APT PACKAGING LTD.,,PUNE vs. COMMISSIONER OF INCOME-TAX - 1,,

आदेश / ORDER

PER ANIL CHATURVEDI, AM :

This appeal filed by the assessee is emanating out of the 1. order of Commissioner of Income Tax (A) - I, Aurangabad dt. 05.03.2015 for the assessment year 2010-11.

2.1 Assessee is a company stated to be engaged in the business

of manufacturing of co-extruded tubes and garments. Assessee

electronically filed its return of income for A.Y. 2010-11 on

13.10.2010 declaring loss of Rs.1,66,42,358/-. The case was

selected for scrutiny and thereafter assessment was framed u/s

143(3) of the Act vide order dt.05.03.2013 and the total loss was

determined at Rs.84,27,078/-. Subsequently, Ld.CIT called for

assessment records of the assessee. On examination of the records

of the assessment, he was of the view that the order passed by AO

u/s 143(3) of the Act dt.05.03.2013 was erroneous and prejudicial

to the interest of revenue for two reasons. The first reason

according to Ld.CIT was that assessee had claimed deduction of

Rs.1,11,42,549/- debited under the head “Provision for bad and

doubtful debts” being the inter corporate deposit as being not

recoverable. According to Ld.CIT ‘provision for bad and doubtful

debts’ was not allowable but was allowed by the AO. The second

reason for the order passed by AO to be erreneous according to

Ld.CIT was that the assessee had claimed depreciation of

Rs.2,29,45,580/- u/s 32 of the Act whereas in the TAR (Clause 15

Annexure 3), depreciation u/s 32 of the Act was calculated at

Rs.1,23,30,392/- which was only allowable to the assessee.

Accordingly, the excess amount of depreciation of Rs.1,06,15,188/-

claimed by assessee and allowed by AO was therefore not

allowable. He was therefore of the view that the aforesaid order

passed by the AO was on the basis of incorrect assumption of facts

and without application of mind and was passed merely on the

basis of written submissions and details submitted by the assessee

and therefore the order passed by AO was erroneous and

prejudicial to the interest of Revenue. He accordingly issued notice

u/s 263 of the Act dt.27.01.2015 and called upon the assessee to

show cause as to why order u/s 263 of the Act not be passed. In

response to show cause notice, assessee inter-alia objected to the

initiation of proceedings u/s 263 of the Act. On the merits of the

objection raised by the Ld.CIT on the issue of claim of bad debts,

assessee inter-alia submitted that assessee had given a loan of

Rs.1 crore to M/s. Sachit Plastic Private Limited vide cheque

No.095844 dt.05.01.1995. M/s. Sachit Plastic Private Limited

made part payments aggregating to Rs.30 lacs in earlier years and

thereafter no payment was made by it to the assessee. The

interest income that was received was accounted for by the

assessee till 31.03.1997. Thereafter, no interest income was

received and hence, not accounted for. It was further submitted

that since there was no recovery, assessee filed a Civil Suit in

Aurangabad in 2001. It was further submitted that as per the

latest audited Balance-Sheet of M/s. Sachit Plastic Private

Limited as on 31.03.1997, its net worth is negative, the total value

of assets were Rs.5.82 lacs as on 31.03.2009 and the amount due

by it to the assessee was Rs.111.43 lacs. Considering the financial

position of M/s. Sachit Plastic Private Limited, the amount was

written off as bad doubtful debts though the nomenclature used

in the Profit and Loss account was “provision of bad and doubtful

debts”. With respect to the 2nd issue being the claim of

depreciation, it was submitted that there are two pages of

Annexure of depreciation one for existing assets and second for

new set up at Haridwar. The second schedule of new asset

remained to be annexed to Tax Audit Report due to oversight. It

was submitted that the assessee had rightly claimed depreciation.

