ACIT, CIRCLE-19(2), NEW DELHI vs. PASUPATI ACRYLON LTD, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES “F” : NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA No.8200/Del./2018 Assessment Year 2015-16 The ACIT, M/s. Pasupati Acrylon Circle – 19 (2), Limited, M-14, Connaught vs., Room No.221, C.R. Circus, Middle Circle, New Building, I.P. Estate, Delhi – 110 001. New Delhi - 110002 (Appellant) (Respondent) For Revenue : Shri Suresh Gupta, C.A. For Assessee : Shri Anil Gandhi, Sr. D.R. Date of Hearing : 09.12.2021 Date of Pronouncement : 21.12.2021 ORDER PER R.K. PANDA, A.M.

This appeal filed by the Revenue is directed against the order dated 24.10.2018 of the Ld. CIT(A)-7, New Delhi, relating to A.Y. 2015-16.

2 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. “Whether on the facts and circumstances and in law, the Ld. CIT(A) has erred both on facts and in law in deleting the addition of Rs.3,47,10,830/- made by the AO to the book profits for the purpose of computation of tax liability u/s 115JB of the Income-tax Act, 1961, as ‘impairment of assets loss written off’ was nothing but provision for diminution in the value of assets and as per clause (i) of Explanation 1 to Sec 115JB(1), the amount or amounts set aside as provisions for diminution in the value of any asset needs to be added back to Book Profits”.

3 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 2014-15 on account of ‘Impairment of assets loss written- off’. However, the same was not added back by the assessee company in computation of income/book profit as per section 115JB of the I.T. Act, 1961. He further noted the following note 30(b) of accompanying notes to the financial statements of the assessee company as under :

“In pursuance of Accounting Standard-28 on impairment of assets (AS-28) by the Institute of Chartered Accountants of India, the company has reviewed the future earnings of its cash generating units. Based on such review the company has accounted for the impairment loss on certain machinery having value of Rs.479.68 lacs due to change in technologies absence of reserves Rs.347.11 lacs impairment loss has been reflected under exceptional item.”

3.1. Since the assessee company has not added back the same in its book profit, the A.O. asked the assessee company to explain as to why the impairment loss of 4 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. Rs.347.11 lacs should not be added for calculating the book profit as per Section 115JB of the I.T. Act, 1961. Rejecting the various explanations given by the assessee company, the A.O. held that impairment loss is nothing, but, provision for diminution in the value of assets and he added the amount of Rs.347.11 lacs by recording the following reasons:

“Discussion : The assessee company’s view that impairment is an actual loss and not a provision is not tenable considering the following : (i) The assessee company has booked impairment loss on the basis of AS-28 issued by the Institute of Chartered Accountants of India (ICAI) which provides that when economic flow from such assets is less than the value at which the same is being carried on, then same needs to be write down.

But on the other hand, it also provides that whenever the position improves, then the same need to be write back and credited to P&L A/c. This implies that impairment loss recorded on the 5 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. basis of AS-28 is nothing but provision in which there is probability of writing back.

(ii) Equating bad & doubtful debts with impairment loss is not right in the sense that bad & doubtful debts are judged on the basis of past trend and on the other hand impairment loss is judged on the basis of future aspects. Further provision for bad & doubtful debts is created for a group of debtors as whole, whereas impairment loss is calculated in terms of AS-28 for every asset separately. Thus in case of impairment, there cannot be a situation of provision at all.

Thus can it be concluded that Clause (i) of Explanation 1 to Section 115JB is not applicable for AS-28. It is not so. If the said clause had been applicable for provision for bad & doubtful debts only and not to any other thing, then law makers were not prevented from drafting accordingly.

The impairment loss is nothing but provision only seeing the future aspects which cannot be 100% estimated correctly. (iii) The assessee company is comparing impairment loss with provision for bad &

6 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. doubtful debts. Both, impairment loss and provision for bad & doubtful debts are not comparable in the sense that bad & doubtful debts or its provision is generally a result of act of a person i.e. debtor. It is result of financial position of debtor. The asset i.e. money receivable is in possession of other person, other than assessee company. On the other hand, in case of impairment loss, goods possession is with the assessee only, there is no involvement of second person. (iv) The resultant loss on valuation is actually in the nature of a national loss. In the Income Tax Act, Incurred losses are allowable and notional losses not allowable. (v) It is established maxim of taxation that one cannot make profit out of himself. Consequently, one cannot make losses out of himself. (vi) In any transaction, there has to be two parties for Profit or loss arises out of a transactions. There cannot be a transaction with oneself. (vii) Assessee Company’s contention that being second hands assets and further

7 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. obsolete of technology is again not tenable in the view that during the year Assessee Company has not sold any of the said assets during the year and no information has been provided of subsequent sale. (viii) A particular loss/provision can be called to be a loss only when there is probability of other person which forces the assessee to forego something. Here it is not so. It is nothing but a notional loss calculated on the basis of future aspects. (ix) It is also a well settled position that in case of conflict between accounting standards and express provisions of law, the latter will prevail over the former. The provision of disallowance of ‘diminution in the value of asset’ is very loud & clear under section 115JB of the Act. (x) Regarding the use of word “provision” before impairment loss, does not any difference because it is the mandate of AS-28 to use which words, to describe impairment loss in what manner. The use of particular - does not change the nomenclature of the provision. What actually matters is the nature

8 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. of transaction. (xi) A wrong claim being made year after year cannot be the basis of allowing the claim in this year also. (xii) If a wrong accounting practice has been allowed in a year, the same cannot be allowed every year. Decision : Considering the above discussion, it is clear that Impairment loss is nothing but provision for diminution in the value of assets and hence Rs.3.47cr. are being added to the book- profits of the company.”

