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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI MANJUNATHA. G, HON’BLE
आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax–LTU (Appeals), Chennai, dated 19.06.2008, and pertains to assessment year 1998-99.
The assessee has raised the following grounds of appeal:
The order of the learned Commissioner of Income Tax-LTU (Appeals) is contrary to law, facts and circumstances of the case.
2. The Commissioner of Income Tax-LTU (Appeals) has erred in confirming the action of the Assessing Officer in adding back the provision for doubtful advance to the book profits in the computation of income under Sec.115JA. 3. The Commissioner of Income Tax-LTU (Appeals) has erred to distinguish between the provision for debt receivable and provisions for debt payable.
4. The Commissioner of Income Tax-LTU (Appeals) failed to note that Clause (c) of the Explanation appended below Section 115JA(2) of the Act provides that amounts set aside to provisions made for meeting liabilities other than ascertained liabilities should be added back to the net profit as per the profit and loss account for the purpose of computing the "book profit" within the meaning of the said statute.
5. The Commissioner of Income Tax-LTU (Appeals) failed to note that the items which come within the ambit of clause (c) of the explanation to Section 115JA are only those with respect to liabilities and that too on account of unascertained liabilities. Once the provision is not for any liability, the question whether the liability is ascertained or unascertained does not arise.
5.1 The Commissioner of Income Tax-LTU (Appeals) has erred in concluding that a provision for doubtful advance is an item which should necessarily to be added back without resorting to accounting terminology whether it is a liability or diminution in value of assets.
5.2 Having regard to the observations of the Supreme Court in the case of Appollo Tyres Ltd., [255 ITR (2000)] the Apex Court held that when the Accounts have been prepared and approved in the Annual General Meeting of the Company and the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act and Accounting Standards the Assessing Officer does not have the jurisdiction to go beyond the net profit shown in the Profit and Loss Account except to the extent provided in the explanation to Section 115J.
6. The Supreme Court of India in the case of HCL Comnet Systems and Services Limited has decided that the Assessing Officer does not have jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the explanation (appended to Section 115JA of the Income Tax Act).
6.1 The Supreme Court has held that the Assessing Officer was not justified in adding back the provision for doubtful debts under clause (c) of the explanation to Section 115JA of the 1961 Act.
7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned Commissioner of income Tax (Admin) be set aside and that of the Assessing Officer restored.
The brief facts of the case are that the assessment for the AY 1998- 99 was completed u/s.143(3) r.w.s.147 of the Income Tax Act, 1961 (in short “the Act") on 08.03.2005, determining the book profit u/s.115JA of the Act, at Rs.3,97,99,390/-. The case has been subjected to revision proceedings u/s.263 of the Act, from the Ld.CIT on 29.03.2007, directing the AO to add back the provision for doubtful debts to the book profit computed u/s.115JAA of the Act. The assessment has been completed u/s.143(3) r.w.s.263 of the Act, on 30.07.2007 and determined total income of Rs.18,90,77,676/- u/s.115JAA of the Act, by adding provision for doubtful advance at Rs.5,64,13,050/-. The assessee carried the matter in appeal before the First Appellate Authority, and the Ld.CIT(A) for the reasons stated in their appellate order dated 19.06.2008, dismissed appeal filed by the assessee. The assessee carried the matter in further appeal before the Tribunal. The ITAT, Chennai benches in vide order dated 08.05.2009, allowed appeal filed by the assessee and deleted the additions made towards book profit computed u/s.115JA of the Act, towards provision for bad and doubtful debts by following the decision of the Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd., reported in 305 ITR 409. The Revenue challenged the order of the Tribunal in further appeal u/s.260-A of the Act, before the Hon’ble High Court of Madras. The High Court of Judicature at Madras vide their order dated 30.11.2022, set aside the order of the Tribunal and restored the issue back to the file of the Tribunal with a direction to re-consider the issue of computation of book profit by taking into account amendment to section u/s.115JA of the Act, by Finance (No.2) Act, 2009, w.e.f.01.04.1998. The relevant findings of the Hon’ble High Court are as under:
16. We have given a careful consideration to the facts and circumstances of the case. The dispute in the present case pertains to the Assessment Year 1998-1999. Section 115JA of the Income Tax Act, 1961 deals with deemed income relating to certain companies.
17. As per the aforesaid provision where in the case of an assessee, being a company, the total income, as computed under the Act in respect of the previous year relevant to the Assessment Year commencing on or after 1st day of April 1997, but before the 1st day of April 2001 is less than 30% of its profit, the total income of such assessee
:: 4 :: chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such profit.
