BAJAJ FINANCE LIMITED,PUNE vs. PRINCIPAL COMMISSIONER OF INCOME TAX-3, PUNE, PUNE

Subsequently the Ld. PCIT examined the record and upon verification found that certain issues on which prima facie disallowance should have been made, were not examined by the Assessing Officer and the expenditure claimed thereon were also without verifying its admissibility under the relevant provisions of law. Hence, he was of the opinion that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. He, therefore, issued a show cause notice asking the assessee to explain as to why the provisions of section 263 of the Act should not be invoked. The contents of the relevant notice, copy of which is placed at pages 147 to 151 of the paper book, read as under:

The assessee in response to the same submitted that during the course of assessment proceedings the assessee had submitted all the relevant details making complete disclosure in relation to the claim in the following manner:  Financial statements - Schedule 8 discloses the amount of carrying provision under various stage 1 and stage 2 as provision for standard assets  Financial statements - note 2 discloses the basis on which provision for debts is accounted for including the standard assets

It was submitted that during the course of assessment proceedings the Assessing Officer had called for various information / details from time to time after considering the financial statements submitted by the assessee. It was argued that if the Assessing Officer has enquired into the claim and followed one of the permitted views under the law, the order cannot be regarded as erroneous.

So far as variance in relation to 40A(2)(a) of the Act is concerned, the assessee submitted that there was no difference in the amount reported as a part of disclosure made in tax audit report and the assessee’s financial statement. It was accordingly argued that the twin conditions required for invoking the jurisdiction u/s 263 of the Act are not satisfied and therefore, the 263 proceedings should be dropped. The assessee also made elaborate arguments on merit justifying its stand that the assessee is a Non-Banking Finance Company and the provisions have been made in accordance with the directions issued by the RBI. Relying on various decisions it was argued that the 263 proceedings initiated by the Ld. PCIT should be dropped since the twin conditions are not satisfied.

However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee and held the assessment order to be erroneous in so far as it is prejudicial to the interests of the Revenue. He, therefore, set aside the order partly to the file of the Assessing Officer for the limited purpose of examining the issue of admissible deduction u/s 36(1)(viia)(d) r.w.s. 36(2)(v) and also the transactions made with related parties u/s 40A(2)(b) of the Act. The relevant observations of the Ld. PCIT from para 7 onwards read as under:

Aggrieved with such order of the Ld. PCIT, the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee at the outset referring to the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2018-19 submitted that the Tribunal vide order dated 26.02.2024 for assessment year 2018-19 has quashed the 263 proceedings under identical circumstances wherein the Ld. PCIT set aside the order u/s 263 to the file of the Assessing Officer on the ground that the Assessing Officer has allowed the deduction on account of provision for doubtful debts claimed u/s 36(1)(viia) of the Act erroneously.

Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of Shri Samartha Sahakari Bank Ltd. Vs. ACIT vide order dated 07.01.2020 for assessment year 2013-14, he submitted that the Tribunal in the said decision, following the decision of Hon’ble Karnataka High Court in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit vs. CIT & Anr vide order dated 29.01.2018, has held that the assessee is eligible for deduction in respect of provision made against standard assets.

Referring to the decision of the Mumbai Bench of the Tribunal in the case of M/s. Union Bank of India vs. DCIT vide order dated 20.06.2025 for assessment year 2019-20, he drew the attention of the Bench to para 8 of the order which reads as under: “8. Coming to the issues relating to the broken period interest paid on purchase of securities, amortization on securities and unrealized interest on bad and doubtful debts, though no specific queries were raised by the AO but these issues have already been decided by the Hon'ble Supreme Court and Hon'ble Bombay High Court and the Tribunals (supra) in favour of the assessee and against the revenue. Therefore, on these issues also the assessment order is neither erroneous nor prejudicial to the interest of the revenue.”

Referring to the decision of Hon’ble Supreme Court in the case of CIT M/s. HCL Comnet Systems & Services Ltd. vide Civil Appeal No.5800 of 2008, order dated 23.09.2008, he drew the attention of the Bench to the following paragraph: “As stated above, the said Explanation has provided six items, i.e., Item Nos.(a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No.(c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee's case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of the Explanation to Section 115JA. In our view, Item (c) is not attracted. There are two types of "debt". A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case "debt" under consideration is "debt receivable" by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts of Rs.92,15,187/- under clause (c) of the Explanation to Section 115JA of the 1961 Act.”

Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of ITO vs. Latur District Central Co-Op Bank Ltd. vide order dated 28.01.2025 for assessment year 2018-19, he submitted that the Tribunal in the said decision has held that the assessee is eligible for deduction in respect of provision for standard assets and bad & doubtful debts & reserves u/s 36(1)(viia) of the Act. He submitted that since the issue stands decided in favour of the assessee by various decisions, therefore, the Ld. PCIT was not justified in invoking the provisions of section 263 for provision of doubtful debts claimed u/s 36(1)(viiia) of the Act.

So far as the second issue is concerned i.e. allowability of deduction u/s 40A(2)(a) of the Act, he submitted that the Assessing Officer in the set aside order has already allowed the claim of the assessee, therefore, there is no error on the second issue. He accordingly submitted that the order passed by the Ld. PCIT should be set aside and the grounds raised by the assessee be allowed.

The Ld. DR on the other hand submitted that the Assessing Officer has not conducted any enquiry whatsoever on the issue of provision for bad and doubtful debts claimed u/s 36(1)(viia) of the Act on standard assets. Referring to four notices issued by the Assessing Officer, copies of which are filed in the paper book he submitted that nowhere the Assessing Officer has ever asked the assessee any query on this issue. He submitted that merely because the Assessing Officer has not made any addition that does not mean that the Assessing Officer has accepted the contention of the assessee regarding the allowability of the claim made u/s 36(1)(viia) of the Act towards provision for doubtful debts.

