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Facts
The assessee filed its return of income, which was selected for scrutiny. The Assessing Officer (AO) passed an order. The Principal Commissioner of Income Tax (PCIT) initiated revisionary proceedings under Section 263, holding the AO's order to be erroneous and prejudicial to the revenue. The issues involved were the disallowance of provision for doubtful debts and the treatment of an insurance claim received for destroyed assets.
Held
The Tribunal held that the PCIT erred in invoking revisionary jurisdiction under Section 263. The Tribunal found that the assessee had adequately explained the disallowance of provision for doubtful debts, and the AO had accepted these explanations. Regarding the insurance claim, the Tribunal found that the assessee had correctly reduced it from the block of assets for depreciation purposes, in line with Section 32 read with Section 43(6)(c). Therefore, the PCIT's order was set aside, and the AO's order was sustained.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order concerning the disallowance of provision for doubtful debts and the treatment of insurance claim for destroyed assets?
Sections Cited
263, 143(3), 144C(3), 115JB, 43(6), 32, 4(3)(vii), 36(1)(vii), 36(1)(iii), 92CA
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Income Tax Appellate Tribunal, MUMBAI “A” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & SHRI RAJ KUMAR CHAUHAN
O R D E R PER VIKRAM SINGH YADAV, A.M :
This is an appeal filed by the assessee against the order of the Learned Principal Commissioner of Income Tax, Mumbai-3 [„Ld.PCIT‟], dated 25-03-2025, pertaining to Assessment Year (AY) 2019-20, wherein the assessee has taken the following grounds of appeal: “Based on the facts and circumstances of the case and in law, Lupin Limited ('the Appellant'). respectfully craves leave to prefer an appeal against the order dated
25. March 2025 passed by the learned Principal Commissioner of Income Tax-3 ['PCIT'] (received by the Appellant on 25. March 2025) under section 263 of the Income-tax Act, 1961 ('Act') on the following grounds which are separate and without prejudice to each other: On the facts and in the circumstances of the case and in law, the learned PCIT has: On validity of initiation of revision proceedings 1. erred in initiating the revision proceedings under section 263 of the Act, without appreciating that proceedings under section 263 cannot be invoked unless the conjunctive conditions that assessment order passed under section 143(3) r.w.s 144C(3) of the Act by National Faceless Assessment Centre ('AO') dated
12. April 2022, is erroneous in law as well as prejudicial to the interests of the revenue, are satisfied; 2 erred in initiating revisionary assessment proceedings under section 263 of the Act, with a view to start the fishing/roving enquiries in the matter without establishing that inadequate enquiry is being made at the time of regular assessment proceedings by the Ld. AO and also not appreciating that when there are two views possible and Ld. AO has taken one of the possible views while passing the assessment order then such order is not erroneous and prejudicial to interest of revenue: Disallowance of provision for doubtful debts amounting to Rs.25,52,660 under Normal provisions of the Act 3. erred in directing the Ld. AO to make additional disallowance on account of provision for doubtful debts amounting to Rs. 25,52,660 (Rs. 7.45,93,193 Rs. 7,20,40,523) without appreciating the fact that the Appellant had suo- moto disallowed provision for doubtful debts amounting to Rs. 7,20,40,523, which is derived after disallowing Rs. 7,45,93,193 for Provision for Doubtful debts, disallowing Rs. 13,47,340 related to Provision for doubtful advances netted with credit for reversal of additional INDAS Provision for doubtful debts/advances Rs. 39,00,000; under normal provisions of the Act and accordingly the said amount of Rs. 25,52,660 already forms part of provision for doubtful debts amounting to Rs. 7,20,40,523 and once again disallowing the same would lead to double disallowance of same amount thereby violating the principles of natural justice; 4. was not justified in assuming that Rs. 25,52,660 is not been disallowed without considering that in original assessment as well as in response to show cause notice under Section 263 of the Act all these facts were clarified and thereby assuming jurisdiction under Section 263 is not valid and bad in law;
Disallowance of provision for doubtful debts under MAT provisions of the Act 5. erred in not considering the judicial precedents relied by the Appellant that provision for doubtful debts cannot be disallowed under MAT provisions even after amendment in Section 115JB by insertion of clause (i) to Explanation 1 to Section 115JB(2) of the Act. 6. erred in directing Ld. AO to add back amount of Rs. 7,45,93,183 while computing book profits under Section 115JB of the Act without appreciating the fact that the Appellant has reduced the provision from Sundry Debtor Schedule (refer Note 10) in the audited accounts for year ended 31 March 2019. Insurance claim of Rs. 12,57,920 received on destruction of iPads and Computers to be treated as income 7. erred in directing the Ld. AO to make addition of insurance claim received on destruction of iPads and Computers amounting to Rs. 12.57,920 treating it as taxable income under the head Income from Business and Profession