2020 (4) TMI 13 - AT - Income Tax

Revision u/s 263 - Deduction u/s 36(1)(viii) - provision for restructuring of assets written back and towards provision for bad and doubtful debts written back - HELD THAT - We are of the considered view that insofar as, the issue of allowances of deduction of ₹ 22.49 crores towards provision for restructuring of assets written back and ₹ 1.44 crores towards provision for bad and doubtful debts written back, the assessment order passed by the AO cannot be termed as erroneous, insofar as it is prejudicial to the interest of the revenue and hence, we set aside the findings of the Ld.PCIT and restored the findings of the Ld.AO. PCIT has questioned deduction allowed u/s 36(1)(viii) being profits from long term finance given by the assesee, on the ground that although, AO has examined the issue and recomputed eligible profit and gains and income from operations, but failed to reduce interest received on income tax refund of ₹ 22.95 crores from profits and gains of business before allowing deduction u/s 36(1)(viii) and consequently, allowed excess deduction of ₹ 1.40 crores. We find that although, the Ld. AO has examined the issue at the time of assessment proceedings and recomputed eligible deduction u/s. 36(1)(viii), but failed to exclude interest received on income tax refund from profits and gains of business before allowing deduction u/s. 36(1)(viii). We further noted that the assessee has accepted the fact that the said interest on income tax refund needs to be excluded from profits and gains of the business. Further contended that once, it has been excluded from profits and gains of the business, then the same needs to be excluded from revenue from operations in order to compute eligible deduction u/s.36(1)(viii) and accordingly, filed a revised computation of eligible deduction u/s.36(1)(viii), which is part of paper book page 107 filed by the assessee. We are of the considered view that insofar as, this issue is concerned the assessment order passed by the Ld. AO is erroneous, insofar as it is prejudicial to the interest of the revenue. However, as regards excess deduction computed by the ld. PCIT and excess deductions worked out by the assessee, there is a difference, which needs to be thoroughly examined by the Ld.AO in light of facts gathered by the Ld.PCIT and revised computation filed by the assessee in revisional proceedings. Assessment order passed by the ld. AO u/s 143(3), insofar as, this issue is concerned is erroneous, insofar as prejudicial to the interest of the revenue. Assessment order passed by the AO u/s 143(3) is neither erroneous, nor prejudicial to the interest of the revenue, insofar as, the first issue of allowances of deduction towards provision for restructuring of assets written back and towards provision for bad and doubtful debts written back. Insofar as, the second issue of excess allowances of deduction u/s.36 (1)(vii), the assessment order passed by the AO is erroneous, insofar as it is prejudicial to the interest of the revenue and hence, we modified the findings of the Ld.PCIT. While considering the second issue of excess deduction allowed u/s.36 (1)(viii), we direct the AO to exclude interest on income tax refund from profits and gains of business and also from total revenue from operations for the purpose of determination of allowable deduction u/s.36(1)(viii). Appeal filed by the assessee treated as partly allowed.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 263 of the Income Tax Act, 1961.
2. Deduction claims for provisions written back, specifically for restructuring of assets and bad and doubtful debts.
3. Excess deduction allowed under Section 36(1)(viii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Proceedings Initiated under Section 263:
The assessee contested the initiation of proceedings under Section 263, arguing that the Commissioner of Income Tax (CIT) erred in initiating these proceedings and passing the order under Section 263. The assessee claimed that the assessment order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the revenue's interest. The CIT, however, held that the assessment order was erroneous and prejudicial to the revenue, as the AO had not properly examined the facts, particularly concerning the deductions claimed for provisions written back and excess deductions under Section 36(1)(viii).

2. Deduction Claims for Provisions Written Back:
The assessee claimed deductions for provisions written back, specifically for restructuring of assets (?22.49 crores) and bad and doubtful debts (?1.44 crores). The CIT argued that these deductions were erroneously allowed by the AO, as they were out of provisions allowed under Section 36(1)(viia) in earlier years and hence not eligible for deduction. The assessee countered that these provisions were not claimed as deductions in earlier years and were added back in the computation of total income. The tribunal noted that the issue was subject to assessment proceedings and litigation before the CIT(A), and therefore, the CIT could not invoke revisional jurisdiction under Section 263 for this issue.

3. Excess Deduction Allowed under Section 36(1)(viii):
The CIT questioned the excess deduction allowed under Section 36(1)(viii) for long-term finance, amounting to ?1.40 crores for AY 2010-11 and ?73.30 lakhs for AY 2011-12. The CIT argued that the AO failed to exclude interest on income tax refunds from profits and gains of business before allowing this deduction. The assessee admitted that interest on income tax refunds should be excluded from profits and gains of business but contended that it should also be excluded from total revenue from operations for determining the allowable deduction. The tribunal agreed with the CIT that the AO's failure to exclude this interest made the assessment order erroneous and prejudicial to the revenue's interest.

Conclusion:
The tribunal concluded that the assessment order was not erroneous or prejudicial to the revenue's interest concerning the deduction claims for provisions written back. However, the assessment order was erroneous and prejudicial to the revenue's interest concerning the excess deduction allowed under Section 36(1)(viii). The tribunal directed the AO to exclude interest on income tax refunds from both profits and gains of business and total revenue from operations for determining the allowable deduction under Section 36(1)(viii).

Result:
- The appeal for AY 2010-11 was partly allowed.
- The appeal for AY 2011-12 was partly allowed.
- Both appeals were partly allowed, with specific directions for re-computation of deductions under Section 36(1)(viii).