18. After explanation to after sub-section (2) to Section 115JA of the Act the expression " book profit" is defined as it stood prior to 1.4.1998. As per the aforesaid Explanation, the expression " book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under Section (2) as increased by-
a) the amount of income-tax paid or payable, and the provision there for:
(b) the amounts earned to any reserves by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; if any amount referred to in the above clauses(a) to (f) is debited to the Profit and Loss Account and is reduced by, - i. the amount withdrawn any such amount is credited to the profit and loss account:
Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but ending before the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or ii. the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or iii. the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
Explanation. For the purposes of this clause, - a) the loss shall not include depreciation; b) the provisions of this clause shall not apply if the amount of loss forward or unabsorbed depreciation is nil; or iv. the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub- section (4) and sub-section (5) of section 80-IB, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (4) or sub- section (5) of section 80-1B; or :: 5 :: vi. the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined in the Explanation to subsection (4) of section 80-IA and subject to fulfilling the conditions laid down in that sub-section; or vii. the amount of profits of sick Industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under subsection (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation. For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or viii. the amount of profits eligible for deduction under section SOHHC, computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3 A), as the case maybe, of that section, and subject to the conditions specified in sub-sections (4) and (4A) of that section: ix. the amount of profits eligible for deduction under section 80HHE, computed under subsection (3) of that section.
Clause(g) was inserted by Finance (No.2) Act, 2009, with effect from 01.04.1998. Similarly, the phrase beginning with "if any amount referred to clauses (a) to (f) is debited to the profit and loss account and as reduced by", was substituted with the phrase if any amount referred to clauses (a) to (g) is debited to the profit and loss account and as reduced by".
The above amendment was not considered by the Hon'ble Supreme Court when it gave its verdict in Commissioner of Income Tax vs. HCL Comnet Systems & Services Ltd., (2008) 305 ITR 0409 for the Assessment Year 1997-98. The above amendment vide Finance (No.2) Act, 2009 was not relevant for the Assessment year 1997-1998 which fell for consideration. The above decision is therefore not relevant. The Tribunal therefore ought to have examined the issue in the light of the inserted Clause (g) to Explanation Sub-Section 2 to Section 115JA of the Act with effect from 1.4.1998 vide Finance (No.2) Act, 2009 which was relevant for the present case.
Therefore, we are of the view mat the impugned order deserves to be set aside and the case should be remitted back to the Tribunal to re-examine the issue fresh in the light of the above amendment brought to the definition of Book Profit" by Finance (No.2) Act, 2009 with effect from 01.04.1998. Otherwise, the above amendment would be rendered otiose. Therefore, we remit the case back to the Tribunal without answering to the substantial questions of law raised to re-examine the issue afresh in the light of the above observation, leaving all issues open to be canvassed by both the appellant and the respondent.
Considering the fact that the impugned order pertains to the Assessment Year 1998- 99, the Tribunal may endeavour to pass a final order in the denovo proceeding within a period of six months from the date of receipt of a copy of this order.
This Tax Case Appeal stands disposed with the above observation by way of remand to the Tribunal. No costs.
The present appeal is posted for hearing in pursuant to direction of the Hon’ble High Court of Madras in Tax Case Appeal No.1316 of 2009 dated 30.11.2022. The Ld.Counsel for the assessee referring to certain judicial precedents, including the decision of the Hon’ble Gujarat High Court in the case of CIT v. Vodafone Essar Gujarat Ltd., reported in [2017] 397 ITR 55 (Guj.FB) submitted that adjustment of provision for bad and doubtful debts if reduced from the loans and/or the debtors from the assets side of the balance sheet, the explanation to sec.115JA(2) of the Act, is not applicable.
He further submitted that the assessee has reduced provision for bad and doubtful debts from the sundry debtors account in assets side of the balance sheet and thus, Clause (g) of the Explanation to Sec.115JA of the Act, cannot be applied to re-compute books of accounts.
5. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that this issue is squarely covered in favour of the Revenue by the decision of the Hon’ble High Court of Madras in the case of EID Parry (India) Ltd., reported in [2019] 108 taxmann.com 109 (Madras), where the Hon’ble Madras High Court has considered Clause (g) inserted into Explanation to Section 115JA(2) of the Act, with retrospective effect from 01.04.1998 and held that provision for doubtful debts is nothing but provision for diminution in the value of the assets and specifically covered under Clause (g) of said Explanation and should be added back to book profit. Therefore, he submitted that there is no merit in the arguments of the Ld.Counsel for the assessee and their appeal should be dismissed.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The Tribunal has deleted the addition made by the AO to book profit computed u/s.115JA of the Act, by following the decision of the Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. (supra), where the issue for consideration before the Hon’ble Supreme Court was Clause (c) of the Explanation to Sec.115JA of the Act, which deals with the amount/amounts set aside to provisions made for meeting liabilities other than ascertained liabilities. The law has been amended by insertion of Clause (g) of the Explanation to section 115JA(2) of the Act, by the Finance (No.2) Act, 2009, with retrospective effect from 01.04.1998 and said amendment was not subject matter of deliberations from the Hon’ble Apex Court. Therefore, we are of the considered view that the decision relied upon by the Ld.Counsel for the assessee in the case of CIT v. HCL Comnet Systems & Services Ltd., is not applicable to the facts of the present case. Further, as
per Clause (g) of the Explanation to Sec.115JA(2) of the Act, the book profit should be added by the amount or amounts set aside as provision for diminution in the value of the assets. In our considered view, provision for doubtful debts is nothing but amount set aside as provision for diminution in the value of the assets, because, debtors is an asset. Therefore, as per Clause (g), if any amount is set aside as provision for debts, then same needs to be added back to book profit computed u/s.115JAA of the Act, and this view is support by the decision of the Hon’ble High Court of Madras in the case of EID Parry (India) Ltd. v. ACIT, where it has been clearly held that provision for doubtful debts was provision for diminution in the value
:: 8 :: of the assets, and thus, same could not be excluded while computing book profit u/s.115JAA of the Act. The relevant findings of the Hon’ble High Court are as under:
We have heard Mr.M.P.Senthil Kumar, learned Counsel for the appellant assessee and Mr.T.Ravikumar, learned Senior Standing Counsel for the respondents Revenue.
6. We proceed to decide the various issues in seriatim as indicated in the above Tabulated Statement. The first question of law is whether the reopening of the assessment for the Assessment Year 1997-98 was justified and whether the Tribunal was right in law upholding the jurisdiction by observing that no opinion was formed, even though no fresh material was available with the Assessing Officer for re-opening the assessment? This issue is no longer res integra and has been decided against the assessee in the decision of the Gujarat High Court in the case of Roto Screentech Pvt. Ltd. vs. Asst. Commissioner of Income Tax reported in 291 ITR SC 500.
As rightly pointed out by Mr.T.Ravikumar, learned Senior Standing Counsel for the Revenue, in the recent decision of the Hon'ble Supreme Court in the case of Deputy Commissioner of Income Tax and others vs. Zuari Estate Development and Investment Company Ltd. reported in 2015 CJ (SC) 1136, it was held that there being no assessment under Section 143(1)(a) of the Act, the question of change of opinion does not arise. Applying http://www.judis.nic.in the above mentioned decisions, substantial question of law No.1 is decided against the assessee.
8. We now proceed to decide three issues jointly, since the common point to be decided is whether the provision made by the assessee for purchase tax, purchase tax on cane subsidy and wealth tax are not to be added while computing the book profits under Section 115JA of the Act.
Mr.M.P.Senthil Kumar, learned counsel for the assessee would contend that the purchase tax was payable on sugarcane purchased from the cane growers and as on the date of making provision for the purchase tax, the assessee is aware of the quantity of the sugarcane purchased and the liability of the purchase tax there on. This provision and the payment of purchase tax were made every year. Therefore, it is an ascertained liability.
So far as the cane subsidy is concerned, it is contended that the same is provided to sugarcane growers for bringing the cane from their field where the distance is more than 10Kms to reach the Sugar Mill and this subsidy forms part of sale price and purchase tax is payable thereon and therefore, it is an ascertained liability.
So far as the wealth tax is concerned, it is contended that it will not fall under Clause (1) of the Explanation to Section 115J of the Act, since the Income Tax is only mentioned therein. In support of such contention, the learned Counsel placed reliance on the decision of the High Court of Bombay in the case of Commissioner of Income Tax vs. Echjay Forgings (P) Ltd. reported in (2001) 251 ITR 15 (Bom).
Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the Revenue contended that the purchase tax or the purchase tax on cane subsidy or the wealth tax was not paid by the assessee but only a provision was made. It is submitted that in all the Appeals, the First Appellate Authority as well as the Tribunal have concurrently held that no scientific method has been adopted by the assessee for making the provision. Further, by referring to the relevant provisions of The Sugarcane [Control] Order, 1966, more particularly, order No.5-A (1), (3), (4), (7) and (9) submitted that the liability
:: 9 :: arises only after Notification was issued by the Central Government and therefore, no provision can be made. Further, by referring to the Assessment Order, it is submitted that there is a gross discrepancy in the provision made as substantial amount of money, which was provided for in the previous year were returned back in the subsequent year, which clearly shows that no scientific method has been adopted.