without appreciating the fact that same has already been reduced from the block of assets as per provisions of Section 43(6) of the Act for calculation of depreciation under Income Tax Act. 8. erred in misinterpreting the definition of the "money payable as defined under Explanation 4 to Section 43(6) r.w.s 41 of the Act which precisely includes an insurance claim in respect of a building, machinery, plant or furniture and thus can be deducted for computing Written Down Value (WDV) as per provisions of section 43(6) of the Act: 9 erred in relying and misinterpreting decision of Hon'ble Supreme Court in case Raghuvanshi Mills Ltd. which was pronounced under old Income Tax Act, 1922 which is different from provisions of Income Tax Act, 1961 and also misunderstood that the facts of the said case are different from that of the Appellant as the issue before Supreme Court pertained to whether insurance claim received was capital receipt exempt from tax or taxable as revenue receipt for loss of profit. Additional Ground of Appeal
10. erred in not considering the fact that even if for academic purposes, it is considered that addition of provision for doubtful debts of Rs. 7,45,93,183 is to be made while computing book profits under section 115JB of the Act, the same would not result in additional tax liability in hands of the Appellant, since, the tax liability under normal provisions of the Act, is higher than tax liability on book profits and there is Nil MAT credit balance carry forward, hence the said addition cannot be termed as "prejudicial to interest of the revenue" as it does not result in any additional tax liability on the Appellant.”
Briefly the facts of the case are that the assessee filed its return of income on 28-11-2019, which was selected for complete scrutiny under CASS and thereafter, after issuance of notices and calling for necessary information/documentation, the assessment proceedings were completed by the Assessing officer and an order dt. 12-04-2022 was passed u/s. 143(3) r.w.s. 144C(3) r/w section 144B of the Income Tax Act, 1961 („the Act‟).
Subsequently, the assessment records were called for and examined by the Ld.PCIT. On perusal of the assessment records and the financial statements of the assessee-company, the Ld. PCIT, referring to the note annexed to the computation of income wherein the assessee-company has stated that Explanation (1) to section 115JB of the Act is not applicable to the provisions for doubtful debts as the company had reduced the provision from Sundry Debtors Schedule (as per Note 10) to the audited accounts for the year ended 31-03-2019, observed that the amount appearing in the said Note 10 is Rs. 7,45,93,183/-whereas the assessee has disallowed an amount of Rs. 7,20,40,523/- as against the amount of provision for doubtful debts of Rs. 7,45,93,183/- while computing the total income under the normal provisions of the Act. Further, on perusal of the computation of income, the Ld.PCIT observed that the assessee-company has reduced an amount of Rs. 12,57,920/- being insurance claim received on destruction of computers from the income under the head „income from business or profession‟. However, the assessee has not offered the said amount to tax separately. It was accordingly observed by the Ld.PCIT that the AO has grossly neglected the fact that the assessee has made wrong claim for bad and doubtful debts and also not offered the income received as insurance claim and since the AO has failed to examine the same, the order so passed u/s. 143(3) r.w.s. 144C of the Act was deemed to the erroneous in so far as prejudicial to the interest of the Revenue and accordingly a show cause u/s 263 dt. 22-02-2025 was issued to the assessee.
In response to the show cause, the assessee submitted that it has correctly disallowed the sum of Rs. 7,20,40,523/- towards the provision for doubtful debts taking into consideration the impact of the provisions of doubtful advances of Rs. 13,47,340/- and a reversal of the provisions amounting to Rs. 39 lakhs while computing the income under the normal provisions of the Act. It was further submitted that as per the provisions of section 43(6)(C)(i)(B) r.w. Explanation-4 for computation of Written Down Value for computation of depreciation u/s. 32 of the Act, the assessee has reduced the insurance claim amount of Rs. 12,57,920/- in the Block of Assets. It was accordingly submitted that the order so passed by the AO was not erroneous and prejudicial to the interest of the Revenue.
The submissions so filed by the assessee were considered but not found acceptable to the Ld. PCIT. As per the Ld. PCIT, the assessee has disallowed only Rs.7,20,40,523/- towards provisions for doubtful debts under normal provisions, whereas the provision for doubtful debts as per financial statements amounts to Rs 7,45,93,183/- There is thus a clear under-disallowance of Rs.25,52,660/-, which has not been appropriately added back while computing total income under normal provisions. The reconciliation provided by the assessee fails to justify this shortfall. The separate adjustment of Rs. 13,47,340/- (provision for doubtful advances) and the reversal of Rs.39,00,000/- is irrelevant in determining the correct disallowance under normal provisions. The AO has not verified whether the full amount of provision for doubtful debts was disallowed as per statutory requirements and the order passed u/s.143(3) r.w.s. 144C(3) has overlooked this discrepancy.
