2023 (2) TMI 1004 - AT - Income Tax

Revision u/s 263 - reduction from provision created for bad and doubtful debts for rural advances - real income theory - as per CIT Provision created for bad and doubtful debts for rural advances to its general reserves, which was liable to be taxed as income of the assessee since the provision created had been allowed a deduction earlier, the AO had not considered this matter and had made no verification or necessary inquiries in relation to the same while finalizing the assessment - As per assessee invocation of Explanation-2 to section 263 by the ld.Pr.CIT without confronting the same to the assessee causing the order passed to be against principle of natural justice and hence invalid - HELD THAT - We are not impressed nor convinced with the contention of the Ld.counsel for the assessee on the merits of the case that the write back of provision for bad and doubtful debts on rural advances was not taxable as income. Considered from all, any and every aspect, as per law read alongwith accounting principles in this regard, the write back, we hold, is to be treated as income and subjected to tax ,as rightly held by the Ld.PCIT. Even as per accepted accounting principles, this write back needed to be treated as income and routed through the P L account, as rightly held by the Ld.PCIT. Thus going by law, supported by accounting principles, the write back of provisions for bad and doubtful debts of rural advances was required to be routed through the Profit and Loss account and treated as income for taxation purposes. Even going by the real income theory the Ld.PCIT, we hold, has rightly found the write back taxable,noting that the write back of the provision to the general reserve indicated no NPA and hence realization of income. Meaning thereby that the provision created earlier, for cushioning against bad debts on account of rural advances turning NPA , being created out of profits , and when not required as written back, it resulted in income to the assessee. This provision for bad and doubtful debts relating to the rural advance, having been allowed as claim for deduction in earlier years, any write back from the same, logically needed to be subjected to tax, since clearly the claim allowed in earlier years was excessive to the extent of the write back done by the assessee. Even on the accounting principles as prescribed by the ICAI the write back from the provision needed to be routed through profit loss account. Therefore, for all purposes, we find that there is no merit in the claim made by the ld.counsel for the assessee that this write back could not be subjected to tax. No merit in the contention of the ld.counsel for the assessee that the order u/s 263 of the Act needs to be set aside for not having confronted the assessee with invocation of Explanation 2 to the said section. Decided against assessee.

Summary

Issues Involved:
1. Validity of invoking Section 263 of the Income Tax Act, 1961.
2. Whether the reduction from the provision for bad and doubtful debts should be taxed.
3. Whether the Principal Commissioner of Income Tax (Pr.CIT) followed due process.
4. Applicability of Explanation-2 to Section 263.

Detailed Analysis:

1. Validity of Invoking Section 263 of the Income Tax Act, 1961:
The appeal was filed by the assessee against the order of the Pr.CIT, which invoked Section 263 of the Income Tax Act, 1961. The Pr.CIT found the original assessment order erroneous and prejudicial to the interests of the Revenue because the Assessing Officer (AO) did not consider the taxability of Rs. 25 crore transferred from the provision for bad and doubtful debts to the general reserve. The Pr.CIT's order highlighted that this amount should have been routed through the profit and loss account and offered to tax.

2. Whether the Reduction from the Provision for Bad and Doubtful Debts Should be Taxed:
The primary argument from the assessee was that the write-back of provisions for bad and doubtful debts for rural advances could not be taxed as income. The assessee contended that there was no specific provision in the law for treating such write-backs as income. However, the Tribunal held that Section 36(1)(viia) allows a deduction for provisions made for bad and doubtful debts, and when such provisions are written back, they no longer remain "made" and thus should be taxed. The Tribunal emphasized that the write-back of these provisions should be treated as income, as it represents an excess claim of provision created earlier.

3. Whether the Principal Commissioner of Income Tax (Pr.CIT) Followed Due Process:
The Tribunal found that the Pr.CIT had given the assessee adequate opportunities to present their case. The Pr.CIT's order was a speaking order, thoroughly analyzing the issue from all aspects, including general accounting principles. The Tribunal noted that the Pr.CIT had correctly dealt with the assessee's contentions and had provided a detailed explanation for why the write-back of provisions should be taxed.

4. Applicability of Explanation-2 to Section 263:
The assessee argued that the Pr.CIT had invoked Explanation-2 to Section 263 without confronting the assessee with this invocation in the show-cause notice. The Tribunal rejected this argument, citing a previous decision (Nilaykumar & Bros. Jewellers) which clarified that Explanation-2 is only an explanatory provision that clarifies the scope of Section 263 and does not expand it. The Tribunal held that mentioning Explanation-2 in the show-cause notice was not necessary as long as the reason for finding the assessment order erroneous was clearly communicated to the assessee.

Conclusion:
The Tribunal upheld the order of the Pr.CIT, confirming that the write-back of provisions for bad and doubtful debts should be taxed and that the Pr.CIT had followed due process in invoking Section 263. The appeal of the assessee was dismissed.