DCIT, CIRCLE - 3, KOLKATA vs. M/S. THE PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD., KOLKATA

This appeal preferred by the revenue is against the order of Ld. CIT(A)-1, Kolkata dated 30.09.2008 for A Y 2002-03 for assessment year 2002-03.

At the outset, it has been brought to our notice that this is the second round of litigation before this Tribunal. According to the Ld. Counsel Shri S. K. Tulsiyan, during the first round, the Ld. CIT(A) had given relief to the assessee on the issue of computation of book profit/MAT against the action of AO in adding back the provision for diminution in investment to the tune of Rs.29,81,59,433/- and provision for NPA (Non-Performing Assets) to the tune of Rs.19,57,60,485/- which were debited in the P&L Account. The Ld. CIT(A) while giving relief to the assessee on this issue, took note of the Special bench (Tribunal) decision in the case of M/s. Usha Martin Industries Ltd. reported in 288 ITR (AT) 63 and held that provision for diminution in investments ofRs.29,81,59,433/- and provision for NPA of Rs.19,57,60,485/- could not be treated as unascertained liability as envisaged in clause (c) below Explanation to section 115JB(2) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) and, therefore, he directed the AO to exclude the The Peerless General Finance & Investment Co. Ltd., AY 2002-03 provision for diminution in investment and provision for NPA while computing the assessee’s book profit/MAT. Thereafter, when the matter travelled to the Tribunal, during the first round, the Tribunal was pleased to reverse the order of Ld. CIT(A) by holding as under:

During the course of hearing, the Ld. AR fairly admitted that the assessee had challenged the retrospective amendment in this regard brought in section 115JB of the Act by way of a Writ Petition before the Hon’ble Calcutta High Court in WP No. 1069 of 2010 and the same was dismissed by the Hon’ble Court vide its order dated 3.5.2017. Accordingly, he fairly agreed with the decision of the Ld. AO in this regard. Hence, the Ground Nos. 5 to 7 raised by the revenue are allowed.”

Aggrieved by the aforesaid decision of the Tribunal, the assessee preferred an appeal before the Hon’ble High Court wherein the Hon’ble High Court vide its order dated 19.03.2019 was pleased to remand only this issue back to Tribunal with a direction to proceed and determine the issue in the light of the decision of the Hon’ble High court of Gujarat in CIT Vs. Vodafone Essar Gujarat Ltd. 397 ITR 55 and other case laws on the subject by observing as under:

Per contra, the Ld. CIT, DR vehemently opposing the plea of the assessee contended that the AO has followed the judgment of the Hon’ble Madras High Court in the case of M/s. Breadshell Ltd. 244 ITR 256 and therefore, he does not want us to interfere, therefore, according to him, Tribunal was correct in the first round of litigation when it upheld the action of the AO.

We have heard rival submissions and gone through the facts and circumstances of the case. We note that the short issue that has been raised before us is pertaining to the AO’s action wherein while computing the book profit u/s. 115JB of the Act, he added back the provision for diminution in value of investments and the amount of NPA amounting to Rs.29,81,59,433/- and Rs.19,57,60,485/- respectively which were debited by the assessee in P&L Account. So, the question is whether this action of AO can be justified by invoking clause (c) or (i) of Explanation (1) to sub-section (2) of section 115JB of the Act which reads as under:

We note that the Ld. CIT(A) has correctly held that while computing book profit, provision for diminution in value of investments and provision for non-performing asset, since were not liabilities, clause “(c)” in Explanation (1) to sub-section (2) of section 115JB of the Act was not attracted. And hence, he rightly directed the AO not to add back these amounts to the book profit. However, the question now before us is whether clause (i) of Explanation (1) to sub-section (2) of section 115JB of the Act could be attracted in the facts of this case. We note that sub-clause (i) of Explanation

To overcome such view of the Supreme Court, the Revenue added clauses (g) and (i) to the explanations in section 115JA and 115JB of the Act respectively with retrospective effect. With such addition now the book profit for the purpose of section 115JB of the Act would be increased by the amount or amounts set aside as provisions for diminution in the value of any asset. The explanatory note for introduction of such amendment clarified that the new clause (i) was inserted "so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit." This legislative change thus was clearly necessitated on account of the judgment of the Supreme Court in case of HCL Comnet Systems & Services Ltd. (supra) holding that under clause(c) to the explanation any provision for bad or doubtful debts for diminution in the value of any asset cannot be added to the book profit of the assessee.

