D.C.I.T. RG.3(3), MUMBAI vs. RELIANCE WELFARE ASSOCIATION, MUMBAI

Per D.T. GARASIA, Judicial Member:

4. The matter carried to CIT(A) and CIT(A) allowed the claim by observing as under:- 4.32 Thus, I am of the considered view that all the provision, which are made in the financial statement prepared as per Part II and III of schedule VI for diminution in the value of any asset are not to be increased to the amount of book profit and only those amounts which are set aside as provision can along be increased as per clause (i) of Explanation 1 to section 115JB of the Act. There is a difference in between ‘retaining an amount’ and writing off an amount. Only those provisions, which are retained can be covered by clause (i) of Explanation 1 to s. 115JB of the Act, as the amount retained is an amount set aside as provision for diminution in the value of any asset, then it is not a case of set aside of an amount as provision as the provision gets obliterated. Where there is an actual loss (ascertained in scientific manner) and such loss is written off against the value of assets, then this clause will not apply because clause (i) of Explanation 1 of section 115JB of the Act provides for increase of book profit by the amount set aside as provision for diminution in the value of any asset even if such loss is not allowed in computation of normal income. For example if a company adopts a method of valuing its current investments are valued at market value of investments, then such debit will be allowable in computation of book profit and it cannot be added back under the proposed value (g) / (i) of Explanation in s.115JA / 115JB respectively. This is in spite of fact that such debit will have to be added while computing total income because in case of capital 3 A.Y.2008-09 assets, computation will be made when capital asset is transferred. Clause (i) of Explanation 1 of section 115JB of the Act provides for increase of book profit by the amount set aside as provision for diminution in the value of any asset. Any corporate entity would have various assets which are reflected in the Balance Sheet as Fixed Assets, Investments or Current Assets. The issue is whether the diminution in the value of any asset is covered by this clause or not. Let us consider what happens when there is a fall in value of stock-in-trade. Where the assessee company adopt method of value of stock-in-trade as at cost or market value whichever is less, and consequently stock is valued at less than cost, the difference between cost and market value will not be a provision for diminution in value of any asset as the amount is written off in the Profit and Loss Account and the value of stock in trade is only reflected at the market value. However, if a hypothetical diminution to the value of stock in trade is provided by not reducing the value of stock in trade but showing the amount as set aside as provision in the Balance Sheet, then the same can be added back under clause (i) of Explanation 1 to section 115JB of the Act. The same treatment is also to be given to other current assets viz. Bad and doubtful loans, advances and sundry debtors written off. As far as the fixed assets (tangible/intangible depreciable assets) are concerned, depreciation has to be provided as per the rates provided under the Companies Act or Income Tax Act. Now what happens in case there is a destruction of an asset which is comprised in the block of assets (for the purpose of Income Tax Act) but is included as an individual asset in the Schedule to ‘Fixed Assets’. In such a case, there would be a diminution in the value of fixed assets which has to be written off as per the provisions of Companies Act and Accounting Standards. Can such a write off for a destroyed asset be increased to the book profit as per the clause (i) of Explanation 1 to s.s.115JB of the Act. The answer is plain and simple ‘No’ as the amount is actually written off and is not set aside as provision. 4.33 Thus the expression ‘Set aside as provision for diminution in the value of any asset’ would not include provisions which have been writing off of as actual loss. Actual loss means what is actually suffered, the amount debited to the P &L account and also reduced from the value of the asset. If one can establish that there is no provision set aside but write off, then clause (i) of Explanation 1 to s.115JB of the Act will not apply.

4 A.Y.2008-09 4.34 The new Explanation in section 36(1)(vii), has 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. In support, reliance is placed on para 25 of the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. Vs. Joint CIT reported in 320 ITR 577 which reads as under: “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. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala Vs. CIT [1981] 130 ITR 95 (Guj.). Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that 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 write off an actual debt. However, if an assessee debits doubtful debt to the profit and loss account and makes a corresponding credit to the provisions for doubtful debt on the liabilities side of the balance sheet, then it would constitute a setting aside a provision for doubtful debt. In the later case, the assessee would not be entitled to deduction after April 1, 1989. 4.35 Reliance is also placed on the decision of the Hon’ble Supreme Court in the case of Vijaya Bank V. CIT 323 ITR 166, wherein the Hon’ble Supreme Court has decided on the following question:

