2017 (9) TMI 1765 - HC - Income Tax

Reopening of Assessment - notice on an overruled judgment - proceeding initiated against the appellant relying on the decision of Madhya Pradesh Cooperative Bank Ltd. Vs. Addl. CIT 1996 (1) TMI 8 - SUPREME COURT - Held that - It is really shocking that the date on which the notice was issued on a judgment which is sought to be relied on was overruled by the decision of Supreme Court in the case of CIT Vs. Karnataka State Cooperative Bank 2001 (8) TMI 9 - SUPREME COURT therefore notice issued under Section 147/148 was based on the judgment which was overruled. In that view of the matter there is no basis for issuing the notice. However in view of the decision of this Court in the case of CIT Bikaner Vs. Shri Ram Singh (2008 (5) TMI 200 - RAJASTHAN HIGH COURT) it is very clear that the authority could not have travelled the notice under Section 147. Further counsel for the respondent contended that the judgment of this Court is required to be considered in view of the Explanation 3 of Section 147 which came into force w.e.f. 2009 the amendment which has been added w.e.f. 1.4.1889. However it will not be out of place to mention here that the notice was issued on 11.3.2003. This explanation was not there at that time. In that view of the matter we are not giving any comment whether the impugned jurisdictional judgment will apply or not and when the notice was issued this explanation was not there. Assessing Officer has not only committed very serious error in issuing the notice on an overruled judgment but has also committed serious misconduct. Inasmuch as in spite of the pointing out the judgment rendered by the Karnataka High Court came subsequently and has overruled the M.P. High Court judgment the proceedings ought to have been closed. However not only the Assessing Officer but the CIT(A) and the Tribunal have not taken into consideration this note. The issue under Section 147 based on an overruled judgment is required to be answered in favour of the assessee. Additions towards non-recoverable interest on NPA debts u/s 43D - Held that - As relying on the decision of the Supreme Court in the case of T.R.F. Ltd. Vs. Commissioner of Income Tax reported in (2010 (2) TMI 211 - SUPREME COURT) AO has not examined whether the debt has in fact been written off in accounts of the assessee. When bad debt occurs the bad debt account is debited and the customer s account is credited thus closing the account of the customer. In the case of Companies the provision is deducted from Sundry Debtors. As stated above the Assessing Officer has not examined whether in fact the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.

Summary

Issues Involved:
1. Legality and propriety of initiation of proceedings under Section 147 of the Income Tax Act for Assessment Year 1998-99.
2. Justification of additions made by the AO towards non-recoverable interest on NPA debts in conformity with Section 43D of the Income Tax Act.

Comprehensive, Issue-Wise Detailed Analysis:

1. Legality and Propriety of Initiation of Proceedings under Section 147:

The appellant challenged the Tribunal's dismissal of the appeal, which confirmed the orders of the CIT(A) and AO. The court framed the question of whether the initiation of proceedings under Section 147 of the Income Tax Act for the Assessment Year 1998-99 was legal and proper. The appellant contended that the AO issued the notice under Section 148 based on a Supreme Court decision in Madhya Pradesh Cooperative Bank Ltd. Vs. Addl. CIT, which was later overruled by the Supreme Court in CIT Vs. Karnataka State Cooperative Bank. Despite this, the AO added income and reassessed, which the Tribunal confirmed.

The appellant relied on the judgment of CIT Bikaner Vs. Shri Ram Singh, which clarified that the AO's jurisdiction to subject any other income to tax under Section 147 ceases if the income believed to have escaped assessment is found to be explained. The court found that the AO committed a serious error by issuing the notice based on an overruled judgment and that the CIT(A) and Tribunal failed to consider this. Thus, the issue under Section 147 was answered in favor of the assessee.

2. Justification of Additions Made by the AO Towards Non-Recoverable Interest on NPA Debts:

The appellant argued that the AO wrongly relied on provisions of Section 43D, which were not applicable to the facts of the case. The Tribunal observed that the assessee did not fulfill the requirements of CBDT Circular No.621 and subsequent amendments. The Tribunal noted that the interest on advances classified as NPA during the year was credited to the Profit & Loss account in past years and reversed during the current year. Since the interest was already credited in earlier years, it was taxable then, and reversing the entries in the current year did not allow for a deduction.

The appellant relied on the Supreme Court's decision in UCO Bank Vs. Commissioner of Income Tax, which supported the mixed method of accounting for interest on doubtful loans. The court found that the AO did not examine whether the debt was written off in the accounts of the assessee, as required by the Supreme Court's decision in T.R.F. Ltd. Vs. Commissioner of Income Tax. Thus, the second issue was also answered in favor of the assessee, and the appeals were allowed.

Conclusion:

The court concluded that the initiation of proceedings under Section 147 based on an overruled judgment was improper, and the additions made towards non-recoverable interest on NPA debts were not justified. Both issues were answered in favor of the assessee, and the appeals were allowed.