PRATHAMA BANK,MORADABAD vs. CIT, MORADABAD

This is an appeal by the assessee against the order dated 19.02.2013 of ld. CIT, Moradabad.

Facts of the case in brief are that the assessee filed its return of income on 30.09.2009 declaring an income of Rs.52,11,39,000/-. The said return was revised on 30.08.2010 and total loss was shown at Rs.18,85,37,525/-. Thereafter the return was further revised and filed on 11.10.2010 showing 3 Prathama Bank loss of Rs.13,80,69,000/-. The said return was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. The AO framed the assessment u/s 143(3) of the Act on 13.12.2011 at the returned loss and categorically stated that the said loss was computed after verification of the details furnished by the assessee. Subsequently, the ld. CIT exercised his powers u/s 263 of the Act and observed that the claim of Rs.80,15,60,000/- was made by the assessee u/s 36(1)(viia) of the Act in computation of income filed with the revised return dated 11.10.2010 and that a note was filed by the assessee alongwith revised return which read as under:

The ld. CIT pointed out that the AO accepted the submission made by the assessee regarding claim of deduction u/s 36(1)(viia) of the Act and completed the assessment on the figure of returned loss. The ld. CIT observed that subsequently a proposal was submitted by the Adl. CIT, Range-I, Moradabad vide letter dated 06.11.2012 wherein it was mentioned that during the assessment proceedings the details regarding 5 Prathama Bank provisions for bad and doubtful debts were not properly examined and there were no details pertaining to the provisions for bad and doubtful debts claimed by the assessee amounting to Rs.80,15,60,000/-, it was also mentioned in the proposal that no revised balance sheet or profit and loss accounts were filed which could show that deduction was reflected in the final accounts and even revised Audit Report was not filed. The ld. CIT accordingly initiated the proceedings u/s 263 of the Act. The ld. CIT referred to the provisions contained in Section 36(1)(viia) of the Act and observed that the claim would be limited to the amount by which such debt or part thereof exceeds the credit balance in the provisions of “bad and doubtful debts account” made under that clause. He further observed that the claim of deduction u/s 36(1)(viia) of the Act has to be examined only in respect of provisions for bad and doubtful debts made in the accounts and in the present case, the assessee had made provision for bad and doubtful debts to the extent of Rs.14,18,27,000/-. According to the ld. CIT that the claim in respect of provision for bad and doubtful debts will not exceed to 7.5% of the total income and 10% of the average agricultural advances made by the rural branches of the bank computed in the prescribed manner which clearly shows that upper limit of the allowance had been fixed by the statute and the claim could not have 6 Prathama Bank been allowed merely on making a claim in the computation of income during assessment proceedings. The ld. CIT was of the view that in the assessee’s case the claim was simply made amounting to Rs.80,15,60,000/- in the revised computation of income whereas the amount claimed initially was at Rs.14,18,27,000/- and the revised claim was worked out on the basis of 10% of average agricultural advances of Rs.801.56 crores. The ld. CIT also referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala Vs CIT & Others reported at (2005) 272 ITR 54. The ld. CIT mentioned in the impugned order that the assessee claimed that the issue under consideration was covered by the judgment of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. Vs JCIT reported at (2010) 320 ITR 567 wherein it was held as under: “Section 36(1)(vii) provides for a deduction in the computation of taxable profit for the debt established to be a bad debt. Section 36(1)(viia) provides for a deduction in respect of any provision for bad and doubtful debt made by a Scheduled Bank or Non- Scheduled. Bank in relation to advances made by its rural branches of a sum not exceeding a specified percentage of the aggregate average advances of such branches. Having regard to the increasing social commitment, Section 36(1)(viia) has been amended to provide that in respect of provision for bad and doubtful debt made by a scheduled bank or a non- 7 Prathama Bank scheduled bank, an amount not exceeding a specified percent of the total income or a specified percent of the" aggregate average advances made by rural branches, whichever is higher, shall be allowed as deduction in computing the taxable profits.”

