Solitary opportunity of only one day to respond to notice is against principles of natural justice***

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R.N. Khemka Enterprises Private Ltd. Vs PCIT (ITAT Delhi)

ITAT Delhi held that a solitary opportunity of one day to respond to show cause notice is in negation of overriding principles of natural justice accordingly revisionary order passed u/s 263 is liable to be quashed and set aside.

Facts-

The assessee filed its ROI claiming bad debt of Rs.2,28,12,685/- as deduction u/s. 36(2) of the Act. The ROI filed by the assessee was selected under scrutiny and specific queries towards claim of deduction were raised by AO vide notices issued u/s. 142(1) of the Act. AO was eventually satisfied with the compliance of the conditions stipulated u/s. 36(1)(vii) r.w. Section 36(2) of the Act and thus assessed the income of the assessee without any adjustment on this score.

Thereafter, the Pr.CIT in exercise of its revisionary powers issued show cause notice dated 23.03.2022 u/s. 263 of the Act requiring the assessee to show cause as to why the impugned assessment order so framed u/s. 143(3) of the Act should not be modified/set aside on the ground that such order is erroneous insofar as prejudicial to the interest of the revenue. It was essentially alleged that assessee is not eligible for deduction towards bad debts u/s. 36(1)(vii) r.w. Section 36(2) of the Act where the debts written off do not arise from business transactions and were not part of the business transaction. The debts were alleged to be loans and advances in the balance sheet unconnected to the business of the assessee.

Post reply from the assessee, the original assessment was set aside and AO was directed to pass a fresh assessment in terms of directions in the revisional order.

Aggrieved by the action of the Pr.CIT, the assessee is in appeal before the Tribunal adjudicating supervisory jurisdiction usurped by the Pr.CIT u/s. 263 of the Act.

Conclusion-

A solitary opportunity of one day was given to the assessee to respond to the show cause notice to the satisfaction of the Pr. CIT. Needless to say, the Pr.CIT was expected to provide reasonable opportunity to the assessee. One day opportunity, by no means, can be said to be any effective opportunity. Such act of the Pr.CIT has virtually incapacitated the assessee to explain its case. Such lackadaisical action of the Pr.CIT is in negation of overriding principles of natural justice inbuilt in the power conferred under Section 263 itself. Needless to say, the opportunity to be given to the assessee must be real and effective, realistic and not mere notional or an empty formality. An opportunity to answer to show cause is not a gift but an absolute right which cannot be bypassed. The revisionary power exercised was in absolute infringement of Section 263 of the Act. We however do not want to expand with this aspect of the matter any further for the reason that the claim of the assessee, in any case, is justifiable on merits as discernible from the record available before the Department. The Assessment order, can not, at least, be labelled as ‘erroneous’ in the circumstances.

Solitary opportunity of only one day to respond to notice is against principles of natural justice

FULL TEXT OF THE ORDER OF ITAT DELHI

The captioned appeal has been filed at the instance of the assessee against the revisional order of the Pr. Commissioner of Income Tax, Delhi-VII [‘Pr.CIT’ in short] dated 30.03.2022 passed under Section 263 of the Income Tax Act, 1961 [‘the Act’] whereby the assessment order passed by the Assessing Officer [AO] dated 18.12.2019 under Section 143(3) of the Act concerning Assessment Year 2017-18 was set aside for reframing the assessment order in terms of supervisory directions.

2. As per its grounds of appeal, the assessee has challenged the assumption of jurisdiction by the Pr.CIT under Section 263 of the Act on the ground that the assessment order under revision is neither erroneous nor prejudicial to the interest of the Revenue. As a corollary, the assessee has sought to impugn consequent revision order passed by the Pr.CIT under Section 263 of the Act.

3. Briefly stated, the assessee filed its return of income for Assessment Year 2017-18 in question inter alia claiming bad debt of Rs.2,28,12,685/- as deduction under Section 36(2) of the Act. The return of income filed by the assessee was selected under scrutiny and specific queries towards claim of deduction were raised by the Assessing Officer vide notices dated 11.09.2019, 21.11.2019 and 14.12.2019 issued under Section 142(1) of the Act. The assessee filed replies thereto vide letter dated 20th November, 2019, 25th November, 2019 along with requisite details as called for, whereby justification for deductibility of bad debt claimed under Section 36(1)(vii) r.w. Section 36(2) of the Act was explained. Vide letter dated 12th December, 2019, it was informed to the Assessing Officer in respect of one of the debtors that for recovery of debt, a case was filed before Hon’ble Delhi High Court. The Assessing Officer was eventually satisfied with the compliance of the conditions stipulated under Section 36(1)(vii) r.w. Section 36(2) of the Act and thus assessed the income of the assessee without any adjustment on this score.

