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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The above titled two cross appeals one by the assessee and the other by the Revenue have been preferred against two separate orders dated 08.03.2011 & 10.12.2013 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2004-05. ITA No.4284/M/2011 is appeal of the assessee agitating the additions
2 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. made/confirmed by the lower authorities in relation to assessment proceedings u/s 143(3) read with section 147 of the Act. Whereas, ITA No.1456/M/2014 is the appeal of the Revenue agitating the action of the Ld. CIT(A) in deleting penalty levied by the Assessing Officer (hereinafter referred to as the AO) under section 271(1)(c) of the Income Tax Act in respect of the quantum additions made in assessment order. Since the facts involved in both the appeals are identical and interlinked, hence both the appeals were heard together and are being disposed of by this common order.
First we take up the quantum appeal of the assessee i.e. ITA No.4284/M/2011.
ITA No.4284/M/2011 3. The assessee in this appeal has taken the following grounds of appeal: “The Appellant objects to the order of the Commissioner of Income-Tax (Appeals) 11, Mumbai (CIT(A) Dated 8th March 2011 received on 30th March 2011 for the aforesaid assessment year on the following among other grounds:
The learned C.I.T. has erred in confirming the addition of provision for diminution in value of Shares/Investments of Rs.4,18,43,402 while computing the book profit U/s115JB of the I.T. Act
2 The learned C.I.T. has erred in confirming the addition of provision for doubtful advances of Rs.2,81,08,718 whle computing the book profit U/s115JB of the I.T. Act
3.The learned C.I.T. has erred in confirming the addition of Rs.12.93 lacs being 20% of Secondment charges paid by appellant co. to M/s Britannia Industries Ltd.
Each one of the above ground of appeal is without prijudice to the other. 5. The appellant reserves the right to amend, alter or add to the grounds of appeal.”
Apart from that the assessee has taken the additional grounds relating to the reopening of the assessment under section 147 of the Act which read as under: “1) For that on the facts and circumstances of the case, the AO's order u/s 147/ 143(3) be held to be bad in law and be therefore cancelled since the conditions precedent for valid re-opening of the assessment were not fulfilled in the present
3 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. case.
2) For that on the facts and circumstances of the case, there being no cogent and valid material available with the AO on the basis of which he could reasonably form belief that income chargeable to tax escaped assessment for AY 2004-05, the re-opening of the assessment for AY 2004-05 was unjustified and consequently order passed u/s 147/ 143(3) was bad in law and deserve to be quashed.
3) For that on the facts and circumstances of the case. the AO's alleged reasons to believe having been based on the wrong understanding of provisions of clause (c) of the Explanation to Sec 115JB of the Act and such understanding being unsustainable in law, the re-opening of the assessment u/s 147 was also bad in law and consequently the order passed u/s 147/143(3) be held to be ab inito void.
4) For that on the facts and circumstances of the case, the order of the AO dated 28.12.2007 passed u/s 147/143(3) be held to be ab inito void and be therefore be cancelled.
5) For that the appellant craves leave to file additional grounds and/or amend or later the grounds already taken either before or at the time of hearing of the appeal.”
The brief facts of the case are that the assessee company had filed return of income for the year under consideration declaring total income of Rs.64,16,128/-. The return was processed under section 143(1) on 31.03.05 and the returned income was accepted. However, later on the AO found from the record that the assessee had added back provision for diminution in the value of investment of Rs.4,18,43,402/- and provision for doubtful advances of Rs.2,81,08,718/- in the computation of total income; however, the same was not considered for working of income under section 115JB. The AO accordingly issued notice under section 148 of the Act. The assessee agitated the addition in relation to the provision for diminution in the value of investment in the computation made under section 115JB pleading that the book value of the company had become negative and that the value of the investment in the market was very low. Regarding the provision of doubtful advances it was pleaded that there was no chance of recovery of the debts and that the same were even not the liability of the assessee. The AO, however, observed that the assessee had failed to prove with sufficient evidence regarding the diminution in the value of investment and
4 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. that the debts had become bad. The AO, therefore, rejected the contentions of the assessee and added the amounts on account of provision for diminution in the value of investment and provision for bad debts holding that the same were ascertained liabilities. He held that the provision for doubtful debts would come within the purview of clause (c) of explanation to section 115JB(2). He accordingly added the provision for doubtful debts and provision for diminution in the value of investment. The AO also observed that the assessee had paid excessive secondment charges to M/s. Britania Industries Ltd. He, therefore, disallowed the 20% of the said expenditure amounting to Rs.12.93 lakhs. 6. Being aggrieved by the above additions made by the AO, the assessee filed appeal before the Ld. CIT(A). However, the Ld. CIT(A) held that the AO had rightly made the above additions. He further held that even the diminution in the value of asset cannot be allowed under sub clause (i) of the explanation 1 to section 115JB(2) of the Income Tax Act which clearly states that the amount set aside as provision for diminution in the value of any asset will be added back to the book profits under section 115JB of the Act. Further that the decision of the AO in adding back the provision for doubtful debt, which was not ascertained liability in the book profit of the assessee company, was correct and in accordance with law. The Ld. CIT(A) also confirmed the addition of Rs.12.93 lakhs being 20% of the secondment charges paid by the assessee company to M/s. Britania Industries Ltd. Being aggrieved by the order of the Ld. CIT(A), the assessee has come in appeal before us.
