2020 (5) TMI 141 - AT - Income Tax

Revision u/s 263 - allowability of bad debts claimed by the assessee - HELD THAT - AO is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return. The order passed by the AO becomes erroneous when an enquiry has not been made before accepting the genuineness of the claim which resulted in loss of revenue. In the present case AO without examining the issue allowed the provision for bad debts as deduction though it was not written off by crediting to the individual accounts of the parties concerned in the books of accounts of the assessee so as to claim deduction u/s. 36(1)(vii) which is erroneous and prejudicial to the interests of the Revenue. Being so, we do not find any infirmity in exercising power u/s. 263 by the Pr. CIT. Main contention of the Ld. AR is that the Assessing Officer had duly verified the accounts of the assessee and allowed deduction and also there is no mandate to write off of bad debts by debiting to the P L account so as to claim deduction u/s. 36(1)(vii) - AR relied on the judgment of the Supreme Court in the case of Vijaya Bank Ltd. 2010 (4) TMI 46 - SUPREME COURT . Unable to accept the proposition because profit and loss account is the final computation of profit made by the assessee based on which assessment is to be framed. Unless the bad debt is written off by debiting to the P L account which necessarily means that the debtors account should be credited or so much of the amount debited in the profit and loss account should be written off from the amount due from the debtors, the condition as contemplated u/s. 36(1)(vii) is not satisfied. Even though the assessee s Counsel contended that when bad debt is recovered, there is provision for assessment of the same u/s. 41 of the I.T. Act, we do not think that such a safety provision will entitle the assessee to claim bad debt as a deduction without satisfying the conditions contained in section 36(1)(vii). Judgment of the Supreme Court in the case of Vijaya Bank Ltd. 2010 (4) TMI 46 - SUPREME COURT relied on by the assessee s Counsel applies mainly to Banking companies and not to other assessees. Accordingly, we hold that the Pr. CIT is justified in exercising his power u/s. 263 of the I.T. Act so as to reconsider the allowability of bad debts claimed by the assessee - Grounds of appeal of the assessee are dismissed.

Issues Involved:

1. Whether the Principal Commissioner of Income Tax (Pr. CIT) erred in exercising powers under Section 263 of the Income Tax Act.
2. Whether the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the Revenue.
3. Whether the provision for bad and doubtful debts was correctly allowed as a deduction under Section 36(1)(vii).

Detailed Analysis:

Issue 1: Exercise of Powers under Section 263

The assessee argued that the Pr. CIT erred in exercising his powers under Section 263 because the twin conditions stipulated in the section were not fulfilled. According to the assessee, there was no error in the assessment order as the Assessing Officer (AO) had examined the facts and allowed the claim based on the Supreme Court's judgment in Vijaya Bank Ltd (323 ITR 166). The assessee relied on several judicial decisions to support this argument, including Malabar Industrial Co. Limited vs. CIT (243 ITR 83) and CIT vs. Vikash Polymers (194 Taxman 57).

Issue 2: Erroneous and Prejudicial Assessment Order

The Pr. CIT noticed that the AO allowed a deduction for bad debts written off without verifying whether the debts had become irrecoverable or were written off in the accounts. The Pr. CIT directed the AO to re-examine the applicability of Section 115BBE. The Pr. CIT held that the AO's order was erroneous and prejudicial to the interest of the Revenue because these issues were not verified. The assessee contended that the AO had examined the facts and formed a definite opinion on the allowability of the claim under Section 36(1)(vii) after raising a query and receiving detailed information from the assessee.

Issue 3: Deduction for Bad and Doubtful Debts under Section 36(1)(vii)

The assessee argued that the AO had properly applied the Supreme Court's judgment in Vijaya Bank Ltd, which held that debiting the Profit and Loss Account and reducing the same from receivables in the balance sheet constitutes a write-off for the purpose of Section 36(1)(vii). The assessee submitted that the AO had formed a view after examining the written submissions and facts of the case. The Pr. CIT, however, substituted his own opinion for that of the AO, which is not permitted by law.

The Tribunal observed that Section 263 empowers the Commissioner to initiate proceedings when the AO takes a wrong decision without considering available materials or without making necessary inquiries. The AO must carry out investigations and decide matters judiciously. The Tribunal noted that the AO allowed the provision for bad debts without writing off such debts in the individual accounts, which is erroneous and prejudicial to the Revenue's interests. The Tribunal relied on the jurisdictional High Court's decisions in Sampanna Kuries Pvt. Ltd. vs. DCIT (249 CTR 210) and State Industrial Development Corporation Ltd. vs. CIT (281 ITR 413), which held that a mere provision for bad debts without actual write-off does not satisfy the conditions of Section 36(1)(vii).

The Tribunal concluded that the judgment of the Supreme Court in Vijaya Bank Ltd applies mainly to banking companies and not to other assessees. Therefore, the Pr. CIT was justified in exercising his power under Section 263 to reconsider the allowability of the bad debts claimed by the assessee.

Conclusion:

The Tribunal dismissed the appeal of the assessee, upholding the Pr. CIT's order under Section 263. The Tribunal found that the AO's assessment order was erroneous and prejudicial to the interest of the Revenue due to the incorrect allowance of the provision for bad debts without proper verification and write-off. The Tribunal emphasized the AO's duty to protect the Revenue's interests and ensure the genuineness of the claims made in the return.

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