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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJEET SINGH
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 22.11.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.
The facts in brief are that the assessee filed the return of income on 27.09.2012 declaring total income at nil which was processed under section 143(1) of the Act. Subsequently the case was selected under CASS and statutory notices were duly issued and served upon the assessee. During the course of 2 M/s. Global Mansions P. Ltd. assessment proceedings, the AO observed that assessee has added back provisions made for bad and doubtful debts of Rs.3,65,57,600/- in its computation of total income but has failed to add back while computing the book profit under section 115JB of the Act and accordingly the assessee was called upon to explain why the different stand is taken when the provisions have been added back in the normal computation whereas while computing the book profits in respect of the express provisions enacted for enhancing the book profit as per clause (c) to Explanation 1 of section 115JB(2) of the Act. The assessee submitted before the AO that in note No.15 of notes to accounts showed the details of operation and other expenses wherein the provisions of bad and doubtful debts were debited to the P & L Account. It was also submitted that in note No.9 which is as regards trade receivable, the said provisions for bad and doubtful debts were reduced from the trade receivables and net amount was shown in the balance sheet. The assessee relies on the decision of Vijay Bank vs. CIT 323 ITR 166(SC). Similarly, the assessee relies on the decision of Hon’ble Bombay High Court in the case of KEC International Ltd. vs. DCIT (33 taxmann.com 243) and CIT vs. Yokogawa India Ltd. (2012) (341 ITR 385). However, the AO brushing aside the submission of the assessee came to the conclusion that provisions made towards bad and doubtful debts of Rs.3,65,57,600/- have to be added to book profits under clause (c) to Explanation 1 of section 115JB of the Act in the assessment framed under section 143(3) of the Act dated 26.02.2105.
3 M/s. Global Mansions P. Ltd.
The Ld. CIT(A) in the appellate proceedings affirmed the order of the AO by observing and holding as under: “3.2. I have considered the finding of the Assessing Officer as well as rival solution of appellant, carefully. It is undisputed fact that appellant has shown trade receivable of Rs. 12,94,41,253/- out of which it has made provision of debts as doubtful of Rs.3,65,57,600/-. Such provision has been made without any valid reason. Further, this provision has been debited in Profit and loss account under head 'Operation and other expenses appearing at page no. 13 and 23 of the paper book. This provision made for the first time is found to be without any reason Clause 'C' of explanation 1 to section 115JB provides that the amount set aside to provision made for meeting liability, other than ascertained liabilities, has to be increased. Thus, it is very obvious that provision so made and debited to Profit and Loss Account is to be added to book profit. The Ld. Assessing Officer has rightly placed his reliance in the case of M/s. Shakti Insulated Wires P. Ltd. v. ITO9(1)(3) (2014) 45 taxmann.com 31 {lTAT)Mumbai. in this case, Hon'ble ITAT has very categorically held that provision for bad and doubtful debt is necessarily to be added while calculating book profit u/s. 115JB. The decision of Vijaya Bank v. CIT 323 ITR 166{SC) is not applicable to the facts of the case as it was rendered in context of section 36(1)(iii). Thus, considering the facts of the case and decision of jurisdictional ITAT, the adjustment made by Assessing Officer of provision of doubtful debt of Rs. 3,65,57,600/- is sustained.”
