Dena Bank Vs PCIT (ITAT Mumbai)
Conclusion: Revision under section 263 by PCIT was not justified as all the four issues questioned by PCIT were thoroughly examined by AO during the assessment proceedings, and after considering relevant facts and explanations furnished by assessee had chosen to accept the claim of the assessee and hence, the same could not be termed as non consideration of issues or AO had failed to carry out required enquiries, which ought to have been carried out in accordance with law. Thus, the assessment order passed by AO was neither erroneous, nor prejudicial to the interest of the revenue
Held: PCIT had revised assessment order passed u/s 143(3) on four issues. PCIT had questioned deductions allowed towards bad debt written off under the provision of section 36(1)(vii) & (viia), including newly inserted Explanation (2) to section 36(1)(vii); payment towards contribution to gratuity fund and deduction claimed u/s 43B, amount paid to RBI towards penalty for violation of KYC norms and deduction claimed towards provision for wage arrears. According to PCIT, AO had not conducted required enquiries to be conducted under respective provisions of the Act, which rendered the assessment order erroneous, insofar as it was prejudicial to the interest of the revenue. It was held that the conditions to invoke the powers u/s 263 were not satisfied and hence, PCIT was erred in invoking the scope of provisions of 263. Further, assuming for a moment, but not accepting in order to invoke 263, the other conditions, which was to be satisfied was that the order should be prejudicial to the interest of the revenue, because in respect of bad debts claim, if any deduction allowed u/s 36(1) (vii), then when the recovery of the same in subsequent years needed to be offered to tax u/s 41(4). In respect of payment towards contribution to the gratuity fund, whether or not deduction was allowed in full on payment basis in this year, but the same needed to be allowed in subsequent years, if said payment was not allowed during the year under consideration. Likewise, provision for wage arrears was also liable to be allowed, when the actual payment had been made. In this case, assessee had made payment in the subsequent years. Therefore, invocation of jurisdiction u/s 263 on these issues was also incorrect. The assessment order passed by AO was neither erroneous, nor prejudicial to the interest of the revenue.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against order of the Ld. Principle Commissioner of Income Tax (PCIT)–02, Mumbai, dated 27/02/2018 u/s 263 of the I.T.Act, 1961 for the Assessment Year 2014-15.
2. The assessee has raised the following grounds of appeal:-
1. The learned Principal Commissioner of income-tax (Pr. CIT) erred in passing an order u/s.263 and directing the Assessing Officer to modify the order dated 29-12-2016 passed u/s 143(3) of Income Tax Act, 1961, Your appellants submit that the order of the Pr. CIT is illegal, bad in law and void and the same ought to be quashed
1.1. The appellants submit that the order of the AO is not erroneous and is not prejudicial to the interest of the Revenue. Your appellants therefore submit that the order of the Pr. CIT be quashed.
1.2. The learned Pr. CIT failed to appreciate the fact that in respect of all the issues, the learned Assessing Officer has adopted one of the possible views.
2. The learned Pr. CIT erred in holding that the amount of Rs. 402,26,72,141/- being the bad debts claim of the Appellant bank u/s 36(1)(vii) is not allowable.
2.1 The learned Pr. CIT failed to appreciate the fact that the 36(1)(viia)(a) is applicable only in respect of rural debts.
2.2 The learned Pr. CIT erred in not considering the binding decision of Hon’ble Supreme Court in the Catholic Syrian Bank [2012] 343 ITR 270 (SC).
2.3 Without prejudice to the above, the learned Pr. CIT erred in holding that the opening balance in the provision account as at 31-03-2013 is for rural advances only.
2.4 Without prejudice to the above, the learned Pr. CIT failed to appreciate the fact that the learned Assessing Officer allowed the deduction after verifying the submissions made by the Appellant bank.
3. The learned Pr. CIT erred in holding that amount of contribution of Rs. 54,00,00,000/-made in advance to Gratuity Fund is not an allowable deduction.
