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Income Tax Appellate Tribunal, Hyderabad ‘A ‘ Bench, Hyderabad
Before: Shri Laliet Kumar & Shri Manjunatha, G.
आदेश/ORDER
Per Laliet Kumar, J.M This appeal filed by the Revenue is directed against the order dated 14/08/2023 of the learned CIT (A) NFAC, Delhi relating to A.Y.2017-18.
Facts of the case, in brief, are that the assessee is a private limited company, filed its original return of income for the A.Y 2017-18 on 30.11.2017 electronically u/s 139(1) of the I.T. Act declaring total income at Rs.106,06,25,999/-. The assessee revised the return on 14.03.2018 declaring income of Rs.95,73,34,608/- under normal provisions and at Rs.95,40,44,681/-under MAT provision. The return was selected for scrutiny under CASS and accordingly statutory notices u/s 143(2) and 142(1) were issued to the assessee to which the assessee furnished the requisite details. The Assessing Officer accordingly completed the assessment.
The learned DR drew our attention to page 3 of the assessment order in para 4 to 6 of the assessment order wherein it was held as under:
It was submitted that the Assessing Officer had made addition and added back the provisions of doubtful debts, provision for doubtful advances and the provision for gratuity to the profit of the assessee company as per Expenditure (1) to Section 115JB of the I.T. Act. However, the learned DR drew our attention to page 19 of the order of the learned CIT (A) particularly to para 2 to 4 of the learned CIT (A)’s order which reads as under:
The learned DR had submitted that feeling aggrieved by the order of the learned CIT (A), the revenue is in appeal before the Tribunal by raising the following grounds:
6. The contention of the learned DR are that by reading of the provisions of section 115JB(1)(i) of the Act, it is abundantly clear that in diminution of the value of the assets is required to be added back to the profit and gain of the assessee company and therefore, the learned CIT (A) NFAC was wrong in deleting the addition made by the Assessing Officer and deleting it after treating it as ascertained liability.
Per contra, the learned AR submitted that the assessee in its P&L Account has reduced the unsecured and doubtful loans from the balance sheet of the assessee. Further, the learned AR drew our attention to page 160 of the Paper Book and based on that it was submitted that the assessee had individually written off bad debts in the books of account and therefore, the order passed by the learned CIT (A) NFAC was in accordance with law.
It was further submitted that the provision for liability for gratuity is an ascertained liability as it was computed on the basis of the actuarial and therefore, the learned CIT (A) NFAC was right in passing the order. The learned AR had also relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Vodafone Essar Gujarat Ltd in ITA 749 of 2012 and our attention was drawn to para 3 of the decision of the Gujarat High Court which is to the following effect: “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), 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 HC-NIC Page 20 of 22 Created On Mon Aug 21 01:35:02 IST 2017 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 b alance sheet as net of the provision for bad debt, it would amount to a write of f 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 Limited(supra) fell in the former category whereas from the brief discussion av ailable in the judgment it appears that case of Indian Petrochemicals Corporation Ltd. (supra), fell in the later category. “
In rebuttal, the learned DR submitted that the judgment is applicable as the Delhi Tribunal after relying on the judgment of the Hon'ble Delhi High Court has decided the issue against the assessee and our attention was drawn to Para 7 of the decision of the Tribunal which is to the following effect:
“7. We have heard both the sides on the issue and also considered relevant material filed in the paper book. We have also considered the case laws cited by both the sides. We have also considered the written submissions. The assessee company is engaged in the business of generation of power and executing turnkey power plants as an Engineering, Procurement and Construction Contractors. The assessee company entered into power purchase agreements with Coal India Ltd and Assam State Electricity Board. The tariff was to remain firm at Rss.1.20 per unit for the first year. The tariff is fixed as per clause 3 of P.P.A.. As per clause 3.2, the tariff had two components, viz., (i) fixed; and (ii) variable. The tariff is based on interest on debt, return on equity, depreciation on assets and operation & maintenance cost. Fixed tariff based on actual capital cost and plant load factor (PLF) of the power plant. The company had recognized tariff receivable for supply of power as per P.P.A. (Power Purchase Agreement). The assessee is following mercantile system of accounting. Thus, recognition of income was as ITA No. 192/Del./2010 ITA No.4471/Del./2010 per accounting principles. Assessee had recognized revenue tariff as per bills raised in accordance with P.P.A. There is dispute with respect of recovery of part of amount raised in bills. Assessee had made provision for doubtful debt in P&L account. Now, assessee pleads that assessee had