The Lakshmi Vilas Bank Ltd Vs Addl. CIT, Tiruchirapalli (ITAT Chennai) –Whether where the AO has considered all the points, on the basis of which the CIT initiated proceedings u/s 263, following the decision of the ITAT and High Court in the case of the assessee itself, proceedings initiated u/s 263 are not valid as it is not prejudicial to the interests of the Revenue. – Assessee’s appeal allowed.
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH ‘C’ : CHENNAI
I.T.A No. 548/Mds/2010
Assessment year : 2005- 06
The Lakshmi Vilas Bank Ltd Vs The Addl. CIT
O R D E R
PER HARI OM MARATHA,
This appeal of the assessee, for assessment year 2005-06, is directed against the order of the ld. CIT, Tiruchirappalli, dated 31.3.2010, which has been passed u/s 263 of the Act.
2. The facts leading to this appeal are that the assessment order in this case for assessment year 2005-06, was completed u/s 143(3) on 27.12.007. The Assessing Officer has made additions to the tune of Rs. 114,91,87,270/- . The ld. CIT noticed that the assessment was completed without making meaningful inquiries in a casual manner. The ld. CIT observed the following deficiencies in the assessment order:
(i) The assessee had claimed deduction of Rs. 59,68,46,701/- on account of bad debts written off u/s 46(1)(vii) even when the credit balance in the provision for bad and doubtful debts account was Rs. 117.90 crores. The Assessing Officer has allowed expenditure of Rs. 39,10,46,701/- which according to the ld. CIT is against the express provisions of the Income tax Act, 1961.
(ii) The Assessing Officer has treated the entire investment in securities held by the bank as capital in nature even when the Hon’ble Madras High Court in the case of assessee itself for assessment years 1985-86 and 1986-87 has held that whether investment in securities constitute stock-in-trade or a capital asset, is a question of fact which need to be decided on the facts and circumstances of each case.
(iii) The ld. CIT noticed that the Assessing Officer has not disallowed the claim of the assessee for amortization to the extent of Rs. 7,06,70,610/-. The amortization is claimed by the assessee when the HTM Securities were acquired at the cost which is higher than the face value of the securities. Since the investment in HTM category of securities is capital in nature, these are required to be valued ‘at cost’ in books of account. As the Assessing Officer has allowed deduction without causing any meaningful and relevant enquiries as warranted by the facts and circumstances of the case.
(iv) The Assessing Officer has allowed expenditure incurred for purchase of software without calling for any details and without examining what was the nature of the software, how it was to be used and how it is revenue expenditure.
(v) The assessee had treated Non-Performance Assets (NPAs) as bad debts. The rules framed by the RBI for NPAs and requirement of bad and doubtful debts as per Rule 6EA are not the same thing. But the Assessing Officer did not bring to tax the income on accrual basis with regard to NPAs which are more tan 90 days old but are less than 180 days old. In the absence of any proof regarding the age of NPAs, the Assessing Officer has allowed deduction u/s 36(1)(viia)(a) to the fullest extent while assuming that NPAs are bad and doubtful debts under the Income-tax Act, 1961 and both are interchangeable terms.
3. On the above mentioned reasons, the ld. CIT issued a notice u/s 263 of the Act to the assessee asking him as to why the assessment framed by the Assessing Officer should not be set aside. The assessee submitted written submission dated 23.3.2010. After considering the submissions of the assessee, the ld. CIT has set aside the assessment order with a direction to pass fresh assessment order in the light of the provisions of the Act, case laws and circulars and instruction of the Board. Now the assessee is in appeal before us.
4. We have considered the rival submissions and have perused the material available on record. In fact, Ground No.1 of the appeal would make it clear that as to on what reasons, the assessment order in question has been set aside, therefore, we extract herein below Ground No.1 :
“1. The Commissioner of Income-tax (Appeals) erred in law and on the facts of the case in setting aside the order dated 27.12.2007 passed u/s 143(3) of the Act on the following grounds:
(i) Deduction u/s 36(1)(vii) has been granted without considering the credit balance in the provision u/s 36(1)(viia).
(ii) While disallowing the fall in the market value of Government Securities, the Assessing Officer has not considered the various circulars of RBI regarding the classification of its Government Securities.