It was therefore submitted that there was no need to initiate

proceedings u/s Sec.263 of the Act. The submissions of the

assessee were not found fully acceptable to Ld.CIT. As far as the

writing of bad and doubtful debts were concerned, he was of the

view that to claim the expenditure as bad and doubtful debts, the

debt must be a trading debt. He was further of the view that u/s

36(1)(vii) of the Act, only bad and doubtful debts written off is

allowable and not provision for bad and doubtful debts. He further

noted that in the assessee’s case the inter corporate deposit were

never taken into account while calculating the income and

therefore the assessee was not eligible for claiming such debts as

bad and doubtful debts. As far as the claim of depreciation is

concerned, he found the assessee’s contention to be acceptable.

He therefore vide order dt.05.03.2015 passed u/s 263 of the Act

directed the AO to disallow the claim of bad and doubtful debts.

Aggrieved by the order of Ld.CIT, assessee is now in appeal before

us.

pre-requisite conditions specified u/s 263 of the Act were not

satisfied and therefore the proceedings initiated u/s 263 of the Act

lacks jurisdiction and are bad in law. He submitted that u/s 263 of

the Act, the Ld. CIT can revise an order passed by the AO only on

the satisfaction of twin conditions namely (i) the order is erroneous

and (ii) it is prejudicial to the interest of Revenue. If one of them is

absent i.e. if either the order of the Revenue is erroneous but is not

prejudicial to the interest of the Revenue or if it is not erroneous

but is prejudicial to the interest of Revenue – recourse cannot be

had to Sec.263(1). He further submitted that the error envisaged by

Sec.263 is not one which depends on possibility or guesswork but

it should be an actual error either of facts or of law. He further

submitted that when two views are possible and the AO has taken

one view with which the Ld. CIT does not agree, the order of the

AO cannot be treated as an erroneous order prejudicial to the

interests of the Revenue unless the view taken by the AO is

unsustainable in law and for the aforesaid proposition, he relied on

the decision in the case of Malabar Industrial Co., Ltd., Vs. CIT

(2000) 243 ITR 83 (SC). The Ld AR further placing reliance on the

decision of Bombay High Court in the case of CIT Vs. Gabriel India

Ltd (1993) 203 ITR 108 (Bom) submitted that Hon’ble Bombay High

Court has held that “An order cannot be termed as erroneous

unless it is not in accordance with law. The section does not

visualise a case of substitution of judgment of the Commissioner

for that of the ITO, who passed the order, unless the decision is

held to be erroneous. He further submitted that the Hon’ble High

Court has held that when the ITO has exercised the quasi-judicial

power vested in him in accordance with law and arrived at a

conclusion and such a conclusion cannot be termed to be

erroneous simply because the Commissioner does not feel satisfied

with the conclusion. It may be said in such a case that in the

opinion of the Commissioner the order in question is prejudicial to

the interest of the Revenue. But that by itself will not be enough to

vest the Commissioner with the power of suo motu revision

because the first requirement, namely, the order is erroneous, is

absent. Similarly, if an order is erroneous but not prejudicial to

the interest of the Revenue, then also the power of suo motu

revision cannot be exercised. Any and every erroneous order

cannot be subject-matter of revision because the second

requirement also must be fulfilled.

Ld.A.R. submitted that assessee had advanced an Inter Corporate

loan of Rs. 1 crore to M/s. Sachit Plastic Private Limited in 1995.

M/s. Sachit Plastic Private Limited had repaid Rs.30 lacs till the

year 2000 and thereafter no payments were received by the

assessee. He submitted that the interest income that was received

till 1997 was accounted by the assessee and was offered to tax.

