AO Is Not Only Adjudicator But Also an Investigator: Kerala High Court

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The Kerala High court has held that the role of the assessing officer under the Income Tax Act, 1961 is not only that of an adjudicator but also of an investigator and he cannot remain oblivious in the face of a claim without any enquiry. 

The bench of Justice Dr. A. K. Jayasankaran Nambiar Judge and Justice Easwaran S. has observed that the assessing officer must exercise a dual role of protecting the interest of the Revenue as well as that of the assessee and that is the reason why he is expected to pass orders with utmost diligence.

The appellant/assessee is a domestic company engaged in operating and maintaining of the Cochin International Airport, is an assessee under the provisions of the Income Tax Act, 1961. 

For the assessment year 2012-13, the appellant declared a total income of Rs.134,43,40,439/- under Section 115-JB of the Income Tax Act, 1961. Since the tax payable under the regular provisions of the  Income Tax Act, 1961 was lower and the appellant had claimed deduction under Section 80-IA of the  Income Tax Act, 1961 in respect of the eligible activity of operating and maintaining the Airport, which is an infrastructure facility, it filed a revised return declaring a taxable income. 

The return was selected for scrutiny under Section 143(3) of the Income Tax Act, 1961 and was completed by order dated 27.3.2015. Since the Department did not accept the claim of deduction under Section 80-IA and also made various other disallowances, the appellant preferred appeal against the order and the same is stated to be pending. During the said financial year, the appellant debited to the profit and loss account an amount of Rs.1,00,33,280/- towards the provision for bad and doubtful debts and the said amount was reduced from the amount of trade receivables and short term loans and advances. 

Since the Provision debited in the profit and loss account is simultaneously obliterated from the value of trade receivables and short term loans and advances, the same was treated by the appellant as a write off in the income tax return. In the assessment proceedings, however, the Department examined this aspect and called for the break up of the provision for bad and doubtful debts. 

The appellant replied to the said notice by pointing out the decision of the Supreme Court in Vijaya Bank v. Commissioner of Income Tax

The appellant contended that it is after considering the reply that the assessing authority decided to accept the explanation and proceeded to issue the assessment order. However, the Principal Commissioner of Income Tax found that the assessment was erroneous and prejudicial to the interest of the Revenue, and decided to invoke the jurisdiction under Section 263 of the Income Tax Act, 1961 and issued a notice proposing to revise the order of assessment. 

The appellant showed cause by its reply. However, the reply was found to be unsatisfactory and therefore, the Principal Commissioner of Income Tax-1, Kochi directed the assessing authority to re-examine the issue.

The appellant preferred an appeal before the Income Tax Appellate Tribunal, which was dismissed by order. 

The court held that all orders, which are erroneous, are not liable to be subjected to proceedings under Section 263 of the Income Tax Act, 1961. To invoke Section 263, the Principal Commissioner of Income Tax must be satisfied that the erroneous order also causes prejudice to the department. The real purport of Section 263 is to remove the prejudice caused to the department by the erroneous order passed by the assessing officer and it empowers the Commissioner to initiate suo motu proceedings, when either the assessing officer takes a wrong decision without considering materials available on record or renders a decision without enquiry.

The court noted that the assessing officer did not show any application of mind and mechanically accepted the statement of the assessee. When the assessee is found to have claimed deduction for Rs.1,00,33,280/- towards the “provision for doubtful assets” for the purpose of computation of book profit under Section 115-JB of the Income Tax Act, 1961, the assessing officer did not state any reason as to why he decided, if at all, to accept the explanation of the assessee despite the fact that the said amount was not debited for the provision for doubtful account and consequently, the provision of doubtful debts account has not been obliterated. Thus, it is only for disclosure purposes that the amount was shown as a reduction from the trade receivables in the balance sheet. The assessee has not included the amount as written off debts, but was hopeful of getting it back at some point of time.

The court dismissed the appeal.

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Case Details

Case Title: COCHIN INTERNATIONAL AIRPORT LTD. Versus ACIT

Case No.: ITA NO. 77 OF 2018

Date: 7/01/2025

Counsel For Appellant: Joseph Markos (Sr.)

Counsel For Respondent: P.K.R.Menon, Senior Counsel

Mariya Paliwala
Mariya Paliwalahttps://jurishour.in/
Mariya is the Senior Editor at JurisHour. She has 5+ years of experience on covering tax litigation stories from the Supreme Court, High Courts and various tribunals including CESTAT, ITAT, NCLAT, NCLT, etc. Mariya graduated from MLSU Law College, Udaipur (Raj.) with B.A.LL.B. and also holds an LL.M. She started as a freelance tax reporter in the leading online legal news companies like LiveLaw & Taxscan.

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