5 A.Y.2008-09 Whether it is 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 assets side of its balance sheet to the extent of the provision for bad debt would be sufficient to constitute a write off is the question which are required to answer in these civil appeals? 4.36 Before the Hon’ble Supreme Court the assessee had contended that once a provision stood created and, ultimately, carried to the balance sheet wherein loans and advances or debtors depicted stood reduced by the amount of such provision, then, there was actual write off because, in the final analysis, at the year end the so called provision does not remain and the balance sheet at the year end. Only carried the amount of loans and advances or debtors, net of such provision made by the assessee for the impugned bad debt. In the said case before the Hon’ble Supreme Court the Tribunal, had upheld the above contention of the assessee on three grounds. Firstly, according to the Tribunal, the asses see had rightly made a provision for bad and doubtful debt by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year. Secondly, the provision account so created was debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated. Lastly, according to the Tribunal, loans and advances or the sundry debtors of the assessee as at the end of the year lying in the balance sheet was shown as net of provisions for doubtful debt created by way of debit to the profit and loss account of the year. 4.37 In the aforesaid facts, the Hon’ble Supreme Court held that in the appeal, broadly, two questions arise for determination. The first question which arises for determination concerns the manner in which actual write off takes place under the accounting principles. The second question which arises for determination, is whether it is imperative for the assessee bank to close the individual account of each debtor in its books or a mere reduction in the loans and advances account or debtors to the extent of the provision for bad and doubtful debt is sufficient? The Hon’ble Supreme Court with reference to the first question has held as under:-

6 A.Y.2008-09 “One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1981] 130 ITR 95 was prior to the insertion of the Explanation vide the Finance Act, 2001, with effect from April 1, 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 April 1, 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 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 not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to the Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and therefore, 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 account by reducing the corresponding amount from loans and advance / debtors on the assets 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 the impugned bad debt. In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1981] 130 ITR 95, a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, 7 A.Y.2008-09 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 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. This aspect is lost sight of by the High 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 indicate above. 4.38 Having regard to the aforesaid discussion, it is held that the amount of provision for diminution in the value of investments is not set aside by the appellant as the amount is written off against the current investments held by the appellant. The write off of the amount against the asset has obliterated the provision and the current assets are reflected in the books of account net of provision. Once the amount of diminution in the value of investments is written off against the asset, there can be no use of any amount having been set aside for diminution in the value of assets. 4.39 Having circumspected the entire spectrum of fact and circumstances of the case vis-à-vis finding of the Assessing Officer and submissions of the appellant, carefully. I have also perused the provisions of Section 115JB of the Income-tax Act, 1961, Section 211 of the Companies Act, 1956 and Accounting Standard – 13 issued by the Institute of Chartered Accountants of India. 4.40 On perusal of provisions of Section 115JB it is very clear that what is appellant company explicit, required to be added to book profit is amount set aside as Provisions for Diminution in value of investment. Under the circumstances, what is required to be decided is whether the amount of Rs.46,94,62,365/- debited to Profit & Loss Account is set aside as a provisions or has it been write off as a loss against the value of the asset. Before coming to the conclusion and also to make the issue involved in this appellant’s case, I wise to narrate the facts of the case as under: 1. The Appellant made investment in units of mutual fund in March,2008.

8 A.Y.2008-09 2. Intention of the appellant was to hold it for short period and accordingly classified the said investment as current investment in the balance sheet of the appellant company as on 30/03/08. The conduct of the appellant approves the intention of the appellant as the units in question were sold in April,2008 with in a period of around 1 month.

3. The appellant being a Company is required to draw its account in accordance with Part II of Schedule VI of the Companies Act as provided in Section 211 of the Companies Act, 1956.

5. Amended provisions of Section 115JB requires Provision for Diminution in value of investment to be added back to book profit to determine Minimum Alternate Tax.

6. Fair Value of Unit of mutual fund was lower than its cost by Rs.46,94,62,365/- and the same being current investment, the appellant following mandatory AS-13, charged Rs.46,94,62,365/- to Profit & Loss Account and prepared its accounts in accordance with Schedule VI as provided in Section 211 of the Companies Act, 1956.

7. Further in subsequent year, the Appellant has credited difference between sale price and fair value as on 31/03/2008 to Profit & Loss Account and not the difference between sale price and its cost. Such accounting treatment is impossible where the provision is made instead of write off. 4.41. On perusal of the above facts, I am of the considered view that debit of Rs.46,94,62,365/- appearing in Profit & Loss Account is not a provisions set aside for diminution in value of investment but a actual charge to the Profit & Loss account which has been written off against the value of the current asset. Thus considering all facts and provisions of Income-tax Act, 1961 and Companies Act, 1956, I am of the considered view that debit of Rs.46,94,62,365/- appearing in Profit & Loss Account is not a Provisions set aside for diminution in value of investment but it is actual charged for the 9 A.Y.2008-09 loss in the diminution in value of investment. Having held that this is not provision set aside, I held that book profit for the purpose of Section 115JB is not required to be increased by Rs.46,94,62,365/- as the same is not in the nature of provision. Accordingly, these grounds of appeal