Further, it was held by the ld PCIT that as per Section 115JB of the Act, the entire provision for doubtful debts must be added back as it is an un-ascertained liability. The assessee has not added back Rs.7,45,93,183/- in MAT computation u/s. 115JB of the Act, which is against the requirements of the Act. The provision for doubtful debts should have been fully disallowed under normal provisions and MAT, without partial adjustments.
Regarding the insurance claim of Rs. 12,57,920/- received on destruction of iPads and computers, it was held by the ld PCIT that as per the principle of taxation of revenue receipts, any compensation received against the loss of an asset used for business purposes is considered taxable unless specifically exempted. The assessee has incorrectly excluded the amount from taxable income, leading to an understatement of profits. The insurance claim should not have been adjusted against the block of assets as per Section 43(6)(c)(i)(B). Explanation 4 to Section 43(6) clarifies that for computing Written Down Value, only money payable from the transfer of an asset should be deducted. However, an insurance claim is compensation and not a sale consideration and does not qualify as „money payable‟ from the transfer of an asset. By reducing the insurance amount from the Written Down Value of the asset block, the assessee has effectively reduced the depreciation claim, but this does not negate the fact that the insurance amount should be separately offered as income. The assessee has included Rs. 12,57,920/- under „consideration or other realization‟ in the depreciation schedule (Schedule DPM), but has not separately offered it to tax in the computation of income. While the total reduction from the block of assets includes Rs. 30,52,569/- (Rs. 12,57,920 from insurance and Rs. 17,94,649 from sale of old computers). The Department's contention is that the insurance claim should not be clubbed with the sale consideration and should instead be recognized as taxable income. The Hon'ble Supreme Court in the case of Raghuvanshi Mills Ltd. vs. Commissioner of Income-tax held that „amounts paid by an insurance company on account of loss of profit are taxable‟ and this ruling highlight the distinction between insurance claims received for loss of capital assets and those for loss of profits, with the latter being taxable as business income.
In light of the aforesaid reasoning, the Ld. PCIT held that the arguments of the assessee are not tenable and the order u/s 143(3) r.w.s. 144B of the Act, dt. 12-04-2022 was set aside u/s 263 of the Act and AO was directed to examine the issues mentioned in the impugned order and make addition/disallowance after giving opportunity of being heard to the assessee. Against the said order, the assessee is in appeal before us.
The Ld.AR at the outset referred to the additional ground of appeal taken by the assessee and submitted that the same is a legal ground of appeal wherein all relevant facts are on record and the same may be admitted and reliance was placed on the Hon‟ble Supreme Court decision in case of NTPC vs CIT 229 383.
10. In this regard, it was submitted that the ld PCIT has initiated the revision proceeding to disallow the provision for doubtful debts under section 115JB of the Act. It was submitted that even if for academic purposes, the addition on account of provision for doubtful debt is sustained to the book profit under MAT provisions, the same would not result into any additional tax liability on account of the fact that the taxes under the normal provisions of the Act are higher than the tax on the book profits so re-computed u/s. 115JB of the Act. In this regard, it was submitted that even if the addition of Rs 7,45,93,183/- is sustained and added to the book profits, the gross tax payable in the hands of the assessee would still be as per the normal provisions of the Act at Rs. 7,75,28,25,749/-, which is paid by the assessee while fining its return of income. It was submitted that since there will not be any additional tax liability on account of disallowance of provision for doubtful debts while computing the book profits u/s. 115JB of the Act and since no MAT credit has been carried forward, the assessment order even if assumed to be erroneous is not prejudicial to the interest of the Revenue and, therefore, the Ld. PCIT has erred in invoking his jurisdiction u/s. 263 of the Act.
11. It was further submitted that all the information in support of its position was made available to the AO in response to notices issued during the course of assessment proceedings. It was submitted that in the computation of income, the assessee while computing the taxable income as per the normal provisions of the Act had suo moto disallowed the entire provisions for doubtful debts. It was further submitted that in the notes of computation of income submitted as part of return of income, the assessee has clearly disclosed the fact that the provision for doubtful debts have not been disallowed while computing the book profits as per section 115JB of the Act in view of the settled legal position. Further in support of insurance claim received on account of destruction of ipads and computers, the same were duly reflected as part of the depreciation schedule in the return of income as well as in the tax audit report duly submitted by the assessee. It was accordingly submitted that the AO had all the relevant information on record and had sufficient opportunity to examine the claim so made in the return of income. It was submitted that only after carrying out the necessary verification and examination, the AO has accepted the claim of the assessee. It was accordingly submitted that the revisionary proceedings are clearly not valid where the AO has duly examined all the records at the time of assessment proceedings with due application of mind. It was submitted that mere fact that the assessment order does not contain any specific discussion with regard to the issues identified by the Ld. PCIT would not by itself indicate non-application of mind wherein the AO has issued the notices and the assessee has placed the requisite information on record which has been duly examined by the AO. In this regard, reliance was placed on the decision of the Hon‟ble Bombay High Court in the case of Moil Ltd. vs. CIT 396 ITR 244 wherein it was held that „the provisions under section 263 cannot be invoked where the Assessee has submitted the relevant details and the AO is satisfied about the admissibility of the claim based on the details submitted.‟ Further, reliance was placed on the decision of CIT vs Nirav Modi [2017] 77taxmann.com 15 (SC), V-Con Integrated Solutions Pvt Ltd [2025] 173 taxmann.com 774 (SC) and various coordinate Benches decision.
