Loading judgment…
Facts
The assessee challenged the revisional jurisdiction invoked by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act. The PCIT had set aside the assessment order, citing two grounds: allowing bad debts written off and allowing employee contributions to PF/ESI despite being remitted after the due date.
Held
The Tribunal held that the PCIT's invocation of revisional jurisdiction was without jurisdiction. The Assessing Officer (AO) had conducted proper inquiries and allowed the bad debts based on the evidence and prevailing law, and the PF/ESI remittances were allowed in line with the jurisdictional High Court's decision at the time of assessment.
Key Issues
Whether the PCIT validly exercised his revisional jurisdiction under Section 263 of the Income Tax Act when the AO had made inquiries and followed the law prevailing at the time of assessment.
Sections Cited
263, 143(3), 144B, 142(1), 36(1)(va), 139(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI MANOJ KUMAR AGGARWAL
आदेश / O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee Revenue against the order of the Learned Principal Commissioner of Income Tax, (hereinafter in short "the Ld.PCIT”), Chennai-1, dated 22.03.2024 for the Assessment Year (hereinafter in short "AY”) 2018-19 u/s.263 of the Income Tax Act, 1961 (hereinafter in short "the Act”). The assessee has challenged the jurisdiction of the Ld.PCIT to have invoked his jurisdiction u/s.263 of the Act. Since it is a legal issue we will take up first.
The brief facts are that the assessee company filed its original return of income (RoI) for AY 2018-19 on 25.09.2018 declaring total loss of Rs.64,99,473/-. Later, the case was selected for scrutiny and the assessment completed u/s.143(3) read with section 144B of the Act on 22.04.2021 by the Faceless Assessment Unit/AO determining the assessed loss at Rs.13,82,109/- [by disallowing Rs.50,55,284/- in respect of expenses claimed and added also adjustment made by the CPC to the tune of Rs.62,080/-]. However, the Ld.PCIT was of the view that the assessment order passed by the AO u/s.143(3) read with section 144B of the Act was erroneous and also prejudicial to the interest of the Revenue on two grounds i.e. i) the action of the AO allowing bad debts written off to the tune of Rs.41,77,844/- and ii) the action of the AO allowing the claim of employees contribution towards PF/ESI to the tune of Rs.8,36,020/-, (even though, remitted after the due date as per PF/ESI Act). The Ld.PCIT, acknowledged that AO enquired into the issue of bad debts written off to the tune of Rs.41,77,844/- by issue of show cause notice u/s.142(1) of the Act dated 19.02.2021 but, the AO completed the assessment without considering the veracity of the issue by further enquiries. Therefore, he was of the opinion that the AO’s action was erroneous and also prejudicial to the interest of the Revenue within the meaning of sec.263 of the Act. Likewise, he found that the assessee has remitted the contributions to the PF/ESI funds received from the employees’ after the due date prescribed by the PF/ESI Act. Therefore, as per provisions of Sec.36(1)(va) of the Act, the same was not an allowable deduction as per the decision of the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. v. CIT (Civil Appeal No.2833 of 2016 dated 12.10.2022 and therefore, the action of the AO to allow the same as deduction was erroneous and also prejudicial to the interest of the Revenue. Therefore, he partly set aside the Assessment Order dated 22.04.2021 and directed the AO to examine the aforesaid two issues and pass fresh orders.
Aggrieved, the assessee has challenged the jurisdiction of Ld.PCIT to have invoked revisionary jurisdiction u/s.263 of the Act before this Tribunal.
We have heard both the parties and perused the material available on record. We find in this case that the Ld.PCIT has invoked his revisional jurisdiction u/s.263 of the Act, which action of Ld PCIT has been challenged. In other words, the jurisdiction of Ld PCIT u/s 263 of the Act is put to test. Hence, we have to first examine the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence as laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s.263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in the said judgment held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
In light of the settled position of law in respect of invoking valid jurisdiction u/s.263 of the Act, let us examine the facts of the present case. In respect of the first issue, raised by the Ld.PCIT i.e., bad debts written off to the tune of Rs.41,77,844/-, we note that the AO during the original assessment proceedings had issued notice to the assessee u/s.142(1) of the Act dated 10.02.2020, copy of which is found placed at Page Nos.11-20 of the Paper Book; and especially note from perusal of Page No.18 Item No.10, the AO had asked the assessee to explain the bad debts written off claimed to the tune of Rs.41,77,844/- and asked the assessee to give the details of all bad debts including the parties name, PAN, nature of the bad debts, amount paid/payable etc. It is further noted that pursuant to notice, the assessee had filed reply which is found placed at Page Nos.23-28 and a perusal Page No.27 reveals that the assessee had furnished the details called for regarding the claim of bad debts. It is noted that the assessee has given the name, PAN and address of the party, nature of expenses, total amount payable during the year and other details called for by the AO. The Ld.AR also drew our attention to Page Nos.29-30 of the Paper Book, wherein, the AO vide notice/letter dated 19.02.2021 again asked the assessee regarding its claim about bad debts written off to the tune of Rs.41,77,844/- by asking query 2(ii); and pursuant to it the assessee again replied by letter dated 05.03.2021 which is found placed at Page Nos.32-33 of the Paper Book and a perusal of reply, we find the assessee has given the details of bad debts, including breakup which is found placed at Page No.34 of the Paper Book and copies of the ledgers of the parties expense bad debts found placed at Page Nos.35-46 and also note that the details given (supra) tallied with the information given at Page Nos.34 & 27 of the Paper Book.
1. Thus, after enquiry as noted (supra), the AO has accepted the genuineness of the claim. The Hon'ble Supreme Court in the case of T.R.F. Ltd. vs. CIT reported in [2010] 323 ITR 397 (SC) has held that after 01.04.1989, it is not necessary for the assessee to establish that the bad debts in fact has become as irrecoverable. It is enough if the bad debts are written off as irrecoverable in the accounts/hands of the assessee. In light of the enquiry conducted by the AO and position of law in respect of claim of bad debts, we note that AO verified the claim of assessee and found that the bad debts claimed by it has been written off in its books, and then the AO has accepted the claim and allowed the same, which action can’t be held to be erroneous and also prejudicial to the interest of the Revenue. Therefore, we find the Ld.PCIT erred in exercising his revisional jurisdiction on this issue.
6. Likewise, in respect of the next issue i.e. AO’s action of allowing deduction regarding remittance of employee’s contribution towards PF/ESI. It is noted that the AO had called for details of employee’s remittances to PF/ESI which fact is discernable from the notice issued by the AO u/s.142(1) of the Act dated 10.02.2020 which is found placed at Page Nos.11-20 of the Paper Book. It is noted that the AO by asking query No.14 [found placed at Page No.19 of the Paper Book] had asked the assessee to give details about the employee’s contribution towards PF/ESI and also asked assessee as to whether the contribution has been remitted/paid within the due date prescribed in explanation to clause (va) of Sec.36(1) of the Act. Pursuant to such a query, the assessee replied to AO on 06.08.2020 [a copy of which is found placed at Page Nos.23-25 of the Paper Book at Page No.25], in tabular form giving the details of (i) sums separately regarding employee’s contribution towards PF/ESI received from employee’s (PF & ESI) (ii) due date of payment (iii) actual amount paid (iv) actual date of payment to the authorities (PF/ESI). It is noted that after such enquiry, the AO has allowed the claim of remittance of employee’s contribution towards PF/ESI to the tune of Rs.8,36,020/- on the strength of the binding decision of the Hon’ble Madras High Court order in the case of CIT v. Industrial Security & Intelligence India P. Ltd., [TCA Nos.585 & 586 of 2015 dated 24.07.2015]. According to the Ld.AR, the AO’s action was in line with the jurisdictional High Court’s decision, wherein, the Hon’ble High Court has held that if the assessee had remitted the employee’s contribution towards PF/ESI before the due date of filing of the return of income u/s.139(1) of the Act, no disallowance was warranted. According to the Ld.AR, the AO can’t be a clairvoyant (person who has power to know about the future) and predict about the decision of the Hon’ble Supreme Court decision in the case of Checkmate Services P. Ltd., which was only given afterwards i.e., in the year 2022 and was not available before the AO when he framed the assessment on 22.04.2021. And since the decision of AO after enquiry on the issue at hand was in line with that of the decision of Hon’ble Jurisdictional High Court (supra), the action of AO cannot be held to be erroneous as well as prejudicial to revenue by relying on the decision of the Hon’ble Supreme Court in the case of CIT v. GM Mittal Stainless Steel (P) Ltd., reported in [2003] 263 ITR 255 (SC) Para Nos.5-8 wherein it was held as under:-
5. In this particular case, the CIT has not recorded any reason whatsoever for coming to the conclusion that the AO was erroneous in deciding that the power subsidy was capital receipt. Given the fact that the decision of the jurisdictional High Court was operative at the material
time, the AO could not be said to have erred in law. The fact that this Court had subsequently reversed the decision of the High Court would not justify the CIT in treating the AO's decision as erroneous. The power of the CIT under Section 263 of the IT Act must be exercised on the basis of the material that was available to him when he exercised the power. At that time, there was no dispute that the issue whether the power subsidy should be treated as capital receipt had been concluded against the Revenue. The satisfaction of the CIT, therefore, was based on no material either legal or factual which would have given him the jurisdiction to take action under Section 263 of the IT Act.
The decisions of the High Courts relied upon by learned counsel appearing for the appellant do not, in our view, assist the Revenue. The Madras High Court in CIT v. Seshasayee Paper Boards Ltd (supra) considered a situation where the AO had relied upon a particular decision in framing the assessment order. The decision relied upon was itself the subject-matter of an appeal before the Supreme Court. In those circumstances, the High Court was of the view, and correctly so that the CIT could have initiated proceeding under Section 263. It is nobody's case that the decision in Dusad Industries (supra) was the subject-matter of any appeal before this Court. As far as the Revenue authorities in Madhya Pradesh were concerned the issue could not be said to be alive.
7. The Calcutta High Court decision, has in fact held contrary to what is being submitted on behalf of the appellant. In that case the AO had initiated reassessment proceedings on the basis of a decision of the Rajasthan High Court. The decision of the Rajasthan High Court was subsequently reversed by this Court. The Calcutta High Court held that despite such reversal, it could not be said that reassessment proceedings were without jurisdiction on the basis of the law as it stood when the proceedings were initiated.
8. Apart from the language of Section 263 of the IT Act, if we were to accept the submission of the appellant that the Revenue authorities within the State could refuse to follow the jurisdictional High Court's decision on the ground that the decision of some other High Court was pending disposal by this Court, it would lead to an anarchic situation within the State. If at the time when the power under Section 263 was exercised the decision of the jurisdictional High Court had not been set aside by this Court or at least had not been appealed from, it would not be open to the CIT to have proceeded on the basis that the High Court was erroneous and that the AO who had acted in terms of the High Court's decision had acted erroneously.
It is not the case of the Ld.PCIT /DR that the decision of the Hon’ble Madras High Court order in the case of CIT v. Industrial Security & Intelligence India P. Ltd. (supra), had been challenged by the Revenue before the Hon'ble Supreme Court. Therefore, in the light of the aforesaid decision of the Hon’ble Supreme Court in the case of GM Mittal Stainless Steel (P) Ltd., (supra), the action of the AO while framing assessment order in 2021 following the jurisdictional High Court decision in the case of CIT v. Industrial Security & Intelligence India P. Ltd. (supra), on the issue of PF/ESI cannot be said to be erroneous, because it was the law as on the date when he passed the order in April, 2021; and since, the order of the Hon’ble Supreme Court in the case of Checkmate Services P.
Ltd., was passed in the year 2022, the action of the AO in following the ratio laid down by the Hon’ble High Court in the case of Industrial Security & Intelligence India P. Ltd.,(supra) can’t held to be erroneous as well as prejudicial to the interest of the Revenue and therefore, on this ground also the action of the Ld.PCIT to exercise his revisional jurisdiction is found to be wholly without jurisdiction and therefore, can’t be countenanced and therefore, assessee succeeds on the legal issue it raised; and consequently, we quash the impugned order of Ld PCIT.
In the result, appeal filed by the assessee is allowed.
Order pronounced on the 23rd day of October, 2024, in Chennai.