This Court in Deepak Nitrite Ltd. (supra), as noted, held that in view of such statutory change, the decision of Supreme Court in case of HCL Comnet Systems & Services Ltd. (supra), would allow the Revenue to make such addition. Delhi High Court in case of ClT v. lLPEA Paramount (P.) Ltd. [2010] 192 Taxman 65/[2011] 336 ITR 54 had come to similar conclusion. Seen from this light and in this context, the decision in case of Deepak Nitrite Ltd. (supra), lays down the correct proposition.

We may however, appreciate the 'implication of the ratio laid down by the Supreme Court in case of Vijaya Bank (supra), on the true interpretation of clause(i) to the explanation 1 and the decisions of Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra). Vijaya Bank (supra) was a case arising under section 36(1)(vii) of the Act. The assessee before the Supreme Court was bank. The issue considered by the Supreme Court was whether it was imperative for the assessee bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its balance sheet to the extent of the provision for bad debt, would be sufficient to constitute a write-off. In this context, the Supreme Court considered the issue as to the manner in which the actual write off takes place under the accounting principle. It was noticed that prior to 1.4.1989 amendment in section 36(1)(vii), even the provision for the bad debt could be treated as write off. After 1.41989 however, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. Vs. Jt. CIT (2010) 320 ITR 577/187 Taxman 346, in which the following observations were made: “Prior to April, 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii). (See CIT V. Jawala Prasad Tiwari (1953) 24 ITR 537 (Born.) and Vithaldas H Dhanjibjai Bardanwala v. CIT (1981) 130 ITR 95 (Guj.)] Such state of law prevailed up to and including the assessment yeatr 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36( l)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). To understand the above dichotomy, one must understand 'how to write off. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor’s account, it would constitute a write off of an actual debt. However, if an assessee debits ‘provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the 'current liabilities and provisions' on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989."

It can thus be seen that in case of Southern Technologies Ltd. (supra), the Supreme Court explained that if an assessee debits an amount of doubtful debt to the Profit and Loss account and credits the asset account like sundry debtor's account, it would constitute a write-off of an actual debt. On the other hand, if an assessee debits provision for doubtful debt to the Profit and Loss account and makes a corresponding credit to the current liabilities and provisions on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt and in such a case after 1.4.1989, the assessee could claim no deduction under section 36(1 )(vii) of the Act.

This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assessee besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans an£ advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for bad debt. Thereafter, the Supreme Court rejecting the Revenue's contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assessee.

Above decision of Supreme Court in case of Southern Technologies Ltd. (supra) and Vijaya Bank (supra) thus bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write- off and not a mere provision.

Karnataka High Court in case of Yokogawa India Ltd. (supra) applying such principle found that case on hand was one of a debt which was an amount receivable by the assessee and not any liability payable by the assessee and observed that clause (c) of the The Peerless General Finance & Investment Co. Ltd., AY 2002-03 explanation to section 115JA/115JB, would not apply. In context of applicability of clause (i) to the explanation, relying on the decision of Supreme Court in case of Vijaya Bank (supra), the Court observed that there is a dichotomy between actual write off and provision for bad and doubtful debt. A mere debit to the Profit and Loss account would constitute a bad and doubtful debt but it would not constitute actual write-off. However, if simultaneously such amount is obliterated from the accounts by reducing corresponding loans and advances on the asset side, the same would amount to a write off. It was concluded as under: " .... Therefore, after the Explanation the assessee is now required not only to debit the P &L A/c but simultaneously also reduce the loans and advances or the debtors from the assets 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 the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s.115JA or JB is not at all attracted."

In case of Kirloskar Systems Ltd. (supra), the Karnataka High Court adopted the same principle.

By way of culmination of above judicial pronouncements and statutory provisions, the situation that arises is that prior to the introduction of clause (i) to the explanation to section 115JB, as held by the Supreme Court in case of HCL Comnet Systems & Services Ltd. (supra), the then existing clause (c) did not cover a case where the assessee ,made a provision for bad or doubtful debt. With insertion of clause (i) to the explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be a added back for computation of book profit under section 115JB of the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB. The judgment in case of Deepak Nitrite Ltd. (supra) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corpn. Ltd. (supra), fell in the later category.

