AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (2) TMI 1004
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....that the mandatory conditions stipulated for invoking such extra-ordinary jurisdiction were totally absent, with the result that the impugned order passed u/s.263 is bad in law. 2. In the facts and circumstances of the case, in exercising power under section 263 of the Act, the learned Principal CIT has failed to appreciate that: 2.1 The order u/s 143(3) passed by learned AO does not in any way represent erroneous order as the AO has taken a view that is sustainable in law and therefore, the action u/s 263 of the Act is merely a "change in opinion", wholly unreasonable, uncalled for and bad in law. 2.2. During assessment proceedings u/s 143(3), details on many points were sought and furnished but as per normal practice in framing the orders, claims of the assesse which were accepted by AO were not discussed in Assessment Order by AO and only those points were elaborated which he disallowed as deduction. Such orders cannot be held to be erroneous 3. The learned Principal CIT is not permitted in law to pre-judge taxability of Rs. 25.00 Crore transferred from Provision for Bad and Doubtful Debt to Statutory Reserve and propose the same to be taxed w....
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....the profit and loss account, resulting in reduction of your taxable income by the extent of Rs. 25 crores. The AO while completing the assessment have neither looked into this aspect not asked any question thereto about the treatment of this amount. Therefore, the order is not just erroneous but also prejudicial to the interest of revenue. I therefore, propose to add this amount of Rs. 25 crores to the total income under the powers vested in me u/s. 263 of the Income tax Act, 1961. You are requested to show cause why the proposed addition should not be made. Your reply should reach me by 09/03/2015." 4. Several arguments were made before the ld.Pr.CIT on the merits of the issue as also challenging the jurisdiction to review, who was not convinced with the same and accordingly order was passed under section 263 of the Act holding the assessment order to be erroneous on this count and directing the AO to pass fresh assessment order as per the law. 5. Before us also several contentions were raised by theld.counsel for the assessee both on the merits of the issue, that the impugned reduction from provision created for bad and doubtful debts for rural advances could not b....
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....sion by way of book entry did not tantamount to a taxable event; Reliance was placed on the following decisions for the same: * Kedarnath Jute Manufacturing Co. Ltd vs CIT (1971) 82 ITR 363 (SC) * Tuticorin Alkali Chemicals & Fertilizers Ltd. CIT, (1997) 93 taxmann 502 (SC) 10. The real income theory was argued by the ld.counsel for the assessee pointing out that no real income accrued or resulted on account of a mere book entry. Reliance was placed on the decision of Hon'ble Apex Court in this regard in the case of CIT Vs. Excel Industries Ltd., (2013) 38 taxmann.com 100 (SC) 11. Attention was also invited to the decision of Hon'ble Apex Court in the case of Catholic Syrian Bank Ltd. Vs. CIT, (2012) 343 ITR 0270 for the interplay and interpretation of section 36(1)(vii) and (viia) r.w.s 36(2) of the Act. It was contended that the Hon'ble Court had held the two provisions to operate in different domains and thus no parity could be drawn from one to the other as done by the Ld.PCIT. The ld.counsel for the assessee drew our attention to para- 41 of the said order pointing out that the Hon'ble Apex Court had interpreted the provisions as under: The que....
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....owever, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be ....
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....ble. However, this is not required in case of Banks. 2. Since the assessee is a Bank, it is covered by the special provisions of section 36(1)(viia) of the Income Tax Act, 1961. In accordance with these provisions, the assessee Is permitted to transfer a specific amount of its income to provision for Bad & Doubtful Debts, without routing the same through the P&LA/c. 3. Ld.PCIT, in a speaking order, discussing various facets of Income tax Act as well as the accounting standards, has held that the assessee should have routed the funds lying in the provision for Bad & Doubtful Debts to the P&L A/c first, and thereafter the same should have, been transferred to the General Reserve, While explaining the underlying accounting principles. Id. PCIT has stated that the General Reserve in Balance Sheet is ordinarily created from Profits after tax. All receipts which are recognized as income are ordinarily to be reflected on the receipt side of the P&L A/c. Thereafter Profits are determined and income is recognized. Taxes are deducted from the Profits. In case of Banks due to special provisions u/s.36(l)(viia) a part of the receipts, which is permitted to be taken to special....
