PENNAR INDUSTRIES LIMITED,HYDERABAD vs. DCIT., CIRCLE-5(1),, HYDERABAD

Succinctly stated, the assessee company, viz. M/s. Pennar Industries Limited had filed its return of income for A.Y. 2020-21 on 15.02.2021, declaring an income of Rs. 71,10,03,500/-. Subsequently, the case of the assessee company was selected for complete scrutiny under CASS on specific issues, viz., (i) debt written off and taxability under Section 41 of the Act; (ii) non-compliance with ICDS; (iii) large “any other amount allowable as deduction” in Schedule BP; (iv) mismatch of personal expenditure; (v) introduction of high value

Subsequently, the Ld. Pr. CIT after culmination of the assessment called for the records and issued a “Show cause notice” (“SCN”) dated 07.11.2024, wherein holding a conviction that the assessment order passed by the AO was erroneous in so far it was prejudicial to the interest of the revenue, he called upon the assessee company to explain as to why the same may not be revised under Section 263 of the Act on certain issues, viz. (i) the omission to disallow the deduction of reversal of provision for onerous contract of Rs.2,36,20,000/-; (ii) the failure to verify the trade and other receivables written off of Rs.27,82,00,000/-; (iii) the non-payment of tax under Section 115QA on buy-back of 66,15,000 shares for a consideration of Rs.20,48,00,000/-; and (iv) allowability of amortization and lease related adjustments under Ind AS 116 aggregating to Rs.4,20,41,563/-, Rs.4,11,00,000/- and Rs.7,46,00,000/-.

Thereafter, the Ld. Pr. CIT, after considering the explanation of the assessee company, observed that the AO had failed to verify the abovementioned issues properly, which, thus, had rendered the 5

The assessee company, aggrieved with the order passed by the Ld. Pr. CIT under Section 263 of the Act, dated 27/11/2024, has carried the matter in appeal before us.

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Shri. Mohd. Afzal, Advocate, the Ld. Authorised Representative for the assessee company (for short, “AR”) at the threshold of the hearing of the appeal submitted that the same involves a delay of 15 days. Elaborating on the reason leading to the delay in filing the appeal, the Ld. AR submitted that the same had crept in because, as he was taken unwell and suffering from severe vertigo and could not attend his office for the period 28/04/2025 to 04/05/2025, therefore, he could not advise the assessee company to assail the order passed by the Ld. Pr.

Per Contra, the Ld. CIT-DR objected to the seeking of condonation of the delay involved in filing the present appeal by the assessee company.

We have given thoughtful consideration to the explanation of the assessee company regarding the reason leading to the delay of 15 days in filing the present appeal. In our view, as the delay in filing the present appeal, which is not inordinate, had crept in for bona fide reasons, the same, in all fairness and interest of justice, merits to be condoned. Our aforesaid view is supported by the recent decision of the Hon'ble

Coming to the validity of the juri iction assumed by the Ld. Pr. CIT for revising the order passed by the AO under Section 143(3) r.w.s. 144B of the Act, dated 20.09.2022, the Ld. AR submitted that the Ld. Pr. CIT had gravely erred in law and facts of the case in assuming juri iction under Section 263 of the Act. Elaborating on his contention, the Ld. AR submitted that the Ld. Pr. CIT had exceeded his juri iction, wherein, in exercise of the powers under Section 263 of the Act, he had substituted his view, as against the well-reasoned view that was arrived at by the AO after necessary deliberations on the subject issues while framing the assessment. The Ld. AR to buttress his contention that the AO, while framing the assessment, had carried out necessary verification of the multi-facet issues based on which the assessment order had thereafter been revised by the Pr. CIT took us through, viz. (i). the queries raised by the AO vide notice issued by the AO under 8 Section 142(1) of the Act dated 20/02/2022, Page 55 to 59 of APB; (ii). notice under section 143(2) of the Act, dated 29/06/2021, Page 60-61 of APB; and (iii). reply filed by the assessee company to notice under section 142(1) of the Act, dated 20/02/2022, Page Nos. 41 to 54 of APB. Also, the Ld. AR had drawn our attention to the assessment order passed by the AO under Section 143(3) r.w.s 144B of the Act, dated 20/09/2022. The Ld. AR submitted that the AO in the assessment order had, after carrying out necessary verifications, specifically recorded his observations regarding the issues on which the Ld. Pr. CIT had thereafter revised the order. The Ld. AR submitted that as the AO, while framing the assessment, had, after necessary verifications, arrived at a possible and plausible view regarding the subject issues, hence the Pr. CIT in the exercise of the powers vested with him under Section 263 of the Act could not have assumed juri iction to seek substitution of his view as against that of the AO. The Ld. AR to support his contention had relied on the judgment of the Hon’ble Supreme Court in Malabar 20.09.2022, had, inter alia, formed the very basis for the selection of its case for complete scrutiny under CASS, viz. (i). debt has been written off and the debtor has not shown deemed income u/s 41; (ii). non-

