Brief of the Case
ITAT Delhi held In the case of G. E. Money Financial Services Ltd. vs. DCIT that where AO has not verified either (a) the allowability of the loss in principle or (b) where the claim is factually correct as quantification of the loss has not been verified by the AO, in both cases exercise of powers u/s 263 is in accordance with law. Just because the CIT has come to a conclusion that in principle the loss in question is a business loss, it does not lead to a conclusion that the quantification has to be accepted based on audited accounts, though the A.O. has not made any enquiry on this issue. It is well settled that in case of no enquiry, it would be a case of non application of mind, resulting in an error in the assessment order which causes prejudice to the interest of the Revenue.
Facts of the Case
The assessee company is a Non-Banking Finance Company (NBFC) and is engaged in the business of financing consumer and auto products. It filed its return of income on 31.10.2002, for the A.Y. 2002-03, declaring total income of Rs.96,28,250/- under the normal provisions of the Act. Book profits u/s 115 JB was declared at Rs.7,35,87,254/-. The assessment was completed u/s 143(3) on 25.2.2005. The CIT revised the order, passed by the Assessing Officer on 25.2.2005, by invoking his powers u/s 263. The revision was made on the following issues. (a) Allowability of loss incurred on sale of repossessed assets, as business loss. (b) Allowability of loss on sale of bad loan portfolio as business loss and (c) Allowability of excess provision of securitized assets.
Contention of the Assessee
The ld counsel of the assessee submitted that there is no loss to the Revenue on any of these issues on which revision has been done by the CIT for the reason that, the assessee could have claimed 100% of the debt as bad debt, but instead had claimed only a limited amount by way of loss on sale of repossessed assets and had rightly claimed business loss, on sale of bad loan portfolio. As far as the allowability of excess provision made on securitised assets is concerned, he submitted that there was total non application of mind by the CIT for the reason that, the assessee himself had disallowed this amount while computing its income.
He further submitted that in the AY 2003-04 & 2004-05, the A.O. not only asked specific question on the allowability of these items of loss as business loss, but had also applied his mind to the detailed submissions made by the assessee and after perusing the audited annual accounts, which have clearly reflected these claims, accepted the contention of the assessee. This is neither non enquiry nor lack of application of mind and it is a possible view taken by the A.O. When the A.O. has drawn inferences after making enquiries, the CIT does not have any jurisdiction u/s 263, to cancel the assessment order. The object of S.263 is not to make rowing and endless enquiries.
He further submitted that the CIT has in principle, for the A.Y. 2002-03, came to a conclusion that the loss in question is a business loss. Under the circumstances, setting aside for the limited purpose of verification of quantification of the loss is uncalled for, as the A.O. relied upon the audited accounts of the assessee for quantification and this cannot be faulted with. Further the CIT has not specified anywhere in his order passed u/s 263, as to what is the prejudice caused to the interest of the Revenue and hence the revision is bad in law.
For the A.Y. 2004-05 one more issue arises i.e. the allowability of the claim for depreciation @ 15% of lease hold improvements, instead of the rate of 10% allowable on the presumption that, such improvements were made to the buildings. He submitted that the depreciation was claimed on furniture and fixtures and the CIT has merely set aside the matter to the file of the A.O. for verification, which act is not in accordance with law. He relied on the following case laws – CIT vs. Vikas Polymers reported in 341 ITR 537 (Del), CIT vs. Sunbeam Auto Ltd. Reported in 332 ITR 167 (Del.) , CIT vs. Max India Ltd. Reported in 295 ITR 282 (SC) and Malabar Industrial Co.Ltd. vs. CIT reported in 243 ITR 83 (S.C.).
Contention of Revenue
The ld counsel of the revenue argued that the A.O. has simply collected replies but has not applied his mind to the issues in question and had simply accepted the replies of the assessee. The A.O. has kept mum on the reply given by the assessee and hence it is a case of no enquiry due to non application of mind. Before the CIT voluminous data has been filed by the assessee, the CIT cannot by himself come to a conclusion and hence the matter was remanded back to the file of the A.O. for fresh adjudication de novo and in such circumstances, no fault can be found with the order of the CIT. He relied on the following case laws – Gee Vee Enterpirses reported in 99 ITR 375 (Del.), Duggal & Co. Reported in 220 ITR 456 (Del.) and Malabar Industries Co.Ltd. reported in 243 ITR 83 (SC).
On the issue of claim on depreciation of improvements to lease hold property it was submitted that the A.O. has not conducted any verification and hence there is no application of mind and the assessee should have no grievance as it is an open remand to the A.O. It was further submitted that the CIT has come to a conclusion that the order of the AO is erroneous and prejudicial to the interest of the Revenue for the reason that, these claims have been allowed either without verification or without due application of mind.
She further submitted that the Hon’ble Allahabad High Court in the case of Motor and General Sales P.Ltd. reported in 226 ITR 137 has held that loss incurred on actual sale of repossessed assets is not allowable because, at the time of sale the asset remained registered in the name of hire purchaser and the repossessed assets can never be treated as part of the stock of the assessee. The assessee has not furnished any evidence to prove actual loss on sale of bad loan portfolio. She relied on the orders of the CIT u/s 263 for all the three A.Ys and prayed that the same be upheld.
Held by CIT (A)
The CIT(A) set aside the assessment to the file of the AO, for the limited purpose of verification of the correctness of deduction claimed at Rs.497.77 lakhs on account of sale of the repossessed stock and at Rs.209.05 lakhs on account of sale of bad loan portfolio, as also for carrying out the verification of the claim that the excess provision of Rs.32 lakhs on securitised assets was in fact, added back to the total income of the assessee company itself and hence no further disallowance was called for. The AO was directed to dispose of these issues as per law.
