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Facts
M/s Pinnacle Capital Solutions (P) Ltd., an NBFC, filed its return for AY 2018-19, which the AO accepted under Section 143(3). The PCIT later initiated Section 263 proceedings, alleging the AO's order was erroneous and prejudicial due to the assessee debiting bad debts of Rs. 2,36,88,041/-, which the PCIT incorrectly linked to Section 36(viia)(d)'s 5% limit.
Held
The Tribunal held that the assessee did not claim deductions under Section 36(1)(viia)(d) but claimed actual bad debts under Section 36(1)(vii), having written them off in its books as irrecoverable and having added back provisions for bad debts in its return. Therefore, the AO's order was neither erroneous nor prejudicial to revenue, rendering the PCIT's Section 263 order invalid.
Key Issues
Whether the PCIT can invoke Section 263 to revise an assessment where the assessee has properly claimed actual bad debts under Section 36(1)(vii) and added back provisions for bad debts, rendering the AO's order neither erroneous nor prejudicial to revenue.
Sections Cited
Section 263, Section 143(3), Section 36, Section 36(1)(vii), Section 36(2), Section 36(viia)(d)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RANCHI BENCH, RANCHI
Before: SHRI GEORGE MATHAN & SHRI RATNESH NANDAN SAHAY
Assessee represented by Shri Sudesh Garg, A.R. Department represented by Smt. Rinku Singh, CIT-DR Date of hearing 12/06/2025 Date of pronouncement 12/06/2025 O R D E R PER: BENCH 1. This appeal by the assessee is directed against the order of learned Principal Commissioner of Income Tax, Ranchi (in short, the ld. PCIT) passed under Section 263 of the Income Tax Act, 1961 (in short, the Act) dated 29/03/2023 for the A.Y. 2018-19. In this appeal, the assessee has raised following grounds of appeal:
1. The ld. PCIT has erred on facts and in law in passing order u/s 263 of the Income Tax Act, 1961 and directing the AO to "pass a fresh order after verifying the bad debts written off within the meaning of Section 36" even though the order passed by the AO u/s 143(3) dated 14/04/2021 was neither erroneous nor prejudicial to the interest of the revenue.
2. The ld. PCIT has erred on facts and in law in issuing notice u/s 263 of the Act dated 20/01/2023 wholly on erroneous facts and assumptions and has further erred in passing order u/s 263 of the Act in pursuance of the same without issuing any further show cause notice u/s 263 of the Act.
3. The ld. PCIT has erred on facts and in law in issuing directions to the AO to verify the write off of the bad debts even though the same was duly verified by the AO in the assessment proceedings and all the relevant details with regard to the same were duly filed before the Ld. PCIT and no error either on facts or in law ITA 130/Ran/2023 M/s Pinnacle Capital Solutions P ltd. Vs PCIT was pointed by the Ld. PCIT either in his notice or in the order passed u/s 263 of the Act.
4. The ld. PCIT has erred on facts and in law in giving directions to the AO with regard to bad debts ignoring the settled law that for allowance of bad debts written the only requirement in law is that the corresponding bad debts should be written off by the assessee and there was no dispute on facts that the relevant bad debts were written off and then only the same were claimed as expenditure u/s 36(1)(vii) read with section 36(2) of the Act.
5. The aforesaid grounds are without prejudice to each other and appellant craves for liberty to add fresh ground(s) of appeal and also to amend, alter, modify any of the grounds of appeal
."
2. Facts of the case, in brief, are that the appellant is an NBFC company and has earned income under various heads for the assessment year under consideration including interest income from financing activities, interest income from factoring services, processing fees and interest income from FDs. The case of the appellant company was selected for complete scrutiny assessment under e-assessment scheme, 2019 on the issue of "refund claim". The Assessing Officer vide its order dated 14/04/2021 accepted the total income declared by the assessee in its return of income without making any variations.
