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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 22.06.2010. Assessment was framed by ACIT, Circle-5, Kolkata u/s 143(3) r.w.s 115WE(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 14.12.2009 for assessment year 2007-08.
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 2 Shri D.S.Damle, Ld. Authorized Representative appearing on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative appearing on behalf of Revenue.
Assessee has filed revised Form-36 together with consolidated grounds, which reproduced below:- “1. The Commissioner of Income Tax (appeals) erred in upholding the action of the Assessing Officer in disallowing u/s. 14A a part of interest and expenses allegedly as relatable to earning of exempt dividend income by applying Rule 8D on the facts and in the circumstances of the case. 2. The Commissioner of Income Tax (appeals) erred in upholding the action of the Assessing Officer in making addition of interest income as per CASS on the facts and in the circumstances of the case. 3. The Commissioner of Income Tax (appeals) erred in upholding the action of the Assessing Officer in making addition of expenses including interest disallowed u/s 14A read with Rule 8D in computing book profit u/s. 115JB of the Act on the fats and in the circumstances of the case. 4. On the facts and in the circumstances of the case the authorities below erred in not reducing the lower of loss brought forward or unabsorbed depreciation as per books of account in computing book profit u/s. 115JB of the Act.” 3. First issue raised in this appeal of assessee is as regards that Ld. CIT(A) erred in confirming the action of Assessing Officer by sustaining the disallowance u/s 14A of the Act r.w.s. Rule 8D of the IT Rules, 1962.
3.1 Facts in brief are that assessee is a Limited Company engaged in business of trading in share and securities, granting of loan and advances. During the year assessee has earned dividend income of ₹306,95,622/- and Long Term Capital Gains (LTCG for short) and Security Transaction Tax (STT for short) for ₹535,53,918/-. The AO has applied the provision of Rule 8D of the IT Rules, 1962 and disallowed a sum of ₹1,29,11,487/- which is comprising to demat charges of ₹1.15 lakh of interest expenses of ₹1,18,14,655/- and other expenses of ₹9,55,832/-. The disallowance made
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 3 under Rule 8D of the IT Rules, 1962 was added to the total income of assessee.
Aggrieved assessee preferred an appeal before Ld. CIT(A) where assessee submitted that its own case for AY 2002-03 in ITA No. 318/Kol/2006 & 283/Kol/2006 dated 10.08.2007 in “C” Bench has upheld the order of Ld. CIT(A) directing the AO to disallow the interest of borrowed capital in the proportionate of dividend income to gross business receipts. However, Ld. CIT(A) has confirmed the action of AO by observing as under : “The Assessing Officer applying the provisions of Rule 8D u/s 14A made the disallowance. The AO following the decision of the Special Bench of Mumbai Tribunal in the case of Daga Capital management made the disallowance under rule 8D. the action of the AO is upheld. This ground of appeal is dismissed.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us Ld. AR submitted two sets of documents which are running pages 1 to 86 and 1 to 38 respectively. He stated that Tribunal has been consistently disallowing the expense @ 1% of the dividend income and prayed to follow the same decision. Ld. AR further submitted that in case applying the Rule 8D of the IT Rules, 62 in relation to the interest expense then net interest (interest receipt as income minus interest paid as expense) should be considered. On the other hand, Ld. DR has relied upon the findings of the lower authorities.
We have considered the rival submissions of both the parties and perused the materials available on record. We find that AO has applied the Rule 8D of the IT Rules and made disallowance. However, we find that similar issue was involved in assessee’s own case in ITA No. 1248 & 1190/Kol/2008 dated 31.08.2009 where disallowance was upheld after applying the income criteria and relevant extract of the order is reproduced below:-
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 4 “15) We have heard the rival submissions and perused the orders of authorities below. Sec. 14A provides that any expenditure relating to earning of income which is not includible in the total income; cannot be allowed in computing the total income. Language of Sec. 14A indicates that an expenditure incurred in relation to earning of exempt income is not permissible and therefore the nexus of the expenditure should be established with the tax free income. Where an assessee incurs composite expenditure which produces income which is partly chargeable and partly non chargeable then in working out the disallowable expenditure u/s. 14A; apportionment should be made by applying income criterion. In our considered pinion apportionment of expenditure on income criteria would be reasonable and appropriate having regard to the language used in Sec. 14A. Moreover we find that the same AO in the assessment of Brabourne Investments Ltd applied the income criteria for quantifying interest disallowable u/s 14A of the Act. In the circumstances, we do not find any reasons for AO to adopt entirely different formula for quantifying the amount disallowable u/s 14A of the Act. For this reasons therefore we do not find any infirmity in the CIT(A)’s order directing AO to compute the disallowance u/s 14A on the basis of dividend received which was exempt u/s 10(33) of the Act. Ground No.3 of the Revenue’s appeal is therefore rejected.”
