KUDOS FINANCE AND INVESTMENT PVT LTD,MUMBAI vs. PRINCIPLE COMMISSIONER OF INCOME TAX-6, MUMBAI

Being aggrieved, the Assessee has preferred the present appeal before the Tribunal.

When the appeal was taken up for hearing, Learned Departmental Representative pointed out that the appeal was time barred by 372 days. Explaining the reason for delay in filing the present appeal the Learned Authorized Representative invited our attention to the affidavit of (a) managing director of the Assessee-Company and (b) erstwhile tax consultant. It was explained that the delay in filing the present appeal was primarily on the account of incorrect legal advice received from the erstwhile tax consultant. The erstwhile tax consultant has, by way of a sworn affidavit, deposed as under:

I say that the learned PCIT passed an Order dated 30 March Assessment Year 2019-2020 2023 in my Client's case, directing the learned AO that the claim of provision for bad and doubtful debt should be verified after providing an opportunity of being heard and should be disallowed/allowed in the light of the provisions of section 36(1)(viia) of the Act.

I say that post the above order was passed, the Client had approached me seeking consultation with respect to the future course of action.

I say that I advised the Client that the Order passed under section 263 of the Act has set aside the intimation passed under section 143(1) of the Act and hence, the matter can be pursued further by filing an appeal before the Commissioner of Income-tax (Appeals) [the learned CIT(A)].

I say that I was under a bonafide belief that the jurisdictional issues concerning the validity of revision proceedings can also be challenged before the learned CIT(A) against the consequential order passed under section 143(1) read with section 263 of the Act since the concluding para of the Order u/s 263 had set-aside the matter for afresh consideration of the Assessing Officer.

It is admitted position that the Assessee had returned loss for the Assessment Year 2019-2020. It has not been disputed by the Assessee that as per Section 36(1)(viia) of the Act deduction for „Provision for bad and doubtful debts‟ could have been claimed for an amount not exceeding specified percentage of the total income. It has been contended on behalf of the Assessee that Assessee had not claimed deduction in respect of „Provision for bad and doubtful debts‟ amounting to INR.1,07,35,497/- and the claim for deduction for „Provision for bad and doubtful debts‟ was only to the extent of INR.1,64,482/-. Even if the aforesaid contention of the Assessee is accepted for the sake of arguments, while processing return of income the deduction claimed by the Assessee for „Provision for bad and doubtful debts‟ was allowed in contravention of the provisions contained in Section 36(1)(viia) of the Act. Assessment Year 2019-2020

Section 143(1) of the Act as applicable to the relevant assessment year was introduced by way of substitution of the earlier Section 143(1) by the new Section 143(1) by the Finance Act, 2008. The new Section 143(1) provided for computation of total income after making the adjustments to the returned income, inter alia, for an incorrect claim, if such incorrect claim is apparent from any information in the return. The expression „incorrect claim apparent from any information in the return‟, has been defined under Explanation to Section 143(1) of the Act to means a claim, on the basis of an entry, in the return, (i) of an item, which is inconsistent with another entry of the same or some other item in such return;

The claim for deduction for the „Provision for bad & doubtful debts‟ allowed by way of Intimation Order, dated 28/04/2020, in the case of the Assessee constitutes an incorrect claim apparent from information in the return since the deduction allowed under Section 36(1)(viia) of the Act exceeded the specified statutory limit (expressed as percentage of total income). Therefore, adjustment for the aforesaid incorrect claim could have been made under Section 143(1) of the Act.

Explanation 2 to Section 263 of the Act provides that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as prejudicial to the interest of Revenue if in the opinion of specified Commissioner such order has been passed without making inquiries or verification which should have been made or such order is passed allowing any relief without inquiring into the claim. In the Assessment Year 2019-2020 present case the claim for provision for bad and doubtful debts was allowed by the Assessing Officer while issuing Intimation Order, dated 28/04/2020, without carrying out any inquiry or verification even though the deduction claimed exceeded the specified statutory limit expressed as percentage of the total income under Section 36(1)(viia) of the Act.