recognized excess income. Assessee claims that income shown in P&L account is inflated. Now assessee pleads that Assessing Officer should recast the accounts to arrive at the correct profit. In our considered view, this proposition of assessee is not as per law laid down by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT - 255 ITR 273 (SC). In this case, it is held that the Assessing Officer has no power to adjust the net profit except to the extent provided in the Explanation 1 to section 115JB of the Act. The Hon'ble Supreme Court has held as under :- " The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the ITA No. 192/Del./2010 ITA No.4471/Del./2010 accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. Held accordingly, that, while determining the "book profits" under section 115J, the Assessing Officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation. Decision of the Kerala High Court in CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 reversed on this point. The Hon'ble Supreme Court has also made it clear that the use of the words "in accordance with the provisions of Part II and III of Schedule VI of the Companies Act" in the section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of the accounts of the company and while so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by the statutory auditor and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies which has statutory obligation also to examine and be satisfied that the accounts of ITA No. 192/Del./2010 ITA No.4471/Del./2010 the company are maintained in accordance with the requirements of the Companies Act. Hon'ble Supreme Court has clearly debarred the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. Further, we also held that the assessee is following the mercantile system of accounting and also preparing the accounts under the mercantile system. In this system, the income has recognized when it was credited in the books of account. The bills were raised on the basis of written power purchase agreement with the customer. The assessee is legally entitled to recover the same and assessee has filed a civil suit to claim the amount and which has gone into arbitration. Since the bills have been raised on the basis of power purchase agreement and the assessee has filed a suit and finally has gone into arbitration, therefore, it cannot be said that it was a unilateral act on the part of the assessee. In the books of account, assessee had made provision for doubtful debts for this amount. The matter is sub-judice before court or arbitration. This shows that the amount was not ascertained. It remained contingent at the relevant time. Moreover, it had been gone against assessee due to amendment in Act. The amendment made by inserting clause (i) in Explanation 1 to section 115JB by the Finance Act, 2009 with retrospective effect 1.4.2001, the amount set aside and provision for diminution in the value of an asset is ITA No. 192/Del./2010 ITA No.4471/Del./2010 to be added to arrive at the book profit under section 115JB of the Act. This empowers the Assessing Officer to add to income any amount debited in profit & loss account for provision of bad and doubtful debts. The case laws relied upon by ld. AR pertain to the period prior to the insertion of clause (i) to Explanation 1 to section 115JB. In view of these amended provisions, the Assessing Officer has no choice except to make additions to arrive at the book profit. Further, we would also like to state that in the accounts, the assessee has made provision for doubtful debts. Nowhere the assessee has stated that it was a provision for unaccrued income. Hence, such pleadings on behalf of the AR have no basis. The amendment brought into by inserting clause (i) to Explanation 1 to section 115JB has been made to overcome the decision of Hon'ble Supreme Court in the case of CIT vs. HCL Comnet Systems and Services Ltd. - 305 ITR 409. The ratio of the case of HCL Comet Systems and Services Ltd. is not applicable to assessee's case on account of the amendment brought by insertion of clause (i) to Explanation 1 of section 115JB. The facts of the case of CIT vs. Nadiad Electric Supply Ltd.(Bom) - 80 ITR 660 are at variance to the facts of the assessee's case. In the case of Nadiad Electric Supply Ltd., the agreement was between assessee and Nadiad Municipality to supply electricity to the Nadiad Municipality for street lighting, etc. at fixed rate of 19 paisa per unit. However, assessee company raised the bill @ 30 paisa per unit. In view of these facts, the Hon'ble Court has held that any rate other than the rate of 19 paisa per unit not legally enforceable by the assessee. However, in assessee's case, the bill was raised as per the power purchase agreement with the customer. In the Nadiad Electric Supply Ltd., it was not as per agreed rate. The reliance of the ld. AR on the case of CIT vs. Western India Co. Ltd. - 81 ITR 712 (Gujarat) is also of no help as in that case the assessee was doing the business of building and construction on the basis of accepted tenders. The additional work was snot included in the tenders for which the rates were not settled. The assessee was crediting the amount of bills for non-tender work in his works account but was making provision in the profit and loss account only such amount