2022 (2) TMI 688 - AT - Income Tax

Revision u/s 263 by CIT - Whether no inquiry conducted by the A.O. in allowing the provision for bad and doubtful debts? - HELD THAT - On perusal of the assessment order, which was subjected to revision u/s 263 of the Act, we notice that there is no inquiry conducted by the A.O. in allowing the provision for bad and doubtful debts. CIT was correct in invoking his revisionary powers u/s 263 . On merits, we notice that the assessee has charged off to its profit and loss account provision for doubtful debts and has simultaneously reduced the same from the value of total sundry debtors in its audited balance sheet. The details of the same are placed from pages 7 to 10 of the paper book filed by the assessee. The Hon ble jurisdictional High Court in the case of CIT v. M/s.Sandvik Asia Limited 2013 (2) TMI 900 - KARNATAKA HIGH COURT by following the judgment of the Hon ble Apex Court in the case of Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT held that provision for doubtful debts, which has been debited to the profit and loss account and simultaneously been reduced from the value of the total sundry debtors in its audited balance sheet would be sufficient requirement for write off of bad debts. In the instance, the assessee has reduced the amount of provision for bad and doubtful debts from the amount of sundry debtors in the balance sheet, which is sufficient compliance of write off of bad debts going by the dictum laid down by the Hon ble jurisdictional High Court, cited supra. Therefore, the A.O. cannot make the addition of provision for bad debts in view of the Hon ble jurisdictional High Court judgment in the case of CIT v. M/s.Sandvik Asia Limited. 2013 (2) TMI 900 - KARNATAKA HIGH COURT Hence, there cannot be any prejudice caused to the Revenue. In such circumstances, we hold that the order passed u/s 263 of the Act is to be quashed and we do so. Appeal filed by the assessee is allowed

Summary

Issues Involved:
1. Validity of the CIT's order under section 263 of the Income Tax Act, 1961.
2. Allowability of the provision for doubtful debts as a deduction.
3. Applicability of judicial precedents cited by the assessee.

Detailed Analysis:

1. Validity of the CIT's Order under Section 263 of the Income Tax Act, 1961:
The appeal was directed against the CIT’s order dated 22.03.2018, passed under section 263 of the Income Tax Act. The CIT had issued a notice under section 263, questioning the allowability of a provision for doubtful debts amounting to ?45,54,137, which was not added back to the total income by the AO. The CIT held that the AO's order was erroneous and prejudicial to the interest of the Revenue because the AO did not consider the allowability of the provision for doubtful debts. The Tribunal agreed with the CIT on this point, noting that there was no inquiry conducted by the AO regarding the provision for bad and doubtful debts.

2. Allowability of the Provision for Doubtful Debts as a Deduction:
The assessee argued that the provision for doubtful debts was debited to the profit and loss account and simultaneously reduced from the value of debtors in the balance sheet, effectively writing off the debts. The assessee relied on judicial pronouncements, including CIT v. M/s. Sandvik Asia Limited and Vijaya Bank v. CIT. The Tribunal found that the assessee had indeed charged off the provision for doubtful debts to the profit and loss account and reduced the same from the value of sundry debtors in the audited balance sheet. This action was deemed sufficient for the write-off of bad debts, as per the judgments cited.

3. Applicability of Judicial Precedents Cited by the Assessee:
The Tribunal noted that the CIT did not adequately explain why the decisions in CIT v. M/s. Sandvik Asia Limited and Vijaya Bank v. CIT were not applicable to the assessee's case. The Karnataka High Court in CIT v. M/s. Sandvik Asia Limited, following the Supreme Court's decision in Vijaya Bank v. CIT, held that debiting the provision for doubtful debts to the profit and loss account and reducing it from the total sundry debtors in the balance sheet suffices for a write-off. Therefore, the Tribunal concluded that the AO could not add back the provision for bad debts, and there was no prejudice to the Revenue.

Conclusion:
The Tribunal quashed the CIT’s order under section 263, holding that the AO’s original order was not erroneous or prejudicial to the interest of the Revenue. The appeal filed by the assessee was allowed, and the Tribunal pronounced its order on December 22, 2021.