Thereafter since no interest was received by assessee, interest

income was not accounted for by the assessee. He further

submitted that as per the audited balance-sheet of M/s. Sachit

Plastic Private Limited as on 31.03.2009, it had negative net worth

and the value of the total assets was Rs.5.82 lacs as against the

amount due by it to the assessee of Rs.111.43 lacs. Considering

the financial position of the company and the low probability of

recovery, in A.Y. 2009-10, the outstanding balance of

Rs.1,11,42,549/- was written off. He thereafter pointed to the

pages 66 to 72 of the Paper Book being the schedule of Profit and

Loss account for the year ended 31.03.2010 and submitted that

though the nomenclature used while writing off the amount was

“provision for bad and doubtful debts” but actually it is writing off

bad and doubtful debts. In support of his contention that the

amount has been written off, he pointed to the schedule of

Balance-Sheet as on 31.03.2011 placed at page 114 of the Paper

Book and pointed that had the amount been considered as

provision, the amount would have recorded in the schedule of

loans and advances. Since the amount that already been written

off in the year 2010 and the amount was not shown as

outstanding in the schedule of loans and advances. He also placed

on record the copy of the Auditors Certificate wherein it was

certified by the Auditor that though the amount has been written

off as bad and doubtful debts under “Provision for bad and

doubtful debts” but actually it is a case of written off of bad and

doubtful debts and not a case of provision for bad debts. He

further submitted that when the interest income arising out of the

inter corporate deposit was offered to tax in earlier years, then the

assessee has satisfied the condition to claim deduction of bad and

doubtful debts in subsequent years and for this proposition, he

relied on the decision of Hon’ble Bombay High Court in the case of

CIT Vs. Pudumjee Pulp and Paper Mills of Bombay reported in

(2015) 63 taxmann.com 283 (Bom). He further submitted that

during the course of assessment proceedings, the claim of the

assessee for deduction of bad debts was allowed by the AO after

being satisfied by the claim of the assessee and therefore there was

proper application of mind by the AO and therefore proceedings

u/s 263 of the Act cannot be initiated for mere change of opinion.

He therefore submitted that the order of Ld.CIT be set aside. The

Ld.D.R. on the other hand, supported the order of Ld.CIT. She

submitted that on the issue of claim of bad and doubtful debts, the

expenditure of bad and doubtful debts is only allowable when the

amount is written off in the books as bad and doubtful debts and

not when a provision for bad and doubtful debts is made by the

assessee. She submitted that in the present case, since the

assessee had made a provision, the claim of the assessee is not

allowable but the claim was allowed by the AO. She therefore

submitted that Ld.CIT has rightly held that the order of AO to be

erroneous and prejudicial to the interest of Revenue and she thus

supported the order of Ld.CIT.

material on record. The issue in the present case is about the

invoking of provisions of Section 263 by Ld CIT. Sec. 263(1) of the

Act, the powers under which Ld CIT has assumed power for

revision reads as under:

“The Commissioner may call for and examine the record of

any proceeding under this Act, and if he considers that any

order passed therein by the ITO is erroneous in so far as it is

prejudicial to the interests of the Revenue, he may, after

giving the assessee an opportunity of being heard and after

making or causing to be made such inquiry as he deems

necessary, pass such order thereon as the circumstances of

the case justify, including an order enhancing or modifying

the assessment, or cancelling the assessment and directing a

fresh assessment.”

the power of suo motu revision u/s 263(1) is in the nature of

supervisory jurisdiction and the same can be exercised only if the

circumstances specified therein exist. Two circumstances must

exist to enable the Commissioner to exercise power of revision u/s

263, namely (i) the order is erroneous (ii) by virtue of being

erroneous, prejudice has been caused to the interests of the

Revenue.

Ltd., Vs CIT reported in (2000) 243 ITR 83 (SC) has held that CIT

has to be satisfied of twin conditions, namely, (i) the order of the

AO 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 ITO 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 Sec.263(1). It was further held that the provision cannot

be invoked to correct each and every type of mistake or error

committed by the AO; when an ITO adopted one of the courses

permissible in law and it has resulted in loss of revenue; or where

two views are possible and the ITO has taken one view with which

the CIT does not agree, it cannot be treated as an erroneous order

prejudicial to the interests of the Revenue unless the view taken by

the ITO is unsustainable in law.

203 ITR 108 (Bom), the Hon’ble Bombay High Court has held as

under:

“An order cannot be termed as erroneous unless it is not in

accordance with law. If an ITO acting in accordance with law

makes certain assessment, the same cannot be branded as

erroneous by the Commissioner simply because according to

him the order should have been written more elaborately.