During the course of hearing it was contended on behalf of the Assessee that Intimation Order issued under Section 143(1) of the Act is not an order which can be subjected to revision under Section 263 of the Act. We have already noted that Section 143(1) of the Act (as applicable to the relevant assessment year) was introduced by way the Finance Act, 2008 and the same provided for computation of total income after making the specified adjustments to the returned income. We note that the First Proviso to Section 143(1) mandates that „no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode‟. The Assessing Officer was, therefore, also required to intimate the Assessee and carry out necessary verification/inquiry before making the adjustment and passing the Intimation Order under Section 143(1) of the Act. Thus, the Intimation Order issued under Section 143(1) of the Act is in the nature of an order (as opposed to a mere intimation). This becomes clear on perusal of Section 246A of the Act. As per Section 246A(1)(a) of the Act an intimation issued under Section 143(1) of the Act passed under Section 143(3) of the Act is an order appealable before the CIT(A). Further, bare perusal of Section 263 of the Act shows that the scope of revision under the said section is not limited only to an order passed under Section 143(3) of the Act. Section 263(1) of the Act provides for revision of an order passed by the Assessing Officer in any proceedings under the Act. Thus, there is no doubt that the specified commissioner can invoke the provisions of Section 263 of the Act to revise the intimation/order Assessment Year 2019-2020 passed under Section 143(1) of the Act. However, while exercising powers of revision under Section 263 of the Act the specified commission cannot enhance the scope of the assessment beyond the provisions contained in Section 143(1) of the Act as originally available to the Assessing Officer. In the present case, the Learned PCIT has directed the Assessing Officer to carry out inquiry in the matter of claim of deduction of INR.1,07,35,497/- under Section 36(1)(viia) of the Act and to reassess the income after granting the Assessee a reasonable opportunity of being heard. It is clarified that the scope of the aforesaid verification/inquiry shall be restricted to the provision contained in Section 143(1) of the Act. Accordingly, the order passed by the Learned PCIT stands clarified/modified as aforesaid and scope of inquiry/verification in respect of deduction claimed for „Provision for bad and doubtful debts‟ under Section 36(1)(viia) of the Act in the set aside proceedings is restricted to the provisions of Section 143(1) of the Act. In case the Assessee is able to establish in the set aside proceedings that the amount of INR.1,05,71,051/- represented the actual bad debts incurred by the Assessee which have been written off in the books of accounts, no disallowance shall be made in respect of the same. The Assessing Officer is directed to pass assessment order afresh in terms of the aforesaid directions. Thus, Ground No.1, 2, 3, and 4 raised by the Assessee are dismissed and Ground No.5, 6 and 7 raised by the Assessee are partly allowed.

Now we will take up appeal preferred by the Assessee for the Assessment Year 2019-2020 which is directed against the Order, dated 27/05/2024, passed by the Additional/Joint Commissioner of Income Tax (Appeals)-2, Chennai [hereinafter referred to as the „CIT(A)’], under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟], whereby the Ld. CIT(A) had Assessment Year 2019-2020 dismissed the appeal of the Assessee against the Assessment Order, dated 31/03/2024, passed under Section 263 read with Section 143(1) of the Act, for the Assessment Year 2019-2020. 14. The Assessee has raised the following grounds /additional grounds in the present appeal: ““Based on the facts and in the circumstances of the case Kudos Finance and Investments Pvt Ltd (hereinafter referred to as 'the Appellant') respectfully craves leave to prefer an appeal under section 253(1)(a) of the Act against the order dated 27 May 2024 passed by the ADDL/JCIT(A)-2 (hereinafter referred to as the learned JCIT(A)') under section 250 of the Act on the following grounds which are independent and without prejudice to each other. On the facts and circumstances of the case and in law, the learned JCIT(A) has: Grounds challenging the merits of the case: Ground 1: Erred in concluding that the actual bad debts were provision for bad and doubtful debts based on the return of income which was an inadvertent error without verifying the same with the financials and detailed submission made by the appellant. Hence the provisions of section 36(1) (viia) are not applicable to the facts of the case Ground 2: Erred in concluding that the appellant has incurred provision for bad and doubtful debts instead of actual bad debts despite providing the party wise details of actual bad debts written off and accepting the error occurred while filing the return of income during the year under consideration. Ground 3: Erred in concluding that there is no jurisdiction of the JCIT(A) against the order passed under section 263 read with section 143(1) of the Act and hence the appeal is not maintainable without appreciating the provision of section 246(1) of the Act. In view of the above grounds and in the facts and circumstances of the case and in law, the Appellant prays your Honours to set aside order under section 263 of the Act and grant relief to the Appellant. Additional Grounds of Appeal Ground 4: The learned CIT(A) and the learned AO erred in exceeding Assessment Year 2019-2020 the jurisdiction under section 263 which categorically directed to make an enquiry with respect to deduction claimed under section 36(1) (viia) of the Act. The learned AO and learned CIT(A) erred in law in verifying the claim of bad debts written off during the year which was against the direction pursuant to order passed under section 263 of the Act Ground 5: The learned CIT(A) and the learned AO erred in exceeding the jurisdiction of section 143(1) of the Act where only apparent inconsistencies as evident on the face of the return and connected material warrant adjustments. The learned CIT(A) and learned AO erred in law in performing detailed verification of the claim of bad debts which was outside the scope of section 263 and section 143(1) of the Act and should have been done by conducting a regular assessment by issuing a notice under section 143(2) of the Act. Ground 6: Without prejudice to the above grounds, the appellant has satisfied the conditions for claiming bad debts specified under section 36(1)(vii) read with section 36(2) of the Act, hence the deduction claimed on bad debts may be allowed.”