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities 8 Prathama Bank below and further submitted that the present case was not a case of lack of inquiry, as the AO conducted inquiry on all the points which were alleged in the show cause notice of the ld. CIT. It was pointed out that the assessee vide its submissions dated 04.02.2013 before the ld. CIT inter alia submitted that the explanation was given to the AO during the course of assessment proceedings vide submissions dated 16.11.2011 that the deduction with respect to Section 36(1)(viia) of the act was claimed out of the book only i.e. in the computation of income and no adjustment had been made in the accounts. Therefore, there would arise no question of preparation and filing of revised accounts. It was further submitted that the branch wise details of advances on which deduction u/s 36(1)(viia) of the Act was claimed and list of branch wise provisions were submitted before the AO vide submission dated 16.11.2011 which were resubmitted before the ld. CIT vide submission dated 16.11.2011. Therefore, the order passed by the AO was neither erroneous nor prejudicial and the same has been passed after making clear inquiries and application on mind. The ld. Counsel for the assessee referred to page no. 7 of the assessee’s paper book which is a copy of order sheet entry dated 01.11.2011 wherein the AO required the assessee to furnish various details with respect to the following:

On the basis of above, the ld. Counsel for the assessee submitted that the AO had raised queries on as many as 12 points including the issue addressed by the ld. CIT vide his show cause notice u/s 263 of the Act and that the assessee vide its submission dated 16.11.2011 stated as under:

The ld. Counsel for the assessee further submitted that the assessee vide its submissions dated 22.11.2011 stated that the ITAT Bangalore in the case of Syndicate Bank Vs DCIT reported at 78 ITD 103 clearly held that u/s 36(1)(viia) of the Act a specific deduction has been given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts. Therefore, there were deliberations with the AO in the course of scrutiny assessment proceedings u/s 143(3) of the Act. It 12 Prathama Bank was emphasized that in the assessee’ case the ld. CIT himself could not point out that certain specific branches are non rural branches and that there was anything wrong with rural advances given by the assessee or claim made u/s 36(1)(viia) of the Act or under any law there was a requirement of furnishing revised Audit Report, revised accounts pursuant to making of claim u/s 36(1)(viia) of the Act as made by the assessee in its revised return of income. It was stated that the ld. CIT only by throwing suspicion had directed the AO to re- examine the matter, the said approach was grossly unsustainable in the eyes of law because the ld. CIT cannot direct the AO to re-examine the claim of the assessee. The reliance was placed on the following case laws:

In his rival submissions the ld. DR strongly supported the impugned order and reiterated the observations made by the ld. CIT in the said order. It was further submitted that the AO did not examine the advances of the rural branches and also the 14 Prathama Bank claim made in the revised return u/s 36(1)(viia) of the Act. Therefore, the ld. CIT was fully justified in holding that the assessment order passed by the AO was erroneous as well as prejudicial to the interests of the Revenue.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the assessee is a subsidiary of Syndicate Bank and its case was selected for scrutiny. The AO framed the assessment u/s 143(3) of the Act on 13.12.2011. Thereafter, the ld. CIT by invoking the provisions of Section 263 of the Act held vide order dated 19.02.2013 that the assessment framed by the AO was erroneous and prejudicial to the interest of Revenue.

It is trite that an order can be revised only and only if twin conditions of ‘error in the order’ and ‘prejudice caused to the Revenue’ co-exist. The subject of 'revision under section 263' has been vastly examined and analyzed by various Courts including Hon'ble Apex Court. The revisionary power conferred on the Ld. CIT vide section 263 of the Act is of vide amplitude, it enables the Ld. CIT to call for and examine the records of any proceeding under the Act. It empowers the Ld. CIT to make or cause to be made such an enquiry as he deems 15 Prathama Bank necessary in order to find out if any order passed by Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The only limitation on his powers is that he must have some material(s) which would enable him to form a prima facie opinion that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. Once he comes to the above conclusion on the basis of the 'material' that the order of the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue, the Ld. CIT is empowered to pass an order as the circumstances of the case may warrant. He may pass an order enhancing the assessment or he may modify the assessment. He is empowered to cancel the assessment and direct to frame a fresh assessment. He is also empowered to take recourse to any of the three courses indicated in section 263 of the Act. But the Ld. CIT does not have unfettered and unchequred discretion to revise an order, he is required to exercise revisional power within the bounds of the law and has to satisfy the need of fairness in administrative action and fair play with due respect to the principle of audi alteram partem as envisaged in the Constitution of India as well as in section 263 of the Act. An order can be treated as 'erroneous' if it is passed in utter ignorance or in violation of any law; or passed without taking into consideration all the relevant facts or by taking into 16 Prathama Bank consideration the irrelevant facts. The word 'prejudice' as contemplated under section 263 of the Act is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right the distortions and prejudices caused to the Revenue in the above context. The fundamental principles which emerge from the several cases regarding the powers of the CIT under section 263 of the Act may be summarized as under:- (i) The CIT must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled. (ii) Section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it is only when an order is erroneous, than the said section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interest of the revenue and if the Assessing Officer has adopted one of the courses permissible under law or where two views are possible and the Assessing Officer has taken one view 17 Prathama Bank which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under the law. (vi) If while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power under section 263 of the Act, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer. (vii) If the Assessing Officer exercises quasi-judicial power vested in him in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. (viii) The CIT, before exercising his jurisdiction under section 263 of the Act, must have material on record to arrive at a satisfaction.” (ix) If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation be a letter in writing and the Assessing Officer allowed the claim on being satisfied with the explanation of the assessee, the decision of the Assessing Officer cannot be said to be either erroneous or prejudicial to the interest of the Revenue.

