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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE PRESEIDENT & SHRI PADMAVATHY S
Per Padmavathy S., Accountant Member
This appeal is against the order of the Principal Commissioner of Income-tax [PCIT], Bengaluru-1, Bengaluru dated 21.02.2017 passed u/s. 263 of the Income-tax Act, 1961 [the Act] for the assessment year 2012-13.
Though various grounds of appeal are raised in this appeal, the only issue involved in this appeal is whether the PCIT was justified in passing impugned order u/s. 263 of the Act holding the assessment order to be erroneous and prejudicial to the interests of the revenue and directing the AO to reframe the assessment.
The assessee is in the business of providing air charter services. The assessee filed the return of income for AY 2012-13 on 30.9.2012 declaring a loss of Rs. (-) 12,84,098. The case was selected for scrutiny and under CASS and notice u/s. 143(2) of the Act was served on the assessee. The AO called for various details and concluded the assessment accepting the returned income.
The PCIT on examination of records noticed that the assessee had debited Rs.12,55,484 being the “advance written off” in the Profit & Loss Account and that the AO accepted the loss return without proper examination whether it was in the nature of revenue expenditure or not. He issued notice us/. 263(1) of the Act as follows:-
“'During the A.Y. 2012-13, in the computation of income statement, the assessee Company has debited Rs.12,55,484/- being the "Advance written off" in P & L A/c (Sechedule17/0ther Expenses). This being in the nature of capital expenditure and adjustable against the advances of the balance sheet, could not be treated as an admissible revenue expenditure. Further, "Loss on sale of fixed assets" debited in the same schedule amounting to Rs. 18,903/- also requires to be disallowed.”
In reply to the notice u/s. 263 of the Act, the assessee made the following submissions:-
“"The assessee has written back the following amounts in the books during the previous year relevant to the asst year 2012-13. 1. Project expenses for MRO Rs. 34,125 2. Security deposit - Telephone Rs. 500 3. Expense advance to employees Rs. 9,487 4. Advance paid to India Aero Ventures P. Ltd Rs. 12,11,372 MRO project has not taken off due to various reason, including recession faced by the aviation sector, government assistance sought for land and infrastructure and hence the same was written off. The assessee had provided security deposit for telephone many years ago. The assessee is unable to obtain any confirmation from BSNL and hence wrote off the same. Travel Advance remaining to be received from an employee was written off as he had left services of the assessee. The payments to IAV were during 2007-08 and 2008¬09. As the project was discontinued, IAV was not in opposition to repay, the assessee wrote off the amounts due. This could be treated as debt due which has gone bad. The same has been written off as a bad advance.”
The PCIT did not accept the contentions of the assessee and observed as follows:-
(i) The assessee has not furnished supporting documents to justify its claim of advances written off by way of a chart filed during the assessment proceedings.
(ii) The advances were not part of the income of the assessee in the earlier years and hence cannot be claimed as bad debt u/s. 36(1)(vii) r.w.s. 36(2) of the Act.
(iii) The allowability of the claim of the assessee in respect of the advances written off has not been examined by the AO.
In view of the above, the PCIT cancelled the assessment and directed the AO to reframe the assessment in accordance with law after due examination. However, the assessee accepted the disallowance of Rs.18,903 as inadvertently claimed before the PCIT which was directed to be disallowed as admitted by the assessee. Aggrieved, the assessee is in appeal before the Tribunal.
Before us, the ld. AR submitted that the assessee has furnished the various details including the advances written off before the AO [pg. 65 of PB]. Based on the various details furnished, the AO has applied his mind and concluded the assessment accepting the returned income. He therefore submitted that the order of the AO is not erroneous or prejudicial to the interests of the revenue and prayed for quashing of the impugned order. He relied on the Supreme Court judgment in the case of TRF Ltd. v. CIT, 323 ITR 397 (SC).
The ld. DR, on the other hand, argued that mere submission of details by the assessee does not amount to verification by the AO. The AO did not verify the details furnished by the assessee and passed a very cryptic order. In this regard, he relied on the following decisions:-
(i) JNS Instruments Ltd. v. PCIT [ITA No.1479/Del/2017 dated 11.10.2021]. (ii) Radiant Life Care Mumbai Pvt. Ltd. v. PCIT [ITA No.896/Mum/2021 dated 31.5.2022].