In the course of hearing of appeal the A/R submitted working chart for the amount disallowable; in conformity with the findings of the ITAT Kolkata in its order dated 10th August 2007, which is reproduced below:
A Dividend Income Received 3030685 B Total Income credited in P&L 50078062 Less: Closing stock of shares 260710039 Provision of NPA written back 3129850 Liability no longer reqd written back 84750 263924639 236855990 C Interest debited to P&L 62857763 Less: Interest relating to earlier year 33350412 Interest on delayed payment of TDS 4423824 37774236 25083527 D Interest relatable to earning exempt 320956 Income (A/B) x C 15. On perusal of the statement, in the light of the ITAT Kolkata’s finding in Assessment Year 2002-03, I find that disallowance of interest u/s. 14A could only be for Rs.3,20,956/-. Sec.36(1)(iii) of the Act allows deduction for interest paid on borrowed capital which is used for business purposes. The deduction allowable u/s. 36(1)(iii) is however now subject to restrictions placed by Sec. 14A of the Act. Sec. 14A
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 5 provides for disallowance of any expenditure which is incurred in relation to earning of income which does not form part of the total income. As per the finding of the ITAT Kolkata in the assessee’s own case, interest disallowable was required to be computed in the proportion of exempt income to gross business income. The deduction u/s. 36(1)(iii) is however allowed upon satisfaction of specified conditions. For allowing interest, it is not necessary for assessee to prove that by use of borrowed capital, assessee has produced corresponding or matching income. From the co-joint reading of provisions of Sec. 14A and 36(1)(iii) I hold that only the interest which was incurred in relation to earning dividend, the disallowance could be made u/s. 14A of the Act. For these reasons therefore I hold that AO could validly make disallowance out of interest paid amounting to Rs.3,20,956/-. The as therefore gets relief of Rs.3,97,88,674/-. Ground Nos. 2 & 3 are partly allowed.” 7. After hearing both the parties and perusing the material viable on record, we find that the same issue was considered by the ITAT, Kolkata Bench in the assessee’s own case for AY 2002-03 in ITA No. 318/K/2006 dated 10th August, 2007. We also find that since the Ld. CIT(A) has given relief to the assessee by following the said decision of the ITAT, Kolkata Bench cited supra, we find no need to interfere with the same and, therefore, the same is hereby upheld. This ground of appeal of the revenue is, therefore, dismissed.”
Taking a consistent view in assessee’s own case (supra) we accordingly restore this issue to the file of AO to work out the disallowance in proportionate to the gross income of assessee in accordance with the law. This ground of assessee’s appeal is allowed for statistical purpose.
Second issue in this appeal of assessee is as regards that Ld. CIT(A) erred in confirming the action of AO in sustaining the addition of interest income as per CASS. During the course of assessment proceeding, AO observed that assessee failed to include a sum of ₹1.50 lakh as interest income in its total income as shown in the CASS. Accordingly, he made this addition of ₹ 1.50 lakh.
Aggrieved, assessee preferred an appeal before Ld. CIT(A), where assessee submitted that the Tax Deducted at Source (TDS for short)
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 6 deducted by the parties namely, RPG Itochu Finance Ltd. was never taken in its total income and accordingly no credit for TDS was allowed for the interest income. Accordingly, assessee prayed for deletion of notional interest income of ₹ 1.50 lakh and deleted the same. However, Ld. CIT(A) disregarded the plea taken before him by holding as under:- “I have gone through the submissions of the appellant and also the order of the AO. The AO made the addition on the basis of CASS. The appellant has not received any TDS certificate from the said party. As seen from the assessment order the appellant company is not registered as an NBFC nor it is privileged to enjoy the benefit of RBI Act, 1934. The company RPG Itochu Finance Ltd. is a group company of the appellant. It is strange that the group company has deducted TDS on the interest payment and the appellant has treated the loan given to the said party a non performing asset from 01.04.2006. Since the appellant company was refused the status of NBFC by the RBI, the argument of the appellant that it mandatorily followed the directions issued by RBI cannot be accepted. The appellant had various other option to treat the bad debts. Taking into consideration the information from CASS, the AO made the addition. The addition made by the AO is confirmed taking the above discussion into consideration. This ground of appeal is dismissed.”