The Ld. A.R. vehemently submitted before us that the computation of book profit under section 115JB of the Act envisages taking into consideration the profit disclosed in the P&L Account in accordance with part-I and part-II of schedule VI to the Companies Act, 1956 as a starting point and only such additions/subtractions can be made profits which are permissible under the Explanations to section 115JB of the Act. The AO as well as Ld. CIT(A) have held that provisions for doubtful debts were provisions for unascertained liability and accordingly covered the addition under clause (c) to Explanation 1 of section 115JB(2) of the Act. The Ld. A.R. submitted that the case of the assessee is squarely covered by the decision of the Apex Court in the case of CIT vs. HCL Comnet Systems & Services Ltd. 174 Taxman 118 wherein it has been held that provision for bad and doubtful debts can not be added under 4 M/s. Global Mansions P. Ltd. clause (VI) of explanation 1 to section 115JB(2) for the purpose of computing book profit. The Ld. A.R. also relied on the decision of Hon’ble Karnataka High Court in the case of CIT vs. Yokogawa India Ltd. (2012) (341 ITR 385) in which it has been held that while computing the book profits in accordance with section 115JB of the Act, the provisions for bad and doubtful debts can not be added in the book profits as the same is not an unascertained liability. The Ld. A.R. also relied on the case of ACIT vs. Vodafone Essar Gujarat Ltd. in ITA No.1999/AG 2008 in which the Ahmedabad Bench has held that there is no requirement to add back the provisions for bad and doubtful debts while computing the book profits in accordance with clause (c) to Explanation 1 of section 115JB(1) of the Act and the said decision has been affirmed by the full bench decision of the Hon’ble Gujarat High Court as reported in 397 ITR 355 and therefore the Ld. A.R. submitted that the addition as made by the AO and affirmed by the Ld. CIT(A) under clause (c) to Explanation 1 of section 115JB(2) of the Act may be deleted. As regards the applicability of clause I of Explanation 1 to section 115JB the Ld. A.R. submitted that it is not the case of the Revenue that addition is made under clause(i) of Explanation of section 115JB and therefore the question does not arise of addition under section (1) to the said Section . The Ld. A.R. also made without prejudice submission that in the financial statement the said provisions for bad and doubtful debts were debited in the P&L Account under the head administrative and other expenses and in the balance sheet the sundry debtor was shown net off provisions for bad and doubtful debts and therefore no addition can be made in view of the decision of 5 M/s. Global Mansions P. Ltd. Hon’ble Karnataka High Court in the case of CIT vs. Yokogawa India Ltd. (supra) and Vijay Bank vs. CIT (Supra). The Ld. A.R., therefore, prayed that unless it was an actual write off of debts ,the question of treating it as provisions of diminishing in the value of such does not arise. The Ld. A.R. also submitted that by not claiming the deduction under section 36(1)(vii) of the Act can not be considered as basis for making adjustment under section 115JB of the Act. The Ld. A.R. submitted that the assessee has consistently been following the policy of claiming of debts under normal computation of income upon squaring off the accounts to avoid any possibility of double claim once at the time of creating provisions for bad and doubtful debts and again at the time of squaring of the accounts. The Ld. A.R. also pointed out that the assessee has also made a claim for provisions for bad and doubtful debts even under the normal provision of Act by raising the additional ground before Ld. CIT(A). However, the claim was rejected. The Ld. A.R. submitted that the assessee has been assessed under the MAT, it has not raised a ground for disallowance of deduction under section 36(1)(vii) of the Act which was claimed before Ld. CIT(A). In defence of his arguments, the Ld. A.R. relied on the decision of the Tribunal in the case of Flex Foods Ltd. vs. DCIT in ITA No.4800/Del/2011.
The Ld. D.R., on the other hand, relied heavily on the order of authorities below by submitting that the arguments of the Ld. A.R. are contradictory and may be dismissed. On the one hand, the Ld. D.R. has submitted that the assessee has suo-moto added the same under the normal provision of the Act while the same provisions for bad and doubtful debts have been claimed
6 M/s. Global Mansions P. Ltd. in the computation of book profit under section 115JB of the Act. The Ld. D.R. drew the attention of the Bench to the provisions of section 115JB of the Act which specifically provided that any provisions created towards unascertained liability has to be deducted under clause (c) to Explanation 1 of section 115JB and therefore has rightly been added by the AO and subsequently affirmed by the Ld. CIT(A). Controverting the arguments of the Ld. A.R. qua the addition made under clause (c) to Explanation 1 of section 115JB , the Ld. D.R. submitted that even if the contentions of the Ld A.R. is accepted, the addition has been made which may kindly be treated as being covered by the clause (i) to Explanation 1 of section 115JB. Finally, the Ld. D.R. submitted that the order of the Ld. CIT(A) may be affirmed by dismissing the appeal of the assessee as the assessee itself has made contradictory claims.