We have considered the rival submissions and perused the material on record. The assessee is in the business of providing air charter services. From the perusal of financials [pages 50 to 62 of PB], it is noticed that the assessee earned income of Rs.35,53,085 from operations and incurred an expenditure of Rs.52,85,846 resulting in a loss of Rs.15,73,641. One of the major components of ‘Other Expenses’ incurred is the amount of Rs.12,55,484 towards ‘advances written off’, the break-up of which was furnished before the AO vide assessee’s letter dated 14.10.2014 [page 64 of PB]. The AO has passed the assessment order accepting the returned income of the assessee without elaborating the details submitted, which fact is accepted by the ld. AR before us. We find merit in the contention of the ld. DR that the mere fact that the assessee has submitted the details of advances does not establish that the AO has gone into the details of advances and has examined the allowability of the advances written off. Further, there is no evidence by the assessee to substantiate the claim that AO has verified the details of advances written off and applied his mind before deciding the issue that it is an allowable expenditure.
Explanation (2) to section 263 provides as follows:-
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 95[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.
Sub-clause (a) of the Explanation 2 talks about the order passed by the AO without making enquiries and verification is deemed to have been erroneous and prejudicial to the interests of revenue. In the present case, the returned income of the assessee is a loss of Rs.12,84,098 and the advances written off of Rs.12,55,484 is a major contributor of the loss. In such circumstances, the AO ought to have examined the details submitted by the assessee to go into the roots of this transaction. The assessee explained before the AO that advance to India Hero Venture Ltd. of Rs.12,11,372 had to be written off as the project was discontinued. In our considered view, given the quantum of the advance written off, the AO failed to examine its allowability based on documents and evidences.
The Delhi High Court in the case of Gee Vee Enterprises v .ACIT [1975] 99 ITR 375 (Del) has held as under:-
“In Tara Devi Aggarwal v. Commissioner of Income-tax [1973] 88 ITR 323 (SC) also the Income-tax Officer, Howrah, while remarking that the source of income of the assessee was income from speculation and interest on investments stated that neither the assessee was able to produce the details and vouchers of the speculative transactions made during the accounting year nor was there evidence regarding the interest received by the assessee from different parties on her investments. Notwithstanding these defects the Income-tax Officer did not investigate into the various sources but assessed the assessee on a total income of Rs. 9,037. The inquiries made by the Commissioner revealed that the assessee did not reside or carry on business at the address given in the return. The Commissioner was also of the view that the Income-tax Officer was not justified in accepting the initial capital, the sale of ornaments, the income from business, the investments, etc., without any inquiry or evidence whatsoever and that the order of assessment was erroneous and prejudicial to the interests of the revenue. The High Court held that there were materials to justify the Commissioner's finding that the order of assessment was erroneous in so far as it was prejudicial to the interests of the revenue. Shri Sharma tried to distinguish this decision on the ground that the address of the assessee in that case was given incorrectly. The decision of the High Court and that of the Supreme Court were not, however, based on that ground at all. On the contrary, the Supreme Court followed their previous decision in Rampyari Devi's case (supra), and upheld the decision of the High Court precisely on the same grounds. These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return.
The reason is obvious. The position and function of the Income- tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry 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. The company and the partnership in this case were formed in the same year with many members common in both. The fact that the company purchased the land but handed over construction work to the partnership even though the object of the company was to make such construction should naturally provoke a query as to why this was done. The partnership was required to be in existence as a genuine firm in the previous year before it could be registered under section 185 of the Act. Such registration gives a substantial advantage to it for the purpose of taxation. In the very first assessment of the company and the firm, the advantage of the registration was given to the firm. The question would naturally arise whether the firm was formed merely for the purpose of getting a tax advantage. Shri Sharma argued that there is nothing wrong if a legitimate advantage is sought by these means. But it was precisely for that reason that the Income-tax Officer had to be satisfied that the firm had existed in the previous year genuinely. It cannot be said that the Commissioner could not be reasonably of the opinion that the order of the Income-tax Officer was erroneous because previous inquiries were not made by the Income-tax Officer. Nor can it be said that it was necessary for the Commissioner himself to make such inquiry before cancelling the order of assessment. In view of the decisions of the Supreme Court in Rampyari Devi’s case (supra)and Tara Devi Agawam’s case (supra), the challenge of the petitioners to the jurisdiction of the Commissioner exercised under section 263 fails and the writ petitions do not qualify for admission on the ground of the impugned orders being without jurisdiction.”
In the instant case, the AO has not analysed the information supplied by the assessee with regard to advances written off and he simply accepted those details without enquiry. In such circumstances, it cannot be said that the AO has made any opinion or taken a particular view by application of mind.
In view of the above discussion and relying on the ratio laid down by the Hon’ble Delhi High Court in the case of Gee Vee Enterprises (supra), we hold that there is no infirmity in the impugned order passed by the PCIT u/s. 263 of the Act.
In the result, the appeal by the assessee is dismissed.
Pronounced in the open court on this 27th day of June, 2022..