2012 (11) TMI 551 - AT - Income Tax

Write -off of Bad debts revision u/s 263 - Held that - Sum debited to the Profit & Loss Account under the head bad debts in the name of M/s Narang General Stores. AO, has not made any investigation for the justification of the said claim, CIT treated this issue covered u/s 263 of the Act. However, the assessee has filed relevant submission on the issue in question. Therefore, this issue cannot be said to have been not considered by the AO. In view of this, to this extent the order of CIT is not sustainable. Interest free advance Following the judgement of court in case of M/s Malabar Industrial Co. V CIT 2000 (2) TMI 10 - SUPREME COURT Held that - CIT has jurisdiction u/s 263 of the Act, if twin conditions are satisfied, namely; (i) the order of the AO, sought to be revised is erroneous; and (ii) it is prejudicial to the interest of revenue. In the present case Assessee had paid interest to the bank and P.F.C. and had raised interest bearing loans and on the other hand, assessee had given interest free advances. The CIT recorded finding that AO had not made any investigation at the time of assessment proceedings in the matter regarding allowability of the claim made by the assessee - having regard to the entirety of the facts and circumstances of the case, speaks about the non-applicability of mind, and non investigation into the issue raised by the CIT - order passed by the CIT u/s 263 of the Act, on this issue is upheld - appeal is disposed of - In the result, appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Application of mind by the Assessing Officer (AO) in the original assessment.
3. Depreciation not debited to the Profit & Loss Account.
4. Bad debts claimed by the assessee.
5. Interest-free advances given by the assessee.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act, 1961:
The appellant contended that the Commissioner of Income Tax (CIT) erred in assuming jurisdiction under Section 263 of the Act, arguing that the original assessment order passed by the AO was neither erroneous nor prejudicial to the interest of revenue. The Tribunal examined whether the CIT's assumption of jurisdiction was justified under the statutory conditions of Section 263, which requires an order to be both erroneous and prejudicial to the interest of revenue.

2. Application of Mind by the Assessing Officer (AO) in the Original Assessment:
The Tribunal noted that the AO's assessment order was laconic and cryptic, lacking detailed findings on any issue. The Tribunal emphasized that it is not feasible to discern the AO's application of mind unless clearly demonstrated in a well-reasoned and speaking order. The Tribunal found that the AO did not specify the issues discussed with the assessee's representative, making it impossible to assume that the AO considered the issues raised by the CIT.

3. Depreciation Not Debited to the Profit & Loss Account:
The CIT observed that the assessee had not debited depreciation in the Profit & Loss Account but claimed it directly in the computation of income. The CIT found this practice resulted in enhanced capital distributed to the partners, which was not considered by the AO during the assessment. The Tribunal upheld the CIT's findings, agreeing that the AO was not aware of this issue and thus could not have applied his mind to it.

4. Bad Debts Claimed by the Assessee:
The CIT noted that the AO did not investigate the justification for the bad debts claimed by the assessee. However, the Tribunal found that the assessee had filed relevant submissions on this issue, indicating that the AO had considered it. Therefore, the Tribunal held that the CIT's order on this issue was not sustainable.

5. Interest-free Advances Given by the Assessee:
The CIT found that the assessee had given interest-free advances while paying interest on loans, and the AO had not investigated the allowability of such claims. The Tribunal agreed with the CIT, noting that the AO failed to make necessary inquiries, which is required under the quasi-judicial powers of an AO. The Tribunal cited the Hon'ble Supreme Court's decision in Malabar Industrial Co. V CIT, which held that the CIT has jurisdiction under Section 263 if the AO's order is erroneous and prejudicial to the interest of revenue.

Conclusion:
The Tribunal concluded that the AO's order was passed in a perfunctory and mechanical manner without proper application of mind and necessary inquiries. The Tribunal upheld the CIT's order under Section 263 concerning the depreciation not debited to the Profit & Loss Account and interest-free advances but did not sustain the CIT's order regarding the bad debts. The appeal of the assessee was partly allowed.