are allowed. In the result, the addition so made by A.O. to the book profit is deleted. 4.42 Even I find that the A.O.’s alternate argument that the loss occurred to the appellant company subsequent to dividend earning from investment in mutual funds will amounts to expenditure to be disallowed u/s.115JB of the Act in accordance to the provisions of section 14A of the Act is not correct taking note of the decision of ITAT, Indore Bench in the case of ACIT, Indore Vs. Kailash Chandra Dhanuka reported in 13 TTJ 213, wherein the Hon’ble ITAT upheld the order of CIT(A) correct after taking note of Hon’ble ITAT, Mumbai’s decision in the case of CIT Vs. Walfort Shares and Stock Brokers Pvt. Ltd. and the Hon’ble Bombay High Court in the same case. The relevant portion of the said order is extracted as under:- “We have considered rival submission and material available on record. The issue is squarely covered in favour of the assessee by the decision of Bombay High Court in the case of Walfort Shares and Stock Brokers Pvt. Ltd. In para 57&58, it is held:

23. The alternative argument of the revenue that the loss arising from the transaction in question is liable to be treated as an expenditure incurred for earning the tax free income and hence disallowable under section 14A is no sustainable. Section 14A deals with the expenditure incurred for earning tax free income. Admittedly, no expenditure is incurred in purchasing the dividend bearing units. It is only because the units are sold at a loss immediately after receiving the divided income, the revenue wants to treat the loss as a deemed expenditure incurred for earning tax free dividend income. What section 14A contemplates is the expenditure actually incurred for earning tax free income and not assumed expenditure or deemed expenditure. In these circumstances, the decision of the Tribunal in rejecting the alternative argument of the revenue cannot be faulted. There is no expenditure incurred for earning dividend income and even under the newly inserted section 94(7), the loss arising from the transaction in question is not considered as an expenditure incurred for earning dividend income.

10 A.Y.2008-09 24. Considering the above, we do not find any infirmity in the order of the Ld. CIT(A) in allowing this issue in favour of the assessee. This ground of appeal of the revenue is accordingly dismissed. 4.43 Having taken note of the aforesaid decision of Hon’ble ITAT, Indore which is based on jurisdictional Bombay High Court decision reported in 310 ITR 421, I am not in agreement with the A.O.’s alternatively action also that the loss of Rs.46,94,62,365/-, which was incurred to the appellant will amounts to expenditure in relation to exempt income and hence to be added to book profit u/s.115JB of the Act. Accordingly the A.O.’s this finding is also considered to be not correct and justified. Accordingly the appellant’s request, as made above in its submission is accepted and the appellant’s appeal is allowed holding that the loss cannot be held to be expenditure as claimed by the A.O. in relation to exempt income. Accordingly, the addition so made by the A.O. to book profit is deleted. Thus, the appellant’s appeal is allowed.

13 A.Y.2008-09 9. We find that recently Hon’ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Vodaphone Essar Gujarat Ltd. wherein the Hon’ble High Court in tax appeal no.749 of 2012 has discussed the issue in detail by discussing decision Hon’ble Supreme Court in case of M/s.Vijaya Bank Vs. Commissioner of Income Tax (323 ITR 0166) and Southern Technologies Limited Vs. Jt. Commissioner of Income Tax (320 ITR 577) held as under:- “11. Further, recently the Hon’ble High Court of Gujarat in case of Commissioner of Income Tax Vs. Vodaphone Essar Gujarat Ltd. decided after reference was made to the larger Bench for consideration of the following question: “Whether in view of decision of the Supreme Court in case of Vijaya Bank (Supra), Judgement in case of Deepak Nitrite Limited (Supra) was not correctly decided and, therefore, later judgement in case of Indian Petrochemicals Corporation Ltd. (Supra) lays down the correct law?” The Hon’ble High Court of Gujarat observed the followings: “20. Above decisions of Supreme Court in cases 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 debts and a case where the assessee may make a provision for doubtful debts and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit & Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet. The later would be an instance of write-off and not a mere provision. Further observed that: 23. 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 and Services Ltd. (Supra), then the existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With insertion 14 A.Y.2008-09 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 (i) of the explanation to section 115JB. The judgment in the case of Deepak Nitrite Limited (Supra) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corporation Ltd. (Supra) fell in the later category.”

Order pronounced in the open court on 15.01.2018.