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TMI Blog2023 (2) TMI 1004X X X X Extracts X X X X X X X X Extracts X X X X ..... w read alongwith accounting principles in this regard, the write back, we hold, is to be treated as income and subjected to tax ,as rightly held by the Ld.PCIT. Even as per accepted accounting principles, this write back needed to be treated as income and routed through the P L account, as rightly held by the Ld.PCIT. Thus going by law, supported by accounting principles, the write back of provisions for bad and doubtful debts of rural advances was required to be routed through the Profit and Loss account and treated as income for taxation purposes. Even going by the real income theory the Ld.PCIT, we hold, has rightly found the write back taxable,noting that the write back of the provision to the general reserve indicated no NPA and hence realization of income. Meaning thereby that the provision created earlier, for cushioning against bad debts on account of rural advances turning NPA , being created out of profits , and when not required as written back, it resulted in income to the assessee. This provision for bad and doubtful debts relating to the rural advance, having been allowed as claim for deduction in earlier years, any write back from the same, logically needed to be sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice in framing the orders, claims of the assesse which were accepted by AO were not discussed in Assessment Order by AO and only those points were elaborated which he disallowed as deduction. Such orders cannot be held to be erroneous 3. The learned Principal CIT is not permitted in law to pre-judge taxability of Rs. 25.00 Crore transferred from Provision for Bad and Doubtful Debt to Statutory Reserve and propose the same to be taxed which effectively serves as directions to AO to make specified addition to the income leaving no scope for the Assessing officer to redo the assessment or pass a fresh assessment order on his own." 3. As transpires from order of the ld.Pr.CIT, the error in the order of the Assessing Officer (AO) was that despite records revealing that the assessee had transferred a sum of Rs.25.00 crores from Provision created for bad and doubtful debts for rural advances to its general reserves, which was liable to be taxed as income of the assessee since the provision created had been allowed a deduction earlier, the AO had not considered this matter and had made no verification or necessary inquiries in relation to the same while finalizing the assessment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly order was passed under section 263 of the Act holding the assessment order to be erroneous on this count and directing the AO to pass fresh assessment order as per the law. 5. Before us also several contentions were raised by theld.counsel for the assessee both on the merits of the issue, that the impugned reduction from provision created for bad and doubtful debts for rural advances could not be taxed asincome of the assessee, and also on the legal aspect of invocation of Explanation-2 to section 263 of the Act by the ld.Pr.CIT without confronting the same to the assessee causing the order passed to be against principle of natural justice and hence invalid. 6. We shall first take up the contention raised by the ld.counsel for the assessee on the merits of the case. 7. His first and primary argument was that wherever Legislature required any write back from reserves or provisions to be treated as income of the assessee, it had specifically provided so, and in the case of provision for bad and doubtful debts for rural development created as per the provisions of section 36(1)(viia) of the Act, there was no such provision in law for treating the write back or reducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd (viia) r.w.s 36(2) of the Act. It was contended that the Hon'ble Court had held the two provisions to operate in different domains and thus no parity could be drawn from one to the other as done by the Ld.PCIT. The ld.counsel for the assessee drew our attention to para- 41 of the said order pointing out that the Hon'ble Apex Court had interpreted the provisions as under: The question for our consideration is - whether on the facts and circumstances of the case, the assessee(s) is eligible for deduction of the bad and doubtful debts actually written off in view of Section 36(1)(vii) which limits the deduction allowable under the proviso to the excess over the credit balance made under clause (viia) of Section 36(1) of Income Tax Act, 1961 ("ITA"for short)? 