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Facts
The assessee, engaged in paper manufacturing, had its assessment completed under Section 143(3). The PCIT initiated revisionary proceedings under Section 263, asserting that the AO erroneously failed to disallow Rs. 25.01 lacs claimed as provision for bad debts and doubtful advances, making the assessment prejudicial to revenue. The assessee contended that the claim was an actual write-off, supported by legal precedents, and the AO had already conducted a thorough enquiry during the original assessment.
Held
The tribunal held that the AO had conducted due enquiry into the deduction for bad debts and had taken a plausible view of law, treating the provision as an actual write-off. Citing Supreme Court judgments, the tribunal reiterated that revisionary jurisdiction under Section 263 requires both conditions (erroneous and prejudicial to revenue) to be met and cannot be invoked when two views are possible or where an enquiry was already conducted. Thus, the PCIT's revisionary order was quashed.
Key Issues
Whether the PCIT validly exercised revisionary jurisdiction under Section 263 when the Assessing Officer had conducted an enquiry and the assessee's claim for bad debts deduction was based on a plausible view of law.
Sections Cited
263, 143(3), 36(1)(vii), 143(2), 142(1)
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Income Tax Appellate Tribunal, “D” BENCH,KOLKATA
Date of concluding the hearing : 28.10.2025 Date of pronouncing the order : 20.11.2025 O R D E R
PER RAJESH KUMAR, ACCOUNTANT MEMBER
The present appeal has been preferred by the assessee against the order dated 03.02.2025 of the Principal CIT-2, Kolkata [hereinafter referred to as the "ld. PCIT"] exercising his revisionary jurisdiction u/s 263 of the Income Tax Act, 1961 [hereinafter referred to as the "Act"].
The issue raised in ground no. 1 is against the order of Ld. Pr. CIT setting aside the order framed u/s. 143(3) of the Act dated 20.06.2022 by invalidly exercising the jurisdiction u/s. 263 of the Act without the twin pre-conditions being satisfied.
Star Paper Mills Limited 3. The facts in brief are that, the assessee is engaged in the business of manufacture and sale of paper & allied items. The assessee had filed return of income on 30.11.2018 declaring total income of Rs.53,01,24,450/-. The case of the assessee was selected for scrutiny and the assessment was completed u/s 143(3) by order dated 20.06.2022.
The Ld. PCIT on perusal of the assessment records observed that the amount of Rs.25.01 lacs being provisions provision of bad debts & doubtful advances in nature were not disallowed by the AO and therefore found that it is a case of erroneous assessment and it was prejudicial to the interest of the revenue and accordingly, a show-cause notice u/s 263 of the Act was issued. The assessee replied the said show cause by submitting a very detailed reply but the ld. PCIT after going over the submission set aside the assessment order passed u/s 143(3) of the Act and directed the Assessing Officer to make the addition after making necessary verification/enquiry and pass a de novo assessment order on this issue.
Aggrieved by the said order, the assessee preferred appeal before us.
The Ld. AR submitted that, the deduction claimed for provision for bad & doubtful debts / unrecoverable advances of Rs. 25.01 lacs was rightly claimed by the assessee u/s 36(1)(vii) of the Act as the same was netted off against Sundry Debtors / Advances and therefore it amounted to actual write off of Bad debts. He relied upon the decision of the Apex Court in the case of Vijaya Bank Vs CIT (323 ITR 166) wherein it was held Star Paper Mills Limited that, the provision account so created and debited, which was simultaneously reduced from the amount of debts/advances and therefore the provision account stood obliterated, would tantamount to actual write off for the purposes of claiming deduction under Section 36(1)(vii) of Act. The ld AR also relied on the following decisions wherein the Courts allowed the deduction for provision for bad & doubtful debts u/s 36(1)(vii) of the Act, where it has been netted off against Sundry Debtors.
- SBI vs PCIT-2, Mumbai [2019] 111 taxmann.com 352 (Mumbai - Trib.)
- Vidras India Ceramics (P.) Ltd vs DCIT, Circle 4(1)(2), Ahmedabad [2021] 129 taxmann.com 320 (Ahmedabad - Trib.)
- Arrow Coated Products Ltd. vs ACIT 8(1), Mumbai [2012] 22 tax- mann.com 31 (Mumbai – Trib.)