The Ld. A.R. of the assessee, at the outset, has sought to agitate the issue relating to the validity of the reopening of the assessment. He has stated that on the date of issuance of notice under section 148 of the Act on 21.03.07, there were no reasons for the AO to believe that the income of the assessee has escaped assessment. He, in this respect, has relied upon the decision of the Hon’ble Bombay High Court in the case of “Rallies India Ltd. vs. ACIT” (2010) 190 taxman 1 (Bom.) and has stated that the facts and issues under
5 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. consideration before the Hon’ble Bombay High Court in the said case were exactly identical to that are involved in the case of the assessee. The Ld. D.R. has submitted that the plea regarding the validity of the reopening of the assessment has been taken for the first time before the Tribunal and that the said plea was not taken before the lower authorities. He, therefore, has stressed that the assessee is now estopped from taking this plea at the stage of second appeal. The Ld. A.R., on the other hand, has stated that since it is a legal plea, the assessee is entitled to take this plea even at the appellate stage.
Considering the above submissions, we are of the view that the plea regarding the validity of the reopening is a legal plea which goes to the route of the case and can be taken at any stage of the proceedings. Reliance in this respect can be placed on the decision of the Hon’ble Bombay High Court in the case of “Industrial Corporation Ltd. vs. CIT” 194 ITR 548 (Bom.).
Now, coming to the issue of validity of the reopening of the assessment, We have gone through the decision of the Hon’ble Bombay High Court in the case of “Rallies India Ltd. vs. ACIT” (supra). We find that the reopening of the assessment in that case was done by the AO because of the following grounds: “(i) that the assessee had not debited any amount on account of write-off of debts/advances to the profit and loss account and, therefore, it was wrongly allowed deduction of bad debts of Rs.6.46 crores; and (ii) that while computing book profit under section 115JB, the assessee had not considered provisions relating to doubtful debts and advances and for the diminution in the value of investments in the books of account.”
The Hon’ble Bombay High Court while adjudicating the issue regarding the validity of the reopening of the assessment for the above reproduced reasons recorded by the AO, in Paras 14 to 20 of the said decision has observed as under: “14. For the purposes of section 115JB, Explanation (1) provides that "book profit" means the net profit as shown in the profit and loss account for the relevant
6 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. previous year prepared under sub-section (2), as increased by the clauses that immediately follow. Sub-section (2) of section 115JB provides that every assessee, being a company, shall, for the purposes of the section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Now, it is a settled principle of law that for the computation of book profits under section 115JB, the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 which are certified by the auditors and passed by the company in its general meeting. The Assessing Officer does not have jurisdiction to go beyond the net profits as shown in the profit and loss account, save and except to the extent which is provided for in the Explanation. The Assessing Officer can increase the net profits as reflected in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act, 1956 only to the extent that is permissible in the Explanation noted above. Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) and CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409 (SC). Clause ( c) of Explanation (1) deals with "the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities". 15. In response to the notice for re-opening of the assessment, the assessee, in the course of its objections pointed out that the view of the Assessing Officer was consistent with the law laid down by this Court in Echjay Forgings (P.) Ltd.'s case (supra ) and the judgments of the Delhi High Court in Eicher Ltd.'s case (supra) and HCL Comnet Systems & Services Ltd.'s case (supra). In the decision in Echjay Forgings (P.) Ltd.'s case (supra), Hon'bleMr. Justice S.H. Kapadia (as he then was) speaking for a Division Bench of this Court noted that under clause (c) of the Explanation to section 115JB, unless a provision is made for ascertained liabilities, the provision has to be included in the book profits for the purpose of taxation under section 115J. The Delhi High Court had held in Eicher Ltd.'s case (supra) and in HCL Comnet Systems & Services Ltd.'s case (supra ) that under Explanation (1)( c) the increase shall be of the amount or amounts set aside for meeting liabilities other than ascertained liabilities. The Delhi High Court held that ascertained liabilities are not to be included in the book profits as defined in that section. In our view, the basic question which would arise is as to whether a provision made for doubtful debts or advances can be regarded at all as a provision made for meeting liabilities in the first place. In order that clause (c) should apply, there must be a provision; the provision must be for meeting a liability and the liability in question must be other than an ascertained liability. 