2025 (7) TMI 424 - AT - Income Tax

Revision u/s 263 - jurisprudence for the assumption of jurisdiction u/s 263 - as per CIT assessment order framed u/s 143(3) r.w.s. 144B is not only erroneous but also prejudicial to the interest of the revenue - HELD THAT - Due to non-enquiry by the AO the assessment order may be erroneous but is it prejudicial to the interest of the revenue as the issues have already been decided by the Superior Courts and the Co-ordinate Bench? The answer would be NO . This means that the assessment order should not only be erroneous but also prejudicial to the interest of the revenue and the twin conditions have to be fulfilled before the assumption of jurisdiction u/s 263 of the Act. In the case in hand the issue relating to Section 115JB disallowance u/s 14A bad debts written off interest paid on perpetual bonds penalty levied by RBI recovery in respect of bad debts written off were specifically enquired by the AO during the course of scrutiny assessment proceedings to which specific replies were furnished by the assessee as evident from the copy of the submissions made by the AO exhibited in the paper book. This shows that specific queries were made to which specific replies were furnished by the assessee and considering the replies of the assessee the assessment order was framed. All the issues mentioned hereinabove were also subject matter of the appeals considered by this Bench 2025 (7) TMI 368 - ITAT MUMBAI and have been decided in favour of the assessee and against the revenue. Therefore insofar as these issues are concerned the assessment order is neither erroneous nor prejudicial to the interest of the revenue. Broken period interest paid on purchase of securities amortization on securities and unrealized interest on bad and doubtful debts though no specific queries were raised by the AO but these issues have already been decided by the Hon ble Supreme Court and Hon ble Bombay High Court and the Tribunals on this matter in favour of the assessee and against the revenue. Therefore on these issues also the assessment order is neither erroneous nor prejudicial to the interest of the revenue. See Karan Jain vs. UOI Ors 2024 (5) TMI 648 - GAUHATI HIGH COURT ALFA LAVAL LUND AB C/O ALFA LAVAL (INDIA) LTD. 2021 (11) TMI 327 - ITAT PUNE MALABAR INDUSTRIAL CO. LTD. 2000 (2) TMI 10 - SUPREME COURT MAX INDIA LTD. 2007 (11) TMI 12 - SUPREME COURT and GABRIEL INDIA LIMITED 1993 (4) TMI 55 - BOMBAY HIGH COURT - Appeal of assessee allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking jurisdiction under section 263 of the Income Tax Act, 1961 ("the Act") to revise the assessment orders passed under section 143(3) read with section 144B for the assessment year 2019-20, particularly when the assessment orders were not only erroneous but also prejudicial to the interests of the revenue.
• Whether the PCIT erred in revising the assessment order of the appellant bank on various grounds including disallowances under section 14A, treatment of bad debts written off, disallowance of interest on perpetual bonds, taxation of recovery in respect of bad debts, depreciation on investments, provision for wage arrears, and other regulatory penalties and expenses.
• Whether the PCIT erred in revising the assessment order of the predecessor bank (Andhra Bank) on similar grounds, despite Andhra Bank being a separate entity for AY 2019-20.
• Whether the PCIT's revision order was legally sustainable in light of binding judicial precedents, including the applicability of section 115JB, Income Computation and Disclosure Standards (ICDS), and Supreme Court decisions such as the case of Vijaya Bank.
• Whether the initiation of revision proceedings under section 263 was valid, particularly whether the PCIT applied independent mind and examined the record before forming satisfaction that the assessment order was erroneous and prejudicial to the revenue.
• The scope and limits of the jurisdiction under section 263 of the Act, including the twin conditions of error and prejudice to the revenue, and the necessity of independent application of mind by the revisional authority.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction of PCIT under Section 263 to revise the assessment order