- Tainwala Chemicals & Plastics India Ltd. vs CIT-8, Mumbai, [2013] 34 taxmann.com 159 (Bombay HC)
The Ld. AR thus claimed that, the claim made by the assessee was a plausible view in law and therefore the PCIT was not justified in holding that the order of the AO was erroneous and prejudicial to the interests of the Revenue. The ld AR argued that in order to revise the assessment order , it has be erroneous and prejudicial to the interest of the revenue. The ld AR submitted that both the conditions have to be satisfied simultaneously and even if one of the two conditions are satisfied , Star Paper Mills Limited jurisdiction u/s 263 is not available. In support, he relied on decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co Ltd (243 ITR 83). The AR submitted that , the assessee had debited provision for bad debts & doubtful advances aggregating to Rs.25.01 lacs in the profit and loss account. The ld AR further submitted that since the provision for bad & doubtful debts / unrecoverable advances of Rs. 25.01 lacs were netted off against Sundry Debtors / Advances, it was treated by the assessee as an actual write off and therefore claimed as deduction while computing the total income for the relevant year. The ld AR submitted that the case of the assessee was selected for scrutiny by issue of notice u/s 143(2) of the Act dated 22.09.2019 wherein one of the CASS reasons was regarding application of Income Computation & Disclosure Standards. The Ld. AR pointed out that, the NFAC had raised specific queries in relation to applicability of ICDS standards, and in response to which, the assessee had furnished its explanation vide letter dated 25.01.2021. He invited our attention to the Annexure - 1 to the reply and particularly to ICDS - X - ‘Provisions, Contingent Liabilities and Contingent Assets’ for which relevant disclosures were given in Tax Audit Report. The Ld. AR showed us that, the assessee had clearly stated that no increase/decrease in profit was made on account of provisions which inter alia included the provision for bad & doubtful debts/ unrecoverable advances of Rs. 25.01 lacs,as verifiable from the face of the Profit & Loss Account.
Star Paper Mills Limited 8. Contrary to that, the ld. DR supports the impugned order of the PCIT. He relied on the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd Vs JCIT (187 Taxman 346) cited by the PCIT to justify the disallowance of provision for bad debts & doubtful advances. According to him therefore, the claim of the assessee was unsustainable in law and that the AO had allowed the claim without any verification. Therefore the assessment was rightly revised and hence the appeal of the assessee may be dismissed.
We have heard the both the parties and perused the material on record. The undisputed facts as noted are that, the assessee had debited provision for bad debts & doubtful advances of Rs.25.01 lacs on the face of P&L A/c which was netted off from the Sundry Debtors/Advances in the Balance Sheet and the assessee treating it to be actual write-off did not disallow such provision while computing the total income for AY 2018-19. The AO is noted to have made enquiry regarding the compliance with the Income Computation & Disclosure Standards from the assessee in his notice u/s 142(1) of the Act, which was one of the CASS reasons as well and it is seen that, the assessee in their reply had made it clear that, no adjustment was made on account of provision debited in P&L A/c and had given relevant disclosures on the policy followed as well. The AO is found to have accepted the claim of the assessee in the assessment order passed u/s 143(3) of the Act dated 20.06.2022. It is therefore seen that, this is not a case of non-enquiry. According to the PCIT, the AO ought to have disallowed the provision as it was not allowable and in support, the Star Paper Mills Limited PCIT in his order has cited decision of Hon’ble Apex Court in the case of Southern Technologies Ltd Vs JCIT (supra). Having gone through this judgment, it is observed that Hon’ble Supreme Court had denied the deduction for provision of NPAs being claimed by NFBCs u/s 36(1)(viia) of the Act, holding that it is available only to Banks. The Ld. AR has rightly pointed out that, this judgment has no application in the present case and has also brought to our notice several decisions cited (supra) of which we find the decision of Hon’ble Bombay High Court in the case of Tainwala Chemicals & Plastics India Ltd (supra) to be of particular relevance, wherein it has been held that, the provision for doubtful debts / unrecoverable advances debited in the Profit & Loss Account and netted off with Sundry Debtors / advances was in the nature of actual write off and not merely a provision and therefore treated to be allowable deduction from the business income. The claim of the assesses is thus found to be is supported by plethora of judgments and therefore the order passed by the NFAC was based on one of the possible views and hence cannot be termed as erroneous and prejudicial to the interests of the Revenue. The case of the assessee finds support from the decision of Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. (Supra) wherein it has been held that the twin satisfaction of conditions as provided u/s. 263 of the Act is mandatory and even if the one of the two conditions is satisfied, the jurisdiction is not available to the Ld. Pr. CIT u/s. 263 of the Act. The relevant portion of the decision is extracted as under:
Star Paper Mills Limited "A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suomotu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue- recourse cannot be had to section 263(1) of the Act. "The phrase ''prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law."
Similarly, the Hon'ble Supreme Court in the case of CIT Vs. Max India Ltd. (295 ITR 282) has held as under:
"The phrase "prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.
Moreover, as noted above, the Assessing Officer has conducted enquiry into the issue and thereafter took a possible view on the issue. Therefore, it is not open to the Ld. Pr. CIT to substitute his own view in place of the view taken by the Assessing Officer by resorting to revisionary proceeding u/s. 263 of the Act unless the view taken by the Assessing Officer is unsustainable in law or is contrary to the facts on record. Keeping in view the above discussion, we find that the order passed u/s 143(3) of the Act by the Assessing Officer cannot be said to be prejudicial Star Paper Mills Limited to the interest of the revenue and therefore, the finding given by the Ld. Pr. CIT is wrong and cannot be sustained. Considering the facts of the case and in the light of the aforesaid decisions, we are inclined to quash the revisionary proceedings u/s. 263 of the Act and also the consequent order passed thereto.
In the result, the appeal of the assessee is allowed.
Order pronounced on 20.11.2025