2024 (10) TMI 919 - AT - Income Tax

Revision u/s 263 - Non-allowance of provision for standard assets u/s 36(1)(viia) (c) - HELD THAT - PCIT is of the view that section 36 starts with in respect of any provision for bad and doubtful debts and therefore, the deduction is allowable only for the bad and doubtful debts, whereas, the assessee has claimed the deduction on standard assets as well. During the course of hearing the AR presented case laws where it has been held that deduction u/s 36(1)(viia) is allowable for the entire provision made as per RBI circular including the provision towards standard assets. DR also fairly submitted that the allowability of the deduction as claimed by the assessee is a debatable issue. There is merit in the contention that whether the provision made by the assessee towards standard assets is allowable u/s 36(1)(viia) is a debatable issue and that the AO while allowing the deduction the order passed has taken a possible view upon verifying the details available on record. On the contention of the PCIT that the AO has not specifically enquired into the allowability of the claim of the deduction on standard assets u/s 36(1)(viia) we notice that the AO has raised a specific query on the same and the assessee has filed the relevant reply for the same. Therefore, it cannot be stated that the AO has not made enquiry into the issue of allowability of the claim of the deduction on standard assets u/s 36(1)(viia). Assessee has no control over the way an assessment order is drafted and generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/ disallowances are made. In our considered view the error envisaged by section 263 of the Act should actually be an error either of fact or of law and in the given case the PCIT has not brought anything on record to show that the deduction claimed by the assessee has been erroneously claimed under the law or any material to show that there been an error in the order that is prejudicial to the interest of the revenue. As in the case of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT we hold that the conclusion of the PCIT that the order passed by the AO is erroneous is not tenable and liable to be quashed. Assessee appeal allowed.

Summary

Issues Involved:

1. Validity of order under section 263.
2. Non-allowance of provision for standard assets under section 36(1)(viia)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Order Under Section 263:

The primary issue in these appeals was the validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. The PCIT invoked section 263, arguing that the Assessing Officer (AO) failed to make specific enquiries regarding the deduction claimed by the assessee under section 36(1)(viia) for provisions towards standard assets. The PCIT contended that the AO's order was erroneous and prejudicial to the interests of the revenue because it allowed a deduction that was not permissible under the law. The PCIT emphasized that section 263 empowers the revision of any order passed by the AO if it is both erroneous and prejudicial to the revenue. The PCIT argued that the AO did not specifically enquire into the allowability of the deduction on standard assets, thus leading to an incorrect assumption of fact and law.

The appellate tribunal, however, found that the AO had indeed raised specific queries regarding the deduction claimed under section 36(1)(viia) and that the assessee had provided the necessary details. The tribunal noted that the AO had taken a plausible view after verifying the details, and the PCIT could not substitute his view in such cases. Citing the Supreme Court's decision in Malabar Industrial Co. Ltd vs CIT, the tribunal held that when two views are possible, and the AO has adopted one, it cannot be considered erroneous unless it is unsustainable in law. Therefore, the tribunal concluded that the PCIT's invocation of section 263 was not tenable, as the AO's order was neither erroneous nor prejudicial to the interests of the revenue.

2. Non-allowance of Provision for Standard Assets Under Section 36(1)(viia)(c):

The second issue was whether the provision for standard assets could be claimed as a deduction under section 36(1)(viia)(c). The assessee argued that the provision was made according to the RBI Master Circular and that section 36(1)(viia) did not restrict the deduction to non-performing assets. The PCIT, however, held that the deduction under section 36(1)(viia) was meant for bad and doubtful debts, not standard assets. The PCIT further argued that the provision for standard assets was contingent and not allowable under the Act.

The tribunal examined the relevant provisions and noted that section 36(1)(viia) allows deductions for provisions for bad and doubtful debts. The tribunal acknowledged that the issue of whether provisions for standard assets could be included was debatable. The tribunal found that the AO had considered the details and allowed the deduction, taking a possible view supported by some judicial precedents. The tribunal reiterated that the PCIT could not invoke section 263 merely because he disagreed with the AO's view, especially when the issue was debatable.

In conclusion, the tribunal quashed the PCIT's order under section 263 for both assessment years, holding that the AO's orders were not erroneous or prejudicial to the interests of the revenue. Consequently, the appeals of the assessee for AY 2018-19 and AY 2019-20 were allowed.