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2025 (6) TMI 492 - AT - Income TaxRevision u/s 263 - amount on account of Provision of VPI and on account of Provision of Doubtful Debts remained to be taxed - HELD THAT - It is an admitted fact that in the tax audit report the tax auditors have reported that an amount oon account of provision for VPI and on account of provision for doubtful debts are liability of contingent in nature. It is also an admitted fact that in the computation of income only an amount on account of provision for VPI has been added back and no addition on account of provision for doubtful debts was made to the taxable income. Since the expenditure on account of provision for VPI and provision for doubtful debts was of contingent in nature this should have been added to the taxable income however the AO during the course of assessment proceedings has neither called for any explanation on this issue nor the assessee filed any reply during the course of assessment proceedings. We find from the working of the net disallowance component of the Provision for VPI that it is not supported by any credible evidence. Further in column No.21(g) of the tax audit report the tax auditor has clearly and unambiguously listed an amount as a provision made by the assessee in its books of account as contingent in nature. Since the tax auditor gave a clear and unambiguous finding about the contingent nature of the expenses and since the AO has neither called for any explanation from the assessee nor the assessee filed any reply during the course of assessment proceedings therefore the order passed by the AO in our opinion has become erroneous in so far as it is prejudicial to the interests of Revenue. Therefore the PCIT in our opinion is fully justified in invoking the jurisdiction u/s 263 of the Act.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal arising under section 263 of the Income Tax Act, 1961 (hereinafter 'the Act') are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of the AO's order in allowing deductions for provisions of contingent nature (Provision for VPI and Provision for Doubtful Debts) Relevant legal framework and precedents: Section 37(1) of the Act permits deduction of any expenditure (not being in the nature of capital or personal expenditure and not covered under sections 30 to 36) if it is laid out or expended wholly and exclusively for the purposes of the business. However, a prime condition is that the expenditure should have crystallized during the relevant accounting year. Provisions of a contingent nature, which are not actual expenses but mere estimates of possible future liabilities, do not satisfy this condition and therefore are not allowable deductions. Section 36(1)(vii) allows deduction for bad debts actually written off, but not for mere provisions for doubtful debts. Court's interpretation and reasoning: The Tribunal noted that the tax audit report (Form 3CD, Sr. No. 21(g)) clearly classified the amounts claimed as provisions for VPI and doubtful debts as contingent liabilities. The AO, however, allowed deduction for Rs. 1,27,64,053/- on account of VPI and fully allowed deduction for the provision for doubtful debts without making any addition back to taxable income. The PCIT found that the AO neither called for any explanation nor examined the contingent nature of these provisions during the assessment proceedings. The assessee's contention that VPI was a part of salary and hence not contingent was not supported by credible evidence or corroborated by the books of account, which recorded the amount as a provision separate from salary expenses. Similarly, the claim for provision for doubtful debts was also not supported by any explanation or dispute of the tax auditor's remark on its contingent nature. The provisions of section 36(1)(vii) were held inapplicable as the amount was not a bad debt actually written off but only a provision. Key evidence and findings:
Application of law to facts: Since the provisions were contingent liabilities and not crystallized expenses, they were not allowable deductions under section 37(1). The failure of the AO to disallow these provisions rendered the assessment order erroneous and prejudicial to the interests of the Revenue. Treatment of competing arguments: The assessee argued that VPI was a part of salary and was determinable from appointment and appraisal letters, and thus not contingent. However, this was not supported by documentary evidence or classification in the books. The Tribunal rejected this argument on the basis of the tax auditor's clear classification and absence of credible evidence from the assessee. Conclusions: The AO erred in allowing deductions for provisions of contingent nature without proper scrutiny or explanation. These provisions should have been added back to taxable income. Issue 2: Validity of the PCIT's invocation of revisionary jurisdiction under section 263 of the Act Relevant legal framework and precedents: Section 263 empowers the PCIT to revise any order passed by the AO if such order is erroneous in so far as it is prejudicial to the interests of the Revenue. The power is discretionary and can be exercised only after recording reasons and giving the assessee an opportunity of being heard. Court's interpretation and reasoning: The PCIT, on perusal of the assessment record and tax audit report, found that the AO's order was erroneous and prejudicial to Revenue for not disallowing contingent provisions. A show cause notice was issued to the assessee, who responded but failed to provide satisfactory explanation or evidence. The PCIT then set aside the AO's order and directed reassessment with due opportunity to the assessee. The Tribunal upheld the PCIT's order, noting that the AO failed to call for explanation or consider the contingent nature of the provisions, and the assessee did not contest the tax auditor's findings effectively. The PCIT's action was justified as the order was indeed erroneous and prejudicial. Key evidence and findings:
Application of law to facts: The PCIT correctly exercised jurisdiction under section 263, as the AO's order was erroneous and prejudicial. The procedural requirements of issuing show cause and hearing the assessee were complied with. Treatment of competing arguments: The assessee contended there was no error and that the provisions were not contingent. The Tribunal rejected this on the basis of evidence and procedural lapses by the AO. The PCIT's action was found to be justified and within the scope of law. Conclusions: The revisionary jurisdiction under section 263 was validly invoked, and the order passed by the AO was rightly set aside. 3. SIGNIFICANT HOLDINGS "As per the Income Tax Act, 1961, deduction for expenditure can be claimed under the provisions of section 37(1) in respect of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee if it is laid out or expended wholly and exclusively for the purposes of its business. However, the prime condition for such claim under section 37(1) is that it should have crystallized during the impugned accounting year. This condition is admittedly not satisfied in respect of this claim of the assessee." "The tax auditor has clearly and unambiguously listed an amount of Rs. 3,25,70,478/- as a provision made by the assessee in its books of account that is contingent in nature. The assessee's contention before me that it was a part of the salary is not supported by any evidence and again does not provide any strength to its stand." "The Income Tax Act, 1961 does not allow for any claim of deduction in respect of such 'provisions', as has been discussed earlier. Also, as the said claim is not in respect of 'bad debts written off, the provisions of section 36(1)(vii) do not come into play." "The order passed under section 143(3) on 13.04.2021 by the FAO is erroneous in so far as it is prejudicial to the interests of the revenue and the same is set aside for framing fresh assessment in respect of the issue discussed above in light of the observations made in this order." "The Assessing Officer during the course of assessment proceedings has neither called for any explanation on this issue nor the assessee filed any reply during the course of assessment proceedings. Therefore, the order passed by the Assessing Officer, in our opinion, has become erroneous in so far as it is prejudicial to the interests of Revenue." Core principles established by the Tribunal include:
Final determinations on each issue:
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