16. The Supreme Court had occasion to consider the interpretation of clause (c) to Explanation (1) in its judgment in HCL Comnet Systems & Services Ltd.'s case (supra). The judgment of the Supreme Court arose in appeal from the judgment of the Delhi High Court to which a reference has been made earlier. Hon'ble Mr. Justice S.H. Kapadia, speaking for a Bench of the Supreme Court held that a debt which is payable by the assessee must be distinguished from a debt which is receivable by the assessee. A provision for bad and doubtful debts is made to cover up the probable diminution in the value of the asset namely a debt which is an amount receivable by the assessee. Such a provision, the Supreme Court held, cannot be regarded as a provision for a liability because even if a debt is not recoverable, no liability could be fastened upon the assessee. The Supreme Court held thus :
7 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. ". . .The assessee's case would, therefore, fall within the ambit of item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than an ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract item (c) of the Explanation to section 115JA. In our view, item (c) is not attracted. 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 the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case, the "debt" under consideration is a "debt receivable" by the assessee. The provision for bad and doubtful debts, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the 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, in our view, item (c) of the Explanation is not attracted to the facts of the present case". In the present case also, the debts written-off were those receivable by the assessee. These are not liabilities and did not fall within clause (c) to Explanation (1 ) as explained by the Supreme Court. 17. Subsequent to the decision of the Supreme Court in HCL Comnet Systems & Services Ltd.'s case (supra ), Parliament stepped in to amend Explanation (1 ) to section 115JB by the Finance Act of 2009. As a result of the amendment, clause (i) came to be inserted in Explanation (1) so as to provide for the amount or amounts set aside as provision for diminution in the value of an asset. Though the amendment was made with retrospective effect from 1-4-2001, it was enacted into law after the Assessing Officer had exercised the power to re-open the assessment in the present case by his notice dated 16-7-2008. Consequently, on the date on which the Assessing Officer exercised his jurisdiction under section 148, the amendment which was brought in subsequently by the Finance Act of 2009 was not in existence. 18. A legislative amendment, though made with retrospective effect has been held not to justify a recourse to the revisional power of the Commissioner under section 263 of the Income-tax Act in Max India Ltd.'s case (supra). Counsel for the revenue sought to distinguish the judgment in Max India Ltd.'s case (supra) on the ground that it dealt with section 80HHC and one of the grounds which weighed with the Supreme Court was that the section had been amended several times. The judgment of the Supreme Court cannot be distinguished for the reasons as suggested by the Counsel for the revenue. The principle which has been laid down in the judgment of the Supreme Court cannot be confined to section 80HHC. In that case, the revisional authority had sought to exercise its revisional jurisdiction under section 263. The exercise of power was challenged firstly on the ground that two views on the interpretation of the provision were possible and hence, recourse to section 263 was not permissible. Moreover, the second ground which appears to have been urged was that the retrospective amendment to the statutory provision
8 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. in question would not have a bearing on the correctness of the recourse to section 263 since on the date on which the power was exercised by the Commissioner, the legislative amendment had not been brought into force. The judgment of the Supreme Court notes firstly that on the date on which the Commissioner passed his order, two views on the word "profit" under section 80HHC were possible and the provision itself had been amended on several occasions. The second ground which weighed with the Supreme Court was that the subsequent amendment in 2005 of the provisions of section 80HHC, even though retrospective, would not attract the provisions of section 263, particularly when the Court would have to take into account the position of law as it stood on the date when the Commissioner passed his order in purported exercise of his powers under section 263. 