Reverting to the facts of the present case, it is noticed that the assessee filed its revised return on the basis of the 18 Prathama Bank judgment of Hon’ble Supreme Court in the case of Southern Technologies Vs JCIT reported at 320 ITR 577. Thereafter, the AO vide order sheet entry dated 01.11.2011 (copy of which is placed age page no. 7 of the assesse’s paper book) asked the assessee to furnish various details with respect to the following: “i. Brief note on the modus operand of the business activities; ii. Computation of deduction u/s 36(1)(viia); iii. Working of provision for bad debts and claim of bad debts; iv. Bills for fixed assets purchased during the year; v. Reasons for loss; vi. Details of branches; vii. Contingent liabilities - details - whether debited to P&L a/c; viii. Confirmation for unsecured loans received / squared during the year; ix. Details of Doubtful & Loss assets; x. Computation of total income; xi. Break up of other expenses; & xii. Repair & maintenance - nature.”

In response to the above, the assessee vide its reply dated 16.11.2011 furnished various details to the AO (copy of which is placed at page nos. 9 to 12 of the assessee’s paper book) and the relevant portion of the said letter read as under:

The computation of deduction u/s 36(i)(viia) of Income Tax Act'1961 was filed alongwith the return of income. The reasons for filing revised return are given in the letter filed alongwith the revised return. It is, however, submitted that the revised return was filed to claim proper admissible deduction u/s 36(1)(viia) of the I.T. Act which is a, statutory deduction. Further, the revised return is covered u/s 139(5) of the I.T. Act. The working of claim of deduction u/s 36(1)(viia) at Rs.80,15,60,000/- is given in the sheet of Computation of Income filed alongwith the revised return. Further the branch wise details of computation of deduction u/s 36(1)(viia) of Rs. 80,15,60,000 is also enclosed herewith. The relevant adjustments in this regard in the computation of income being self explanatory from the computation as are follows: Firstly, the provision for bad & doubtful debts of Rs. 14,18,27,000 are added back i.e. offered to tax. Thereafter, the aforesaid amount of Rs. 80,15,60,000 is claimed as a deduction u/s 36(1)(viia). Please note, the aforesaid adjustments are effected out of the book i.e. in the computation of income. The accounts are thus not affected by the aforesaid 20 Prathama Bank adjustments. Further, in the course of discussion on 01/11 your goodself had wanted to know as to whether after making these adjustments the assessee is required to furnish any revised report from auditor, accounts etc. In this regard, it may be noted that since the aforesaid adjustments are made out of the book only i.e. in the computation of income therefore the accounts are not impacted by the aforesaid two adjustments. Therefore, there will arise no requirement of furnishing any revised report from auditor, accounts etc. This deduction has been claimed strictly in accordance with the provisions of section 36(1)(viia). The claim of such deduction also finds support from the decision of the apex Court in the case of Southern Technologies Ltd. vs JCIT (2010) 228 CTR (SC) 440. An elaborate and detailed clarification regarding claim of deduction u/s 36(1)(viia) has already been filed in your office on 06/07/2010. However, for the sake of convenience, a copy of the same is being filed. Under these circumstances, the claim of Rs.80,15,60,000/-which is equal to the 10% of Rural advances, may kindly be allowed u/s 36(1)(viia) of the IT. Act.

