Section 36(1)(vii), 37(1), 43B and 263 of the Income-tax Act, 1961—Business expenditure— Revision proceedings invalid as order of AO was neither erroneous nor prejudicial to the interests of revenue.

Facts: Assessee before Tribunal has raised the ground that Pr. CIT erred in passing an order u/s.263 and directing the AO to modify the order passed u/s 143(3). Assessee submit that the order of Pr. CIT is illegal, bad in law and void and the same ought to be quashed.

Held, that It is a settled principle of law that in order to invoke, the provisions of section 263 , PCIT shall ascertain from the records that twin conditions embedded in said provision i.e, the order of AO is erroneous and it is 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 legislature vide Finance Act, 2013 inserted Explanation (2) to section 263 in which it has been declared, when order shall be deemed to be erroneous. From the facts, it can be seen that there was an enquiry by AO, in respect of all issues and the assessee had also furnished a detailed reply and it can be seen that the relief has been allowed only after making enquiries. Therefore, we are of the considered view that the conditions to invoke the powers u/s 263 are not satisfied and hence, the 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 is to be satisfied is 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 needs to be offered to tax u/s 41(4). In respect of payment towards contribution to the gratuity fund, whether or not deduction is allowed in full on payment basis in this year, but the same needs to be allowed in subsequent years, if said payment is not allowed during the year under consideration. Likewise, provision for wage arrears is also liable to be allowed, when the actual payment has been made. In this case, the assessee has made payment of the wage arrears in the subsequent years. Therefore, invocation of jurisdiction u/s 263 on these issues is also incorrect. - DENA BANK V/s PR. CIT - [2020] 181 ITD 322 (ITAT-MUMBAI)