2020 (1) TMI 1035 - AT - Income Tax

Revision u/s 263 - provision for bad and doubtful debts u/s 36(1)(va) - HELD THAT - In this case, from the facts, it can be seen that the relief has been allowed only after making enquiries. Therefore, this clause has also not applicable in this case. Therefore, we are of the considered view that the conditions to invoke the powers u/s 263 of the Act are not satisfied and hence, the Ld.PCIT was erred in invoking the scope of provisions of 263 of the I.T.Act, 1961. Further, assuming for a moment, but not accepting in order to invoke 263, the other conditions, which is to be satisfied is that the order should be prejudicial to the interest of the revenue, because in respect of bad debts claim, if any deduction allowed u/s 36(1) (vii) of the Act, then when the recovery of the same in subsequent years needs to be offered to tax u/s 41(4) of the Act. In respect of payment towards contribution to the gratuity fund, whether or not deduction is allowed in full on payment basis in this year, but the same needs to be allowed in subsequent years, if said payment is not allowed during the year under consideration. Likewise, provision for wage arrears is also liable to be allowed, when the actual payment has been made. In this case, the assessee has made payment of the wage arrears in the subsequent years. Therefore, we are of the considered view that invocation of jurisdiction u/s 263 on these issues is also incorrect. We are of the considered view that the conditions prescribed u/s 263 are not fulfilled to invoke revisional jurisdiction by the Ld.PCIT to revise the assessment order passed by the Ld. AO u/s 143(3) of the I.T.Act, 1961. Therefore, we are of the considered view that the assessment order passed by the Ld. AO is neither erroneous, nor prejudicial to the interest of the revenue. We, therefore, quash the order of the Ld.PCIT u/s 263 of the Act, and allow the appeal of the assessee.

Issues Involved:
1. Legality of the order passed under section 263 of the I.T. Act, 1961.
2. Deduction of bad debts under section 36(1)(vii) and its applicability to non-rural advances.
3. Deduction of contribution to the Gratuity Fund under section 43B.
4. Deduction of penalties paid to RBI for KYC norms violations under section 37(1).
5. Deduction of provision for wage arrears.

Detailed Analysis:

1. Legality of the Order Passed Under Section 263 of the I.T. Act, 1961:
The assessee argued that the Principal Commissioner of Income Tax (PCIT) erred in invoking section 263 without establishing how the assessment order was erroneous and prejudicial to the interest of the revenue. The PCIT must satisfy the twin conditions that the order is both erroneous and prejudicial to the revenue. The Tribunal found that the Assessing Officer (AO) had conducted necessary inquiries and verifications, and thus, the conditions for invoking section 263 were not met. The Tribunal cited several case laws, including the decision of the Hon'ble Bombay High Court in CIT vs Gabriel India Ltd, to support its view that the PCIT's revisionary powers could not be exercised merely because the PCIT had a different opinion.

2. Deduction of Bad Debts Under Section 36(1)(vii):
The PCIT questioned the deduction of ?402,26,72,141/- claimed under section 36(1)(vii) for non-rural advances, arguing that it should have been adjusted against the provision for bad and doubtful debts under section 36(1)(viia). The assessee contended that the AO had thoroughly examined the issue and allowed the deduction after considering the relevant facts and provisions, including the newly inserted Explanation (2) to section 36(1)(vii). The Tribunal held that the AO had adopted one of the possible views, and the PCIT's interpretation was incorrect. The Tribunal cited the Hon'ble Supreme Court's decision in Catholic Syrian Bank, which clarified that the proviso to section 36(1)(vii) applies only to debts for which a deduction was allowed under section 36(1)(viia).

3. Deduction of Contribution to the Gratuity Fund Under Section 43B:
The PCIT argued that the deduction of ?54 crores towards the Gratuity Fund was not allowable as it included advance payments not pertaining to the relevant assessment year. The assessee contended that section 43B allows deductions on a payment basis, irrespective of the accounting method followed. The Tribunal found that the AO had allowed the deduction after considering the provisions of section 43B and that the PCIT's interpretation was incorrect. The Tribunal cited the Hon'ble Supreme Court's decision in CIT vs Modipon Ltd, which supported the assessee's view that deductions under section 43B are allowable on a payment basis.

4. Deduction of Penalties Paid to RBI for KYC Norms Violations Under Section 37(1):
The PCIT held that the penalty of ?2 crores paid to RBI for KYC norms violations was not allowable under section 37(1) as it was for an offense or prohibited by law. The assessee argued that the penalty was not for a violation of law and cited several Tribunal decisions supporting the deductibility of such penalties. The Tribunal found that the AO had allowed the deduction after considering the relevant facts and provisions and that the PCIT's interpretation was incorrect.

5. Deduction of Provision for Wage Arrears:
The PCIT argued that the provision for wage arrears of ?96 crores was not allowable as it was contingent in nature. The assessee contended that the provision was based on an agreement with employees and was an ascertained liability. The Tribunal found that the AO had allowed the deduction after considering the relevant facts and provisions and that the PCIT's interpretation was incorrect.

Conclusion:
The Tribunal concluded that the AO had conducted necessary inquiries and verifications, and the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal quashed the PCIT's order under section 263 and restored the assessment order passed by the AO. The appeal filed by the assessee was allowed.

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