PCIT's revision order quashed as AO's allowance of standard assets provision under section 36(1)(viia)(c) was permissible view after proper enquiry

ITAT Mumbai quashed PCIT's revision order u/s 263 regarding non-allowance of provision for standard assets u/s 36(1)(viia)(c). The tribunal held that allowability of deduction for standard assets provision is a debatable issue where AO took a possible view after proper enquiry. PCIT failed to demonstrate actual error of fact or law prejudicial to revenue interests. The AO had specifically queried the claim and received assessee's reply, establishing adequate examination. Since the legal position on standard assets provision deduction remains debatable with supporting case law, the AO's allowance constituted a permissible view rather than erroneous order warranting revision.

---

---

Issues Involved:

1. Validity of order under section 263.
2. Non-allowance of provision for standard assets under section 36(1)(viia)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Order Under Section 263:

The primary issue in these appeals was the validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. The PCIT invoked section 263, arguing that the Assessing Officer (AO) failed to make specific enquiries regarding the deduction claimed by the assessee under section 36(1)(viia) for provisions towards standard assets. The PCIT contended that the AO's order was erroneous and prejudicial to the interests of the revenue because it allowed a deduction that was not permissible under the law. The PCIT emphasized that section 263 empowers the revision of any order passed by the AO if it is both erroneous and prejudicial to the revenue. The PCIT argued that the AO did not specifically enquire into the allowability of the deduction on standard assets, thus leading to an incorrect assumption of fact and law.

The appellate tribunal, however, found that the AO had indeed raised specific queries regarding the deduction claimed under section 36(1)(viia) and that the assessee had provided the necessary details. The tribunal noted that the AO had taken a plausible view after verifying the details, and the PCIT could not substitute his view in such cases. Citing the Supreme Court's decision in Malabar Industrial Co. Ltd vs CIT, the tribunal held that when two views are possible, and the AO has adopted one, it cannot be considered erroneous unless it is unsustainable in law. Therefore, the tribunal concluded that the PCIT's invocation of section 263 was not tenable, as the AO's order was neither erroneous nor prejudicial to the interests of the revenue.

2. Non-allowance of Provision for Standard Assets Under Section 36(1)(viia)(c):

The second issue was whether the provision for standard assets could be claimed as a deduction under section 36(1)(viia)(c). The assessee argued that the provision was made according to the RBI Master Circular and that section 36(1)(viia) did not restrict the deduction to non-performing assets. The PCIT, however, held that the deduction under section 36(1)(viia) was meant for bad and doubtful debts, not standard assets. The PCIT further argued that the provision for standard assets was contingent and not allowable under the Act.

The tribunal examined the relevant provisions and noted that section 36(1)(viia) allows deductions for provisions for bad and doubtful debts. The tribunal acknowledged that the issue of whether provisions for standard assets could be included was debatable. The tribunal found that the AO had considered the details and allowed the deduction, taking a possible view supported by some judicial precedents. The tribunal reiterated that the PCIT could not invoke section 263 merely because he disagreed with the AO's view, especially when the issue was debatable.

In conclusion, the tribunal quashed the PCIT's order under section 263 for both assessment years, holding that the AO's orders were not erroneous or prejudicial to the interests of the revenue. Consequently, the appeals of the assessee for AY 2018-19 and AY 2019-20 were allowed.

---