2021 (1) TMI 956 - AT - Income Tax

Revision u/s 263 - loss on OTS is nothing but the claim of deduction of bad debt during the previous year and same is allowable as a deduction u/s.36(1)(vii) - HELD THAT - The provisions of section 36(1)(vii) provides that in case of the banks, who are eligible deduction u/s.36(1)(viia), deduction on account of bad debts relating to rural advance/loans shall be first set off against credit balance in the provision for bad and doubtful debts account and deduction will be allowed to the extent of debts relating to rural debts which exceeds credit balance available in the said provision created under section 36(1)(vii). Present case are that the assessee had a credit balance in its balance sheet as on 31.3.2014 as provision for bad and doubtful account . Thus, as per proviso to section 36(1)(vii) of the Act, the amount of loss on TOS, which was in the nature of rural debts which was extended as benefit to the weaver in the rural areas, which should have been first set off against credit balance available in the balance sheet, which was more than the actual rural bad debts was not available u/s.36(1)(vii). The rider created by the legislature by way of insertion of proviso to section 36(1)(vii) of the Act raises a clear-cut bar on the allowability of claim of the assessee made before the AO during the original assessment proceedings under the head loss on OTS account in a situation, when the amount standing in the balance sheet as provision for bad doubtful debts is higher than the amount of bad debts shown as loss on OTS a/c. . We are inclined to hold that since the AO has ignored the relevant provisions of the Act before allowing the claim of the assessee of loss on OTS account and without making proper and adequate enquiry and the view taken thereafter was also not sustainable, therefore, the impugned order passed by ld Pr. CIT revising the order u/s.263 is fully justified and correct alleging the impugned assessment order as erroneous and prejudicial to the interest of the revenue and there is no valid reason to interfere with the same. - Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Justification of invoking section 263 of the Income Tax Act by Pr. CIT.
2. Allowability of the claim of "loss on OTS account" under section 36(1)(vii) of the Income Tax Act.
3. Adequacy of the Assessing Officer's (AO) enquiry and assessment.

Issue-wise Detailed Analysis:

1. Justification of invoking section 263 of the Income Tax Act by Pr. CIT:
The primary grievance of the assessee is that the Pr. CIT invoked section 263 of the Act, contending that the order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue. The Pr. CIT observed that the AO allowed a deduction of ?17,03,22,962/- under section 36(1)(vii) without considering the first proviso and applying the provisions of section 36(1)(via) read with section 36(2). This led to the revision of the assessment order, directing the AO to disallow the claimed deduction on the grounds that the AO failed to conduct a thorough enquiry and verification of the claim.

2. Allowability of the claim of "loss on OTS account" under section 36(1)(vii) of the Income Tax Act:
The assessee claimed the "loss on OTS" as a deduction under section 36(1)(vii), arguing it was a bad debt written off during the year. The Pr. CIT noted that the assessee had a credit balance of ?38,43,38,064/- in the "provision for bad and doubtful debts account" as on 31.03.2014. According to the first proviso to section 36(1)(vii), the deduction for bad debts in the case of banks should be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account. Since the bad debt did not exceed the credit balance, the Pr. CIT held that the AO should have disallowed the deduction.

3. Adequacy of the Assessing Officer's (AO) enquiry and assessment:
The Pr. CIT observed that the AO did not make sufficient efforts to collect full facts during the assessment proceedings. The AO accepted the assessee's claim based on written submissions without conducting a detailed enquiry. The Pr. CIT emphasized that the AO's failure to consider the interplay between sections 36(1)(vii), 36(1)(viia), and 36(2), along with the newly introduced Explanation-2 to section 36(1)(vii) by the Finance Act, 2013, rendered the assessment order erroneous and prejudicial to the interest of the revenue.

Conclusion:
The Tribunal upheld the Pr. CIT's order, stating that the AO's assessment was indeed erroneous and prejudicial to the interest of the revenue due to inadequate enquiry and failure to apply relevant provisions of the Act. The appeal of the assessee was dismissed, affirming the Pr. CIT's direction to disallow the claimed deduction of ?17,03,22,962/- under the head "loss on OTS account."