Further on the merits of the case, with regard to disallowance of 12. provision for doubtful debts amounting to Rs.25,52,660/- while computing the income under normal provisions of the Act, it was submitted that the assessee had suo moto disallowed an amount of Rs.7,20,40,523/- on account of provision for doubtful debts while computing its income under normal provisions of the Act and the working of the amount of Rs.7,20,40,523/- on account of provision of doubtful debts, which is tabulated as under:
It was submitted that the assessee during the previous year has debited an amount of Rs. 6,98,30,007/- in its audited financial statements as "Impairment Allowances for Doubtful Trade Receivables/Advances/Deposits (net)", which is mentioned in Note 34 of the financials at Page No. 305 of the factual paper book. It was submitted that the exchange difference of Rs. 22,10,516/- pertaining to forex loss has been debited in the profit & loss account under the head "Net gain on Foreign Currency Transactions", under Note No. 29 of the audited financial statements, which is mentioned in Page No. 303 of the Factual paper book.
Further, regarding the allegation of the Ld.PCIT that the assessee has disallowed an amount of Rs. 7,20,40,523/- on account of provision of doubtful debts under normal provisions in its return of income filed for the AY.2019-20 as against an amount of Rs. 7,45,93,183/- which is reflected in Note 12 to Return of Income "provision of doubtful debts not disallowed under provision of Section 115JB of the Act, thereby resulting in short disallowance of Rs.25,52,660/- while computing the total income under normal provisions of the Act, the Ld.AR has drawn our attention to the reconciliation of Rs 7,45,93,193/- reported note No 12 to the return of income, and amount of Rs 7,20,40,523/- disallowed in the normal provision of the Act, in the table herein above. It was submitted that as evident, Rs. 7,20,40,523/- (Rs. 6,98,30,007/- plus Rs. 22,10,516/- for net forex loss on restatement of trade receivables) was disallowed by the assessee in its computation of income under normal provisions of the Act. This figure reflects the disallowance of debit of Rs. 13,47,340/- for Provision for doubtful advances, offset by a reversal credit of Rs. 39,00,000/- for notional IND AS provision for doubtful debts/advances, resulting in a net disallowance effect of Rs. 25,52,660/-. It was submitted that the net amount of Rs. 25,52,660/- (calculated as Rs. 13,47,340/- for doubtful advances less reversal credit of Rs. 39,00,000/-) is already included in the provision for doubtful debts of Rs. 7,20,40,523/- which has been disallowed in computing income under the Act. Therefore, adding Rs. 25,52,660/- again, as stated in the Ld.PCIT's order dated 25-03-2025, would results in double disallowance. It was accordingly submitted that where the assessee had already made the disallowance of provision for doubtful debts amounting to Rs. 7,20,40,523/- which includes the net amount of Rs. 25,52,660/- and the same has been examined and accepted by the AO, the order so passed by the AO is not at all erroneous nor prejudicial to the interests of the Revenue.
As far as disallowance of provision for doubtful debts under MAT provisions of the Act amounting to Rs. 7,45,93,183/- is concerned, it was submitted that the Ld.PCIT in his order passed u/s 263 of the Act stated that the entire amount of Rs. 7,45,93,183/- on account of provision of doubtful debts should be added back to the computation of book profit u/s. 115JB of the Act. In the connection, the Ld.AR submitted that while computing the book profit u/s. 115JB of the Act, the assessee had separately disallowed a net amount of Rs.25,52,610/- being "Provision for doubtful advances" amounting to Rs. 13,47,340/-, which is debited in the P&L account and reduced an amount of Rs. 39,00,000/- on account of "Reversal of Additional/Notional IND AS Provision for Doubtful debts/advances", which is credited in P&L Account in book profits computed u/s. 115JB of the Act and submitted that the same is evident from the Computation of Income of the assessee for the year under consideration. In this connection, the Ld.AR drawn our reference to Page No. 146 of the factual paper-book. It was also submitted that even in the notes to Computation of Income submitted during the assessment proceedings, the assessee has submitted as to why the provision for doubtful debits amounting to Rs. 7,45,93,183/- should not be added back while computing book profits u/s. 115JB of the Act and drawn our reference to Page No. 176 of the factual paper-book. Thus, the Ld.AR submitted that it is clear that the AO had examined the aforesaid issue during the assessment proceedings and has allowed the claimed made by the assessee.