2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . All receipts which are recognized as income are ordinarily to be reflected on the receipt side of the P&L A/c. Thereafter Profits are determined and income is recognized. Taxes are deducted from the Profits. In case of Banks due to special provisions u/s.36(l)(viia) a part of the receipts, which is permitted to be taken to special Bad debts reserve, is however not routed through P&L A/c. Accordingly, Ld. PCIT has held that in case of assessee, being one such bank, as and when the liability for maintaining a Bad Debts Reserve 'ceases' due to any reason, the amount transferred to bad-debts reserve under sec. 36(l)(viia), should be reflected in P&L Account, offered to tax and thereafter the Profits after tax should be transferred to General Reserve. (B) Procedural aspects of Section 263:- Ld. PCIT has given adequate opportunities to the assessee and the order of Ld.PCITis a speaking order. Though Ld.PCIT has taken support from Explanation 2, to sec.263 inserted w.e.f.1.6.2015 by the Finance Act, 2015, the current matter pertains to A.Y.2011-12. There was no procedural requirement to invoke Explanation in the notice u/s.263 as the same did not exist for the purpose of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o include Explanation 2 at the notice stage, as the provisions did not exist for the said assessment year. However, the Id. PCIT has taken supports from the provisions of Explanation 2 to sec. 263 and mentioned such insertions in the Impugned order, as the order u/s 263 has been issued 21.03.2016. 3. It is submitted that Ld. AO has failed to analyze the implications of transfer of Funds to general Reserves, without routing it through P&L Account, and subjecting it to taxation. The issue has neither been analyzed, nor any possible views (correct views) have been taken by Id. AO in the assessment order. In short, Ld. AO has failed to apply his mind on the issue of transferof funds of Rs. 25Cr from special reserve under Sec. 36(l)(viia) to General same was considered as a ceased liability, without subjecting it to taxation in Reserve, when the P&L account. 4. It may kindly be seen that the order of Ld.PCIT explains in detail the incorrectness of accounting methodology followed by the assessee. It discusses the legislative intents of sec.36(l)(viia). It also discusses in para.5.2 as to how the General Reserves are maintained and it isdistinction with the Special Reserves created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11) 9 taxmann.com 128 (Hyd.) it has been held, The expression "prejudicial to the interest of revenue1 appearing under section 263 in conjunction with the expression 'erroneous1 and that every loss of revenue as a consequence of an order of the Assessing Officer cannot, cause prejudice to the interest of the revenue. In case, where the Assessing Officer adopts one of the courses permissible in law where two views are plausible the Commissioner cannot exercise his power under section 263 to defer with the Assessing Officer even if there has been a loss of revenue. On the other hand, when the Assessing Officer takes a view, which is patently unsustainable, the Commissioner can exercise his powers where the loss of revenue results as a consequence of the view taken by the Assessing Officer. It is also clear that while passing the order under section" 263, the Commissioner has to examine not only the assessment order but also the entire facts on the record. Further, when a regular assessment is made it has to be presumed that it has been passed upon proper application of mind. The Income-tax Officer is not only the adjudicator but also an investigator. He cannot be rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Meerut Roller Floor Mills Ld. V. Commissioner of Income-tax (2013) 39 taxmann.com 183 (Allahabad), after analyzing the various decisions of the High Courts and Supreme Court observed: Much emphasis was laid by the learned counsel for the petitioner that there is difference in between a case where an inquiry has been conducted and a case where inadequate inquiry had been conducted. Reliance has been placed by him on CIT v. Sunbean Auto Ltd. [2011] 332 ITR 167/[2010] 189 Taxman 436 (Delhi) wherein a distinction has been pointed out by Delhi High Court between lack of inquiry and inadequate inquiry. It was pointed out that the aforesaid decisions had been relied upon by Delhi High Court in subsequent decision in ITO v. D.G. Housing Project Ltd. [2013] 212 Taxman 132/[2012] 20 taxmann.com 587 (Delhi). 10. The Commissioner may consider an order to be "erroneous" for the purpose of section 263 even if error of law may not be apparent on the face of the order. The Commissioner may consider an order of the Assessing Authority to be erroneous not only if it contains some apparent error of reason or of law, or of fact on the face of it but also because it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se such an inquiry has notbeen made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 14. In CIT v. Smt. Rambha Devi [1987] 164 ITR 658, the Patna High Court has laid down that where the necessary facts had not been gone into, a case for exercise of jurisdiction under section 263 of the Act is made out. In this case, the crucial question, what is the source of initial capital, had been explained by the assessee or not, was left unexamined. It was held that it is a case where prejudice is writ large. 