3. The ld. PCIT vide the impugned order, set aside the impugned assessment order made under Section 143(3) dated 14/04/2021 with a direction to the Assessing Officer to pass fresh assessment order after verifying the bad debt written off within the meaning of Section 36 of the Act. On perusal of the case records, it was revealed that during the period under consideration, the assessee had shown income from business a sum of Rs. 7,19,23,183/- in the P&L account for the year ending 31/03/2018 and debited bad debts of Rs. 2,36,88,041/-. As per Section 36(viia)(d) of the Act, the bad debts cannot exceed 5% of the total income computed before making any deduction under ITA 130/Ran/2023 M/s Pinnacle Capital Solutions P ltd. Vs PCIT Section 36(viia)(d) of the Act and Chapter (VIA). Since 5% of Rs. 7,19,23,183/- comes to Rs. 35,96,159/-, it means the assessee had debited more than what was allowable under the said Section and therefore, the same should have been disallowed while passing the order under Section 143(3) of the Act. Since the Assessing Officer has failed to do so, the said omission resulted in short computation of income of Rs. 2,00,93,041 and consequential tax effect of Rs. 65,42,767/-.
Aggrieved by the order passed by the ld. PCIT under Section 263 of the Act, the assessee is in appeal before this Tribunal.
Before us, the ld. AR of the appellant has submitted as under: "That in respect of merit of the case, it is submitted that the captioned assessee during the period under consideration has not claim any expense under section 36(1)(viia)(d) of the act as mentioned by your goodself in the impugned notice. Your goodself may kindly note that captioned assessee has debited Rs. 1,92,75,697/- as provision for bad debts in the profit & loss account under companies act 2013 but the same was duly added back while computing the income under income tax act. (Copy of relevant extract of P&L account and ITR is attached at Page No. 1 - 5 for your kind perusal). The impugned amount mentioned by your goodself of INR 2,36,88,041/- in the captioned notice relates to actual bad debts which was claimed as expenses according to section 36(1)(vii) after fulfilling the conditions prescribed u/s 36(2) of the Act." The ld. AR, thus submitted that from the above extract, it is clearly evident that to claim bad debts under the Income Tax Act, the basic requirement is to fulfill to write off the debt in the books of account which has already been fulfilled by the appellant company. The ld. AR further drew our attention to the CBDT Circular No. 12/2016 dated 30/05/2016 where the CBDT has stated that" The Hon'ble Supreme Court in the case of TRF Ltd. in CA Nos. 5292 to 5294 of 2003 vide judgment dated 09/02/2010 has stated that the position of law is ITA 130/Ran/2023 M/s Pinnacle Capital Solutions P ltd. Vs PCIT well settled. After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1)(vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable, it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee. In view of the above, claim for any debt or part thereof in any previous year shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub-section (2) of sub- section 36(2) of the Act.". Thus, the assessee company is eligible to claim deduction of actual bad debts of ₹ 2,36,88,041/- for the period under consideration. The ld. AR further showed page No. 30 of the return of income filed by the appellant company for the assessment year under consideration and specifically drew our attention to column No. "7" in part (a) other information, in column-6 (sub-column-'r') wherein it has already added back the provisions for bad and doubtful debts as required under Section 36(1)(viia) of the Act.
On the other hand, the ld. CIT-DR defended the action of ld. PCIT.
We have considered the rival submissions. Since the appellant company has already added back the provisions for bad debts in its return of income, there is no reason to further add the same in the body of the assessment order and therefore, the Assessing Officer in its impugned order under Section 143(3) of the Act has not added this as income of the assessee. The ld. PCIT's order under Section 263 of the Act setting aside the assessment order, therefore, is bad in law as the order of the Assessing Officer is neither erroneous nor ITA 130/Ran/2023 M/s Pinnacle Capital Solutions P ltd. Vs PCIT prejudicial to the interest of revenue. Thus, the order of the ld. PCIT is quashed and the appeal of the assessee is allowed.
In the result, this appeal of the assessee is allowed. Order announced in open court on 12th June, 2025.