It was further submitted that the provision for doubtful debts should not be added back while computing the book profit even after insertion of clause (1) to Explanation 1 to Sec 115JB(2) of the Act since clause (i) to Explanation 1 to sec 115JB of the Act is not applicable to provision for doubtful debts as the assessee has reduced the provision from Sundry Debtors Schedule in the audited financials for year ended 31st March, 2019 and drawn our attention to the presentation of the Schedule 10: Sundry Debtors in financial statements, as under:
The Ld.AR submitted that this is an actual write-off and thus, would not be hit by clause (i) of Explanation to section 115JB of the Act, and drawn our attention to Explanation 1, reads as under: "Explanation 1. For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by- (1) the amount or amounts set aside as provision for diminution in the value of any asset, 18. In this regard, the Ld.AR placed reliance on the decision of the Co- ordinate Bench of the Mumbai Tribunal in assessee‟s own case for the AY. 2009-10 (ITA No. 1920/Mum/2020 & C.O. No. 129/Mum/2021 dated 03- 02-2023), wherein the Co-ordinate Bench of the Tribunal relying on the decision of the Hon'ble Gujarat High Court in case of CIT vs. Vodafone Essar Gujarat Ltd (2017) 397 ITR 55 (Guj) has held that Provision for doubtful debts should not be added while computing book profits u/s. 115JB of the Act and the relevant findings therein read as under:
“10.8 We notice that the Hon'ble Gujarat High Court in the case of CIT vs. Vodafone Essar Gujarat Ltd (supra) and the Hon'ble Karnataka High Court, in the case of Yokogawa Ltd (supra) has expressed the view that the "Provision for bad and doubtful debts", if reduced from the amount of "Sundry debtors balance" in the assets side of Balance Sheet would amount to actual write off of bad debts and accordingly, it would not be hit by clause (i) of Explanation 1 to sec. 115JB of the Act. Both the High Courts have followed the decision rendered by Hon'ble Supreme Court in the case of Vijaya Bank (323 ITR 166)(SC). The Hon'ble Apex Court was considering the provisions of sec. 36(1) (vii) r.ws 36(2) of the Act in the context of a banking company. Under the provisions of sec. 36(1) (vii) of the Act, an assessee is eligible to claim deduction of amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee. Explanation 1 to sec. 36(1)(vii) reads as under:- "Explanation 1:- For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. The above said explanation recognized the distinction between "actual write off bad debts" and "Provision for bad and doubtful debts". The Hon'ble Supreme Court, in the case of Vijaya Bank and after considering Explanation 1 to sec. 36(1) (vii), has held that the reduction of "Provision for bad and doubtful debts" from the "Loans and Advances account would meet the requirements of sec. 36(1)(iii), viz., "written off as irrecoverable" 10.9 We noticed earlier that the total income is computed in accordance with the provision of Income tax Act and "Book profit" is computed on the basis of financial statements prepared in accordance with the accounting principles and accounting standards. Even though the decision in the case of Vijaya Bank (supra) was rendered by Hon'ble Supreme Court in the context of sec. 36(1) (vii) of the Act relating to computation of income, the Hon'ble High Courts have chosen to extend the said principle laid down by Hon'ble Supreme Court to computation of 'book profit" u/s 115JB of the Act, wherein the accounting principles and accounting standards acquire prime importance. Following the decision rendered by High courts (referred supra), we hold that the amount of "Provision for bad and doubtful debts", if reduced from the amount of "Sundry debtors balance" in the assets side of Balance Sheet, the same would not be hit by clause (i) of Explanation 1 to sec. 115JB of the Act. The AO not to add the amount of Provision for bad and doubtful debts to net profit, while computing book profit u/s 115.JB of the Act.”
