THE GUNTUR DISTRICT CO OPERATIVE MARKETING SOCIETY LIMITED,GUNTUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), GUNTUR

This order under section 263 of the Act was passed by the Pr.CIT as it was noticed that the assessee has debited an amount of Rs.20,85,248/- towards “Provision for Bad & Doubtful Debts” in the Profit and Loss account which is an “ascertained liability” and should have been disallowed as this expenditure is prima facie not allowable under the provisions of the Act. The Ld.AO should have examined its allowability and the Assessing Officer [in short “Ld. A.O.”] did not make the required disallowance in this regard. Ld. Pr.CIT has observed that the case was selected for complete scrutiny and still the A.O. has not examined the above issue. Apart from this an amount of Rs.3,11,472/-, excess levy of demand also was there as per the order of the A.O. In order to apply the correct provisions of law, Pr.CIT has passed this order under section 263 of the Act by stating that there is failure on the part of the A.O. to verify the issue of disallowance of the “Provision for “Bad & Doubtful Debts” and the incorrect adoption of assessed income reflects a lack of adequate scrutiny and proper application of the provisions of the Act and hence Pr.CIT came to the conclusion that the order passed by the A.O. was “Erroneous” and “Prejudicial to the Interest of Revenue”. The order was passed by the Ld.A.O under section 143(3) r.w.s. 144B of the Act on 29.09.2022 and after observing as above, a notice under section 263 of the Act was issued by the Pr.CIT on 22.11.2024 to the assessee calling for the objections, if any, against the proposed revision of the assessment. This notice was served on the assessee-society also. The relevant portion of the show cause notice is reproduced below: - "2. Upon review of the assessment records, it has come to light that: 1. The assessee debited Rs.20,85,248/- towards "Provision for Bad & Doubtful Debts" in the Profit and Loss account, which was an ascertained liability and should have been disallowed. This expenditure is prima facie not allowable under the provisions: of the: Income Tax Act, 1961, and should have been examined for its allowability. 2. It was noticed that the assessed income was adopted: as Rs.14;91,21,020/- instead of Rs.14,63,78,410/- in the ITBA system, resulting in an excess levy of demand of Rs.3,11,472l-. This discrepancy reflects a failure to accurately compute the assessed income, which is a key component of the assessment process. The failure to disallow the "Provision for Bad & Doubtful Debts" and the incorrect adoption of assessed income reflects a lack of adequate scrutiny and proper application of the provisions of the Income Tax Act. As such, the assessment order passed on 29.09.2022 appears to be erroneous and prejudicial to the interests of revenue. 3. You are required to explain why the assessment order passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, on 29.09.2022 for the A. Y. 2020-21 should not be treated as erroneous and prejudicial to the interests of revenue due to the lack of adequate verification concerning the disallowance of the "Provision for Bad & Doubtful Debts" and the incorrect adoption of assessed income. Please provide your detailed response, including any relevant certified documents or evidence you wish to rely upon, by the date mentioned above. 4. If you fail to make a written submission or choose not to attend the hearing, the proceedings under Section 263 of the Income Tax Act, 1961, will be concluded ex-parte, based on the available records, as per the applicable law.”

In response to this show cause notice, the assessee-society has given a reply stating that this amount was totally written off in their books of account and there is no “Provision for Bad & Doubtful Debts”. In proof of the same, the account copies of the parties evidencing the total “written off” of bad debts along with copy of audited Balance Sheet. There was no “Provision” on the “Liabilities” side of the Balance Sheet. It was submitted by the assessee-society that it was a clerical mistake while filing the Income Tax Return and a wrong nomenclature was used by the staff as “Provision for Bad & Doubtful Debts” and in fact these bad debts were already written off in their books of account. In view of the same assessee’s society requested the Pr.CIT to drop proceedings under section 263 of the Act. After perusing the documents filed by the assessee-society the Pr.CIT came to the conclusion that the assessee has not written off the “bad debts” in their books of accounts and held as follows: -

In view of the above detailed discussion, the Ld.Pr.CIT finally held that the assessment order was passed without verification in respect of the issues discussed above. As the A.O. failed to verify the above aspect, the assessment order passed by the A.O. was held as “erroneous” in so far as the same is “prejudicial to the interest to revenue” within the meaning and scope of provisions of section 263 of the Act.