15. It is not necessary for us to multiply the precedents for the simple reason that the assessment order does not contain the necessary discussion with regard to the various aspects of the case indicated in the revisional order by the Commissioner of Income Tax. 16. It was incumbent upon the Assessing Officer to have examined the cash credit entries appearing in the accounts of the petitioner assessee in detail keeping in view the explanation furnished by the petitioner. Having failed to do so, it is but obvious that the assessment order is erroneous and prejudicial to the interest of the Revenue. Mere filing of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. It is humbly prayed to dismiss the grounds of appeal by the assessee and not to interfere with the order u/s 263 passed by Ld. PCIT." 13. We have heard both the parties and have gone throughorder of the ld.Pr.CIT. We are not impressed nor convinced with the contention of the Ld.counsel for the assessee on the merits of the case that the write back of provision for bad and doubtful debts on rural advances was not taxable as income . Considered from all ,any and every aspect, as per law read alongwith accounting principles in this regard, the write back, we hold, is to be treated as income and subjected to tax ,as rightly held by the Ld.PCIT. 14. Before bringing out our reasoning for the same it is pertinent to revisit the facts relating to the issue which are un-disputed. The assessee, during the impugned year, had written back an amount of Rs. 25 Crs from the provision created for bad and doubtful debts relating to rural advances of Rs.27,98,75,203/-. This provision had been allowed to be deducted for the purposes of computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btful debts, as required by section 36(1)(viia) of the Act . The Ld.PCIT has rightly dealt with the issue accordingly at para 5.1 of his order as under: "5.1 Legislative intent for Sec.36(l)(viia) Section 36(l)(viia) of the IT Act is hereby reproduced:- Section 36(l)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural ^ development bank to the following extent: "An amount not exceeding seven and one-half per cent (7.5%) of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner." Normally no deduction is allowable in respect of a mere provision of bad and doubtful debts. However in order to promote rural banking and in order to assist banks in making adequate provision from their current profits for risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the bank for taxation purpose, as bank had already claimed deductions in respect of these provisions u/s 36(l)(viia). 16. Though the Ld.PCIT, above, has drawn parity between the provisions of section 36(1)(vii) and section 36(1)(viia) of the Act, to hold that the principle of taxing bad debts, claimed as deduction u/s 36(1)(vii) of the Act,on being recovered, as per section 41(4) of the Act, would apply to section 36(1)(viia) of the Act also on write back of provisions created, the fundamental reasoning remains the same. Section 36(1)(viia) of the Act allowing deduction of provisions for bad and doubtful debts of rural advances, the deduction cannot exceed the provision created by the assessee for the same and any write back of the provision implying nothing but the provision to that extent no longer required as created by the asseessee, has to be therefore subjected to tax. Thus as per the provisions of section 36(1)(viia) of the Act itself, we hold, this write back of provision is liable to be subjected to tax. 17. This reasoning and interpretation of law as above is strengthened by the Accounting Principles relating to provisions and their write back, delineat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g when income is said to accrue for the purposes of taxability under the Income Tax Act. The ruling reiterates that it is only real income, and not hypothetical income, which can be taxed in India. Further, for real income to accrue under the ITL, the income should be due; there should be a corresponding liability to pay; and practically, there is a plausible realization of such income. In the instant case, these tests are fully satisfied, as assesse bank itself transferred amount out of provision for bad debts to general reserve, which clearly indicates that there is realization of income as there are no NPA. In this landmark judgement Hon'ble Supreme court held that merely by making accounting entry hypothetical income can't be brought to tax and on same analogy just by making accounting entry, real income should not go out of tax net. What to be taxed should be real income only. It clearly shows the importance of substance over form concept for taxation purpose. Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 463(AII) ii. CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) iii. CIT v. Mogul Line Ltd. (1963)46 ITR 590,600(Bom) iv. State Bank of India Vs. CIT(1996) 157 ITR 67 (SC) The issue involved in the above decisions is summarized hereunder: (i) CIT v. HiraLal Mittal & Sons, (1972) 86 ITR 463(AII) The issue in the cited case was whether the assessee was entitled to the deduction of the interest claimed even though it had not made the necessary entries in its account books. (ii) CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) The issue in the cited case relate to the taxability under section 10(5A) of Act of a certain amount received by the assessee-firm as compensation on the termination of its managing agency. (iii) CIT v. Mogul Line Ltd. (1963)46 ITR 590,600(Bom) The issue in the cited case was with regard to an amount debited to foreign exchange suspense account. (iv) State Bank of India Vs. CIT(1996) 157 ITR 67 (SC) In issue in this case is with regard to increase in amounts credited due to devaluation and it was held that the increased amount has been utilised by repatriation, it was incidental to the banking business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed-- (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of subsection (1). 23. Therefore the event for claiming deduction as per the said section is earning of profits from specified businesses and not creation of Reserves, which is only a condition put in place for claiming deduction of profits so as to ensure utilization of profits for investment in plant and machinery of the said business. Non utilization for the specified purpose, tanatmounting to failure to fulfil the condition prescribed for claiming deduction of profits, accordingly results in subjecting the reserves, representing profits, to the extent not so utilized, to tax. These sections therefore cannot be read as specifically providing for taxing of reserves to the extent unutilized, in the circumstance of deduction being provided for on account of creation of Reserves. No parity therefore can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh order under the said section]. Explanation 1.--For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-- …. ….. ….. …. Explanation 2.--For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,-- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person." 34. As is evident from the above, section 263 empowers Commissioners/ Pr.Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been altered by the explanation. Therefore where section 263 itself has been invoked and the reason for finding the assessment order erroneous clearly pointed out to the assessee during revisionary proceedings to the effect that adequate inquiries were not conducted by the AO on the issue in question, Explanation 2 to section 263 (a) also being to the same effect of assessment orders being deemed to be erroneous on account of lack of adequate inquiry, we see no reason why pointedly the Explanation also needs to be brought to the notice of the assessee while applying it to the case. 36 Once the ld.Pr.CIT brings to the notice of the assessee the reason why he finds the assessment order to be erroneous, which in the present case was inadequate inquiries conducted by the AO on the nature of disclosure made by the assessee during the survey in excess stock found, he need not specifically point out that he has invoked Explanation-2 to sub-clause (a) to the section which is to the same effect of inadequate inquiries conducted qualifying as error in assessment order. The fact that he clearly brings out the reason why he found assessment order erroneous, is sufficient in itself and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entitled to revise assessment order u/s. 263 of the Act r/w Explanation 2 thereto by ignoring that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of revenue in as much as the Assessing Officer has passed the assessment order without making inquires/verification in the light of the unsecured loans of Rs. 2.49 Crores received from M/s. Georgette Tradecom Pvt. Ltd (GTPL) and M/s. PurbaAgro Food Pvt. Ltd (PAFPL)? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in cancelling the impugned order u/s. 263 of the I.T. Act and allowing all the grounds of the Assessee?" 40. The Revenue had challenged the order of the ITAT setting aside the order passed by the ld.Pr.CIT under section 263 of the Act on account of inadequate inquiry made by the AO on unsecured loans received by it from two parties. The question framed before the Hon'ble High Court was therefore whether the ITAT order was correct when adequate inquiries were not made by the AO. The Hon'ble High Court answered the question against the Revenue, noting that the ITAT had given a finding of fact that the AO had made full inqu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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