Further, the Ld.AR placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Vodafone Essar Gujarat Ltd (2017) 397 ITR 55 (Guj), wherein it was held that if provision is obliterated from accounts, it would amount to a write off and such actual write off would not be hit by clause (i) of Explanation to section 115JB of the Act and the relevant findings therein read as under:
23. By way of culmination of above judicial pronouncements and statutory provisions, the situation that arises is that prior to the introduction of clause(i) to the explanation to sec 115JB, as held by the Supreme Court in case of HCL Comnet Systems & Services Ltd. (supra), the then existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With insertion of clause (i) to the explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under sec 115.JB of the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to sec 115JB. The judgment in case of Deepak Nitrite Ltd. (supra) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corpn. Ltd. (supra), fell in the latter category
The Ld. AR also drew our attention to the catena of judgments, wherein similar view has also been adopted by various Courts/Tribunals in the following cases: i. PCIT v. Narmada Chematur Pharmaceuticals Ltd. (2021) 439 ITR 761 (Guj), ii. CIT v. ACC Ltd. (2019) (112 taxmann.com 402) (Bom HC). SLP dismissed in (2020) (269 Taxman 14) (SC); iii. PCIT v. Torrent (P.) Ltd. (2019) 108 taxmann.com 375 (Guj); iv. PCIT v. Sun Pharmaceutical Ind Ltd (2017) 87 taxmann.com 215 (Guj HC); v. Cadila Pharmaceuticals Ltd. v. ACIT (2024) 162 taxmann.com 220 (Ahd); vi. PCIT v. Vaibhav Global Ltd. (2023) 151 taxmann.com 114 (Raj) [SLP dismissed in (2023) 151 taxmann.com 115 (SC), vii. Apollo Tyres Ltd. v. CIT [(2002) 255 ITR 273 (SC)]
viii. CIT v. Kirloskar Systems Ltd. [(2014) 220 Taxman 0001 (Karnataka)] ix. CIT v. Saint Gobain Glass India Ltd [[2020] 269 Taxman 610 (Madras HC)] x. CIT v. Indian Petrochemicals Corporation Ltd [2016] 74 taxmann. com 163 (Gujarat HC) Affirmed in [2025] 171 taxmann.com 48 (SC)) xi. Asian Paints Limited [ITA No. 2700/Mum/2023, 2697/Mum/2023, 2696/Mum/2023 (Mumbai ITAT)] dated 26 July 2024. xii. CIT v. Yokogawa India Ltd [[2012] 204 Taxman 305 (Karnataka HC)] xiii. Schindler India Private Limited [ITA No. 7326/Mum/2017, 7311/Mum/2018] dated 6 June 2025.
The Ld.AR further submitted that, since the assessed total income under the normal provisions was higher than the book profit determined u/s. 115JB and no MAT credit was carried forward, section 263 of the Act is not applicable unless the order is found to be erroneous and prejudicial to the Revenue. Accordingly, invoking section 263 on this issue was not supported by sufficient grounds and the same may be set-aside.
It was further submitted that the assessee reduced Rs. 30,52,569/- in its return of income, comprising Rs. 12,57,920 from insurance claims for destroyed iPads and computers, and Rs. 17,94,649 from the sale of old computers and laptops, as shown under "consideration or other realization" in the depreciation schedule (Schedule DPM). The Ld.AR drawn our attention to Section 43(6)(c) of the Act which states that in the case of any block of assets for the assessment year starting April 1, 1988, the written down value at the year's start is adjusted by adding the cost of new assets acquired during the year and subtracting amounts payable for asset sold, discarded, demolished, or destroyed assets (including scrap value), ensuring this reduction does not exceed the increased written down value." The Ld.AR referred to the definition of the term "Moneys payable" as provided in section 43(6)(c) of the Act, which is defined under section 41 of the Act, as applicable during this year. "Moneys payable," as defined in section 41, explanation 4 of the Act for sub-section (3), refers to:
(a) insurance, salvage, or compensation payments for any building, machinery, plant, or furniture; (b) the sale price if such property is sold.
It was submitted that the term 'money payable' includes any insurance, salvage, compensation money in respect thereof. Where the asset is sold, money payable includes the price for which it is sold. Thus, where insurance company makes any payment for the destroyed assets to the insured assessee, the insurance claim amount has to be reduced from the block of asset and any excess shall be charged as capital gains. Section 41(2) now substituted by section 50 would treat moneys payable on an asset which is discarded, demolished or destroyed as an amount received on sale value of such asset and would bring to tax the excess of such moneys received over the written down value as chargeable income to tax. The surplus is assessable as short-term capital gains. Where only some of the items in a block was destroyed by fire for which the assessee had received compensation from the insurer, a matter came up for consideration as to whether such amount should go to reduce the entire block or is limited to the written-down value of the assets for which compensation was received. It was decided in CIT v. Priyadarshini Spinning Mills Ltd. [2014] has to be limited to the extent of compensation as regards the written-down value reflected in the accounts. It follows that the excess will be treated as short-term capital gains and the written-down value of the other assets in the block would not be affected. From the above, it is evident any insurance amount received in connection with asset, would form part of the 'moneys payable and same has to be reduced from the WDV of block of asset for the purpose of computation of Depreciation under section 32 of the Act.
