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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Before: Shri C Nagendra Prasad & Rajesh Kumar
O R D E R Per C Nagendra Prasad, Judicial Member
This appeal has been filed by the Revenue against the order of the learned CIT(A)-10, Mumbai, dated 16.03.2016, for A.Y. 2011-12. The only grievance of the Revenue in this appeal is that the CIT(A) erred in deleting the addition made towards provisions for doubtful debts while computing the book profits u/s. 115JB of the Act.
Briefly stated the facts are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee did not add back provision for doubtful debts amounting to ` 58,13,597/- to the book profit computed u/s. 115JB. The Assessing Officer required the assessee to explain as to why the same should not be added back to the book profits of the assessee. The assessee in its reply stated that the investments in Mutual Funds reflected in AIR report are also reflected in the schedule of investments in the audited Balance Sheet. The Assessing Officer observing that as per clause (c) of Explanation to section 115JB the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, held that the provision made by the assessee towards doubtful debts is an unascertained liability and, therefore, added it to the book profits u/s. 115JB of the Act.
On appeal by the assessee, the learned CIT(A) observing that the provision for doubtful debts will not fall under unascertained liability under clause (c) to Explanation 1 to section 115JB, deleted the addition made by the Assessing Officer.
Before us the learned counsel for the assessee placing reliance on the decision of Hon’ble Karnataka High Court in the case of CIT vs. Yokogawa India Ltd. 17 taxmann.com 15 and that of Hon’ble Gujarat High Court in the case of CIT vs. Vodafore Essar Gujarat Ltd. 397 ITR 55 submitted that when the assessee reduces the amount of provision made for doubtful debts from the debtors account, it amounts to actual write off and in such circumstances, it is not mere provision for bad debts and therefore, it should not be treated as provision for doubtful debts falling uncder clause (c) of Explanation to section 115JB of the Act. The learned counsel further furnished copy of balance sheet as at 31.03.2011 and referring to Schedule 8 of Sundry Debtors submitted that provision for doubtful debts have been reduced from the Sundry Debtors account.
The learned DR submitted that the assessee has not provided any details before the Assessing Officer to show that the provisions made for doubtful debts have been reduced from the debtors account. Therefore, he submitted that the mater may be restored to the Assessing Officer for examining afresh.
We have heard the rival submissions and perused the orders of the authorities below as also the decisions relied on. The Assessing Officer in this case while completing the assessment noticed that the assessee did not add back provision for doubtful debts to the book profit computed u/s. 115JB and, since, the provision made by the assessee according to the Assessing Officer falls within clause (c) of Explanation1 to section 115JB i.e. the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, he was of the view that the provision made for bad and doubtful debts should be added back while computing the book profits u/s. 115JB. However, the learned CIT(A) held that sub clause (c) of section 115JB has not application for provision of bad and doubtful debts. In the case of CIT vs. Yokogawa India Ltd. (supra), the Hon’ble Karnataka High Court considered whether the provision made for bad and doubtful debts can be added back while computing book profits in accordance with clause (c) of Explanation 1 to section 115JB of the Act as unascertained liabilities. The Hon’ble High Court after considering the decision of Hon’ble Apex court in the case of Vijaya Bank 323 ITR 166 held that if the bad debt or the doubtful debt is reduced from the loans and advances or debts from the asset side of the balance sheet, the explanation to section 115JA or JB is not at all attracted. The relevant portion is as under:
“8. In the present case, the debt is an 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 it was held that Item (c) of the Explanation is not attracted to the facts of the case. Item (c) in Section 115JA and 115-JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in Item (c) of the Explanation. It is the amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision Is made which is in the nature of diminution in the value of any asset would not fall within item (c) of Explanation (i). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (i) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, in case of the assessee falls under Item (c). In meeting the aforesaid case, the learned counsel for the assessee brought to our notice the judgment of the Apex Court in the case of Vijaya Bank ( supra) where the Apex Court had an occasion to consider his explanation. It accepted the argument on behalf of the Revenue to the effect that the explanation makes it very clear that there is a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. A mere debit to the profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under Section 36(l)(vii) of the 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 a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and, consequentially, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt.' Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss 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. 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 Section 115JA or JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. In that view of the matter, we do not see any merit in this appeal”
Similar view has been taken by Hon’ble Gujarat High Court in the case of CIT vs. Vodafore Essar Gujarat Ltd. (supra), wherein it has observed as under:
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 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 (1) 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.”
Respectfully following the said decisions, we hold that if the provisions for bad and doubtful debts is reduced from the loans and advances or the debtors account, it amounts to actual write off and the provisions of clause (c) of Explanation 1 to Section 115JB have no application. However, this aspect of the matter has to be examined by the learned Assessing Officer. Under these circumstances, we set aside the issue to the Assessing Officer for verification of this fact and allow the claim accordingly.
In the result, the appeal of the Revenue is allowed for statistical purpose.
Order pronounced in the open court on 7th day of March, 2018.