Referring to the decision of the Pune Bench of the Tribunal in the case of Jalgaon People’s Co-op Bank Ltd reported in (2021) 188 ITD 608 (Pune-Trib.), he submitted that the Tribunal in the said decision has held that where the assessment had been made by Assessing Officer, without verification of claim of bad debts written off as deduction, such order has become erroneous and prejudicial to interest of revenue, hence, Commissioner was correct in assuming revisionary jurisdiction and passing order under section 263 of the Act.

So far as the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2018-19 is concerned, the Ld. DR drew the attention of the Bench to the same and submitted that the Assessing Officer in the said case during the course of assessment proceedings had called for the details of standard assets. The assessee had submitted all the details to the Assessing Officer and after considering the submissions of the assessee, the Assessing Officer had arrived at the conclusion after studying the details. However, in the instant case no such query has been raised by the Assessing Officer on this issue. Therefore, the decision in assessee’s own case for assessment year 2018-19 is not applicable to the facts of the present case.

So far as the argument of the Ld. Counsel for the assessee that the various Benches of the Tribunal have taken a favourable view on the issue of allowability of claim u/s 36(1)(viia) of the Act towards provision for doubtful debts is concerned, he submitted that if the Assessing Officer had called for the details and has taken a view on this issue, then probably the powers of the Ld. PCIT could have been limited. However, in the instant case since no query whatsoever was raised on this issue and the Assessing Officer has not taken any view and has allowed the claim of the assessee, therefore, the order has become erroneous as well as prejudicial to the interests of the Revenue and therefore, the Ld. PCIT was fully justified in invoking his revionary powers u/s 263 of the Act.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case completed the assessment u/s 143(3) of the Act on 29.09.2021 determining the total income of the assessee at Rs.5732,80,60,408/-. We find the Ld. PCIT set aside the order u/s 263 of the Act on the ground that the Assessing Officer has not conducted any enquiry on the following two issues: (i) excessive allowance of deduction of provision for bad debts u/s 36(1)(viia) of the Act; and (ii) the excessive payments made u/s 40A(2)(b) of the Act in respect of payments made to the related parties.

He, therefore, set aside the order of the Assessing Officer to his file for the limited purpose of the above two issues.

So far as the second issue is concerned, the Ld. Counsel for the assessee filed a copy of the order passed by the Assessing Officer u/s 143(3) r.w.s. 263 of the Act dated 13.03.2025 where the Assessing Officer has not made any addition on account of payments made to the related parties by invoking the provisions of section 40A(2)(b) of the Act. That leaves us with the first issue i.e. allowance of deduction of provision for bad and doubtful debts u/s 36(1)(viia) of the Act in respect of such provision on account of standard assets.

So far as the provision created for bad and doubtful debts u/s 36(1)(viia) of the Act which include the provision in respect of standard assets is concerned, we find admittedly the Assessing Officer has not raised any query on this issue. However, it is also an admitted fact that the Assessing Officer has raised specific queries on this very issue in the immediately preceding assessment year and had not made any addition on account of provision in respect of bad and doubtful debts which include standard assets. We find the Co-ordinate Bench of the Tribunal in the case of Shri Samartha Sahakari Bank Ltd. vs. ACIT vide order dated 07.01.2020 for assessment year 2013-14, following the decision of Hon’ble Karnataka High Court in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit vs. CIT & Anr vide order dated 29.01.2018 has held that the assessee is eligible for deduction in respect of provision for bad and doubtful debts for the purpose of section 36(1)(viia) of the Act which includes the standard assets.

We find the Co-ordinate Bench of the Tribunal in the case of ITO vs. Latur District Central Co-Op Bank Ltd. vide order dated 28.01.2025 for assessment year 2018-19 has also held that the assessee is entitled for deduction u/s 36(1)(viia) of the Act in respect of provision for bad and doubtful debts which includes the standard assets.

We find the Co-ordinate Bench of the Tribunal in assessee’s own case vide order dated 26.02.2024 for assessment year 2018-19 has quashed the 263 proceedings under identical circumstances by observing as under: “6. We have heard both the parties and perused the records. The issue involved is whether ld.Pr.CIT had rightly invoked jurisdiction under section 263 of the Act.

So far as the argument of the Ld. DR that while the Assessing Officer in assessment year 2018-19 has made specific queries on the issue of allowability of deduction under the provision of bad and doubtful debts which included the standard assets, however, for the impugned assessment year he has not raised any query is concerned, we find the Mumbai Bench of the Tribunal in the case of M/s. Union Bank of India vs. DCIT vide order dated 20.06.2025 for assessment year 2019-20 at para 8 of the order has observed as under: “8. Coming to the issues relating to the broken period interest paid on purchase of securities, amortization on securities and unrealized interest on bad and doubtful debts, though no specific queries were raised by the AO but these issues have already been decided by the Hon’ble Supreme Court and Hon’ble Bombay High Court and the Tribunals (supra) in favour of the assessee and against the revenue. Therefore, on these issues also the assessment order is neither erroneous nor prejudicial to the interest of the revenue.”

Since the Co-ordinate Benches of the Tribunal have taken the consistent view that the assessee is entitled for deduction u/s 36(1)(viia) of the Act on account of provision for bad and doubtful debts which include the standard assets and since the Co-ordinate Bench of the Tribunal in assessee’s own case in the preceding assessment year has quashed the 263 proceedings on this very issue under identical circumstances, therefore, respectfully following the order of the Co-ordinate Bench of the Tribunal in assessee’s own case for the immediately preceding assessment year, we quash the 263 proceedings initiated by the Ld. PCIT. The grounds raised by the assessee are accordingly allowed.

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