It was submitted that the Ld. PCIT in his order has misinterpreted the said provisions of the Act relying on the decision of the Hon'ble Supreme Court in case of Raghuvanshi Mills Ltd. v. CIT (1952) (22 ITR 484) (SC)] which was based on old provisions and the facts of which were different from those in the case of the assessee and disregarded the treatment adopted by the assessee. It was submitted that in the said case, the question before the Hon'ble Supreme Court was whether insurance claim received from “consequential loss policy" insured against loss of profit, standing charges and agency commission where the mills were completely destroyed as a result of fire and a certain amount was paid to the assessee by the insurance companies. The question was whether this amount which was treated as paid on account of loss of profits was assessable to income-tax under Section 4(3)(vii) of the Income Tax Act, 1922. The Supreme Court held that the receipt was inseparably connected with the ownership and conduct of the business and arose from it and therefore it was not exempt under Section 4(3)(vii) of the 1922 Act whereas in the appellant's case the insurance claim was received on account of the destruction of the iPad and computers (capital assets). Thus, the Supreme Court‟s decision in Raghuvanshi Mills Ltd. v. CIT (Supra) is not applicable to the facts in the case. It was accordingly submitted that the contention of the Ld.PCIT that the insurance claim amount received of Rs. 12,57,920/- should be offered to tax as business income as against reduction of the same from Block of Assets on account of loss of profits is not correct and that the assessee has given correct treatment of the insurance claim received and the same has been correctly taxed by the AO and the order passed by the AO is not erroneous and not prejudicial to the interests of the Revenue.
Per contra, the Ld. CIT/DR is heard, who has vehemently argued the matter and has relied on the order passed by the Ld. PCIT, which we have already taken note and hence not been reproduced for the sake of brevity. The Ld. DR further relied on the decision of the Hon‟ble High Court of Himachal Pradesh in the case of CIT vs. Himachal Pradesh Financial Corpn.[2010] 186 Taxman 105 (Himachal Pradesh).
We have heard the rival contentions and perused the material available on record. Section 263 of the Act provides that the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceedings under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including, an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or an order modifying the order under section 92CA; or an order cancelling the order under section 92CA and directing a fresh order under the said section.
The Statute thus vest the revisionary jurisdiction on the Commissioner where the order passed by the Assessing officer is found to be erroneous and prejudicial to the interest of the Revenue and for the purposes of exercise of such revisionary jurisdiction, has laid down a clear and robust mechanism, whereby the Commissioner has to provide an opportunity of being heard to be assessee and thereafter, after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. As held by the Courts from time to time, there is no statutory requirement to issue a show-cause u/s 263 detailing specific grounds on which the revisionary proceedings are proposed, at the same time, an opportunity is to be provided to the assessee to contest the grounds basis which the Commissioner seeks to exercise his revisionary jurisdiction. The opportunity of being heard is not limited to allowing verbal contentions/arguments to be raised but include an opportunity to present written submissions/arguments and to take into consideration the submissions so made and thereby examining the same and passing a speaking order accepting or rejecting the contentions so raised and determining as to how the order so passed by the AO is held to be erroneous and prejudicial to the interest of the Revenue and passing appropriate directions. As part of such exercise and examination of submissions so made by the assessee, the Commissioner is also empowered to make or cause to be made such further inquiry as he deems necessary in the facts and circumstances of the relevant case. The statute thus provides an opportunity to the Revenue to contest the order and findings of the Assessing officer through exercise of revisionary jurisdiction with the Commissioner and at the same time, provides an opportunity to the assessee to contest such action and therefore, the Commissioner has to exercise due care in allowing equal opportunity and follow a judicious approach while exercising such powers. And such an exercise of judicious approach has to reflect in the order and directions of the Commissioner and he has to speak through his order and lay bare his mind and thoughts as to why he is of the opinion that it is a fit case for exercise of revisionary jurisdiction within the touchstone of dual principle, i.e, the order so passed by the Assessing officer is not just erroneous but also prejudicial to the interest of the Revenue.