3.1 The learned Pr. CIT failed to appreciate the fact that the deduction in respect of Contribution to Gratuity Fund is eligible only on payment basis as per the provisions of section 43B.
3.2 The learned Pr. CIT erred in interpreting the word otherwise allowable to include advance payment.
4. The learned Pr. CIT erred in holding that amount of Rs. 2,00,00,000/-paid penalty is not an allowable deduction.
4.1. The learned Pr. CIT failed to appreciate the fact that the amount imposed by RBl is not towards violation of any law.
5. The learned Pr CIT erred in holding that amount of Rs, 96,00,00,000/- being the provision for Wage Arrears is not an allowable deduction.
5.1. The learned Pr. CIT failed to appreciate the fact that the wage arrears provision is towards ascertained liability.
5.2. The learned Pr. CIT erred in holding that the wage arrears provision is a contingent liability.
6. Your appellants further reserve the rights to add, amend or alter the aforesaid grounds of appeal as they may think fit by themselves or by their represent
3. The brief facts of the case are that the assessee is a public sector bank, engaged in the banking business, filed its return of income for AY 2014-15 on 27/11/2014, declaring total income of Rs. 564,72,89,730/- under normal provisions of the I.T.Act, 1961. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T.Act, 1961 on 29/12/2016, determining the total income at Rs. 669,39,34,675/- under normal provisions of the Act and book profit of Rs. 944,74,945,532/- u/s 115 JB of the I.T.Act, 1961, by making various additions, including additions towards disallowances of expenditure incurred in relation to exempt income, additions towards broken period interest, disallowances of depreciation on value of investments and re-computation of deduction claimed u/s 36(1)(viia) and 36(1)(viii), in respect of provisions of bad debts, as well as bad debt written off.
4. Subsequently, the Ld.PCIT-2, Mumbai has issued a show cause notice u/s 263 of the I.T.Act, 1961 and called upon the assessee to explain as to why, the assessment order passed by the Ld. AO u/s 143(3) of the I.T.Act, 1961, dated 29/12/2016 shall not be revised for the reasons stated in his show-cause notice. In the said show-cause notice, the Ld.PCIT observed that the assessment order passed by the Ld. AO is erroneous, insofar as, it is prejudicial to the interest of the revenue within the meaning of section 263 of the I.T.Act, 1961, because the Ld. AO has completed assessment proceedings, without conducting required enquiries to be conducted, in light of facts of the case along with specific provisions of the Act, dealing with issues, which rendered the assessment order is erroneous, insofar as, it is prejudicial to the interest of the revenue. The PCIT had questioned deduction allowed towards bad debts written off of Rs. 402,26,72,141/-, in respect of non-rural advances u/s 36(1)((vii), payment of Rs. 54 crores made towards contribution to gratuity fund, penalty payment of Rs. 2 crores paid to RBI for violation of KYC norms and provision for wage arrears amounting to Rs. 96 Lacs. In response, the assesee vide its letter, dated 09/02/2018, filed a detailed written submissions on the issues questioned by the Ld.AO and argued that the assessment order passed by the Ld. AO is neither erroneous, nor prejudicial to the interest of the revenue, because the Ld. AO, at the time of assessment proceedings has examined all four issues questioned in show-cause notice issued u/s 263, for which the assessee has filed a detailed reply and explained, how deductions claimed for bad debts is allowable under the provision of section 36(1)(vii) of the I.T.Act, 1961. The assesse, further submitted that in respect of other issues, like payment of gratuity funds, penalty payment to RBI for violation of KYC norms and provisions for wage arrears has been thoroughly examined by the Ld. AO, at the time of assessment proceedings, which is evident from the fact that the assessee has annexed a detailed note, in respect of all four items, which is part of statement of total income filed along with return of income. The Ld. AO after being satisfied with explanation furnished by the assessee has chosen to accept the claim of the assessee, insofar as, payment of contribution to gratuity fund, penalty payment to RBI for violation of KYC norms and provision for wage arrears. As regards deduction claimed for bad debt written off, in respect of non-rural advances, the Ld. AO has discussed the issue in para ‘’7’’ of his assessment order and computed eligible deduction in Tabular form. Therefore, it is incorrect to say that the assessment order passed by the Ld. AO is erroneous, insofar as it is prejudicial to the interest of the revenue.