This section does not visualise a case of substitution of

judgment of the Commissioner for that of the ITO, who

passed the order, unless the decision is held to be erroneous.

Cases may be visualised where ITO while making an

assessment examines the accounts, makes enquiries, applies

his mind to the facts and circumstances of the case and

determines the income either by accepting the accounts or

by making some estimates himself. The Commissioner, on

perusal of the records, may be of the opinion that the

estimate made by the officer concerned was on the lower side

and, left to the Commissioner, he would have estimated the

income at a higher figure than the one determined by the

ITO. That would not vest the Commissioner with power to re-

examine the accounts and determine the income himself at a

higher figure. It is because the ITO has exercised the quasi-

judicial power vested in him in accordance with law and

arrived at a conclusion and such a conclusion cannot be

termed to be erroneous simply because the Commissioner

does not feel satisfied with the conclusion. It may be said in

such a case that in the opinion of the Commissioner the

order in question is prejudicial to the interest of the Revenue.

But that by itself will not be enough to vest the

Commissioner with the power of suo motu revision because

the first requirement, namely, the order is erroneous, is

absent. Similarly if an order is erroneous but not prejudicial

to the interest of the Revenue, then also the power of suo

motu revision cannot be exercised. Any and every erroneous

order cannot be subject-matter of revision because the

second requirement also must be fulfilled.”

provisions of Sec.263 of the Act and held that the assessment order

passed by the AO u/s 143(3) of the Act is to be erroneous and

prejudicial to the interest of Revenue for the reason that the claim

of bad and doubtful debts was allowed by the AO even though the

assessee had made a provision for bad and doubtful debts.

advanced to M/s. Sachit Plastic Private Limited as inter corporate

deposits and the assessee had received the interest on such inter

corporate deposits till 31.03.1997 and which was offered as

income by the assessee. It is assessee’s contention that the

financial position of M/s. Sachit Plastic Private Limited is bad, it

has a negative net worth of Rs.0.88 lacs and the value of the total

assets as on 31.03.2009 is Rs.5.82 lacs as against the amount due

by it to the assessee at Rs.111.43 lacs and the assessee has also

filed Civil Suit for recovery. The aforesaid submissions of the

assessee have not been found to be incorrect. On pointing to the

schedule of Profit and Loss account, it is assessee’s contention that

though nomenclature used is “provision for bad and doubtful

debts” but the amount has actually been written off bad and

doubtful debts and for which assessee has also placed on record

the copy of the Auditors Certificate, wherein it was certified that

the amount in reality has been written off as bad and doubtful

debts and it is not a case of provision. On the observation of

Ld.CIT issue that the amount has not been considered as income

by the assessee in earlier years, it is assessee’s contention that the

interest amount was offered to tax in the past. The submissions of

the assessee have also not been found to be incorrect. We find that

the Hon’ble Bombay High Court in the case of CIT Vs. Pudumjee

Pulp and Paper Mills (supra) has held that when a part of debt

was offered to tax in earlier assessment years, the conditions of

Sec.36(1)(vii) are satisfied and it would therefore satisfy the

conditions for claiming the deduction u/s 36(1)(vii) r.w.s. 36(2)(i) of

the Act. Before us, Revenue has not placed any contrary binding

decision in its support. Further before us, Revenue has not

brought any material on record to demonstrate that the view taken

by the AO was an impermissible view or was contrary to law or

was upon erroneous application of legal principles necessitating

the exercising of Revisionary powers u/s 263 of the Act.

Considering the totality of the aforesaid facts, we are of the view

that in the present case the condition precedent for assuming the jurisdiction u/s 263 of the Act did not exist and therefore the Ld. CIT was not justified in resorting to the revisionary powers u/s 263 of the Act. We therefore set aside the orders of Ld. CIT whereby he has directed the AO to disallow the claim of bad and doubtful debts. Thus, the ground the of assessee is allowed.

Order pronounced on 5th day of March, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 5th March, 2018. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER

// True Copy //

व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.