2010 (8) TMI 1158 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the order passed under section 263 of the Income Tax Act.
2. Jurisdiction of the CIT under section 263 concerning the issue of bad debts.
3. Time limitation for invoking section 263.
4. Merger of the issue of bad debts with earlier appellate orders.
5. Allowability of bad debts under section 36(1)(vii) and section 28(1) of the Income Tax Act.

Detailed Analysis:

1. Validity of the order passed under section 263 of the Income Tax Act:

The assessee challenged the order passed by the CIT under section 263, arguing it was bad in law and liable to be quashed. The CIT had restored the issue of allowability of bad debt to the file of the Assessing Officer (AO) for further inquiries and verification. The assessee contended that the issue of bad debts had already been adjudicated in earlier appellate proceedings and thus, the CIT's order was invalid.

2. Jurisdiction of the CIT under section 263 concerning the issue of bad debts:

The CIT invoked section 263, claiming the AO's order was erroneous and prejudicial to the interest of revenue. The assessee argued that the AO had already considered the bad debts in the original assessment order and subsequent appellate orders, and therefore, the CIT wrongly assumed jurisdiction under section 263. The Tribunal agreed with the assessee, citing that the AO had examined the bad debts in the original assessment, and no new material was found during the search to warrant a fresh inquiry.

3. Time limitation for invoking section 263:

The assessee argued that the CIT's order was barred by limitation as the time limit of two years prescribed under section 263(2) had already expired. The Tribunal noted that the AO had considered the bad debts in the original assessment order dated 18-03-2004, and the CIT wrongly assumed jurisdiction under section 263 for the same amount in the order passed under section 153A read with section 143(3) dated 31-12-2007.

4. Merger of the issue of bad debts with earlier appellate orders:

The assessee contended that the issue of bad debts had merged with the appellate orders in the first round of litigation and subsequent proceedings. The Tribunal referred to earlier orders where the matter was restored to the AO to verify whether the assessee had written off the amounts in the books of accounts. The Tribunal held that the issue of bad debts, which was considered in the original assessment and appellate proceedings, could not be revisited under section 153A unless new incriminating material was found during the search.

5. Allowability of bad debts under section 36(1)(vii) and section 28(1) of the Income Tax Act:

The Tribunal examined whether the bad debts were allowable under section 36(1)(vii) or as a trading loss under section 28(1). The AO had initially disallowed certain bad debts, which were later confirmed by the CIT(A). The Tribunal, in its earlier order, directed the AO to verify if the bad debts were written off in the books of accounts and allowed the deduction if they were written off. The Tribunal reiterated that the AO had already considered the bad debts in the original assessment, and no new material was found during the search to warrant a fresh inquiry under section 153A.

Conclusion:

The Tribunal concluded that the CIT's order under section 263 was invalid as the issue of bad debts had already been considered in the original assessment and subsequent appellate proceedings. The Tribunal held that the AO could not revisit the issue of bad debts under section 153A without new incriminating material found during the search. Consequently, the Tribunal quashed the CIT's order passed under section 263.