19. In the present case, the principle of law which has been laid down by the Supreme Court in Max India Ltd.'s case (supra) would be attracted. On the date on which the Assessing Officer purported to exercise his power to re-open the assessment under section 147, the legislative amendment by the insertion of clause (i) to Explanation (1 ) to section 115JB had not been brought into force on the statute book. Obviously, therefore, the subsequent amendment could not have been and is not a ground which has been taken by the Assessing Officer, while re- opening the assessment. The validity of the notice issued by the Assessing Officer in seeking to re-open the assessment must be determined with reference to the reasons which are found in support of the re-opening of the assessment. These reasons cannot be allowed to be supplemented on a basis which was not present to the mind of the Officer and could not have been so present on the date on which the power to re-open the assessment was exercised. We, therefore, hold that the principle laid down by the Supreme Court in MaxIndia Ltd.'s case (supra) would be attracted to the present case. Consequently, it is evident that the order of the Assessing Officer with reference to the computation of book profits under section 115JB was at the least a probable view and as a matter of fact the correct view to take in view of the decision of the Supreme Court in HCL Comnet Systems & Services Ltd.'s case (supra). It is well-settled that the law laid down by the Supreme Court is declaratory of the position as it always stood. In any event, as we have noted, the view of the Assessing Officer was supported by the interpretation placed even contemporaneously in the judgment of this Court in Echjay Forgings (P.) Ltd.'scase (supra) and in the judgments of the Delhi High Court in Eicher Ltd.'s case (supra) and HCL Comnet Systems & Services Ltd.'s case (supra ). In the circumstances, there was no warrant for re-opening the assessment in exercise of the power conferred under section 147. 20. For all these reasons, we are of the view that the petitioner would be entitled to succeed in these proceedings. Rule is made absolute by setting aside the notice dated 16-7-2008 and the order rejecting the objections of the petitioner dated 30- 11-2009. There shall be no order as to costs.”
Now coming to the case of the assessee before us, the reasons recorded in this case before issuance of notice of reassessment read as under: “Provision for diminution in value of investments of Rs.418,43,402/- & provision for doubtful advances of Rs.281,08,718/- though added in computation of total income
9 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. has not been considered while computing the Book Profit u/s 115JB resulting in short levy of tax of Rs.30,75,305/-.”
The above reasons recorded in the case of the assessee are identical to that of the case of “Rallis India Ltd”. (supra). The Hon’ble Bombay High Court has, thus, categorically held that in computation of book profit under section 115JB, the AO has to accept the authenticity of the accounts maintaining in accordance with the provisions of Companies Act, 1956 which are certified by auditors and passed by the company in the general meeting. The AO does not have jurisdiction to go beyond the net profits as shown in the profit and loss account, save and except to the extent which is provided for in the explanation and not otherwise. While relying upon the decision of the Hon’ble Supreme Court in the case of “HCL Comnet Systems & Services Ltd.” (supra), the Hon’ble Bombay High has further held that a provision for doubtful debt cannot be recorded as a provision for liability. The debt, at the most can be said to be not recoverable, but no liability in this respect could be fastened upon the assessee. The Hon’ble Bombay High Court has further observed that the amendment brought vide Finance Act, 2009 vide which clause (i) has been inserted in explanation (1) so as to provide for the amount set aside as provision for diminution in the value of an asset is to be added while computing profits under section 115JB; though, has been made to operate retrospectively, yet, the benefit of the said provision was not available to the AO at the time of reopening of the assessment and hence, the same cannot be a ground for reopening of the assessment. In view of this, there was no warrant for reopening the assessment in exercise of powers conferred on the AO under section 147. The law laid down by the jurisdictional High Court is binding on this Tribunal. Hence, respectfully following the decision of the Hon’ble Bombay High Court in the case of “Rallis India Ltd.” (supra), the reopening of the assessment in this case is hereby set aside. The additions made in consequence to the
10 ITA No.4284/M/2011 & ITA No.1456/M/2014 M/s. J.B. Mangharam Foods Pvt. Ltd. reopening, therefore, have no legs to stand and the same are accordingly ordered to be deleted.
Now coming to the appeal of the Revenue i.e. ITA No.1456/M/2014. The Revenue in this appeal has agitated the action of the Ld. CIT(A) in deleting the penalty levied by the AO u/s 271(1) (c) of the Act on account of additions made under section 115JB pursuant to the reopening of the assessment. Since we have already held that the reopening in this case was bad in law and have already deleted the additions made by the AO pursuant to the reopening of the assessment under section 147 of the Act, hence the consequential penalty levied by the AO under section 271(1)(c) by the AO has no legs to stand. The order of the Ld. CIT(A) deleting the penalty is therefore upheld.
In the result, appeal of the assessee is hereby allowed but that of the Revenue is hereby dismissed. Order pronounced in the open court on 29.07.2016.
Sd/- Sd/- (G.S. Pannu) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 29.07.2016. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.