So far as the wealth tax is concerned, it is submitted by Mr.T.Ravikumar, learned Senior Standing Counsel that the wealth tax liability accrues as on 31st March of every year and nothing prevented the assessee from effecting payment under adhoc method and the Assessing Officer, the Commissioner of Income Tax and the Tribunal were perfectly right in rejecting the plea raised by the assessee.
To decide this question, we shall first take note of the meaning of the word "provision". First, we should steer clear of what is a provision in terms of the Income Tax Act, 1961. In the case of Shree Sajjan Mills Ltd., vs. Commissioner of Income Tax reported in (1985) 4 SCC 590, it is pointed out that the expression provision under Section 40A(7) has not been defined in the Act and is not used in any artificial sense but in its ordinary sense. It was held that the provision in its ordinary sense means something that is provided for future use. Thus, the assessee has made provisions with regard to the payment of the purchase tax, payment of purchase tax on cane subsidy and the wealth tax. The Assessing Officer after perusing the books of accounts of the assessee for all the relevant Assessment Years has recorded a finding that a provision is an appropriation of money for a loan and existing liability and it is necessary that the provision in the accounts must be in accordance with the actuarial valuation of the ascertaining liability. In the assessee's case, they have made provision for purchase tax, not adopting any scientific method, but in anticipation of the Government Notification, which may not be issued after two years. With these observations, the objections raised by the assessee was overturned.
The Commissioner of Income Tax also re-examined the matter and found that scientific method was not adopted by the assessee to the effect that the provision with regard to the purchase tax or with regard to the wealth tax liability. Thus, applying the decision, it is axiomatic for the assessee to adopt scientific method or follow a scientific data to justify a provision.
As pointed out by Mr.T.Ravikumar, the Notification for payment of additional cane price etc., would not arise in the Assessment Years under consideration and only in the next year. In the absence of any data to show that scientific method was adopted, we are of the considered view that the provisions made by the assessee towards purchase tax, purchase tax on cane subsidy and wealth tax are to be treated as unascertained liability. Therefore, the factual finding recorded by two authorities and the Tribunal is fully justified.
So far as the wealth tax is concerned, the decision relied on by the assessee in the case of Shree Sajjan Mills Ltd supra was rightly distinguished by the authorities below and the Tribunal has held in the said case that the amount on wealth tax, which was paid should not be added to the net profit. However, in the case of assessee before us, he has made only a provision for the wealth tax liability and that too was an adhoc amount, which stands crystalized as on 31st March of the relevant year. Therefore, we fully agree with the view taken by the Tribunal in the affirming orders passed by the Assessing Officer and the Commissioner of Income Tax. Accordingly, the substantial questions of law nos.2, 3 and 4 are answered against the assessee.
So far as the substantial question of law no.5 is concerned, with regard to the provision of liability, this arises in two of the Assessment Years, namely, 1997-98 [T.C.A.No. 1411 of 2008] and 1998-99 [T.C.A.No.1412 of 2008]. This issue came up for consideration in the assessee's own case in T.C.A.No.2511 of 2006 dated 30.10.2012 [M/s.EID Parry (India) Limited vs. The Asst. Commissioner of Income Tax] wherein, the Division Bench of this Court took into consideration the decision of the Delhi High Court in the case of Commissioner of Income Tax vs. Ilpea Paramount P. Ltd. reported in 336 ITR 54 and pointed out that by virtue of the Finance (No.2) Act, 2009, Clause (g) has been inserted in the Explanation under Section 115JA(2) of the Act with retrospective effect from 01.04.1998 and the provisions for doubtful debts and provision for doubtful advances, which are nothing but provision for diminution in the value of the asset, are specifically covered under Clause (g) of the said Explanation and the provision for gratuity could not be added to the book profits while computing the income of a Company under Section 115JA of the Act. Accordingly, it has held that the amendment thus goes directly against the assessee.
7. In this view of the matter and by respectfully following the decision of the Hon’ble High Court of Madras in the case of EID Parry (India) Ltd. v.
ACIT (supra), we are of the considered view that there is no error in the computation of book profit u/s.115JAA of the Act, by adding provision for doubtful debts, and thus, we are inclined to upholding the findings of the Ld.CIT(A) and dismiss the appeal filed by the assessee.
In the result, appeal filed by the assessee is dismissed.
Order pronounced on the 08th day of March, 2023, in Chennai.