9 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 10 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 11 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi.

7.1. Referring to the decision of Chennai Bench of the Tribunal in the case of Indowind Energy Ltd., vs., DCIT, Chennai, copy of which is placed at page nos.77- 100 of the PB, he submitted that the Tribunal in the said decision has held that impairment of fixed assets in compliance of AS-28 cannot be added to book profit under section 115JB of the I.T. Act, 1961.

7.2. Referring to decision of Ahmedabad Bench of the Tribunal in the case of Hitechi Home & Life Solutions India Ltd., ITA.No.3363/Ahd/2015 dated 02.11.2018,

13 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. copy of which is placed at page nos.68-76 of the PB, he submitted that the Tribunal in the said decision has held that impairment of loss written-off in the books of account cannot be added to compute book profit under section 115JB of the I.T. Act, 1961. Learned Counsel for the Assessee also relied on the following decisions and submitted that the issue stands squarely covered in favour of the assessee.

S. Particulars No 1. CIT v/s Yokogawa India Ltd 17 Taxmann.com 15 (Kar) 2. Vijaya Bank vs Commissioner of Income Tax & Or (2010) 323 ITR 166 (SC) 3. Commissioner of Income Tax vs. Kirloskar Systems [2013] 40 taxmann.com 124 (Kar) 4. CIT Vs Vodafone Essar Gujarat Ltd. Tax Appeal No.749 of 2012 (Guj) 5. Southern Technologies Ltd. Vs CIT (2010) 2 SCC 548 (SC) 6. CIT vs HCL Comnet Systems and Services Ltd. 305 ITR 409 (SC) 7. CIT vs. Adbhut Trading Co. (P) Ltd. (2011) 338 ITR 0094 (Bom) 8. CIT vs. Akshay Textiles Trading & Agencies (P) Ltd. (2008) 304 ITR 0401 (Bom)

14 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 7.3. He accordingly submitted that the Ld. CIT(A) is fully justified in deleting the addition made by the A.O. and, therefore, the ground raised by the Revenue should be dismissed.

15 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. “8. We have heard the rival contentions and perused the materials available on record. On perusal of the fixed assets schedule of the assessee placed on page 34 of the paper book we note that the provision for loss on assets held for disposal was actually written off in the block of assets and accordingly resulting reduction in the assets side of the balance sheet. Thus, it is clear that the provision as discussed above was not shown as liability in the balance sheet of the assessee. Thus, in our considered view, there cannot be any addition on account of provision made by the assessee for the diminution in the value of assets in its books of accounts. In this regard, we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT reported in 323 ITR 166, wherein it was held as under:

“7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya,

16 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1- 4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would

17 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee-bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from 18 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. Loans and Advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision "for impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High

19 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in its books, as indicated above.”

At the time of hearing ld. DR has not brought anything on record contrary to the arguments advanced by the ld. Counsel for the assessee. Therefore, we have no alternate except to reverse the order of authorities below. Hence, after having reliance on the judgment of Hon’ble Supreme Court in the case of Vijaya Bank (supra) we hold that the provisions has actually been written off by the assessee for diminution in the value of assets. Therefore, no addition under clause-(i) to Section 115JB of the Act was warranted. Hence, we set aside the order of ld. CIT(A) and direct the AO to delete the same. Hence, ground of appeal of the assessee is allowed”.

20 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 8.1. We find the ITAT, Chennai Bench of the Tribunal in the case of Indowind Energy Ltd., (supra) had also an occasion to decide an identical issue in favour of the assessee by dismissing the appeal of the Revenue. The relevant observation of the Chennai Bench of the Tribunal reads as under :

“9.3. We find merit in the order of the Ld. CIT(A) on this issue because of the following reasons : i) Section 2(11) (3A) of the Companies Act provides that the profit and loss account and balance sheet of the company shall comply with the accounting standards. ii) Accounting Standard-28 states that an asset is said to be impaired when carrying amount of the asset is more than the recoverable amount. It further states that such impairment loss on the asset is to be accounted and the asset should be shown in the balance sheet at its cost less depreciation less impairment loss. Precisely the 21 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. impairment loss has to be written off in the books of accounts by debiting to profit & loss account and crediting to asset account. This is mandatory as per Accounting Standard-28, which every company has to follow while preparing its statement of affairs. iii) As held by the learned Commissioner of Income Tax (Appeals) there is no whisper in the provisions of section 115JB of the Act for adding back the impairment loss to the profit & loss account of the assessee while computing “book profit” & tax under section 115JB of the Act.

9.4. Therefore, we do not find it necessary to interfere with the orders of the learned Commissioner of Income Tax (Appeals) on this issue.

22 ITA.No.8200/Del./2018 M/s. Pasupati Acrylon Limited, Delhi. 8.2. Similar view has been taken in various other decisions relied on by the Learned Counsel for the Assessee. Since the facts of the case are identical to the facts of the case decided by ITAT, Ahmedabad Bench of the Tribunal in the case of Hitechi Home & Life Solutions India Ltd., (supra) and the Chennai Bench of the Tribunal in the case of Indowind Energy Ltd., (supra) therefore, respectfully following the same and in absence of any contrary decision brought to our notice by Ld. D.R, we uphold the order of the Ld. CIT(A) on this issue and the ground raised by the Revenue is dismissed.

Order pronounced in the open court on 21.12.2021.