The working of provisions of Bad Debts of Rs. 14,18,27,000 was also filed alongwith the revised return of income, same is re enclosed herewith for ready reference.

The detail of branches is enclosed herewith. It may be noted that since we are a Regional Rural Bank sponsored by the Syndicate Bank therefore; we are under the strict vigilance and control of RBI. It is not permissible for us to provide non-rural advances. From the details submitted it is very clear that all the advances made and accordingly the claim of deduction u/s 36(1)(viia) is with respect to rural advances only.”

The assessee also furnished the details of monthly average of agricultural advances outstanding in rural branches (copy of which is placed at page no. 14 of the assessee’s paper book) which read as under: S. No. Region Monthly average of agricultural advances outstanding in rural branches F.Y. 2008-09 AMT IN ‘000’ 1. Moradabad 1104553 2. Rampur 1389390 3. Thakurdwara 847040 4. Amroha 1729725 5. Sambhal 1662607 6. A.P. Chopla 1282308 Total 8015623 18. In the present case, the assessee had given the break-up of each branch (copies of which are placed at page nos. 15 to 28). In the instant case, the assessee in its computation of revised 22 Prathama Bank total income/loss (copy of which is placed ate page no. 1 of the assessee’s paper book) clearly mentioned that deduction u/s 36(1)(viia) of the Act was claimed @ 10% of average agricultural advances of Rs.801.56 crores. Thereafter, the AO after examining the aforesaid details came to the conclusion that the claim of the assessee was allowable and he accordingly allowed the claim of the assessee u/s 36(1)(viia) of the Act. The said claim was in accordance with law and as provided in the provisions of Section 36(1)(viia) of the Act.

In the present case, the ld. CIT only directed the AO to re- examine the claim afresh. He nowhere stated that the claim of the assessee was not correct or it was not in accordance with provisions contained u/s 36(1)(viia) of the Act.

On a similar issue the Hon’ble Jurisdictional High Court in the case of DIT Vs Jyoti Foundation (2013) 357 ITR 388 (Del) held as under: "Revisionary power under section 263 of the Income- tax Act, 1961, is conferred by the Act on the Commissioner/Director of Income-tax, when an order passed by the lower authority is erroneous and prejudicial to the interests of the Revenue. Orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interests of the Revenue, but orders which are passed after 23 Prathama Bank inquiry/investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interests of the Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken. In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry /made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.”

In the present case also the AO made the proper inquiry/investigation on the issue under consideration and the ld. CIT simply directed the AO to re-examine the claim u/s 36(1)(viia) of the Act afresh. He nowhere recorded a finding that the inquiry made by the AO was erroneous and did not point out any error or mistake made by the AO. Therefore, the action of the ld. CIT in setting aside the assessment order passed by the AO was not justified.

Similarly, the Hon’ble Jurisdictional High Court in the case of CIT Vs International Travel House Ltd. (2012) 344 ITR 554 (Del) held as under:

In the present case also the ld. CIT had directed the AO to re-examine the claim u/s 36(1)(viia) of the Act of the assessee which the AO had already examined and on being satisfied, allowed the same. Therefore, the impugned order passed by the ld. CIT is not sustainable.

On a similar issue, the Hon’ble Jurisdictional High Court in the case of CIT Vs Ashish Rajpal (2010) 320 ITR 674 has held as under: “If the Assessing Officer acts in accordance with law his order cannot be termed as erroneous by the Commissioner, simply because according to him, the order should have been written "more elaborately".

In the present case as we have already pointed out that the AO asked the assessee to furnish the various details in support of its claim u/s 36(1)(viia) of the Act and in response the assessee furnished the various details which were examined by the AO, thereafter on being satisfied the claim was allowed. Therefore, the ld. CIT was not justified in setting aside the assessment order dated 13.12.2011 and in directing the AO to re-examine the same issue again. We, therefore, considering the totality of the facts are of the considered view that the impugned order passed by the ld. CIT is not sustainable in the eyes of law. Accordingly, the same is set aside.

In the result, the appeal of the assessee is allowed. (Order Pronounced in the Court on 25/11/2016)