5. The Ld.PCIT after considering relevant submissions of the assessee and also, taken note of provision of section 36(1)(viia) and 36(1)(vii) and newly inserted proviso thereto, held that the assessment order passed by the Ld. AO is erroneous, insofar as it is prejudicial to the interest of the revenue, in respect of deduction allowed towards bad debit written off, in respect of non-rural advances. The Ld.PCIT, further noted that as per the proviso provided to section 36(1) (viia) & 36(1)(vii) deductions towards bad debt written off is allowed over and above, the amount of provision for bad debts in books of accounts, as on the first date of financial year. In this case, if the total amount available under the head provision of bad and doubtful debts account is considered, then the bad debt written off, in respect of rural, as well as non-rural advances is less. Therefore, the entire amount of Rs. 478,85,05,054/- on account of bad debt written off was required to be debited to provisions for bad and doubtful debt accounts. Therefore, he opined that the allowances of bad debt of Rs. 402,26,72,141/- is not in accordance with the provision of Clause of sub section (1) of section 36 and Explanation 2 thereto. The aforesaid allowances has rendered the assessment order erroneous, insofar as it is prejudicial to the interest of the revenue as by excess allowance, the loss occurred to the revenue. Similarly, the Ld.PCIT, further noted that insofar as, advances payment of contribution to gratuity fund, although, the assessee has debited a sum of Rs. 5.94 crores into the profit and loss account, but deductions has been claimed towards total amount paid towards gratuity funds of Rs. 54 Crores, as per the provisions of section 43B of the I.T.Act, 1961. But, fact remains that if you go through the provisions of section 43B, it’s start with the clause not withstanding anything contained in any other provision of this Act, a deduction allowable otherwise under this Act. It means deductions on account of payment is allowable u/s 43B, only when the same is otherwise allowable under the provision of the Act. Since, the assesee is maintaining its account on mercantile basis, the advance payment which does not pertain to the assessment year under consideration, is not allowable in view of matching principles. The Ld. AO without considering these aspects has simply allowed deductions claimed towards amount paid to gratuity fund, even though, the same is not pertains to relevant assessment year, which rendered the assessment order erroneous, insofar as prejudicial to the interest of the revenue.
6. As regard, penalty payment for violation of KYC norms to RBI, the Ld.PCIT observed that the RBI has levied penalty for violation of KYC norms. Further, Explanation (1) to section 37 declares that any expenditure incurred by an assessee for any purpose, which is an offence or prohibited by the law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made, in respect of such expenditure. Although, penalty payment for violation of KYC norms, as per RBI regulations is in the nature of expenditure, which is incurred for an offence or prohibited by the law, the Ld. AO has allowed deduction claimed for said expenditure, which rendered the assessment order is erroneous, insofar as it is prejudicial to the interest of the revenue. As regards, provision for wage arrears of Rs. 96 crores, the Ld. PCIT noted that unless, wage revision was notified, the exact liability was not ascertainable. The assessee bank has claimed provision for wage arrears, which was due from 01/11/2012 onwards, but the bank has not started any process for revision of wages. Therefore, the provision created for wage arrears is in the nature of contingent liability, which is not crystallized during the year under consideration
The Ld. AO allowed the aforesaid provision without appreciating the facts and also, verifying the facts with regard to nature of liability, which rendered the assessment order erroneous, insofar as it is prejudicial to the interest of the revenue. Therefore, he opined that the assessment order passed by the Ld.AO u/s 143(3) of the I.T.Act, 1961, dated 29/12/2016 is erroneous, insofar as it is prejudicial to the interest of the revenue and accordingly, set aside the assessment order passed by the Ld. AO and direct the Ld. AO to disallow the aforesaid claims of deductions and recompute the total income in accordance with law. The Ld. AO may also initiate appropriate penalty proceedings for furnishing inaccurate particulars of income, as the patently wrong claim of deductions has been made by the assessee under clause (vii) of sub section (1) of section (36) of the I.T.Act, 1961. Aggrieved by the Ld.PCIT order, the assessee is in appeal before us.