Held by ITAT
Loss on sale of repossessed assets / Loan portfolio
ITAT held that the allowability of the claim of loss on sale of re-possessed assets and loss on sale of bad loan portfolio per se, as a business loss, is not disputed by the CIT. He only doubts whether the quantification of the claim is correct or not. This is because the A.O. has not enquired into these aspects during the course of assessment proceedings. Thus he sets aside the assessment to the file of the A.O. for the limited purpose of verification of the correctness of the quantification of the deduction claimed. Hence we need not labour much on the issue whether the claims in question are allowable or not as business loss.
In the case on hand the assessee has repossessed the assets and disclosed the same as its stock in trade by crediting the debtor’s account to the extent of the value of the repossessed assets. Thus it records recovery of part loan. In other words recovery of the amount from the debtor is recorded and the repossessed assets come to stock in trade of the assessee company. Loss/profit is not claimed on revaluation but on actual sale of such re-possessed assets. Wherever profit was disclosed, the assessee has offered the same to tax. On the loss incurred on sale of loan portfolio, the outstanding dues from defaulting customers less the sale proceeds recovered, which is written off and claimed as business loss by the assessee.
Jurisdiction u/s 263 in case of inadequate enquiry
For the A.Y. 2003-04 and 2004-05, the A.O. has, during the course of assessment proceedings raised specific queries on these issues on allowability of business loss in both these issues from the assessee and thereafter accepted its claim. The question before us is, whether under such circumstances the CIT can invoke his powers u/s 263 when this is not a case of lack of enquiry but merely a case of inadequate enquiry as per the CIT.
The Hon’ble High Court in the case of CIT vs. Anil Kumar Sharma reported in 335 ITR 83 (Del) has held that the present case would not be one of ‘lack of inquiry’ even if the inquiry was termed inadequate. The Tribunal found that complete details were filed before the AO and that he applied his mind to the relevant material and facts, although such application of mind was not discernible from the assessment order. The Tribunal held that the Ld.CIT in proceedings u/s 263 also had all these details and material available before him, but had not been able to point out defects conclusively in the material, for arriving at a conclusion that particular income had escaped assessment on account of non application of mind by the AO. The Tribunal was right and the order of revision was not valid.
The Hon’ble Delhi High Court in the case of CIT vs. Vikas Polymers reported in 341 ITR 537 (Del) has held that the Commissioner had mentioned that the AO had not examined the cash credits of the partners or deposits of chit fund. Assuming this to be so, this might make the order erroneous, but how it was prejudicial to the interest of the Revenue had not been stated by the Ld.CIT as he did not deal with the explanation given by the assessee in the course of S.263 proceedings. The Commissioner observed in his order that the assessee had not filed certain documents on the record at the time of assessment. Assuming this was so it did not justify the conclusion arrived at by the Commissioner that the AO had shirked his responsibility of examining and investigation of the case. Applying the propositions laid down in the above judgements, ITAT hold that this is not the case of lack of enquiry. The CIT cannot invoke his powers u/s 263 on the ground that, in his opinion it is a case of of inadequate enquiry.
Further ITAT held that the CIT has not demonstrated as to what is the prejudice caused to the Revenue in the above cases. The loss in question is admittedly a business loss, and as the Ld.CIT in his order u/s 263 of the Act for the A.Y. 2002-03 has accepted this position. As submitted by the Ld.Sr.Counsel for the assessee, if these N.P.As are written off as bad debts then 100% of such write off would have to be allowed and that the assessee was conservative in its claim.
Applying the propositions laid down in the above judgements to the facts of the case we hold that the invoking of powers u/s 263for both the A.Ys is bad in law on the issue of (a) loss on sale of repossessed assets; (b) loss on sale of bad loan portfolio.
On the matter of depreciation on improvement to leasehold assets, ITAT held that the CIT has gone on a wrong presumption that the depreciation is claimed for renovation of building. When the clarification has been given by the assessee that it is only depreciation of furniture and fixtures he remanded the issue to the file of A.O. for verification, without pointing out as to what is the prejudice caused to revenue. This in our opinion is bad in law. The CIT has not given any material or evidence which would contradict the assessee’s version and which aspect has not been adverted to by the A.O. while completing the assessment. For all these reasons we allow both these appeals by the assessee for the A.Y. 2003-04 and A.Y. 2004-05, by holding that the CIT has erroneously invoked his powers u/s 263.
For the AY 2002-03, admittedly there is lack of enquiry on the part of the AO. In the S.263 proceedings, the CIT has come to a definite conclusion that the loss in question is a business loss. This does not mean that the lack of enquiry by the A.O. would not be considered as erroneous and prejudicial assessment order passed by the A.O. The A.O. has not verified either (a) the allowability of the loss in principle or (b) where the claim is factually correct as quantification of the loss has not been verified by the A.O. In our opinion such exercise of powers u/s 263 is in accordance with law. Just because the CIT has come to a conclusion that in principle the loss in question is a business loss, it does not lead to a conclusion that the quantification has to be accepted based on audited accounts, though the A.O. has not made any enquiry on this issue. It is well settled that in case of no enquiry, it would be a case of non application of mind, resulting in an error in the assessment order which causes prejudice to the interest of the Revenue. For this year the decision of the Hon’ble Delhi High Court in the case of Duggal & Co. Reported in 220 ITR 456 (Del.) is squarely applicable.
Accordingly appeals of the assessee allowed for the year 2003-04 & 2004-05 and dismissed for the year 2002-03.