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....pecified. Further, income is an inclusive definition. As such, any ceased liability has to be declared in P&L A/c on income/receipt side, taxes have to be computed and deducted from the profits, before transferring the balance funds in the General Reserve. Sec. 41 deals with trading liabilities and their cessation. While in case of non-trading liabilities, viz. a loan taken by the assessee, on which the liability to pay has ceased, for any reason, can be included under income, under the Inclusive definitions of income provided in the Income Tax Act. 2. It is also humbly submitted that Ld. AR has incorrectly submitted during oral hearings that the Id. PCIT has not invoked Explanation 2 to Sec. 163 in the show-cause. This case pertains to AY 2011-12 and the Explanation 2 has been inserted with effect from 01.04.2015. Hence for AY 2011-12, there was no occasion or mandate to include Explanation 2 at the notice stage, as the provisions did not exist for the said assessment year. However, the Id. PCIT has taken supports from the provisions of Explanation 2 to sec. 263 and mentioned such insertions in the Impugned order, as the order u/s 263 has been issued 21.03.2016. ....
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....the following case laws:- (1) In the case of Malabar Industrial Co.Ltd. v. CIT 243 ITR 83the Hon. Supreme Court pointed out that the permissible view of the AO cannot be replaced by the thought of the CIT, however it also pointed out that the order passed without applying the principle of natural justice or without application of mind would also attract the Invocation of power u/s.263. In fact, while justifying the order of the Commissioner u/s.263(l) the Hon.Supreme Court highlighted that the CIT had set aside the order for lack of inquiry and for non-application of mind. The Hon.Court also relied on the decision of Ram Pyari Deri Saraogi vs. CIT (1968) 67 ITR 84 as reported above to uphold that non application of mind renders the order erroneous and prejudicial to the interest of Revenue. (2) In the case of "Rain Commodities Ltd. v. Deputy Commissioner of Income-tax" 3(1], Hyderabad(2011) 9 taxmann.com 128 (Hyd.) it has been held, The expression "prejudicial to the interest of revenue1 appearing under section 263 in conjunction with the expression 'erroneous1 and that every loss of revenue as a consequence of an order of the Assessing Officer cannot....
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....f the Assessing Officer was erroneous for want of proper enquiry. He had not recorded reasons for accepting the return of the assessee as submitted by it on the impugned issue. The Assessing Officer without making any enquiry, and recording any reasons accepted the clajm of the assessee and the assessment order was silent about the issue raised by the Commissioner. He had not examined the merit of the claim of the assessee. Therefore, It could not be said that he had taken one of the permissible views in accordance with law. He had not taken any view, except blindly accepting the view of the assessee on the issue. In the instant case, the failure of the Assessing Officer to make an enquiry with regard to the claim of the assessee and to record such a reason, why he was taking particular view, makes the assessment order erroneous and prejudicial to the interest of the revenue. (3) The Allahabad High Court in the case of Meerut Roller Floor Mills Ld. V. Commissioner of Income-tax (2013) 39 taxmann.com 183 (Allahabad), after analyzing the various decisions of the High Courts and Supreme Court observed: Much emphasis was laid by the learned counsel for the petitioner ....
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....mount of evidence may be accepted by a Civil Court in absence of any rebuttal. The Civil Court is neutral. It simply gives decision on the basis of the pleadings and evidence which comes before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which Is apparent in the order but call for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an Inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has notbeen made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 14. In CIT v. Smt. Rambha Devi [1987] 164 ITR 658, the Patna High Court has laid down that where the necessary facts had not been gone into....
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....n is obvious. Unlike the civil court which is neutral to give a decision on the basis of evidence produced before it, an Assessing Officer is not only an adjudicator but is also an investigator. He tannot remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. The word 'erroneous' in that section includes cases where there has been failure to make the necessary inquiries. It is incumbent on the Assessing Officer to investigate the facts stated in the return when circumstances make such an inquiry prudent and the word 'erroneous' in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. It is humbly prayed to dismiss the grounds of appeal by the assessee and not to interfere with the order u/s 263 p....