In the instant case, as we have noted supra, the Ld. PCIT, referring to the notes annexed to the computation of income and available as part of the assessment records observed that the assessee has disallowed an amount of Rs. 7,20,40,523/- as against the amount of provision for doubtful debts of Rs. 7,45,93,183/- while computing the total income under the normal provisions of the Act, alleging short disallowance by the assessee. Another matter observed by the Ld. PCIT was that the assessee- company has reduced an amount of Rs. 12,57,920/- being insurance claim received on destruction of computers from the income under the head „income from business or profession‟, however, the assessee has not offered the said amount to tax separately. There were thus two issues which were observed by the ld PCIT and it was held that there was failure on part of the AO in verifying the same and the order so passed u/s. 143(3) r.w.s. 144C of the Act was prima facie held to be the erroneous in so far as prejudicial to the interest of the Revenue and accordingly a show cause u/s 263 dt. 22-02-2025 was issued to the assessee. The assessee in response to the show-cause filed its submissions and which were considered but not found acceptable to the ld PCIT and the assessment order was set-aside to the file of the AO. Here it is relevant to note that while setting aside the matter to the file of the AO, the ld PCIT besides the two issues stated in the show-cause has also that as per Section 115JB, the entire provision for doubtful debts must be added back as it is an unascertained liability. Interestingly, when the initial show-cause was issued, the Ld.PCIT has referred to the same notes to the computation of income, however, no show-cause was issued on the said issue, however, in the impugned order, a finding has been recorded disputing the position so adopted by the assessee and accepted by the AO. Further, during the course of revisionary proceedings, we find that the assessee has not been given any opportunity and its explanation sought as to why the provisions for doubtful debts should not be added back while computing book profits u/s 115JB of the Act. Though the Ld.AR has admittedly not taken this ground of lack of opportunity before us, at the same, the reasons why we find relevant to highlight the same is that it demonstrate lack of adherence on the part of the Ld.PCIT to well laid down mechanism in the statue for exercise of revisionary jurisdiction where the assessee has to be necessarily confronted before disturbing its vested right in terms of concluded assessment proceedings and adoption of a tax position which is supported by the judicial pronouncements of Hon‟ble Courts and Tribunal including in assessee‟s own case.
Now, coming to the findings of the Ld.PCIT, we find that on the issue of under-disallowance of provision for doubtful debts to the extent of Rs 25,51,660/-while computing the income under the normal provisions of the Act, the assessee has sufficiently demonstrated before us during the course of hearing through disclosure in its financial statements and explanation thereto that there is no mis-match in the provision for doubtful debts as so reported in the financial statements and disallowed while working out the income under the normal provisions of the Act. We find that similar explanation were furnished before the Ld.PCIT as well, however, the same were not appreciated in correct perspective by the ld PCIT. On this ground, the order so passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of Revenue
On the issue of disallowance of provision for doubtful debts while computing the book profits u/s. 115JB of the Act, we find that the assessee has adequately disclosed the same as part of its financial statements (note 10) that the amount of provision has been reduced from trade receivables and thus, no separate adjustment called for u/s. 115JB of the Act, besides in the notes attached to the computation of income, it has adequately explained as to why it has not added back the said provision for doubtful debts for the purposes of computing the book profits and the same were duly submitted during the course of assessment proceedings and the contents of the note read as under:
12. While computing the Book Profit under section 115JB of the Act, the company has not added back Provision for Doubtful debts (net) amounting to Rs. 7,45,93,183 as Explanation (i) to section 115JB is not applicable to provision for doubtful debt, as the company has reduced the provision from Sundry Debtor Schedule (refer Note - 10) In the audited accounts for year ended 31 March 2019. In this regard the company relled on decision in the case of the Hon'ble Guj High Court in the case of CIT v. Vodafone Essar Gujarat Ltd (2017) 397 ITR 55 [followed In Pr. CIT v Sun Pharmaceutical Ind Ltd (2017) 87 Taxmann.Com 215 (Guj)).
We further find that where the matter is covered by the decision of Hon‟ble Gujarat High Court in case of Vodafone Essar Gujarat Ltd and which has subsequently been followed by the Coordinate Bench in assessee‟s own case for A.Y 2009-10, the AO has taken a plausible view in the matter while accepting the said position. The Ld.PCIT has however not dealt with the aforesaid and has summarily held that the provision for doubtful debts have not been added back for the purposes of computing the book profits. In any case, as pointed out by the Ld.AR, the tax liability has been determined under the normal provisions and even where such an adjustment as so suggested by the Ld.PCIT is accepted, the order so passed by the AO cannot be held to be prejudicial to the interest of the Revenue. In light of the same, on this ground, the order so passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of Revenue.
On the issue of insurance claim received on destruction of ipads and computers, we find that the assessee company has rightly reduced the same from the block of assets (which continues to exist at the end of the financial year) for the purposes of computation of depreciation and the same is in conformity with the provisions of section 32 r/w 43(6)(c) of the Act and thus, on this ground as well, the order so passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of Revenue.
In light of aforesaid discussion and in the entirety of facts and circumstances of the case, we are of the considered view that there is no legal and justifiable basis for exercise of revisionary jurisdiction by the ld PCIT u/s 263 of the Act and thus, the order of the Ld.PCIT is set-aside and that of the AO is sustained.
In the result, the appeal of the assessee is allowed.