIT AO failed to examine whether the claim of the assessee towards provision for doubtful debts was correct or not - HELD THAT:- There is no whisper in the assessment order with regard to the claim of the assessee which refers to the provisions of bad and doubtful debts. Since there was no enquiry at the end of the AO on this issue, the CIT took up the case under section 263 and AO being a quasijudicial authority cannot take a view, either against or in favour of the assessee without making proper enquiries and without proper examination of the claim made by the assessee in the light of the applicable law. Commissioner is empowered to initiate suo moto proceedings under section 263 where the AO takes a wrong decision without considering the material available on record or he takes a decision without making any enquiry into matters where such enquiry was prima facie warranted. In the present case, the CIT was of the opinion that there is no proper enquiry by the AO and he accepted the claim of the assessee without making any enquiry with regard to the bad and doubtful debts. He has not gathered any information and evidence to suggest that the claim of the assessee was right. AO absolutely closed his eyes and accepted the claim of the assessee toward the provision for bad and doubtful debts both under the normal computation of income as well as u/s 115JB. AO is required to cause enquiries with regard to the claim of the assessee. As such, the CIT is justified in remitting the issue to the file of the AO for re-examination. All the grounds raised by the assessee are dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issue in this judgment revolves around whether the order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act was erroneous and prejudicial to the interests of the revenue, thereby justifying the invocation of Section 263 by the Commissioner of Income Tax (CIT). Specifically, the case examines whether the AO's acceptance of the assessee's claim regarding the deduction of a provision for doubtful debts was made without proper inquiry or consideration of relevant legal principles.ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The legal framework centers on Section 263 of the Income Tax Act, which allows the CIT to revise an order if it is erroneous and prejudicial to the interests of the revenue. The precedents cited include the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which outlines the conditions under which Section 263 can be invoked. The judgment also references the Supreme Court's decisions in Vijaya Bank v. CIT and Southern Technologies Ltd. v. Jt. CIT, which clarify the distinction between a provision for doubtful debts and the actual write-off of bad debts.Court's interpretation and reasoning:The Tribunal examined whether the AO's order was erroneous and prejudicial to the revenue. It noted that an order is considered erroneous if it is based on an incorrect assumption of facts, incorrect application of law, or if the AO fails to conduct necessary inquiries. The Tribunal emphasized that the AO's role is not only to adjudicate but also to investigate claims made by the assessee. The Tribunal found that the AO had not conducted a sufficient inquiry into the assessee's claim regarding the provision for doubtful debts.Key evidence and findings:The Tribunal observed that the AO had accepted the assessee's claim without proper scrutiny or inquiry. The AO's order lacked any discussion or analysis of the relevant facts or law, leading the Tribunal to conclude that the AO had not applied his mind to the issue. The Tribunal also noted that the assessee's reliance on the Vijaya Bank case was misplaced, as the facts of that case differed from the present case.Application of law to facts:The Tribunal applied the principles from Malabar Industrial Co. Ltd. and other precedents to conclude that the AO's order was both erroneous and prejudicial to the revenue. The AO's failure to conduct a proper inquiry or to apply the relevant legal principles rendered the order erroneous. The Tribunal emphasized that the AO's role includes both investigation and adjudication, and a failure to investigate amounts to an error.Treatment of competing arguments:The Tribunal considered the arguments presented by the assessee, including the claim that the AO had followed a possible view based on judicial precedents. However, the Tribunal rejected this argument, noting that the AO's acceptance of the assessee's claim was not based on any inquiry or analysis. The Tribunal also dismissed the assessee's reliance on the Vijaya Bank case, as the facts differed.Conclusions:The Tribunal concluded that the CIT was justified in invoking Section 263 to revise the AO's order. The AO's failure to conduct a proper inquiry or to apply the relevant legal principles rendered the order erroneous and prejudicial to the revenue. The Tribunal upheld the CIT's decision to remit the matter back to the AO for re-examination.SIGNIFICANT HOLDINGSThe Tribunal held that the AO's order was erroneous and prejudicial to the interests of the revenue due to the lack of inquiry and application of relevant legal principles. The Tribunal emphasized the AO's dual role as both investigator and adjudicator, stating that the AO must conduct a proper inquiry into claims made by the assessee. The Tribunal cited Malabar Industrial Co. Ltd. to support its conclusion that an order is erroneous if it is based on incorrect assumptions or lacks proper inquiry.Core principles established:The Tribunal reinforced the principle that an AO's order can be revised under Section 263 if it is erroneous and prejudicial to the revenue. An order is erroneous if it lacks proper inquiry or application of law. The AO's role includes both investigation and adjudication, and a failure to conduct necessary inquiries renders an order erroneous.Final determinations on each issue:The Tribunal determined that the CIT was correct in invoking Section 263 due to the AO's failure to conduct a proper inquiry into the assessee's claim regarding the provision for doubtful debts. The Tribunal dismissed the assessee's appeal and upheld the CIT's decision to remit the matter back to the AO for re-examination.