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....e claim of deduction as per section 36(1)(viia) of the Act ,in totality, is allowable only to the extent debts liable to turn bad or are doubtful for recovery are provided for by the assessee .When an amount is reduced from such provisions made earlier, it denotes that debts to the said extent are found to be good and no longer require being provided for, for turning bad or doubtful for recovery. Thus provision to the said extent is written back as no longer required. There can be no case, in such circumstances, as per law therefore, for allowing claim of deduction for provision to the full extent ,even that no longer required. Such write backs, representing excess claims of provision created, necessarily need to be reversed and treated as income for taxation purposes. Such write backs ipso facto have to be treated as taxable, so as to restrict the assesses claim of deduction to the extent of provision created for bad and doubtful debts, as required by section 36(1)(viia) of the Act . The Ld.PCIT has rightly dealt with the issue accordingly at para 5.1 of his order as under: "5.1 Legislative intent for Sec.36(l)(viia) Section 36(l)(viia) of the IT Act is hereby re....
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....ective of the fact whether there are actual bad debts or not and when actual bad debts happen in case of banks, these provisions provide them necessary cushion, as public money is involved. Main idea behind Sec.36(l)(vii) and Sec.36(l) (viia) is the stark realty of business that there has to be some bad debts in each business, whether it is trading, manufacturing or banking, and a business should be allowed its deduction to the extent of actual non-recoverables. Thus, it is evident that basics of Sec.36(l)(vii) and sec.36(l)(viia) are same except to the fact that, sec.36(l)(viia) is applicable only for banks and allow, above,ability of provisions irrespective of actual expenditure. In such scenario, when bad debts are recovered, they become taxable as contained in sec. 41(4) of IT Act, 1961, similarly, when bank is of view that, it does not need any provisions for bad debts, as there is going to be no bad debts, then those provisions will be added back to the income of the bank for taxation purpose, as bank had already claimed deductions in respect of these provisions u/s 36(l)(viia). 16. Though the Ld.PCIT, above, has drawn parity between the provisions of section 36(1....
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....account, as rightly held by the Ld.PCIT. Thus going by law, supported by accounting principles, the write back of provisions for bad and doubtful debts of rural advances was required to be routed through the Profit and Loss account and treated as income for taxation purposes. 18. Even going by the real income theory the Ld.PCIT, we hold, has rightly found the write back taxable,noting that the write back of the provision to the general reserve indicated no NPA and hence realization of income. Meaning thereby that the provision created earlier, for cushioning against bad debts on account of rural advances turning NPA , being created out of profits , and when not required as written back, it resulted in income to the assessee.. The Ld.PCIT has dealt with this aspect at para 5.3 of his order as under: 5.3 Taxability of real income Furthermore, Hon'ble Supreme court in case of Excel Industries ltd (civil appeal no. 125 of 2013) lays down the key principles for evaluating when income is said to accrue for the purposes of taxability under the Income Tax Act. The ruling reiterates that it is only real income, and not hypothetical income, which can be taxed in I....
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....the assessee has contended that the exercise of initiating the proceedings u/s. 263 of the Act in its case was unwarranted as the issue involved is a book entry which has no relevance with the chargeability of a particular item which is otherwise taxable under the Act. The assessee's contention is not tenable because the issue involved in this case is with regard to transfer of amount of Rs.25 Crore which has been claimed and allowed in earlier years according to provisions of section 36(l)(viia) of the Act. This amount has been put in another Reserve instead of bringing it to the P&L account." 20. Every case law relied upon by the ld.counsel for the assessee for the proposition that it was a mere book entry warranting no taxable event has been distinguished by the ld.Pr.CIT at para 4.5 of his order as under: "4.5. In Para no. 2 of the submission dated 16.02.2016, with regard to book entry, the assessee has relied on the following decisions: i. CIT v. HiraLal Mittal & Sons, (1972) 86 ITR 463(AII) ii. CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) iii. CIT v. Mogul Line Ltd. (1963)46 ITR 590,600(Bom) iv. State Bank of....