4. Thereafter, the Pr.CIT in exercise of its revisionary powers issued show cause notice dated 23.03.2022 under Section 263 of the Act requiring the assessee to show cause as to why the impugned assessment order so framed under Section 143(3) of the Act should not be modified/set aside on the ground that such order is erroneous insofar as prejudicial to the interest of the revenue. It was essentially alleged that assessee is not eligible for deduction towards bad debts under Section 36(1)(vii) r.w. Section 36(2) of the Act where the debts written off do not arise from business transactions and were not part of the business transaction. The debts were alleged to be loans and advances in the balance sheet unconnected to the business of the assessee.

5. The assessee filed online submissions on 25th March, 2022 defending its factual position and contended that the assessee is engaged as a dealer in shares and securities and also in providing loans and advances on which interest income has been earned. The queries raised by the Assessing Officer and the replies filed thereto were also provided to the Pr.CIT. The Pr.CIT however proceeded with the revisional action on the ground that Assessing Officer has not conducted proper inquiry with reference to bad debt deduction and the aspect as to whether loans and advances were given in the ordinary course of business or that money lending was the regular business of the assessee, was not examined by the Assessing Officer while making assessment. The original assessment was thus set aside on the above point and the Assessing Officer was directed to pass a fresh assessment in terms of directions in the revisional order.

6. Aggrieved by the aforesaid action of the Pr.CIT, the assessee is in appeal before the Tribunal adjudicating supervisory jurisdiction usurped by the Pr.CIT under Section 263 of the Act.

7. When the matter was called for hearing before the Tribunal, the ld. counsel for the assessee raised several points to assail the revisional action of the Pr.CIT. To begin with, it was alleged that no effective opportunity was given to the assessee while resorting to drastic action in terms of Section 263 of the Act. A show cause notice was issued dated 23.03.2022 which day cannot be counted. The reply was expected on third day of the date of issue of notice, i.e., 25th March, 2022. The assessee has thus effectively given one day opportunity to respond to the show notice. No further opportunity was given thereafter and the order was hurriedly passed on 30th March, 2022. It was contended that the principles of natural justice, inbuilt in Section 263 itself was patently offended which has a debilitating impact on the rights of Assessee. The assessee despite, one day notice, has attempted to somehow comply with the show cause and filed an online submission hurriedly. The Pr.CIT thereafter passed the order in less than week’s time without affording any further opportunity. In this regard, it was submitted that such revisionary order passed in haste without providing any effective opportunity of hearing and without making any inquiry on the issue by the Pr.CIT is null and void ab initio. It was thus strongly urged that in the absence of any effective opportunity of hearing embodied in Section 263, the revisional order is required to be quashed at the threshold on this ground itself.

8. Adverting to the merits of the issue raised in the show cause notice, the ld. counsel for the assessee pointed out that the main plank of the contentions of the Pr.CIT is that the assessee is not eligible to the deduction under Section 36(1)(vii) r.w. Section 36(2) as the debt or part thereof has not arisen in the course of money lending business nor represents money lend in the ordinary course of business, it was contended that the above observation is contrary to the facts on record as well as consistent view taken by the Department in the past in the matter as demonstrated viz;.

(a) The nature of business is shown to be financing business and interest income thereon amounting to Rs.66,41,588/- was assessed as ‘business income’ as per order passed under Section 143(3) dated 18.12.2015 for Assessment Year 2012­13.

(b) ‘Director’s report’ for F.Y. 2011-12 reflects the nature of business being finance and trading in share and securities. The interest income arising from the loans claimed to be bad debt has been assessed as ‘business income’ in the relevant assessment years including Assessment Year 2016-17 whereof, assessment was carried out under Section 143(3) vide order dated 16.12.2018. The nature of business in item no.10 of the tax audit report also claims that assessee is engaged in finance sector.

(c) On facts, the investment in finance business stands at Rs.23.47 crore (previous year 37.75 crores) which is 91% (P.Y. 78%) of the total assets of Rs.25.84 crore (P.Y. Rs.48.85 crore). Such data vindicates the stand of assessee that financing the borrower is key activity of assessee. The Pr.CIT could not have ignored these crucial details available on record more so, when there is clear finding given in earlier year regarding financing business of the assessee and that there is no change in facts of the case in the year under consideration qua earlier assessment years. The Pr. CIT could have easily found out such facts, had any proper opportunity was given or some minimum enquiry on facts were conducted as mandated in law before issuing directions.

(d) The Pr.CIT has sought to revise the assessment order based on a fresh inference on facts inconsistent with the inference drawn by the revenue for several preceding years.

