INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - AO ignored relevent provisions before allowing loss on 'OTS' -

Pr.CIT noticed that claim of assessee bank towards 'loss on OTS' or 'claim of deduction of bad debt' neither exceeded the credit balance in the 'provision for bad and doubtful account nor concerned amount was debited to provision for bad and doubtful debt account. Accordingly, Pr.CIT took the view that claim of assessee was required to be disallowed and added back to total income of assessee in the light of provisions of section 36(1)(vii) and its first proviso together with its Explanation-2 read with sections 36(1)(via) and section 36(2). As AO completed assessment by allowing deduction under section 36(1)(vii) without referring to its first proviso and applying section 36(1)(via) read with section 36(2), assessment order was erroneous and prejudicial to the interest of revenue. Held: Section 36(1)(vii) provides that in case of banks, which are eligible deduction under section 36(1)(viia), deduction on account of bad debts relating to rural advance/loans shall be first set off against credit balance in the provision for bad and doubtful debts account and deduction would be allowed to the extent of debts relating to rural debts which exceeds credit balance available in the said provision created under section 36(1)(vii). The rider created by legislature by way of insertion of proviso to section 36(1)(vii) raises a clear-cut bar on allowability of claim of assessee made before AO during original assessment proceedings under the head 'loss on OTS account' in a situation, when amount standing in balance sheet as 'provision for bad and doubtful debts' was higher than the amount of bad debts shown as 'loss on OTS account'. As AO had ignored relevant provisions of Act before allowing claim of assessee of loss on OTS account, impugned order passed by Pr. Chief CIT under section 263 was fully justified and correct alleging assessment order as erroneous and prejudicial.

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2014-15

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