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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri S.S. Viswanethra Ravi
Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd....…..…….……………………..……………………………………………….…..Appellant 227, A.J.C. Bose Road Kolkata – 700 020 [PAN : AACCA 0846 K] Income Tax Officer, Ward-11(1), Kolkata...........................................................……………..Respondent Appearances by: Shri S. Jhajharia & Shri Sujoy Sen, A/R, appeared on behalf of the assessee. Shri S. Dasgupta, Addl. CIT, D/R. appearing on behalf of the Revenue. Date of concluding the hearing : July 18th, 2018 Date of pronouncing the order : July 27th, 2018 ORDER Per J. Sudhakar Reddy, AM :-
This is an appeal filed by the assessee directed against the order of the Commissioner of Income Tax (Appeals)-18, Kolkata (hereinafter the ‘Ld. CIT(A)’), dt. 03/08/2016, passed u/s 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Year 2008-09, wherein he has confirmed the order passed u/s 154 of the Act, by the Assessing Officer on 21/05/2013, rectifying an order passed u/s 143(3) of the Act, on 31/12/2010, for the Assessment Year 2008-09.
The Assessing Officer in this case issued a notice u/s 154 of the Act, to the assessee proposing rectification of the order passed u/s 143(3) of the Act, on 31/12/2010. The particulars of the mistake proposed to be rectified was as follows:- “Provision on account of bad debts amounting to Rs.18,02,697/- has not been added in the computation of book profit. Provision of doubtful debts of Rs.18,02,697/-, will be added in the computation of book profit.”
In reply, the assessee stated as follows:- “Hence, it seems that your goodself is now assuming different view than that was opted by you at the time of framing the original assessment u/s 143(3).
Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd Without prejudice to above as per clause (i) of Explanation- 1 of section 115JB any provision created for diminution in value of any asset is required to be added back to the net profit while computing the book profit and your goodself may also kindly appreciate that vide Finance (No.2) Act, 2009 this amendment brought with retrospective effect from AY 2001-02. Hence, provision for bad and doubtful debtors is required to be added back as per clause (i) of Explanation-1 of section 115JB while computing the book profit u/s 115JB. However, since at the time of filing of the return such provision did not exist and hence the same was not taken into consideration in the computation of book profit. Without prejudice it may kindly be appreciated that said amount of Rs. 18,02,697/- is not a "provision at all but it is actually written off since the same has been reduced from the debtors outstanding as on 31.03.2008. Hence, it cannot be added to book profit u/s 115JB. Hence, under instructions of our client we submit that proceedings so initiated in the matter are bad in law and hence the proceedings so initiated may kindly be dropped.”
3.1. The Assessing Officer rejected the contentions of the assessee and rectified the order passed u/s 143(3) by recomputing the book profits u/s 115JB of the Act, by adding the provision of doubtful debts. On appeal, the ld. First Appellate Authority, rejected the contention of the assessee that there is no mistake apparent on record as well as the claim that the assessee that it had actually written off the debts in question and it is not a case of making a provision for doubtful debts. At para 4 page 4 of his order, he held as follows:- “Grounds of appeal no. 4 - According to assessee although in the audited book it was mentioned that provision for bad debts are being made but in reality this was writing off of doubtful debts. Hence as per assessee AO. had made this addition of non application of mind and on misinterpretation of the law. It is further submitted that while framing assessment order u/s 143(3) AO. was satisfied with the explanation of the assessee and hence addition was not made. Appellant has also relied upon the order of the Hon'ble Supreme Court in the case of Vijaya Bank -vs - CIT 323 ITR 166 in which the Hon'ble Supreme Court has held that even if the word provision has been used but if an equal amount has been reduced from the sundry debtors it is .an allowable deduction as bad debts. Appellant has also provided the list of debts which have been written off. I have carefully considered the facts of the case and the submissions of the appellant. Perusal of the balance sheet revealed that only provision of doubtful debt was made in balance sheet and there was no actual writing off in individual ledger. Hence, letter dtd: 28.06.2016 was issued asking assessee to produce Parties ledger [Sundry debtor] whose debt were sought to be written off. Date of hearing was fixed on 07.07.2016. However, till date assessee has not submitted debtor's ledger which may prove that debt are actually written off. Under the circumstances assessee's contentions are not acceptable and this ground is dismissed.” (Emphasis Ours)
Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd 4. Aggrieved, the assessee is in appeal before us.