9. The ld. counsel further vehemently contended that it is not in dispute that Assessing Officer did conduct inquiry on the correctness of bad debt issue. The only dispute is that the Assessing Officer has not inquired on certain facets of the issue. Under such circumstances, it was incumbent upon the Pr.CIT to enter into some minimal inquiry himself before holding the order of the Assessing Officer to be erroneous and prejudicial to the interest of the revenue. The aforesaid proposition is endorsed by large number of judicial precedents. The Ld. counsel thus submitted that the Pr.CIT misdirected himself in law and on facts in exercising powers conferred under Section 263 of the Act without meeting the prerequisites thereof and therefore urged the Tribunal to quash impugned revisional order.

10. The ld. CIT-DR for the Revenue, on the other hand, placed reliance upon the revisional order and submitted in furtherance that in the absence of proper inquiry on the relevant facets of Section 36(1)(vii) r.w. Section 36(2) governing the deduction of bad debt, the action of the Assessing Officer was both erroneous as well as prejudicial to the interest of the Revenue.

11. On appraisal of the facts and circumstances of the case as well as the case law referred on behalf of the assessee as well as the revenue;

11.1 We firstly observe that the Assessing Officer has carried out specific inquiries with regard to the claim towards deduction of bad debt with reference to Section 36(1)(vii) r.w. Section 36(2) of the Act.

11.2 Secondly, the claim of assessee towards bad debt is supportable on facts on record as pointed out on behalf of the assessee. The assessee has taken a clear position that it is inter alia engaged in financing business. The interest arising on the impugned loans were offered and assessed as business income in the past and therefore, the debt or part thereof has been taken into account in computing the income of the assessee in the earlier previous years.

11.3 As contended, it is not necessary that money can be advanced only in the course of money lending activity alone. A reading of clause (i) of sub Section (2) of Section 36 of the Act clearly suggests that the bad debts can be claimed in two situations (i) where debt or part thereof has been taken into consideration in computing the income of the assessee or (ii) where the debt represents money lent the ordinary course if money lending. Thus a bad debt being allowable only to a money lender in the ordinary course of business of banking or money lending is not the only aspect of the matter and the bad debt as such can be allowed as deduction in computing the income of the assessee even if the bad debt comes into existence because of the advancing of money giving rise to taxable business income as observed in Turner Morrson and Co. Ltd., 245 ITR 724 (Cal) (2000).

11.4 The first and second part of Section 36(2) are thus, in essence, distinguishable. As per the first part of clause (i) to Section 36(2), so long as advance has been made in the course of business and such advance has resulted in swelling the profits of the assessee, such debt will be covered in the first part. The second part however deals with money lending exclusively where money advanced itself is stock in trade and thus under second part, it is not necessary to see whether it has actually swelled the business profits. The case of the assessee is covered by first part rather than second part as claimed.

11.5 Thus in the given facts, one cannot say that bad debt arising in the course of financing business of the assessee is not eligible under first part where interest income was offered for taxation in the earlier years. Besides, the assessee has demonstrated that substantial part of the total assets of the company comprises of lending to various borrowers. This significant fact underscores and vindicates the stand of the assessee that it is engaged in money financing business as its dominant part. The Pr.CIT could have easily come to such understanding with some minimal inquiry, if conducted before setting aside the matter to the Assessing Officer, as expected by law as echoed in several judicial precedents including Pr.CIT vs. Delhi Airport Metro Express Pvt. Ltd., in ITA No.705/2017 judgment dated 05.07.2017. The revisional action therefore requires to be quashed on discernible facts justifying claim of bad debts.

12. Another significant aspect to the matter as made out on behalf of the assessee is noticed. A solitary opportunity of one day was given to the assessee to respond to the show cause notice to the satisfaction of the Pr. CIT. Needless to say, the Pr.CIT was expected to provide reasonable opportunity to the assessee. One day opportunity, by no means, can be said to be any effective opportunity. Such act of the Pr.CIT has virtually incapacitated the assessee to explain its case. Such lackadaisical action of the Pr.CIT is in negation of overriding principles of natural justice inbuilt in the power conferred under Section 263 itself. Needless to say, the opportunity to be given to the assessee must be real and effective, realistic and not mere notional or an empty formality. An opportunity to answer to show cause is not a gift but an absolute right which cannot be bypassed. The revisionary power exercised was in absolute infringement of Section 263 of the Act. We however do not want to expand with this aspect of the matter any further for the reason that the claim of the assessee, in any case, is justifiable on merits as discernible from the record available before the Department. The Assessment order, can not, at least, be labelled as ‘erroneous’ in the circumstances.

13. The impugned revisional order passed under Section 263 of the Act is thus set aside and quashed.

14. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 21/10/2022.

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