The Ld. Pr.CIT has invoked Clause(a) Explanation 2 to Section 263(1) of the Act inserted in the statute w.e.f. 01.06.2015 by the Finance Act, 2015 and held that the order passed by the A.O. shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue if the order was passed without conducting enquiries or verification which should have been made. Applying these provisions, the Pr.CIT invoked revisionary powers under section 263 of the Act and held that the assessment order is incorrect and thereby the issue was set-aside to the file of Ld.A.O. with a direction to pass an order in accordance with the law after necessary verification / enquiries in respect of the “Provision for Bad & Doubtful Debts” and excess levy of demand. A.O. was also directed to afford a reasonable opportunity of being heard and pass the order as per law.

Aggrieved with the order of Pr.CIT, the appeal was filed before ITAT with the following grounds: -

The case was posted for hearing several times. Sometimes the case was represented by Shri M.V. Prasad for Shri C. Subrahmanyam. The Authorised Representative filed several adjournments and the same were granted liberally by the Bench. When the case was posted for hearing on 17.03.2026, Shri C.Subrahmanyam, Counsel for the appellant, has stated that he is withdrawing the “Vakalat” which was filed by him earlier and hence requested the Bench to discharge him as counsel for appellant in this case.

Ld. Departmental Representative [hereinafter in short “Ld.DR”] elaborately argued the case and submitted the Bench to confirm the Order passed by the Pr.CIT because the same will not cause any prejudice to the assessee, as it was very clearly mentioned by the Pr.CIT that the assessee should be given an opportunity of being heard before taking the action. The Pr.CIT has categorically held that the A.O. has not applied his mind and no enquires were also caused with regard to the major issue of “Provision for Bad & Doubtful Debts”. Hence the order of the Pr.CIT exercising the revisionary jurisdiction under section 263 of the Act is correct and valid and accordingly the same should be upheld.

After hearing both the sides, the Bench observed that several adjournment requests were granted over a period of time and finally the Ld. AR of the assessee-society filed a copy of withdrawal letter and requesting the Bench to permit him to withdraw his “Vakalat” and arguing this case. In view of the same, the Bench decides to pass the order based on the material available on record and arguments of Ld.DR.

From Para No. 6 of the order of the Pr.CIT, it is observed that the debts which were claimed as “Provision for Bad and Doubtful Debts” did not consist bad debts because the appellant is still pursuing the recovery of the demands and it was also found that the assessee has not “written off” the debts as bad debts in the books of accounts. Since the main condition to allow the bad debts of written off the same in the books account was not fulfilled, the observation of Pr.CIT that “Provision for Bad & Doubtful Debts” cannot be allowed as expenditure and hence to that extent, the order of Ld.Pr.CIT under section 263 of the Act is upheld. In other words, the main condition of “written off” of the bad debts in the books of account was not fulfilled and as the assessee-society is still pursuing the recovery, the same cannot be allowed as expenditure as claimed by the assessee-society. Anyhow, the direction of the Ld.Pr.CIT is only proper enquiry should be caused and an opportunity of being heard should be given, the Bench decides to confirm the order of Ld.Pr.CIT of setting aside the order passed by the A.O because prima facie, the observation of Ld.Pr.CIT is correct. Accordingly, the direction to Ld.AO that “enquiries” should be caused and apply correct provisions of law is upheld. Similar is the case with respect to the issue of excess levy of demand. Hence, the order of Ld.Pr.CIT is upheld.

In the result, appeal filed by the assessee is dismissed.