Relevant legal framework and precedents: Section 263 of the Act empowers the Commissioner to revise an assessment order if it is "erroneous" and "prejudicial to the interests of the revenue." The jurisdiction is discretionary and requires satisfaction of both conditions. The Supreme Court in Malabar Industrial Co. Ltd. held that the order must be both erroneous and prejudicial to revenue for section 263 to be invoked. The Bombay High Court in CIT vs. Gabriel India Ltd. emphasized the need for material on record to satisfy the Commissioner that the order is erroneous and prejudicial, and that the power cannot be exercised arbitrarily or mechanically. The Guwahati High Court in Karan Jain vs. UOI reiterated that the Commissioner must apply independent mind and cannot act solely on proposals from subordinate officers. Similarly, a Co-ordinate Bench in Alfa Laval Lund AB held that revision cannot be initiated merely on the AO's proposal without the Commissioner independently calling for and examining the record.

Court's interpretation and reasoning: The Tribunal examined whether the PCIT independently called for and examined the records before forming the opinion that the assessment order was erroneous and prejudicial. It found that the PCIT's order was based primarily on the proposal submitted by the AO, without independent application of mind or examination of the record. The Tribunal held that such initiation of revision proceedings is illegal and without jurisdiction. The Tribunal relied on the above judicial precedents to conclude that the PCIT's order under section 263 suffers from jurisdictional infirmity.

Key evidence and findings: The Tribunal perused the assessment records, submissions made by the assessee during assessment proceedings, and the PCIT's order. It noted that the AO had made specific enquiries on key issues and considered the assessee's replies before framing the assessment order. The PCIT's order did not demonstrate independent examination of records but was based on the AO's proposal.

Application of law to facts: Since the PCIT did not independently call for and examine the records but mechanically acted on the AO's proposal, the twin conditions of section 263 were not satisfied. The assessment order could not be said to be erroneous and prejudicial in the absence of independent application of mind by the PCIT.

Treatment of competing arguments: The Revenue argued that the PCIT was justified in revising the order due to errors in disallowances and treatment of provisions. The Tribunal rejected this, holding that mere errors or differences of opinion do not justify revision under section 263 unless the order is both erroneous and prejudicial, and the revisional authority has applied independent mind.

Conclusion: The PCIT's order under section 263 is set aside for lack of jurisdiction and failure to satisfy the twin conditions of error and prejudice with independent application of mind.

Issue 2: Merits of disallowances and other adjustments made by PCIT in the revision order

Relevant legal framework and precedents: The issues raised include disallowance under section 14A, treatment of bad debts written off, disallowance of interest on perpetual bonds, depreciation on investments, provisions for wage arrears, and taxation of recovery on bad debts. The Tribunal referred to binding decisions of the ITAT in the assessee's own case and Supreme Court rulings such as Vijaya Bank (323 ITR 166), which held that provisions written off after being reduced from advances cannot be added back in computing book profits under section 115JB. The Tribunal also referred to the applicability of Income Computation and Disclosure Standards (ICDS) and judicial precedents on the non-applicability of section 115JB to the appellant.

Court's interpretation and reasoning: The Tribunal observed that the AO had made specific enquiries on these issues and considered the evidence and submissions of the assessee in detail. The assessment order reflected application of mind on these issues. The PCIT's revision order ignored binding precedents and the detailed assessment record. The Tribunal found that the PCIT's disallowances and additions were contrary to settled law and the factual matrix.

Key evidence and findings: The AO's order dated 23/09/2021 and 29/09/2021 (for the appellant and predecessor bank respectively) contained detailed examination of the issues, supported by documentary evidence and submissions. The Tribunal noted that the identical issues had been decided in favor of the assessee in related appeals for subsequent assessment years. The PCIT's order failed to appreciate these facts and precedents.

Application of law to facts: The Tribunal applied the binding judicial precedents and the factual findings of the AO to hold that the disallowances and additions directed by the PCIT were not sustainable. The provisions written off were rightly excluded from book profits, disallowances under section 14A were properly dealt with, and the expenses and provisions in question were allowable as per law and accounting standards.

Treatment of competing arguments: The Revenue contended that the PCIT was justified in revising the order due to incorrect allowance of certain expenses and provisions. The Tribunal rejected this, holding that the AO's order was neither erroneous nor prejudicial on these issues, and the PCIT's revision was contrary to binding precedents.

Conclusion: The PCIT's directions to disallow various expenses and provisions are set aside as unsustainable and contrary to law and facts.

Issue 3: Applicability of revision proceedings to the predecessor bank (Andhra Bank) for AY 2019-20

Relevant legal framework and precedents: Andhra Bank merged with Union Bank of India effective 01/04/2020. For AY 2019-20, Andhra Bank was a separate entity. The Tribunal referred to the legal principle that assessment and revision orders must be passed in the hands of the correct entity for the relevant assessment year.

Court's interpretation and reasoning: The Tribunal held that the PCIT erred in considering issues relating to Andhra Bank in the hands of the appellant bank (Union Bank of India) for AY 2019-20. Since Andhra Bank was a separate entity for that year, such issues could not be attributed to the appellant.

Key evidence and findings: The Tribunal noted the Gazette notification of merger and the separate assessment orders for Andhra Bank and the appellant bank for AY 2019-20.

Application of law to facts: The PCIT's revision order erroneously included Andhra Bank's issues in the appellant's assessment, which was legally impermissible.

Treatment of competing arguments: The Revenue did not dispute the separate entity status for the relevant year but sought to justify the revision. The Tribunal rejected this approach.

Conclusion: The PCIT's revision order is unsustainable to the extent it concerns Andhra Bank's issues for AY 2019-20 in the hands of the appellant bank.

Issue 4: Treatment of issues where no specific queries were raised by AO but PCIT directed disallowances

Relevant legal framework and precedents: The Tribunal noted that issues such as broken period interest on purchase of securities, amortization on securities, and unrealized interest on bad and doubtful debts were not specifically queried by the AO during assessment. However, these issues have been judicially decided in favor of the assessee by the Supreme Court, Bombay High Court, and ITAT.

Court's interpretation and reasoning: The Tribunal held that since these issues were not specifically examined during assessment and were already decided in favor of the assessee, the PCIT's revision order directing disallowances was unjustified.

Key evidence and findings: The Tribunal relied on judicial precedents and the assessment record showing absence of specific enquiries.

Application of law to facts: The PCIT's directions on these issues were contrary to settled law and the facts on record.

Treatment of competing arguments: The Revenue argued for the revision on these issues. The Tribunal rejected such arguments based on absence of enquiry and binding judicial decisions.

Conclusion: The PCIT's directions on these issues are set aside.

3. SIGNIFICANT HOLDINGS

"Section 263 of the Act would not be invoked merely to correct a mistake or error committed by the Assessing Officer unless it has caused prejudice to the interests of the revenue."

"The power reposed on the Commissioner, no doubt, is a power of judicial nature and therefore such power is to be exercised lawfully and with due application of mind. The power cannot be exercised mechanically or at the behest of some other authority other than on the own discretion of the assigned officer."

"The Commissioner must call for and examine the record of any proceeding under the Act and consider that the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. The twin conditions of (i) calling for and examining the record and (ii) considering the order erroneous and prejudicial must be cumulatively fulfilled."

"An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised."

"If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority."

"The initiation of revision proceedings under section 263 without independent application of mind and merely on the basis of a proposal from the AO is illegal and without jurisdiction."

"Provisions written off after being reduced from advances cannot be added back in computing book profits under section 115JB as held by the Apex Court in Vijaya Bank."

"Where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the AO is unsustainable in law."

Final determinations:

• The PCIT's order under section 263 is set aside for lack of jurisdiction and failure to satisfy the twin conditions of error and prejudice with independent application of mind.
• The AO's assessment orders dated 23/09/2021 and 29/09/2021 are restored.
• The disallowances and additions directed by the PCIT in the revision order are unsustainable and set aside.
• The PCIT erred in attributing Andhra Bank's issues to the appellant bank for AY 2019-20.
• The appeal of the assessee is allowed accordingly.