7. The Ld. AR for the assesee submitted that the Ld.PCIT was erred in revision of assessment order passed u/s 143(3) of the I.T.Act, 1961, u/s 263 without bringing on record, how the assessment order is erroneous, insofar as it is prejudicial to the interest of the revenue. The Ld. AR, further submitted that if you go through four issues questioned by the Ld.PCIT in his order, all those issues were subject matter of consideration by the Ld. AO during the assessment proceedings, for which a detailed enquiry was conducted, in light of submissions of the assesee. The Ld. AO after being satisfied with explanation furnished by the assessee has accepted claim of deduction towards bad debt write off, in respect of non-rural advances and rural advances, even though the opening balance in provisions for bad and doubtful debt account is more than the amount of bad debt written off for the year. The Ld. AO after carefully considered the facts of the case, in light of provisions of section 36(1)(vii) & 36(1)(viia) has allowed deductions towards bad debt written off, in respect of non-rural advances by taking opening balance available in provision for bad and doubtful debt account, in respect of non rural advances. Further, the ld. AO had adopted one of the possible views and as such the Ld. PCIT was erred in invoking his jurisdictions u/s 263 of the I.T.Act, 1961. He, further submitted that as regards, other issues questioned by the Ld.PCIT, like payment towards contribution to gratuity fund, amount paid to RBI towards penalty for violation of KYC norms and provisions for wage arrears areall subject matter of discussions by the Ld. AO, which is evident from the fact that the assessee has annexed a detailed note to statement of total income, where each and every issue has been discussed and explained, how the deduction was permissible under respective provisions of the Act. The statement of total income is very much part of financial statement filed along with return of income. The Ld. AO after being satisfied with the explanation furnished by the assessee has chose to complete the assessment without making any additions towards those issues and hence, the Ld.PCIT was incorrect in coming to the conclusion that the Ld. AO has not carried out required enquiries to be conducted, in light of a provision of section 263, more particularly Explanation (2) inserted by the Finance Act, 2013. The Ld. AR for the assessee has filed a detailed written submissions, which has been reproduced as under:-
1. Ground No. 1 – Technical
It is a settled principle of Law that in order to invoke the provisions of section 263 of the Income Tax Act, 1961, twin conditions of erroneous and prejudicial to the interest of the Revenue are to be satisfied. The term erroneous has been subject matter of litigation and in order to put an end to the same the Government vide Finance Act, 2015 inserted Explanation ‘2 To section 263, in which it has been declared when an order shall be deemed to be erroneous The said Explanation contains 4 clauses (a) to (d) to determine whether the impugned order is erroneous in the opinion of the Principal Commissioner / Commissioner.
Based on the facts of the present case, it can be said that it is only clause (a) & (b) are relevant and the other 2 clauses are not relevant Clause (a) deals with circumstances where in the order has been passed without making enquiries or verification which should have been made. In this case, from the facts it can be seen that there was an enquiry by the learned Assessing Officer and the Appellant bank had also furnished a detailed reply Therefore, this clause is not applicable in this case.
Clause (b) of the Explanation deals with circumstances where in the order has been passed allowing any relief without enquiring into the claim. In this case, from the facts it can be seen that the relief has been allowed only after making enquiries. Therefore, this clause is also not applicable ill this case.
Since the conditions to invoke the powers u/s 263 are not satisfied, the passing of the impugned order u/s 263 is beyond the scope of the provisions of 263 and is not tenable.
Reliance in this regard is placed on the following decisions:
