Smt. Sunita Mehul Barot, Ahmedabad V. Pr. CIT-2, , Ahmedabad

ITA 1075/AHD/2018

AI Insights

The case revolves around the appeal by Smt. Sunita Mehul Barot against the order of the Principal Commissioner of Income Tax-2, Ahmedabad, which set aside the assessment order allowing the claim of bad debts. The assessee, engaged in trading and commission agency, had claimed deductions for bad debts which were initially accepted by the Assessing Officer. However, the PCIT later found the assessment to be erroneous and prejudicial to the Revenue's interest, leading to a revision under section 263. The Tribunal examined whether the AO's actions constituted a lack of inquiry or an inadequate inquiry and concluded that the AO had indeed made inquiries and considered the assessee's submissions before allowing the claim.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135594 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-01-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 30-04-2018
• Other Referred Cases: CIT Vs. Sunbeam Auto, Gabriel India Ltd. vs. CIT, Sh. Narayan Tatu Rane Vs. ITO, Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates, Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Revision of order; Question of law; Bad and doubtful debts; Corroborative evidences; Assessment record; Set aside
• Section: 263; 28; 2; 143(3); 142(1); 69A; 2(A)

Judgement Text

आयकर आयकरआयकर आयकर अपी अपीअपी अपीलीय लीयलीय लीय अिधकरण अिधकरणअिधकरण अिधकरण, अहमदाबाद अहमदाबादअहमदाबाद अहमदाबाद यायपीठ यायपीठ यायपीठ यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ A” BENCH, AHMEDABAD SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 1075/AHD/2018 िनधा रण िनधा रणिनधा रण िनधा रण वष वष वष वष /Asstt. Year: 2013-2014 Smt. Sunita Mehul Barot, 6, Purshottam Bunglows, Sakar School Lane, New C.G. Road, Chandkheda, Ahmedabad. PAN: AMZPB6126D Vs. Pr. C.I.T-2, Ahmedabad. (Applicant) (Respondent) Assessee by : Shri S. N Divatia, A.R Revenue by : Shri Vijay Kumar Jaiswal, CIT. D.R सुनवाई क तारीख/Date of Hearing : 04/01/2023 घोषणा क तारीख /Date of Pronouncement: 31/03/2023 आदेश आदेशआदेश आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the assessee against the order of the Learned Principal Commissioner of Income Tax-2, Ahmedabad, dated 23/03/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2013-14. ITA no.1075/AHD/2018 A.Y. 2013-14 2 2. The only interconnected issue raised by the assessee is that the learned Principal CIT erred in holding the assessment framed under section 143(3) as erroneous insofar prejudicial to the interest of Revenue. 3. The brief facts are that the assessee is an individual and engaged in the business of trading in all types of telephone instruments and parts & commission agents through two proprietary concern namely M/s Drasti Enterprise and M/s M Link Well. During the year, the assessee claimed deduction of bad debts for Rs. 37,338/- and Rs. 39,27,247/- in both the proprietary concern respectively. During the assessment proceeding, the assessee explained that, he had an agency of Reliance Communication Ltd (the company), for the sale of their CUG connection to the Government Department. Thus, it was his responsibility for the collection sale proceeds made on behalf of the company and as per MOU with the company, if a customer will not pay his bill timely, then the entire outstanding amount will be deducted from his sales commission. During the year, some of parties did not paid the bill on time and subsequently there was election in Gujarat. Hence, the code of conduct was announced and the department stopped the payment till the election of new government. After election, he made effort for transfer of outstanding amount but got no response. Therefore in such circumstances he settled loss with the company and stopped future dealing and thereby written off the amount as bad debt. The AO concurred with the explanation of the assessee and allowed the impugned claim of bad debt vide order dated 22-03-2016. 4. The PCIT on examination of the assessment records found that the sale was made by the company Reliance Telecommunication Ltd. If there was any bad debt on account of supply to the government department then the same were the bad debt of Reliance Communication Ltd and not the assessee. As the assessee was merely an agent working on commission and therefore in terms of section 36(2) of income tax act 1961, assessee was not entitled for such deduction on account of bad debts. However the AO, without making enquiry and application of ITA no.1075/AHD/2018 A.Y. 2013-14 3 mind in this regard finalized the assessee which is erroneous insofar prejudicial to the interest of the Revenue. Thus issued show cause notice under section 263 of the Act purposing revision of assessment order. 5. The assessee in response to such show cause notice reiterated its submission during the assessment proceeding and requested to allow the claim of the bad debt. 6. However, the ld. PCIT disagreed with the submission of the assessee and set aside the assessment order as erroneous insofar prejudicial to the interest to the Revenue by observing as under: 3.1 On perusal of the copy of agreement between the assessee and Relinace Communication Ltd, it was observed that the assessee is a mere recovery agent and it did not have any obligation to discharge the debts owned by the parties to Reliance Communication. Ltd.Therefore, the said debts could never be claimed as bad debts by the assessee in its books of account as these debtors were primarily debtors of Reliance Communication Ltd and not the assessee. 3.2 The assessee has not produced the copy of his ledger account as appearing in from the books of Reliance Communication which could establish the treatment meted out by Reliance in its books of account. 