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2025 (4) TMI 852 - AT - Income TaxRevision u/s 263 - Whether the deductions allowed u/s 36(1)(vii) for bad debts and depreciation on shifting of investments - HELD THAT - Admittedly the assessment order does not specify the enquiries conducted by the Ld.AO however multiple notices were issued by the AO to enquire about both issues that is the subject matter of consideration in the 263 proceeding. Further from the details filed by the assessee in response it is clear that the computation of the claim has been properly looked into by the Ld.AO. Therefore this cannot be treated to be a case of no enquiry or inadequate enquiry. We now refer to the decision of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT the prerequisite for the exercise of jurisdiction by the CIT under section 263 is that the order of the AO must be erroneous in so far as it is prejudicial to the interests of Revenue. PCIT has to be satisfied of twin conditions namely order of the AO sought to be revised is erroneous and it is prejudicial to the interests of the Revenue. If one of them is absent i.e; if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the interest of the revenue recourse cannot be had to section 263(1) of the Act. It was further held that the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committed by the AO. As in case of Jamnadas T. Mehta 2001 (12) TMI 223 - ITAT PUNE it was held that the ambit of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. The section is not enacted to get a sheer escapement of revenue which is taken care of in other provisions of the Act. Prejudice that is contemplated u/s 263 is the prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate s order in exercise of the supervisory power but it is to be invoked and employed only for setting right distortions and prejudices to the revenue which is a unique conception which is to be understood in the context of and in the interests of the revenue administration. No merit in the present proceedings initiated against the order u/s.143(3) on an issue that falls outside the scope of reasons recorded. We therefore of the opinion that the notice issued u/s. 263 is void-ab- initio as a consequence of which the order passed u/s. 263 has to be declared to be bad in law. Appeal filed by the assessee stands allowed.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are: 1. Whether the notice issued under section 263 of the Income-tax Act, 1961, by the Principal Commissioner of Income-tax (PCIT) was illegal and invalid. 2. Whether the order under section 263 dated 05/01/2024 was illegal and invalid due to lack of authority and jurisdiction. 3. Whether the assessment order dated 16/04/2021 was erroneous and prejudicial to the interest of the revenue, justifying revision under section 263. 4. Whether the deductions allowed under section 36(1)(vii) for bad debts and depreciation on shifting of investments were correctly allowed by the Assessing Officer (AO). ISSUE-WISE DETAILED ANALYSIS 1. Legality and Validity of Notice under Section 263 The relevant legal framework involves section 263 of the Income-tax Act, which empowers the PCIT to revise any order passed by the AO if it is erroneous and prejudicial to the interests of the revenue. The court examined whether the notice dated 02/03/2021 was issued with proper authority and jurisdiction. The court found that the PCIT failed to establish that the assessment order was erroneous or prejudicial to the interests of the revenue. The notice was deemed invalid as it did not satisfy the conditions required for invoking section 263. 2. Legality and Validity of Order under Section 263 The order under section 263 was challenged on the grounds of being without authority and jurisdiction. The court considered whether the PCIT had the jurisdiction to pass such an order based on the assessment order dated 16/04/2021. The court noted that the PCIT's order was based on inadequate enquiry rather than no enquiry, which does not fall within the ambit of section 263. The court emphasized that the PCIT must demonstrate that the AO's order was both erroneous and prejudicial to the revenue, which was not established in this case. 3. Assessment Order's Alleged Errors and Prejudice to Revenue The court analyzed whether the assessment order was erroneous and prejudicial to the revenue, focusing on two primary issues: a) Deduction under section 36(1)(vii) for bad debts: The court referenced the Supreme Court's decision in Catholic Syrian Bank Ltd. Vs. CIT, which clarified the distinct and independent nature of deductions under sections 36(1)(vii) and 36(1)(viia). The court found that the AO had correctly allowed the deduction based on the applicable legal framework and precedents. b) Depreciation on shifting of investments: The court examined the application of Income Computation & Disclosure Standards (ICDS-VIII) and found that the AO had correctly allowed the deduction following the standards issued by the CBDT. 4. Application of Law and Treatment of Competing Arguments The court scrutinized the arguments presented by both the appellant and the respondent. The appellant argued that the deductions were correctly allowed, supported by detailed explanations and compliance with relevant standards and instructions. The respondent contended that the AO's order lacked adequate enquiry, justifying revision under section 263. The court concluded that the AO had conducted sufficient enquiry, and the deductions were allowed based on a thorough examination of the facts and applicable legal provisions. The PCIT's reliance on incorrect instructions and lack of evidence for inadequate enquiry led to the conclusion that the order under section 263 was invalid. SIGNIFICANT HOLDINGS The court held that: "The provisions of sections 36(1)(vii) and (viia) of the Income-tax Act, 1961, are distinct and independent items of deduction and operate in their respective fields." The court established that the AO's order was not erroneous or prejudicial to the revenue, as the necessary enquiries were conducted, and the deductions were allowed based on correct application of law. The court determined that the notice and order under section 263 were void ab initio, as they did not satisfy the conditions required for invoking the section. The appeal filed by the assessee was allowed, and the order under section 263 was declared bad in law.
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