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....ses, we find that there is no merit in the claim made by the ld.counsel for the assessee that this write back could not be subjected to tax. 22. The argument of the Ld.Counsel for the assessee that in the absence of any specific provision taxing write backs of provisions made u/s 36(1)(viia) of the Act the same was not liable to be taxed , accordingly is rejected as meriting no consideration. Even otherwise most of the provisions referred to by the Ld.Counsel for the assessee are in relation to deductions allowed for profits earned in specific circumstances / businesses, on the condition of creation of reserves to be utilized for specified business purposes such as purchase of plant and machinery for the said business. That when these reserves are not utilised for the purpose created or to the said extent , the reserves to the extent remaining unutilized are to be subjected to tax. For clarity the provisions of section 10AA in this regard are reproduced and the rest of the sections, i.e 33AC,80HHB, 80HHD are all identically worded. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in c....
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.... may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income61 for the assessment year relevant to the previous year in which such plant or machinery was first put to use. (3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),- (a) has been utilised for any purpose other than those referred to in subsection (2), the amount so utilised; or (b) has not been utilised before the expiry of the period specified in subclause (i) of clause (a) of sub-section (2), the amount not so utilised, shall be deemed to be the profits,- (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of subsection (2), and shall be charged to tax accordingly : Provided that where in computing the total income of the Unit for any a....
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....der: "33. To understand the import of the argument that the invocation of Explanation 2 to section 263 was to be confronted before being applied, it is necessary to see what Explantion-2 to section 263 is all about. For this purpose, provision of section 263(1) of the Act along with the Explanation2 to the same are reproduced hereunder: 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, [including,- (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under section 92CA; or (iii) an order cancelling the order und....
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....ain enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same. Explanations are not substantive provisions and are inserted to clear up any ambiguity in the section. They only clarify an existing law. Normally Explanations do not enlarge the scope of the section but only explain the scope. Explanation 2 to section 263, clearly provides additional support to the dominant object of section 263, specifically pointing out situations where a....
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....ope of section but only explained the scope of section, and therefore, once the specific section has been invoked, it is not necessary to mention any specific Explanation thereto which has been invoked. Therefore, this contention of the ld.counsel for the assessee is rejected outrightly that the order needs to be set aside for the reason that ld.Pr.CIT did not confront the assessee before invoking Explanation 2 to sub-clause (a) to section 263 of the Act. 37. As for the decision of the jurisdictional High Court in the case of Shreeji Prints (supra), relied upon by the ld.counsel for the assessee in support of this contention, the assessee, we hold, cannot derive any benefit from the same. 38. On going through the decision of the Hon'ble High Court ,we find that the decision is not on the question framed before it whether Explanation to section 263 of the Act can be said to be validly invoked without first confronting it to the assessee. In the case before Hon'ble High Court in the decision relied upon by the Ld.AR, the Revenue had proposed the following questions as substantial question of law before the Hon'ble High Court: "(a) Whether on the facts and i....
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....f the Tribunal dismissing the appeal of the Revenue. 42. Thus it is apparent from the above that the decision of the Hon'ble High Court was not to the effect that Expl 2 to section 263 not being confronted to the assessee its invocation was invalid. Neither was the decision rendered in the backdrop of this question before the Hon'ble High Court, nor does the Hon'ble High Court hold so in its order. What is noted in the order to this effect is only its noting of the findings of the ITAT while setting aside the order passed u/s 263 of the Act. Therefore the decision of the Hon'ble jurisdictional High Court cannot be read as holding that order passed u/s 263 of the Act is invalid when Expl to section 263 is invoked without confronting it to the assessee. 43. It is settled law that a precedent is an authority only for what it actually decides and a decision on a question that has not been argued cannot be treated as a precedent. Judgments must be read as a whole and observations in judgements should be considered in the context in which they are made and in the light of the questions that were before the court. The Hon'ble apex court has held so in the case of CIT vs ....