The ld. Counsel for the assessee, submits that this is not a case of merely a provision of doubtful debts but, it is a case of actual write off of debts. He produced a copy of the ledger to demonstrate that in certain cases, amounts were recovered and only the differential amount was written off as irrecoverable. He submitted that in the balance sheet the figure of bad debts were written off by reduction in the sundry debtors. For the proposition he relied on the decision of the Hon’ble High Court of Gujarat at Ahmedabad in Tax Appeal 749 of 2012, CIT vs. Vodafone Essar Gujarat Ltd., judgement dt. 04/08/2017. He also disputed the jurisdiction of the Assessing Officer to rectify this issue u/s 154 of the Act, by submitting that the issue is a debatable one requiring verification of facts and hence beyond the ken of Section 154 of the Act. He relied on certain case-law for the proposition. We would deal with them as and when necessary.
The ld. D/R, relied on the order of the Assessing Officer as well as the ld. CIT(A) and submitted that the assessee failed to demonstrate that this is a case of actual write off bad debts. He argued that, despite providing ample opportunity, the individual ledgers of the debtors were not produced to evidence actual write off. He pointed out, that from a perusal of the annual accounts it was clear that, this is a provision made for bad debts and hence not making an adjustment of the same, despite amendment to the Act, while computing book profits u/s 115JB of the Act, is a mistake apparent on record, which was rightly rectified by the ld. CIT(A). We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 7. The assessee relied on the judgment of the Hon’ble Gujarat High Court at Ahmedabad in the case of CIT vs. Vodafone Essar Gujarat Ltd. (supra), wherein its was held as follows:- “19. 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 and advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the 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 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 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 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 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.
Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd 24. 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.”
The ld. CIT(A) had agreed with the proposition laid down in the case law discussed above. He rejected the claim of the assessee only because no evidence was produced to prove its claim. The issue whether the assessee had merely made a provision or has actually written off bad debts, is a debatable issue. This requires investigation into the facts. Hence, in our view, it is not correct to adjudicate this issue in a proceeding u/s 154 of the Act. A claim of the assessee cannot be considered on merits. Only mistake on the face of the record can be rectified.
The Hon’ble Bombay High Court in the case of Volkart Brothers vs. ITO 65 ITR 179 (bom.) held as follows:- The contentions of the petitioners are firstly that the original assessments made on the firm did not suffer from any mistake and, secondly, at any rate, the mistake alleged by the respondent, viz., that section 17(1) was not applied in making the assessments of the firm cannot be regarded as a mistake apparent from the record. Now, the power of the Income-tax Officer under section 35 of the Income-tax Act, 1922, or the corresponding section 154 of the Act of 1961, is limited to rectification of mistakes which are apparent from the record. It is well settled that the error apparent from the record is not only confined to an error of fact but may also include errors of law. It is, however, necessary that it must be an error which is apparent on the examination of the record itself without entering into any fresh or additional investigation. Moreover, it must be obvious and patent from the record and an error, which is not obvious and patent and can only be discovered as a result of an argument, cannot qualify as an error apparent from the record. (emphashis ours)
The Hon’ble Supreme Court in the case CIT vs. Hero Cycles P. Ltd. (1997) 228 ITR 463 (SC), held as follows:- Rectification under section 154 can only be made when glaring mistake of fact or law has been committed by the officer passing the order and it becomes apparent from the record. Rectification is not possible if the question is debatable. Moreover, the point which is not examined on fact or in law cannot be dealt with as mistake apparent on the record.
The Hon’ble Supreme Court in the case of Mepco Industries Ltd. vs. CIT (2009) 319 ITR 208 (SC), held that the right to rectify mistake apparent on record u/s 154 cannot be made on mere change of opinion.
Assessment Year: 2008-09 M/s. A.P. Fashions Pvt. Ltd 9. Applying the propositions of law laid down in these case laws to the facts of the case, we hold that the issue in question is a debatable issue and requires examination of law as well as facts and hence beyond the ken of Section 154 of the Act. Hence, we quash the order passed u/s 154 of the Act and allow this appeal of the assessee. 10. In the result, appeal of the assessee is allowed.