2023 (4) TMI 336 - AT - Income Tax

Revision u/s 263 - bad debt on account of supply to the government department - Principal CIT held the assessment framed u/s 143(3) as erroneous insofar prejudicial to the interest of Revenue - As the assessee was merely an agent working on commission and therefore in terms of section 36(2) assessee was not entitled for such deduction on account of bad debts - HELD THAT - As it is not the case that the AO has not made any enquiry. Indeed, the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of bad debts. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee. As per CIT there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him, thus making the order of the AO erroneous insofar prejudicial to the interest of revenue - We make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment framed under section 143(3) was erroneous and prejudicial to the interest of the Revenue.
2. Whether the assessee was entitled to claim the bad debts under section 36(2) of the Income Tax Act, 1961.

Summary:

Issue 1: Erroneous and Prejudicial Assessment
The assessee filed an appeal against the order of the Principal Commissioner of Income Tax (PCIT) who held that the assessment framed under section 143(3) was erroneous and prejudicial to the interest of the Revenue. The PCIT found that the Assessing Officer (AO) finalized the assessment without proper application of mind and without making necessary inquiries or verification. The PCIT invoked section 263 of the Income Tax Act, 1961, and directed the AO to disallow the bad debt claim of Rs. 39,64,585/-.

Issue 2: Claim of Bad Debts under Section 36(2)
The assessee, engaged in trading telephone instruments and parts, claimed deductions for bad debts. The PCIT observed that the assessee, acting as a recovery agent for Reliance Communication Ltd, did not have any obligation to discharge the debts owed to Reliance Communication Ltd. Therefore, the bad debts could not be claimed by the assessee as they were primarily the debts of Reliance Communication Ltd. The PCIT also noted that the supporting evidence provided by the assessee was self-made and not corroborated by Reliance Communication Ltd.

Tribunal's Findings:
1. Adequacy of Inquiry: The Tribunal emphasized that an inquiry deemed inadequate by the PCIT does not make the AO's order erroneous. The AO has the prerogative to determine the extent of inquiry needed.
2. Judicial Precedents: The Tribunal referred to several judicial precedents, including CIT Vs. Sunbeam Auto and Gabriel India Ltd., which distinguished between lack of inquiry and inadequate inquiry. The Tribunal noted that the AO had made inquiries and accepted the bad debt claim after considering the assessee's submissions and evidence.
3. Explanation 2 to Section 263: The Tribunal observed that the PCIT did not specify the nature and manner of inquiries that should have been conducted by the AO. Furthermore, the PCIT did not invoke Explanation 2 to section 263 in the show cause notice, thereby denying the assessee an opportunity to respond.

Conclusion:
The Tribunal concluded that the AO had made sufficient inquiries and applied his mind to the facts of the case. Therefore, the assessment order was not erroneous or prejudicial to the interest of the Revenue. The Tribunal quashed the revisional order passed by the PCIT and allowed the assessee's appeal.

Order Pronounced: The appeal filed by the assessee was allowed, and the order was pronounced on 31/03/2023 at Ahmedabad.