ITAT Chennai Confirms Section 263 Revision for Lack of Inquiry in Faceless Assessment

The Income Tax Appellate Tribunal, Chennai Bench, in the case of Shriram Finance Ltd. Vs PCIT, has upheld the exercise of revisional powers under Section 263 over an assessment framed under the faceless regime in Section 144B. The Tribunal concluded that the assessment order was both erroneous and prejudicial to the interests of the Revenue because the Assessing Officer had not carried out any inquiry on crucial issues relating to lease rent claims and deduction of bad debts under Section 36(1)(vii).

This decision clarifies two significant aspects:

  1. Faceless assessment orders under Section 144B are squarely open to revision under Section 263.
  2. Non-conduct of inquiry itself is sufficient to render an assessment order erroneous and prejudicial, justifying revision.

Background of the Case

Business profile and return filing

Shriram Finance Limited, an NBFC incorporated under the Companies Act, 1956, filed its return of income for Assessment Year 2021-22 on 31.03.2022, declaring a total income of Rs. 4,758,39,14,590. During the relevant period:

  • Shriram Transport Finance Company Limited (STFC) subsequently became Shriram Finance Limited (SFL).
  • Shriram City Union Finance Limited (SCUF) and another entity were amalgamated with STFC with effect from 01.04.2022, and the merged entity was later renamed Shriram Finance Limited.

The case was selected for scrutiny under CASS primarily to verify substantial purchases from parties who were non-filers or had filed non-business returns (ITR 1/2) or disclosed substantially lower turnover.

Faceless assessment under Section 143(3) r.w.s. 144B

The e-Assessment Unit completed the scrutiny and passed an order dated 23.12.2022 under Section 143(3) read with Section 144B, accepting the returned income without making any variation. No additions or disallowances were made on the contentious issues examined later in revision.

Action by Principal CIT Under Section 263

Issues noticed from assessment records

After examining the assessment records, the Principal Commissioner of Income Tax, Chennai-3, formed the view that the order suffered from non-verification of material claims. Two primary areas of concern were:

  1. Lease rent under Ind AS (office premises)

    • In the computation of income, the assessee claimed “Rent under Ind AS (rent paid towards office premises)” of Rs. 98,62,56,531.
    • Note 48 of the financial statements, however, disclosed actual cash outflow towards lease liabilities at Rs. 96.16 crore.
    • This mismatch between the rent claim and cash outflow had not been examined in the assessment proceedings.

  2. Deduction for bad debts and provision for impairment (Section 36(1)(vii))

    • As per the annual accounts for AY 2021-22:
      • Provision for impairment of loans and loan assets was Rs. 3,128.29 crore.
      • Loan assets actually written off (bad debts) were Rs. 1,509.29 crore.
    • For tax computation, the assessee:
      • Adjusted bad debts of Rs. 1,509.61 crore against the above provision of Rs. 3,128.29 crore.
      • Added back only the net provision of Rs. 1,618.36 crore.
    • Under Section 36(1)(vii), bad debts are allowable only to the extent they exceed the credit balance of the provision for bad debts.
    • Examining AY 2020-21 records, the Principal CIT noticed that a credit balance of Rs. 221.39 crore stood in the provision for bad debts account as on the beginning of AY 2021-22.
    • This opening credit balance had not been considered while working out the allowable bad debt claim for AY 2021-22.
    • According to the Principal CIT, bad debts allowable should have been restricted to Rs. 1,288.22 crore, making Rs. 221.39 crore an excess claim liable to be taxed.

Show cause notice under Section 263

Based on these discrepancies, the Principal CIT issued a show cause notice dated 12.02.2025 under Section 263, asking the assessee to explain why the assessment order should not be treated as:

  • Erroneous, and
  • Prejudicial to the interests of the Revenue

within the meaning of Explanation 2 to Section 263.

The assessee submitted detailed written submissions dated 26.02.2025 contesting the proposed revision, arguing that the assessment was properly completed and that the order was not erroneous.

Principal CIT’s findings

After considering the explanation, the Principal CIT concluded that:

  • The Assessing Officer had not made the necessary inquiries or verifications in relation to:
    • The correctness of the lease rent claim; and
    • The computation of deduction for bad debts and loan impairment under Section 36(1)(vii).
  • In terms of Clause (A) and Clause (B) of Explanation 2 to Section 263, failure to conduct enquiries that should have been made renders the order erroneous and prejudicial to the interests of the Revenue.

Accordingly, the Principal CIT:

  • Partly set aside the assessment order dated 23.12.2022, and
  • Directed the Assessing Officer to reframe the assessment on the specified issues after:
    • Carrying out detailed verification based on the assessee’s submissions and records, and
    • Giving the assessee an opportunity of being heard.

Arguments Before the ITAT