We have heard the rival submissions of both the parties and perused the material on record including the decisions cited before us by the Ld. A.R. Undisputedly, the assessee has added back the provisions for bad and doubtful debts of Rs.3,65,57,600/- while computing the book profit under section 115JB of the Act ,the said provisions for bad and doubtful debts were not added. This is also undisputed that assessee has been assessed under section 115JB of the Act on MAT as tax under the normal provisions of the Act was lower as compared to MAT tax liability. The assessee has tried to raise this issue before Ld. CIT(A) by way of additional ground qua allowing the claim under section 36(1)(vii) of the Act , however, the same was not taken before the Tribunal for the reason stated above that tax as per MAT provision was more than the tax as per normal provisions
7 M/s. Global Mansions P. Ltd. of the Act. This is also undisputed that the provisions for bad and doubtful debts has been claimed in the P&L account under the head operation and another expenses and the sundry debtors in the balance sheet has been shown at net of provisions for bad and doubtful debts. In the light of these facts we will be deciding this issue . We have perused provisions of section 115JB of the Act and observe that under clause (c) to Explanation 1 of section 115JB(2) of the Act , the provisions qua for meeting the unascertained liabilities can be added to the book profit which is not the case before us. In the present case the provisions for bad and doubtful debts created and claimed by the assessee in respect of trade receivables and not for unascertained liability as has been observed by the lower authorities. Therefore, we find merits in the contentions of the Ld. A.R. that said provisions were added by the AO and affirmed by Ld. CIT(A) on wrong understanding of facts and law as the provisions for bad and doubtful debts are not relating to any unascertained liability but represents the provisions created for writing off the trade debts which have become bad. Therefore, the addition made by the AO under clause (c) to Explanation 1 of section 115JB of the Act is wrong and can not be sustained. The case of the assessee is squarely covered by the decision of the Apex Court in the case of CIT vs. HCL Comnet Systems & Services Ltd. (supra) wherein the Hon’ble Apex Court has held as under: “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 it has to pay (be amount lo others, whereas the debt receivable by the assessee is an amount which it has 10 receive from others. In the instant case, 'debt' under consideration was 'debt receivable' by (he assessee. The provision for bad and doubtful debt, therefore, was made to cover up the probable diminution in the value of asset, i.e.. debt which was an amount receivable by the assessee.
8 M/s. Global Mansions P. Ltd. Therefore, such a provision could not be said to be a provision for liability, because even if a debt was not recoverable, no liability could be fastened upon the assessee. In the instant case, since the debt was the amount receivable by the assessee and not any liability payable by it, any provision made towards irrecoverability of the debt could not be said to be a provision for liability. Therefore, clause (c ) of the Explanation to section 115JA was not attracted to the facts of the instant case. The Assessing Officer was not justified in adding back the provision for bad and doubtful debts under clause (c) of the Explanation to section 115JA for the purpose of computing book pro/it under section 115JA."
Similarly, the Hon’ble Karnataka High Court in the case of CIT vs. Yokogawa India Ltd. (supra) has held that while computing book profit in accordance with section 115JB of the Act provisions for bad and doubtful debts can not be added in the book profits as the same is not for an unascertained liability. The Hon’ble High Court has followed the decision of the Apex Court in the case of CIT vs. HCL Comnet Systems & Services Ltd. (supra)while passing this judgment. The Hon’ble Ahmedabad Tribunal in the case of ACIT vs. Vodafore Essar Gujarat Ltd. (supra) has held that there is no requirement to add back the provisions for bad and doubtful debts while computing the book debts under clause (c) to Explanation 1 of section 115JB. The said decision of the co-ordinate bench of the Tribunal has been affirmed by the Hon’ble Gujarat High Court as reported in 397 ITR 55. Therefore, considering the facts of the case in the light of the above decisions of the Hon’ble Apex Court, High Courts and Tribunal, we are not in agreement with the conclusion drawn by the Ld. CIT(A) on this issue. We also find merits in the contentions of the assessee that the aforesaid addition ought to be made under clause (i) of Explanation 1 to section 115JB and there can not be improvement in the case of the AO at this stage. Without prejudice submission made by the Ld. A.R. also contains merit that provisions for bad and doubtful
9 M/s. Global Mansions P. Ltd. debts is debited to the P&L account under the head operation and other expenses and these book debts were shown under the head sundry debtor net of these provisions for bad and doubtful debts. The case of the assessee also finds support from Hon’ble Karnataka High Court in the case of CIT vs. Kirloskar Systems Ltd. 220 Taxman 1. The operative part is reproduced as under: “The Apex Court in the case of Vijaya Bank vs. CIT [2010] 323 ITR 166/190 Taxman 257 (SC) has held that the assessee is entitled to the benefit of rejection under Section 36(1)(vii) of the Income Tax Act, 1961 (for short 'the Act) when there is an actual write off by the assessee in its book. This Court in the case of CIT vs. Yokogawa India Ltd. [2012] 204 Taxman 305/17 Taxmann.com 15 (Kar.) has held adjustment of provision for bad and doubtful debts is reduced from the loans and advances or the debtors from the assets side of the balance sheet, the Explanation to Section 115JA and JB is not at all attracted. Therefore, after the Explanation the assessee is now required not only to debit the P and E account 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. "
In view of these facts and the ratio laid down in the various decisions as discussed above, we are inclined to set aside the order of Ld. CIT(A) and directed the AO to delete the addition made to book profits of Rs.3,65,57,600/-.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 13.09.2019.