2019 (2) TMI 2065 - AT - Income Tax

Revision u/s 263 by CIT - credit card write off not allowable under section 36(1)(vii), wrong calculation on claim of special reserve allowable under section 36(1)(viii) and interest on perpetual bond wrongly allowed by the AO - HELD THAT - It is clear from the order of CIT as reproduced above that Ld. CIT has given a direction to the AO to pass the order in a specified manner by giving the assessee an opportunity of being heard before passing the order and clearly noted that assessment order will be modified to that extent. As per the provisions of section 263 CIT has the power to examine the assessment order passed by the AO and if he is of the view that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue then the Ld. CIT may direct the AO to redo the assessment - section 263 does not contemplate setting aside an assessment order with a direction to pass the fresh assessment as per findings and directions of Ld. CIT. We are therefore of the considered view that the ld CIT has not exercised his revisionary jurisdiction as per the provisions of section 263. The case of the assessee is supported by a decision of M/s. Dev Prakash Contractor 2015 (11) TMI 859 - ITAT CHANDIGARH . Thus it is clear from the above that by setting aside the assessment order , the Ld. CIT has exceeded his jurisdiction by directing the AO to pass the order on the issues as raised by the Ld. CIT in the revisionary order passed especially by directing that the assessment order would be modified to that extent and as such the order u/s 263 of the act can not be sustained as the ld CIT has expressed final opinion and has left no scope for AO s verification of the controversial issues - Decided in favour of assessee.

Summary

Issues Involved:
1. Allowability of credit card write-offs under section 36(1)(vii) of the Income Tax Act, 1961.
2. Calculation of deduction in respect of special reserve under section 36(1)(viii).
3. Allowability of interest on perpetual debt instruments.

Issue-wise Detailed Analysis:

1. Allowability of Credit Card Write-offs:
The Pr. CIT challenged the deduction claimed by the assessee under section 36(1)(vii) for bad debts related to credit card business, arguing that such debts do not qualify as they neither represent money lent in the ordinary course of banking business nor were taken into account for computing income. The assessee countered by asserting that credit card transactions are part of the banking business, as per RBI guidelines, and the write-offs should be allowed as they represent irrecoverable amounts lent to customers. The assessee also argued that if not allowable under section 36(1)(vii), the write-offs should be considered as business losses under section 28. The Tribunal found that the AO had allowed the claim after due consideration, and thus the Pr. CIT's direction to disallow the write-offs exceeded his jurisdiction.

2. Calculation of Deduction for Special Reserve:
The Pr. CIT noted that the assessee's method of calculating the special reserve under section 36(1)(viii) was arbitrary, particularly the allocation of 80% of interest costs against non-fund based income and the percentage of long-term finance business. The assessee defended its method, stating it was consistent with past practices accepted by the revenue authorities and supported by statutory auditors. The Tribunal observed that the AO had examined and accepted the assessee's method, and the Pr. CIT's directive to recompute the deduction was beyond his revisionary powers.

3. Allowability of Interest on Perpetual Debt Instruments:
The Pr. CIT argued that interest on perpetual debt instruments should not be allowed as a deduction under section 36(1)(iii) because such instruments should be treated as equity, not debt. The assessee contended that these instruments qualify as Tier I capital and the interest paid is deductible. The Tribunal noted that the AO had allowed the interest deduction after due examination, and the Pr. CIT's intervention was not justified.

Tribunal's Conclusion:
The Tribunal held that the Pr. CIT exceeded his jurisdiction by directing specific disallowances and modifications to the assessment order. The Tribunal emphasized that under section 263, the Pr. CIT can direct the AO to redo the assessment but cannot dictate the specific outcome. The Tribunal quashed the Pr. CIT's order, asserting that the AO's original assessment was neither erroneous nor prejudicial to the interest of the revenue, as the AO had taken one of the possible views after due consideration.

Final Judgment:
The appeal of the assessee was allowed, and the order passed by the Pr. CIT under section 263 was quashed. The Tribunal concluded that the Pr. CIT's directions were beyond the scope of his revisionary jurisdiction and invalidated the order on technical grounds.