Coming to the respective issues based on which the Ld. Pr. CIT had revised the order passed by the AO under section 143(3) r.w.s. 144B of the Act, dated 20.09.2022, the Ld. AR submitted that the AO vide his notice u/s 142(1) of the Act, dated 20/02/2022, had specifically directed the assessee company to furnish complete details of the debts that were written off during the year under consideration, i.e., details of the debts alongwith names, PAN, amount of interest paid, and copies of the corresponding ledger account. The Ld. AR submitted that the assessee had filed with the AO the complete details of bad debts of Rs. 27.82 crores (supra), which, he had, after necessary deliberations, accepted. The Ld. AR submitted that the assessee company had written off the bad debts in its books of accounts. Elaborating further on his contention, the Ld. AR submitted that after the amendment to Section 36(1)(vii) with effect from 01.04.1989, it is sufficient if the bad debt is 10 Pennar Industries Limited vs. DCIT written off as irrecoverable in the accounts of the assessee, and the requirement of establishing that the debt has become irrecoverable is no longer necessary. The Ld. AR to support his contention had relied on the judgment of the Hon’ble Supreme Court in TRF Ltd. v. CIT (2010) 323 ITR 397 (SC). Apart from that, the Ld. AR submitted that the Pr. CIT’s observation that the AO ought to have examined whether such bad debts were admitted as income in the debtor’s books of account was not relevant for the allowability of the assessee’s claim for deduction of bad debts. The Ld. AR had, under Rule 10 of the Appellate Tribunal Rules, 1963, placed on record an “affidavit”, dated 05/02/2026 of Shri. Aditya Narsing Rao, Managing Director of the assessee company, wherein he had deposed that the assessee company in the course of the assessment proceedings had furnished with the AO the complete details of the “bad debts” of Rs. 27.82 crores (supra), and had provided to him a list of customer wise bad debts with details such as job number, name of the party and amount involved. Apart from that, it is deposed that the bad debts of Rs. 27,82,33,342/- were taken into account by the assessee company while computing its income in the earlier years. The Ld. AR submitted that though the claim of the assessee company for deduction of bad debts was after necessary verifications accepted by the AO while framing the assessment, but, even otherwise, the Ld. Pr. CIT had failed to point out in his order u/s 263 of the Act, dated 28/02/2025, as to how the said

Per Contra, the Ld. CIT-DR submitted that the Ld. Pr. CIT had rightly, vide his order passed u/s 263 of the Act, dated 28/02/2025, assumed juri iction and revised the assessment order passed by the AO under Section 143(3) of the Act, dated 20/09/2022. Elaborating on her contention, the Ld. CIT-DR submitted that as the AO had failed to carry out any verifications on the specific issues based on which the case of the assessee company was selected for complete scrutiny under CASS, and had summarily accepted the claims for deduction of the assessee company, therefore, the Ld. Pr. CIT had rightly exercised his juri iction u/s 263 of the Act and set aside the assessment with a direction to the AO to frame a fresh assessment after affording an opportunity of being heard to the assessee company. The Ld. CIT-DR, to buttress her contention, had taken us through the assessment order.

We have thoughtfully considered the contentions advanced by the Ld. Authorised Representatives of both parties in the backdrop of the orders of the lower authorities. We shall first take up the Ld. AR’s contention that the Pr. CIT was not justified in invoking juri iction under Section 263 of the Act. It is a settled position of law that twin conditions must co-exist before Section 263 can be invoked, viz, (i) the order of the Assessing Officer must be erroneous; and (ii) it must be prejudicial to the interests of the Revenue. The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) has clearly held that where the AO has adopted one of the courses permissible in law, or where two views are possible and the AO has taken one view with which the CIT does not agree, the order cannot be treated as erroneous and prejudicial unless the view taken is unsustainable in law. Further, in the case of CIT v. Max India Ltd. (2007) 295 ITR 282 (SC), the Hon’ble Supreme Court has reiterated that when two views are possible, and the AO has taken one view, then Section 263 cannot be invoked merely because the CIT prefers another view. It is equally well settled that where the AO has made enquiries, elicited replies, and applied his mind to an issue, the CIT cannot assume juri iction under Section 263 merely on the ground that the enquiry was inadequate. The Hon’ble High Court of Delhi in CIT v.