Viewed from this angle and subject to the observations and clarifications made above, in our view, there is no conflict between the two judgments and both operate in different fields. Reference is answered accordingly.”

We note that after considering the aforesaid judgments rendered in the above case laws, the Hon'ble High Court of Gujarat held that if the provision for diminution in value of investment is not a mere provision made by the assessee by merely debiting the profit and loss account and makes a credit to the “current liabilities and provisions” on the liabilities side of the balance sheet, then it would constitute provision for bad and doubtful debt, but if an assessee debits an amount of doubtful debt to the profit and loss account and simultaneously obliterate such provision from its account by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year shows the loans and advances on the asset side of the balance sheet as net of the provision for bad debt, it would amount to an actual write off and such actual write off would not attract clause (i) of the Explanation to sub-section (2) of section 115JB of the Act.

When we apply this law to the facts of this case, Ld. AR Shri S. K. Tulsiyan, Advocate drew our attention to the P&L Account for the year ending on 31.03.2002 which is found placed at page 34 of the paper book wherein we note that the assessee has debited “provision for diminution in value of investments amounting to Rs.29,81,59,433/- which is shown as Rs.298.16 million in the Balance Sheet and provision for NPA amounting to Rs.19,57,60,485/- has been shown as Rs.195.76 million”. According to Ld. AR, the said provision for diminution in value of investments and provision for non-performing assets was not a mere provision debited

Thus we note from a perusal of page 34 of paper book that Rs.298.16 million which was the amount shown as provision for diminution in the value of investment for the current year AY 2002-03 (FY 2001-02) was debited to the Profit & Loss Account. Further, we note that provision for diminution in the value of Investments has been written back during the year which amounts to Rs.312.08 million. This amount it can be seen from a perusal of page 2 of the paper book that it has been credited in the Profit and Loss A/c under the head 'Miscellaneous Income'. Moreover, our attention was drawn to page 26 of paper book, which is the Schedule - 9 of the Audited Accounts wherein Point No.13(f) we note it has been clearly mentioned that Miscellaneous

We note from a perusal of page 35 of paper book that this closing balance of Rs.2111.82 million was reduced from Schedule 6 - Investments (Trade) of the audited accounts. Thus, we note that the Provision of Rs.298.16 million created during the year was debited in the Profit and Loss A/c for the year and Provision written back during the year amounting to Rs.312.08 million was credited in the Profit and Loss A/c. This shows that it was not only a mere creation of 'Provision for diminution in Investments' by debiting the Profit and Loss account but simultaneously the corresponding amount from Investments shown on the Asset side of the Balance Sheet was also reduced/adjusted. In other words, the Investments in the Asset Side that was recorded in the books were the net of provision. Thus, in view of the above facts, the said Provision for diminution in Investments would amount to an actual “write off” of Provision from the Assets side and therefore would not attract clause (i) of the Explanation to sub- section (2) of section 115JB of the Act as held by the Hon'ble Gujarat High Court in the case of Vodafone Essar (supra) since Assets side of the Balance Sheet has also been accordingly reduced in the present case of the assessee, so, we agree that provision for diminution in investment was not a mere provision but it was actual write off and so, clause (i) of Explanation (1) of sub-section (2) of section 115JB of the Act is not attracted to the facts of this case and so we uphold the action of Ld CIT(A) on this issue.

Next coming to the event of non-performing asset is concerned, our attention was drawn to page 34 of paper book the assessee had created 'Provision for non-performing assets' amounting to Rs.19,57,60,485/- and debited the same in the Profit and Loss Account for the year ending 31-03- 2002. Our attention was invited to 'Schedule 7 - Current Assets, Loans and Advances', of the Audited Accounts which is found placed at The Peerless General Finance & Investment Co. Ltd., AY 2002-03 page 36 of the paper book wherein we note that after deducting the accumulated Provision for non- performing assets amounting to Rs.2620.53 million, the closing balance of Loans and Advances was arrived at Rs.5576.16 million.

In the result, the appeal of revenue is dismissed.