2008 (1) TMI 522 - AT - Income Tax

ITAT quashes CIT revision order under Section 263, upholds admissibility of bad debt claim

The ITAT quashed the revision order passed by the CIT under Section 263, holding that the assessment order by the Assessing Officer was not erroneous or ... Bad Debts Issues Involved:1. Jurisdiction of the CIT under Section 263 of the Income-tax Act.2. Legality of the order passed by the Assessing Officer under Section 143(3) read with Section 147.3. Admissibility of the bad debt claim under Section 36(1)(vii) read with Section 36(2) of the Income-tax Act.4. Compliance with the provisions of the Companies Act regarding the alteration of the Memorandum of Association.5. Whether the assessee was engaged in the business of money-lending or financing.Detailed Analysis:1. Jurisdiction of the CIT under Section 263 of the Income-tax Act:The CIT issued a notice under Section 263, arguing that the assessment order was erroneous and prejudicial to the interest of the revenue. The CIT's main contention was that the assessee was not engaged in the business of banking or money-lending and had not complied with the provisions of the Companies Act regarding the alteration of the Memorandum of Association. The assessee argued that the CIT's order was illegal and void ab initio, as the Assessing Officer had passed the assessment order after due application of mind and appreciation of the facts. The ITAT held that the Assessing Officer had taken one of the possible views after considering all facts and documents, and the CIT cannot direct an investigation without finding the order to be erroneous. The ITAT quashed the CIT's order under Section 263, stating that the CIT had no jurisdiction to set aside the assessment order merely to conduct another inquiry.2. Legality of the order passed by the Assessing Officer under Section 143(3) read with Section 147:The Assessing Officer had reopened the assessment under Section 147 and allowed the assessee's claim for bad debts after verifying all details and examining the admissibility of the claim. The CIT argued that the Assessing Officer had not properly examined the issue and that the order was erroneous and prejudicial to the interest of the revenue. The ITAT found that the Assessing Officer had indeed examined the claim in detail and allowed it after due verification. The ITAT held that the assessment order was neither erroneous nor prejudicial to the interest of the revenue.3. Admissibility of the bad debt claim under Section 36(1)(vii) read with Section 36(2) of the Income-tax Act:The CIT contended that the conditions laid down in Section 36(1)(vii) and Section 36(2) were not satisfied, and no details or supporting documents were available to show that the debt was bad and irrecoverable. The ITAT noted that the assessee had provided complete details of the loans advanced and the income earned from them, and the Assessing Officer had considered these details while allowing the bad debt claim. The ITAT held that the bad debt claim was admissible as the conditions under Section 36(1)(vii) read with Section 36(2) were fulfilled.4. Compliance with the provisions of the Companies Act regarding the alteration of the Memorandum of Association:The CIT argued that the assessee had not complied with the provisions of Sections 16, 17, 17A, 18, and 19 of the Companies Act regarding the alteration of the Memorandum of Association. The assessee contended that these provisions were not applicable as the company was a private limited company, and the activities were covered under ancillary objects. The ITAT found that the assessee had passed a resolution to carry out financing and investment activities, which were covered under the incidental or ancillary objects of the Memorandum of Association. The ITAT held that there was no default committed by the assessee under the Companies Act.5. Whether the assessee was engaged in the business of money-lending or financing:The CIT contended that the assessee was not engaged in the business of money-lending or financing. The ITAT found that the assessee had been lending money to various concerns from the time of its incorporation, and the income earned from these activities was shown as business income and taxed accordingly. The ITAT held that the business of money-lending was carried on by the assessee in its ordinary course of business, and the bad debt claim was allowable.Conclusion:The ITAT quashed the revision order passed by the CIT under Section 263 for both assessment years, holding that the assessment order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue. The ITAT allowed the appeals filed by the assessee, confirming the admissibility of the bad debt claim and the compliance with the provisions of the Companies Act.