Hon’ble Mumbai ITAT quashed order passed u/s 263 of the Income Tax Act, 1961 (Act) by holding that the AO has made detailed inquiry before passing the order which has been raised by the PCIT in proceeding initiated u/s 263 of the Act. Hon’ble ITAT also allowed following claims on merits:
(i) Loss on relinquishment of shares due to capital reduction.
(ii) Loss due to waiver of loan given.
(iii) Bad debt of interest receivable from partnership firm.

Jurisdiction:
During the course of assessment proceeding, the AO has issued seven notices to the assessee and made inquiries on the issues raised by the CIT in proceeding u/s 263 of the Act. Hence, it cannot be said that the AO has not made the inquiry. Therefore, invoking explanation 2 of section 263 of the Act was unwarranted.

Merits:
(a) Loss on relinquishment of shares due to capital reduction: The assessee rightly claimed the loss as capital loss on relinquishment of shares due to capital reduction pursuant to an order passed by NCLT
(b) Loss due to waiver of loan given: The assessee had given loan to a company. Both entered into a settlement agreement whereby the assessee agreed to settle the claim with a lower amount as against higher amount receivable. Hon’ble ITAT allowed the capital loss of amount not received by the assessee as waived off in settlement.
(c) Bad debt of interest receivable from partnership firm: The assessee infused capital in a firm. Interest on such capital offered as business income in preceding years and accepted by the department. Since, the interest became non-recoverable, the assessee claimed the same as bad debt and Hon’ble ITAT approved the claim of the assessee.