(iii) Loss on sale of Government securities has not been disallowed.
(iv) Amortization expenses has not been disallowed.
(v) Software expenditure, Entertainment expenditure and payment to SEBI had been allowed without proper inquiry.
(vi) Interest on NPA has not been considered and added.”
5. The ld.AR has submitted his arguments in respect of each and every point taken in this appeal for revising the assessment order. Before giving our finding, it would be proper to explain the scheme of revision. 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.
6. The subject of ‘revision under section 263’ has been vastly examined and analyzed by various Courts including the Hon’ble Apex Court. The revisional power conferred on the CIT vide section 263 is of vide amplitude. It enables the CIT to call for and examine the records of any proceeding under the Act. It empowers the CIT to make or cause to be made such an inquiry as he deems necessary in order to find out if any order passed by Assessing Officer is erroneous in so far as it is prejudicial to the interest 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 Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. Once he comes to the above conclusions 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 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 also empowered to cancel the assessment and direct to frame a fresh assessment. He is empowered to take recourse to any of the three courses indicated in section 263. So, it is clear that the CIT does not have unfettered and unchequred discretion to revise an order. The CIT 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 in section 263. As order can be treated as ‘erroneous’ if it was passed in utter ignorance or in violation of any law; or passed without taking into consideration all the relevant facts or by taking into consideration irrelevant facts. The ‘prejudice’ that it contemplated under section 263 is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right 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 may be summarized below:
(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, that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice for the requirement or 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 under with 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, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer.
(vii) The Assessing Officer exercise quasi-judicial power vested in him and if he exercise such power in accordance with law and arrives as 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, must have material on record to arrive at a satisfaction.
(ix) If the Assessing Officer has made inquiries 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 held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.
7. Now, reverting to the facts of this case, it was found that the issue raised vide Ground No.1 (i) regarding deduction u/s 36(1)(vii) of the Act stands covered by the order of the Tribunal, in favor of the assessee passed in I.T.A.No. 1161/Mds/1995 for assessment year 1990-91, order dated 22.5.2003. The Department could not controvert this fact and we have also found it to be correct. Therefore, Ground No.1(i) does not stand to be made a basis for revision.
8. Ground No.1(ii) relating to the value of Government Securities also stands covered in favor of the assessee by the order of the Tribunal (supra). This will also not survive for making revision.
9. Ground Nos.1(iii),(iv) & (v) relating to Government securities, amortization expenses, software expenses etc stand covered in favor of the assessee by the decision of the Hon’ble Madras High Court rendered in assessee’s own case in Tax Case Appeal No.2139 of 2008 [copy of the order placed at pages 30 to 34 of the paper book].
10. We have gone through the facts of the case as well as the decision of Hon’ble Madras High Court (supra) and found that the decision taken by the Assessing Officer is correctly in accordance with and commensurate with the findings given in the High Court’s decision. Therefore, these points cannot be made the basis for revising the assessment order.
11. With regard to the other expenses other than sundry expenditure, the Assessing Officer has applied his mind and has taken one of the possible views on this issue. In earlier years, the Assessing Officer has allowed the expenditure which is evident from the document placed at page 29 of the paper book. Hence, the other expenses are also correctly allowed by the Assessing Officer and there is no error in the assessment order in so far as it is prejudicial to the interests of the Revenue.
12. Ground No.1(vi) regarding the issue of interest on NPA which has not been considered and added. Section 45D itself is clear on this subject because in case of financial companies, interest has to be charged on receipt basis. Therefore, all points which have been made the basis for revising and coming to the conclusion that the order is erroneous in so far as it is prejudicial to the interests of Revenue, cannot survive in the eyes of law in view of our foregoing discussion. All these points taken to revise the assessment order do not fulfill the twin conditions individually. Hence, the assessment order in the given case cannot be revised on the basis of the grounds stated above and which do not make the assessment order erroneous and also prejudicial to the interests of the Revenue. Hence, we set aside the order of the ld. CIT passed u/s 263 of the Act and allow the appeal of the assessee, upholding the assessment order.
13. In the result, the appeal of the assessee stands allowed.
Order pronounced in the open court on 6.5.2011.