3.3 The supporting evidences in form of communication through which the assessee has claimed such expenditure are self made and self serving. There is nothing on record to support that these communication were pursuant to the claim made by Reliance communication. 3.4 The major issue in these revisional proceedings u/s 263 of Income Tax Act, 1961 is that the impugned assessment order was passed without proper application of mind and without examination, enquiry and verification of the facts & application of correct law on the given set of facts. As per Explanation 2 to Sec. 263 inserted w.e.f. 01.6.2015, orders passed by the Assessing Officer shall be deemed to be erroneous and prejudicial to the interest of revenue, if, in the opinion of the Pr. Commissioner or Commissioner :-(a) the order is passed without making inquiries or verification which been made; (b) passed allowing any relief without inquiring into the aim (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in case of the assessee or any other person. 3.5 The instant case falls under the clauses (a) & (b). Further, the law on the issue is very clear that bad debts can be allowed to the assessee only when such debt amount was taken as income in the books, which is not ITA no.1075/AHD/2018 A.Y. 2013-14 4 the casehere,, Thus, in term of the section 36(2) of the IT Act the assessee was not allowed to claim such amount as bad debts. As regards claim as a loss u/s 28 or section 37(1) of the Act, the assessee has failed to adduce any credible or worthwhile evidence to demonstrate that the assessee had indeed incurred such loan. 4. In this view of the matter, invoking the provisions of section 263 of the Income Tax Act, 1961, I hereby direct the AO to disallow the said claim of bad debts of Rs.39,64,585/- .The AO to issue the revised order & Demand Notice accordingly. 7. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us. 8. The learned AR before us filed a paper book running from pages 1 to 117 and pages 1 to 63 and contended that the assessment was framed by the AO after necessary verification and due application of mind. Therefore, the assessment order cannot be said as erroneous insofar prejudicial to the interest of revenue on account of non-verification. 9. On the contrary, the learned DR vehemently supported the order of the authorities below. 10. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification with respect to the bad debts claim by the assessee in the P&L account as discussed above and hence the assessment is erroneous insofar prejudicial to the interest of the Revenue and thus requiring revision by Pr. CIT u/s 263 of the Act. 10.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is ITA no.1075/AHD/2018 A.Y. 2013-14 5 considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon’ble High Courts in this regard. 10.2 Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under: “12...... There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a 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 the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer 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 estimate 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 figure higher than the one determined by the Income-tax Officer. 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 Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the ITA no.1075/AHD/2018 A.Y. 2013-14 6 application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.” 10.3 The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner: “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. 10.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.” ITA no.1075/AHD/2018 A.Y. 2013-14 7 10.5 The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee's income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:- “We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed” 10.6 The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ITA no.1075/AHD/2018 A.Y. 2013-14 8 ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed” 10.7 From an analysis of the above judicial precedents, the principle which emerges is that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind. 10.8 Now in the facts before us, in the case of the assessee the AO during the course of assessment proceedings, made enquiries on issue of bad debts and after consideration of written submissions filed by the assessee and documents / evidence placed on record, and then framed the assessment under section 143(3) accepting the genuineness of claim of bad debts. This fact can be verified from the notice issued under section 142(1) of the Act and the relevant reply of the assesse there to which are placed on pages 302 33 of the paper book. The learned PCIT also not disputed the fact that the AO not made enquiry which was duly explained by the assessee. However, the learned PCIT is of the opinion that the assessee is merely acting as agent therefore any bad debt on account of sales made belong to the principal company i.e. Reliance Telecommunication and not the assesse. 10.9 From the above it is revealed it is not the case that the AO has not made any enquiry. Indeed, the Pr. CIT initiated proceedings under section 263 of the Act ITA no.1075/AHD/2018 A.Y. 2013-14 9 on the ground that the AO has not made enquiries or verification which should have been made in respect of bad debts. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee. 10.10 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act. 10.11 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed. ITA no.1075/AHD/2018 A.Y. 2013-14 10 11. In the result, the appeal filed by the assessee is allowed. Order pronounced in the Court on 31/03/2023 at Ahmedabad. Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 31/03/2023 Manish