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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K. & Ms. PADMAVATHY S
Per Padmavathy S., Accountant Member
This appeal is against the order of National Faceless Assessment Centre, Delhi [NFAC] dated 28.6.2022 for the assessment year 2011-12.
The assessee is engaged in the business of manufacture, sale and distribution of Ayurvedic veterinary medicines. For ay 2011-12, the assessee filed return of income on 25.9.2011. by declaring 3,80,71,754. The case was selected for scrutiny under CASS and notice u/s. 143(2) was duly served on the assessee. The AO completed the assessment by making an addition of Rs,44,57,060 claimed by the assessee towards provision for doubtful debts debited in the P&L Account on the ground that it was an unascertained liability. The AO made the addition in both income under normal provisions of the Act as well as book profits u/s. 115JB. Aggrieved, the assessee filed an appeal before the CIT(A).
Before the CIT(Appeals), the assessee submitted that the assessee has made a provision for bad & doubtful debts by debiting the P&L account and on the assets side, the same is reduced from the balance of debtors. The assessee also submitted that the AO has made addition by relying on clause (i) of Explanation 1 to sub-section (2) of section 115JB which is not correct since the assessee has actually written off the amount by adjusting the provision against the debtors. The assessee relied on the decision of Supreme Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 (SC) wherein it was held that the adjustment of provision for bad and doubtful debts if reduced from the debtors or loans & advance from the assets side of the balance sheet, then Explanation 1 section 115JA/115JB is not attracted. The assessee further relied on the decision of the Karnataka High Court in the case of CIT v. Yokogawa India Ltd. [2012] 214 Taxman 305 (Kar) and the decision of Gujarat High Court in the case of CIT v. Vodafone Essar Gujarat Ltd. 397 ITR 55 (Guj).
The CITAA after considering the submissions of the assessee has held as under:- “4.2 I have carefully gone through the submission of the Appellant. I have also gone through the records and facts of the case and case laws cited by the appellant. The addition on account of provision of Rs.44,57,060 on account of it being unascertained liability was incorrect as the same was already disallowed by the appellant while filing its return of income. The addition therefore amounts to double addition and is therefore liable to be deleted. The ground is therefore decided in favour of the appellant.”
Since the CITAA has not deleted the addition made to 115JB while allowing the appeal, the assessee preferred an appeal before the Tribunal on this specific point raising the following grounds:-
1. “That the order of the Commissioner of Income Tax (Appeals) in so far it is prejudicial to the interests of the appellant is bad and erroneous in law and against the facts and circumstances of the case.
2. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not providing specific finding that the provision for bad and doubtful debts amounting to Rs. 44,57,060 cannot be added to book profits computed u/s 115JB of the Act even though he has accepted the decision of the jurisdictional High Court in favour of the assessee.
3. That the learned Commissioner of Income Tax (Appeals) ought to have held that the provisions for bad and doubtful debts amounting to Rs. 44,57,060 is not an unascertained liability and therefore, not liable for addition under clause (c) in Explanation 1 to section 115JB of the Act.
4. That the learned Commissioner of Income Tax (Appeals) ought to have held that the provisions for bad and doubtful debts amounting to Rs. 44,57,060 is not a mere provision for diminution in the value of any asset as the same is debited to profit and loss account and reduced from the trade receivables on assets side of the balance sheet and therefore, it will not fall under the clause (i) in Explanation to S. 115JB of the Act. Each of the above grounds is without prejudice to one another, the appellant seeks the leave of the Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or modify otherwise one or more grounds of appeal either before or at the time of hearing this appeal.”
6. The ld. AR submitted that the AO treated the provision for bad and doubtful debts as unascertained liability and added under clause (c) of Explanation 1 to sub-section (2) of section 115JB which is not correct since this provision is for an asset that results in reduction in value of asset and not creation of a liability, therefore this item will not fall under the above clause (c). The ld. AR in this regard relied on the decision of the Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd., 305 ITR 409 (SC). The ld. AR also submitted that provision for bad & doubtful debt shall not fall under clause (i) of Explanation 1 to sub-section (2) of section 115JB. Since in assessee’s case, the said provision is reduced from the balance of sundry debtors that would amount to actual write off which would not be hit by the provisions of Explanation 1 to sub-section (2) of section 115JB. The ld. AR in this regard placed reliance on the decision of Karnataka High Court in the case of CIT v. Kirloskar Systems Ltd. (40 taxmann.com 124). The ld. AR also brought to our attention various other judicial pronouncements that he relied on during the course of appellate proceedings.
The ld. DR relied on the order of the CIT9A)
We have heard the rival submissions and perused the material on record. We notice that the CIT(A) has accepted the contentions of the assessee with regard to the fact that the provision for doubtful debts is an ascertained liability.The CIT(A) has deleted the adjustment made by stating that the assessee while computing the income under normal provisions of the Act already disallowed the provision and adding the same would amount to double addition. However, the CITA did not adjudicate the addition made by the AO to the book profits u/s. 115JB. We notice that the Hon’ble SC in the case of HCL Comnet Systems (supra) has considered a similar issue and has held that – “8. As stated above, the said Explanation has provided six items, i.e., Item Nos. (a) to (f ) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No. (c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee's case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of the Explanation to section 115JA. In our view, Item (c) is not attracted. There are two types of "debt". A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case "debt" under consideration is "debt receivable" by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs. 92,15,187 under clause (c) of the Explanation to section 115JA of the 1961 Act.
9. For the aforestated reasons, there is no merit in this civil appeal and accordingly, the same is dismissed with no order as to costs.”
We also notice that the Karnataka High Court in Kirloskar Systems (supra) by following its own judgment in the case of Yokogawa India Ltd. (supra) has held that once the provision for bad & doubtful debts is reduced from loans & advances and debtors from the assets side of the balance sheet, then Explanation 1 to sub-section (2) of section 115JA & 115JB. Similar view has been held by the Hon’ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. (supra). From the perusal of the financials it is noticed that the provision for doubtful debts is reduced from the sundry debtors from the financial year end 31.3.2011. The extract of Note 10 to the financials is given below:-
From the above, it is clear that the assessee has adjusted the provision of bad & doubtful debts against the sundry debtors and following the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166, which is followed in the decisions of Kirloskar Systems Ltd. (supra) and Yokogawa India Ltd. (supra) by the Hon’ble jurisdictional High Court, we hold that the provision made by the assessee for bad & doubtful debts is the actual write off and not a mere provision and therefore cannot be adjusted under clause (i) of Explanation 1 to sub-section (2) of section 115JB. Further, the Hon’ble Supreme Court in the case of HCL Comnet Systems (supra) has clearly laid down that when the provision is made against a debt receivable, cannot be equated with a provision for liability and therefore cannot be adjusted under clause (c) of Explanation 1 to sub-section (2) of section 115JB. In view of the above discussion, we hold that the addition made by the AO towards provision for bad & doubtful debts to the book profit u/s. 115JB is not tenable and the same is deleted.
In the result, the assessee’s appeal is allowed.
Pronounced in the open court on this 20th day of October, 2022.