However, we find that the Pr. CIT was of the view that, as the Assessing Officer had failed to properly examine the above issues, the assessment order passed by him was rendered as erroneous and prejudicial to the interests of the Revenue. The Ld. Pr. CIT, while setting aside the assessment, had relied upon the judgment of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83. 16. We have carefully considered the contentions advanced by the Ld. Authorised Representatives of both parties in the backdrop of the orders of the authorities below. In addition to examining the legality of the invocation of Section 263 of the Act, we shall hereinbelow adjudicate the issues on merits as well, as under:

We find on a perusal of the record that the AO in the course of the assessment proceedings had neither raised any specific query nor carried out any verification regarding the amount of Rs. 2,36,20,000/- that was deducted by the assessee company under the head “Reversal of Provisions for Onerous Contract” in its computation of income. We, thus, are of a firm conviction that the Ld. Pr. CIT, remaining well within his juri iction, had rightly directed the AO to examine the amount of Rs. 2,36,20,000/- deducted by the assessee company under the head “Reversal of Provisions for Onerous Contract” in its computation of income. Apart from that, we are of the view that the AO while framing the assessment had failed to take cognizance of the fact that the assessee company which had a closing balance of Rs. 20,00,000/- as on 31/03/2019 for “Provisions for loss on Onerous Contracts” had though reversed the said provision to the tune of Rs. 10,00,000/- and admitted the same as its income in its Profit & Loss account, but had deducted an amount of Rs. 10,20,000/- in its computation of income. We, thus, in the backdrop of the aforesaid facts, are of the view that as the AO, while framing the assessment, had failed to verify the aforesaid claim of deduction of the assessee company, therefore, the Ld. Pr. CIT, principally remaining well within his juri iction, had set aside the assessment order with a direction to the AO to verify the same.

On merits, we find that it is the Ld. AR’s claim that out of Rs. 2,36,20,000/-, a substantial portion represented a reversal of provision,

Coming to the amount of Rs. 10,00,000/- credited to the Profit and loss account of the assessee company during the subject year, we find that it is the Ld. AR’s claim that, as the same was a reversal of a provision and not real income, it was reduced in the “computation of income”. In our view, if the original provision was not allowed as a deduction in the earlier year, its reversal will not give rise to taxable

We find on a perusal of the record that the AO, while framing the assessment, had vide his Notice u/s 142(1) of the Act, dated 20/02/2022, Page Nos. 55 to 59 of APB, specifically directed the assessee company to file complete details of the debts that were written off during the year under consideration, Page Nos. 55-59 of APB. In compliance, we find that the assessee company had, in the course of the assessment proceedings, filed with the AO the complete details of bad debts of Rs. 27,82,33,342/-, Page Nos. 51-54 of APB. In our view, as the assessee company, as directed by the AO, had furnished the requisite details regarding its claim for deduction of bad debts of Rs. 27,82,33,342/-, which, after necessary deliberations was accepted by the AO, therefore, the Pr. CIT could not have thereafter assumed

On merits, we find that the assessee company had written off the bad debts in its books of account and in the course of the assessment proceedings, furnished the requisite details regarding its claim for deduction of bad debts. After the amendment to Section 36(1)(vii) of the Act with effect from 01.04.1989, it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee, and the requirement of establishing that the debt has become irrecoverable is no longer necessary.

Ostensibly, the record reveals that the issue of bad debts was specifically part of the selection of the case of the assessee company for complete scrutiny under CASS. The AO had issued notice under Section 142(1) of the Act, dated 20/02/2022, wherein the assessee company was called upon to furnish the requisite details on the subject issue. In compliance, the assessee company had furnished the complete details of the parties/Job that were written off in its books of account. The Ld. Pr. CIT had observed that the AO had failed to verify the identity, genuineness and creditworthiness of the debtors, and whether the amounts were offered as income in the debtor’s books of 22 Pennar Industries Limited vs. DCIT account. However, such reasoning overlooks the settled position of law governing deduction under Section 36(1)(vii) of the Act. The Hon’ble Supreme Court in TRF Ltd. v. CIT (2010) 323 ITR 397 (SC) has categorically held that after the amendment to Section 36(1)(vii) with effect from 01.04.1989, it is not necessary for the assessee to establish that the debt has become irrecoverable. It is sufficient if the bad debt is written off as irrecoverable in the books of account of the assessee. The ratio laid down by the Hon’ble Supreme Court in TRF Ltd. Vs. CIT (supra) makes it clear that once the assessee writes off the debt in its books of account, then the condition under Section 36(1)(vii) stands satisfied, subject to Section 36(2) of the Act and the Revenue cannot insist upon further proof of irrecoverability. For the sake of clarity, we deem it apposite to cull out the observations of the Hon’ble Apex Court in TRF Ltd. Vs. CIT (Supra), as under: