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TMI Blog2023 (2) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... voking 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 which effectively serves as directions to AO to make specified addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 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 be taxed asincome of the assessee, and also on the legal aspect of invocation of Explanation-2 to section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nath 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 question for our consideration is - whether on the facts and circumstances of the case, the assessee(s) is eligible for deduction of the bad and doubtful debts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions, 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 Bad debts reserve, is however not routed through P&L A/c. Accordingly, Ld. PCIT has held that in case of assessee, being one such bank, as and when the liability for maintaining a Bad Debts Reserve 'ceases' due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve. 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. 3. It is submitted that Ld. AO has failed to analyze the implications of transfer of Funds to general Reserves, without routing it through P&L Account, and subjecting it to taxation. The issue has neither been analyzed, nor any possible views (correct views) hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, cause prejudice to the interest of the revenue. In case, where the Assessing Officer adopts one of the courses permissible in law where two views are plausible the Commissioner cannot exercise his power under section 263 to defer with the Assessing Officer even if there has been a loss of revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment 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 that there is difference in between a case where an inquiry has been conducted and a case where inadequate inquiry had been conducted. Reliance has been placed by him on CIT v. Sunbean Auto Ltd. [2011] 332 ITR 167/[2010] 189 Taxman 436 (Delhi) wherein a distinction has been pointed out by Delhi High Court bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, a case for exercise of jurisdiction under section 263 of the Act is made out. In this case, the crucial question, what is the source of initial capital, had been explained by the assessee or not, was left unexamined. It was held that it is a case where prejudice is writ large. 15. It is not necessary for us to multi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 passed by Ld. PCIT." 13. We have heard both the parties and have gone throughorder of the ld.Pr.CIT. We are not impressed nor convinced with the contention of the Ld.counsel for the assessee on the merits of the case that the write back of provision for bad and doubtful debts on rural advances was not taxable as income . Considered from all ,a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reproduced:- Section 36(l)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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)(vii) and section 36(1)(viia) of the Act, to hold that the principle of taxing bad debts, claimed as deduction u/s 36(1)(vii) of the Act,on being recovered, as per section 41(4) of the Act, would apply to section 36(1)(viia) of the Act also on write back of provisions created, the fundamental reasoning remains the same. Section 36(1)(viia) of the Act allowing deduction of provisions for bad and doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 India. Further, for real income to accrue under the ITL, the income should be due; there should be a corresponding liability to pay; and practically, there is a plausible realization of such income. In the instant case, these tests are fully satisfied, as assesse bank itself transferred amount out of provision for bad debts to general reserve, which clearly indicates that there is realization of income as there are no NPA. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier 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 India Vs. CIT(1996) 157 ITR 67 (SC) The issue involved in the above decisions is summarized hereunder: (i) CIT v. HiraLal Mittal & Sons, (1972) 86 ITR 463(AII) The issue in the cited case was whether the assessee was entitled to the deduction of the interest claimed even though it had not made the necessary entries in its account books. (ii) CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) The issue in the cited case relate to the taxability unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed- (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of subsection (1). 23. Therefore the event for claiming deduction as per the said section is earning of profits from specified businesses and not creation of Reserves, which is only a condition put in place for claiming deduction of profits so as to ensure utiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under section 92CA and directing a fresh order under the said section]. Explanation 1.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- .... ..... ..... .... Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drance 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 assessment orders will be deemed to be erroneous. The main provision of the section and its import has not been altered by the explanation. Therefore where section 263 itself has been invoked and the reason for finding the assessment order erroneous clearly pointed out to the assessee during revisionary proceedings to the effect that adequate inquiries were not conducted by the AO on the issue in question, Explanation 2 to section 263 (a) also being to the same effect of assessment orders being deemed to be erroneous on account of lack of adequate inquiry, we see no reason why pointedly the Explanation also needs to be brought to the notice of the assessee while applying it to the case. 36 Once the ld.Pr.CIT brings to the notice of the assessee the reason why he fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 in the circumstances of the case and in law, the Hon'ble ITAT is correct in holding that the PCIT was not empowered and entitled to revise assessment order u/s. 263 of the Act r/w Explanation 2 thereto by ignoring that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of revenue in as much as the Assessing Officer has passed the assessment order without making inquires/verification in the light of the unsecured loans of Rs. 2.49 Crores received from M/s. Georgette Tradecom Pvt. Ltd (GTPL) and M/s. PurbaAgro Food Pvt. Ltd (PAFPL)? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in cancelling the impugned order u/s. 263 of the I.T. Act and allowing all the grounds of the Assessee?" 40. The R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 Sun Engineering Works Pvt. Ltd.198 ITR 297 (SC). In the case of Padma Sundra Rao v State of TN 255 ITR 147(SC) the Hon'ble Apex Court had laid down that a ratio laid down by the Court have to be read in the context of the entire facts leading to the said ratio. 44. In view of our elaborate discussion as above, we hold that the assessee cannot derive any benefit from the judgment of Hon'ble High Court in the case of Shreeji Prints P. Ld. (supra), to the effect that non-mentioning of Explanation 2 to section 263 in the show cause notice will render entire revisionary order as non-est in the eyes of law. This contention raised by the ld.counsel for the assessee, is therefore, rejected." 27. In view of the above, we do not find any merit in the contention of the ld.counsel for the assessee that the order u/s 263 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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