as he is expected to receive and retain the works amount as kasar. Thus, the facts of the case were completely at variance. In the case of Apollo Tyres, cited supra, the Hon'ble Supreme Court has clearly disagree with the arguments of the revenue that Assessing Officer has power to scrutinize their accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. The Assessing Officer was having limited power only to make adjustments either increase or reduction as provided in Explanation 1 of section 115JB. In the case of CIT vs. Sain Processing & Weaving Mills (P) Ltd reported in 221 CTR 493 (Del.), the issue involved was whether the current year's deprecation even if not charged to the P&L account but disclosed in the note appended to the accounts has to be deducted from the net profit for the purposes of section 115J. In that situation, the Hon'ble Court held that assessee was entitled to seek deduction of current year depreciation from net profit to arrive at the book profit even though it is not charged to P&L account. This case is also distinguishable on the account that section 32 of the I.T. Act mandates to allow depreciation even if not claimed by the assessee. Moreover, this case pertains to the period prior to the amendment in Explanation 1 to section 115JB. Thus, ratio of this case is also not applicable to facts of assessee's case. In our considered view, the issue is covered against the assessee by various decisions of ITAT and decision of Hon'ble jurisdictional High Court. In the case of CIT vs. Khaitan Chemical & Fertilisers Ltd., issue was of prior period items and extra ordinary items for purposes of section 115JA. Moreover, this case was also pertained to period prior to amendment in Act. In the case of Rain Commodities Ltd. vs. DCIT, the facts are at variance and it has no help to assessee. Other case laws relied by ld. AR are also of no help to assessee on account of variation on facts. In the case of DCM Sriram Consolidated Ltd. vs. ACIT A No.4299/Del/2009, ITA No. 192/Del./2010 ITA No.4471/Del./2010 the ITAT, Delhi Bench 'B' vide order dated 23.04.2010 has held a under:- "9. We have considered the rival contentions in the light of material placed on record vis-a.-vis amendment brought in provisions of Section 115JB by the Finance Act 2009 by insertion of new clause (i). According to the amended provision, amount set aside as provision for diminution in value of any asset is required to be added in the book profit. Clause (i) has been inserted retrospectively with effect from 1.4.2001 meaning thereby from AY 2001-02, such provision for bad debts is to be added in the book profit while computing book profit u/ s 115JB. The ratio laid down by the Hon'ble Supreme Court in the case of HCL Comnet System & Services Ltd. - 305 ITR 409 is no more applicable in view of the amended provisions brought in the statute with retrospective effect. The relevant assessment year under consideration is AY 2005-06 to which amended provisions are applicable. Recently Hon'ble Delhi High Court in the case of CIT Vs. llpea Paramount (P) Ltd. - 2010-TIOL-155-HC- Del-IT, vide order dated 18.22.2010 after considering the decision of the Hon'ble Supreme Court in the case of HCL Comnet System & Services Ltd. (supra) held that amendment brought in Section 115JA was brought with retrospective effect, accordingly provision for doubtful debts are nothing but provision for diminution in the value of the asset covered under clause (g) of the said Explanation. It was accordingly held that such provision is required to be added while computing book profit u/s 115JA. Similarly, amendment in Section 115JB was also brought by the same Finance Act w.e.f, AY 2001-02, therefore respectfully following the order of the Hon'ble Jurisdictional High Court, we do not find any infirmity in the orders of the lower authorities. Hon'ble Delhi High Court in the case of CIT vs. Ilpea Paramount (P) Ltd., cited supra, has held as under :- " The questions with regard to the provision for doubtful debts and provision for doubtful advances have to be answered in favour of the revenue and against the assessee because of the retrospective amendment introduced in section 115JA of the said Act. By virtue of ITA No. 192/Del./2010 ITA No.4471/Del./2010 Finance (No.2) Act, 2009 clause (g) has been inserted in the Explanation contained in Section 115JA(2). By virtue of the said amendment, the amount or amounts set aside as provision for diminution in the value of any asset, is specifically mentioned. The Supreme Court in the case of CIT v. HCL Comnet Systems & Services : 305 ITR 409 = (2008- TIOL-182-SC-IT) held that provision for doubtful debts and doubtful advances did not fall within clause (c) of the said Explanation inasmuch as they amounted to provision in respect of diminution in the value of asset. Now, with the introduction of the said amendment with retrospective effect from 1.4.98, the provision for doubtful debts and the provision for doubtful advances, which are nothing but provision for diminution in the value of asset, are specifically covered under clause (g) of the said Explanation. Consequently, the question insofar as it relates to provision for doubtful debts and provision for doubtful advances, required to be answered in favour of the revenue and against the assessee. It is so answered."
