2025 (1) TMI 30 - AT - Income Tax

Revision u/s 263 - As per CIT allowance of deduction u/s 36(1)(viia) passed by the AO is erroneous and prejudicial to the interest of Revenue - HELD THAT - As undisputed fact that the issue on which the PCIT has invoked jurisdiction u/s 263 has already been decided by the Tribunal in assessee s own case in its favour. Merely because the department has not accepted the decision of the Tribunal and has filed an appeal before the Hon ble High Court, therefore, in our opinion, the order of the AO cannot be held as erroneous. In our opinion, it may be prejudicial to the interests of the Revenue but certainly not erroneous. As decided in the case of Malabar Industrial Co Ltd. 2000 (2) TMI 10 - SUPREME COURT has held that in order to invoke the jurisdiction u/s 263 the twin conditions must be satisfied i.e. the order must be erroneous and the order must be prejudicial to the interests of the Revenue. In the instant case, the Tribunal has already decided the issue in favour of the assessee though it has not been accepted by the Revenue and the appeal is pending before the Hon ble High Court and since the AO on the basis of submissions made by the assessee and relying on the decision of the Tribunal in assessee s own case has not made any addition / disallowance, therefore, the order of the AO in our opinion cannot be held to be erroneous - Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the order passed by the Assessing Officer allowing the deduction under section 36(1)(viia) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of the Revenue, thereby justifying the invocation of section 263 by the Principal Commissioner of Income Tax (PCIT).
Whether the deduction under section 36(1)(viia) should be restricted to the provision made for rural advances only, or if it can include the total provision for bad and doubtful debts.
Whether the proceedings under section 263 were validly initiated by the PCIT.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of PCIT's Invocation of Section 263

Legal Framework and Precedents: Section 263 of the Income Tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interests of the Revenue. The Supreme Court in Malabar Industrial Co Ltd. Vs CIT established that both conditions must be satisfied.
Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had conducted inquiries and accepted the assessee's claim based on precedents, including the Tribunal's own decisions in the assessee's favor in earlier years.
Key Evidence and Findings: The Tribunal found that the Assessing Officer had considered detailed submissions from the assessee and relied on Tribunal decisions that supported the assessee's claim.
Application of Law to Facts: Since the Tribunal's decisions in the assessee's favor were not overturned, the order could not be deemed erroneous, even if it was prejudicial to Revenue interests.
Treatment of Competing Arguments: The Tribunal dismissed the PCIT's argument that the order was erroneous because the Department had appealed the Tribunal's decisions.
Conclusions: The Tribunal concluded that the PCIT's invocation of section 263 was unjustified as the order was not erroneous.

Issue 2: Scope of Deduction under Section 36(1)(viia)

Legal Framework and Precedents: Section 36(1)(viia) provides for deduction of bad and doubtful debts, with specific provisions for rural advances. The Tribunal had previously ruled that the provision need not be limited to rural advances.
Court's Interpretation and Reasoning: The Tribunal reiterated its stance that the deduction could include the total provision, not limited to rural advances, aligning with its past rulings.
Key Evidence and Findings: The Tribunal relied on its previous decisions and similar cases where the deduction was allowed for total provisions.
Application of Law to Facts: The Tribunal found that the Assessing Officer's acceptance of the deduction was consistent with legal precedents.
Treatment of Competing Arguments: The Tribunal rejected the PCIT's argument that the deduction should be restricted to rural advances, noting the pending appeal did not invalidate the Tribunal's prior decisions.
Conclusions: The Tribunal upheld the broader interpretation of section 36(1)(viia), allowing deductions for total provisions.

Issue 3: Validity of Proceedings under Section 263

Legal Framework and Precedents: Section 263 requires the PCIT to independently apply their mind to invoke jurisdiction.
Court's Interpretation and Reasoning: The Tribunal found no evidence that the PCIT independently assessed the case, suggesting the proceedings were initiated at the behest of the Assessing Officer.
Key Evidence and Findings: The Tribunal highlighted the lack of independent application of mind by the PCIT.
Application of Law to Facts: The Tribunal concluded that the proceedings were not validly initiated.
Treatment of Competing Arguments: The Tribunal did not find merit in the PCIT's approach and emphasized the need for independent judgment.
Conclusions: The Tribunal ruled that the section 263 proceedings were invalid.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "In order to invoke the jurisdiction u/s 263 of the Act, the twin conditions must be satisfied i.e. the order must be erroneous and the order must be prejudicial to the interests of the Revenue."
Core Principles Established: The Tribunal reinforced that an order cannot be revised under section 263 unless it is both erroneous and prejudicial to the Revenue. The scope of deductions under section 36(1)(viia) includes total provisions, not limited to rural advances.
Final Determinations on Each Issue: The Tribunal set aside the PCIT's order, holding that the original assessment was not erroneous and the invocation of section 263 was unjustified.

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