It was further contended that there was no actual write of the doubtful debts and unsecured loan in the books of account of the assessee as required under the law. Therefore, the order of the learned CIT (A) is incorrect and required to be set aside.
We have heard the rival arguments made by both the sides and perused the material available on record. For the purpose of deciding the above issues in hand, it is essential to reproduce the relevant provision of section 115JB Exp. (1) which reads as under: “115JB. Special provision for payment of tax by certain companies. (1)Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2)Every assessee,— (a)being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b)being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,— (i)the accounting policies; (ii)the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii)the method and rates adopted for calculating the depreciation,shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,— (i)the accounting policies;(ii)the accounting standards adopted for preparing such accounts including statement of profit and loss;(iii)the method and rates adopted for calculating the depreciation,shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by— (a)the amount of income-tax paid or payable, and the provision therefor; or (b)the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c)the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d)the amount by way of provision for losses of subsidiary companies; or (e)the amount or amounts of dividends paid or proposed ; or (f)the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa)the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (A)the capital gains arising on transactions in securities; or (B)the interest, [dividend,] royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, (fb)the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,—if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc)the amount representing notional loss on transfer of a capital asset, (h)the amount of deferred tax and the provision therefor,(i)the amount or amounts set aside as provision for diminution in the value of any asset,(j)the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset,
From the reading of Exp (1)(i) it is abundantly clear that in case there is a diminution of valuation of the asset, then the same is required to be added back to the profit & loss of the company.
For the purposes of fulfilling the criteria in (c) it is essential that(i) the amount(s) set aside for meeting the liability other than the ascertained liability are only required to be added to the P&L Account of the company for the purpose of computing the book profit of the company.
13.1 In the present case with respect to gratuity, the assessee has made the provision on the basis of scientific principles. The Hon'ble Kerala High Court in a case (2019) 111 Taxmann.com 350 (Ker.) has decided this in favour of the assessee. We are of the considered opinion that the provisions made for meeting the liability for the gratuity is an ascertained liability and it is calculated on the basis of scientific basis and therefore, the findings given by the learned CIT (A) is in accordance with the law.
With respect to two other issues i.e. for doubtful debts and advances, it is very much clear that these items would fall within the realm of section (i) of Exp.(1) of section 115JB of the Act as they will have the effect of diminishing the value of the asset. We have seen page 160 of the Paper Book and submission before the learned CIT (A) and from the perusal of the above, it is not clear whether the assessee had complied with the provisions of section 36(vii) of the Act i.e. by proving that bad debts have neem written off as irrecoverable in the accounts of the assessee for the previous year. Similarly, whether advances have also been written off as irrecoverable in its account or not. In view of the legality of the above, we deem it appropriate to remand the issue of doubtful debts and advances to the file of the Assessing Officer, with a direction to examine the record available and find out whether bad debts and advances have been written off irrecoverable or not. However, if the assessee was able to demonstrate that they were actually written off in the books of account of the assessee, then the bad debts and advances would cease the character of the provisions, as it will be calculated as actually written off of the bad debts and loans and advances and if not be covered within the provisions of (i) of Exp.(1) of section 115JB of the Act. In the light of the above, we deem it proper to remand back these two issues to the file of the Assessing Officer with a direction to verify after giving an opportunity of being heard to the assessee whether the bad debts and loan advances were actually written off in the books of account or not.
In the result, appeal of the Revenue is allowed for statistical purposes. Order pronounced in the Open Court on 27th May, 2024. Sd/- Sd/- (MANJUNATHA, G) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, dated 27th May, 2024 Vinodan/SPS Copy to: S.No Addresses 1 ACIT Circle 2(1) Room No.513, 5th Floor, Signature Towers, Kondapur Hyderabad 500084 2 Aragen Life Sciences Ltd, Plot No.28A, Road No.15, IDA, Nacharam Hyderabad 500076 3 Pr. CIT - Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File By Order
Draft dictated on 21st May, 2024 2. Draft placed before author 21st May, 2024 27th May, 2024 3 Draft proposed & placed before the second Member 4 Draft discussed/approved by second Member 27th May, 2024 5 Approved Draft comes to the Sr.P.S./PS 27th May, 2024 6. Kept for pronouncement on 27th May, 2024 7. File sent to the Bench Clerk May, 2024 8 Date on which file goes to the Head Clerk May, 2024 9 Date of Dispatch of order