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us Ld. AR submitted that the party has deducted the TDS which was being shown under CASS but the same was never taken in the income of assessee. On the other hand, Ld. DR has relied upon the findings of the lower authorities.
We have considered the rival submissions of the Ld. representatives of the both parties and materials available on record. From the aforesaid discussion, we find that assessee has not included a sum of ₹ 1.50 lakh on account of interest income shown under CASS. Therefore, addition was made by AO and subsequently confirmed by Ld. CIT(A). From the facts of the case, we find that assessee was following the mercantile system of accounting but
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 7 the real income should be liable to tax irrespective method of accounting system followed by assessee. In this connection, we relied on the decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746 (SC) wherein the extract reproduced below:- “The tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made, represented only hypothetical income and the amount in question brought to tax by the Income Tax Officer did not represent income which had really accrued to the assessee company during the relevant previous year.”
In the said judgement the Hon'ble Supreme Court reiterated the following observations made by it earlier in the case of CIT v. Shoorji Vallabhdas & Co. [46 ITR 144]
‘Income tax is a levy on income. No doubt, the Income tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or it receipt but the substance of the matter is income. If income does not result at all. There cannot be a tax even though in book keeping, an entry is made about a hypothetical income, which does not materialize.’
After referring to the ratios laid down in the earlier decisions, the Apex Court ultimately held in the said decision that even though the revision in tariff was approved by the Supreme Court and the assessee had made entries in the books for electricity charges at enhanced rates yet the Income Tax Officer was not justified in assessing such income since the assessee did never actually realize the increased tariff from the customers. Your Honour will thus appreciate that the Supreme Court has thus repeatedly held that the subject matter of taxation is not hypothetical income but real income.
The same principle was laid down by the Hon'ble Calcutta high Court in the case of Sri Kewal Chand Bang vs. CIT [183 ITR 207]. The Hon'ble Calcutta High Curt further held that when no interest was in fact charged by the assessee the AO could not presume accrual of income in absence of evidence indicating that the interest was actually charged. The same principle has also been laid down in the decision of the Madras High Court in the case of CIT v. Motor Credit Co. Pvt. Ltd. [127 ITR 572] and by the Punjab & Haryana High Curt in the case of Ferozpur Finance Pvt. Ltd. v. CIT [124 ITR 619]. Similar view has also been taken by the Calcutta High Court in the case of CIT vs. Balarampur Commercial Enterprises Ltd. [362 ITR 439]. In all these decisions the High Courts have repeatedly held that unless the
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 8 assessee actually charged the interest or interest in real terms accrued to the assessee, it cannot be brought to tax merely on the ground that the assessee follows mercantile system of accounting.”
We also find that similar issue was also raised in Agra Bench in the case of Devendra Nath Dewedi, Aligarh v. DCIT in ITA No.253/Agra/2013 dated 27.06.2014 for AY 2008-09, wherein the Tribunal has held:- “5. Having heard the learned Departmental Representative and having perused the material on record, we are of the considered view that based on 26AS along no additions can be made. This can at best be a starting point for necessary verification by these, but it cannot, on standalone basis, justify the impugned additions. However, we also considered it appropriate to remit the matter to the file of the Assessing Officer for strictly limited purpose of verifying the information. In case, he can find any independent evidence of the assessee’s AY 2008-09 having actually received the said rent, he can bring the same to tax. We make it clear that the onus will be on the Assessing Officer to find such evidence and that the assessee cannot be expected to discharge the impossible burden of proving a negative i.e., that the assessee did not received such rent.
With the observations as above, and for the limited purposes set out above, the matter stands restored to the file of the Assessing Officer. Needless to add that any material, adverse to the assessee, will have to be confronted to the assessee by the Assessing Officer, and that, in case Assessing Officer intends to pass any fresh order as a result of these directions, he will do so only after giving due and fair opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order.”
Taking a consistent view on the aforesaid order in the case of Devendra Nath Dewedi (supra) we reverse the orders of Authorities Below and this ground of assessee’s appeal is allowed.
Third issue in this appeal of assessee is as regards that Ld. CIT(A) erred in confirming the action of AO by sustaining the addition of the expense including the interest disallowed u/s. 14A r.w.s 8D of the IT Rules in computing the book profit u/s. 115JB of the Act.
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 9 12. During the course of assessment proceedings, AO has applied the provision of Sec. 14A r.w.s. 8D of the IT Rules and disallowed the expense of ₹ 1,29,11,487/- while working out the book profit under the provision of Minimum Alternate Tax (MAT for short) which was subsequently confirmed by Ld. CIT(A).
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us Ld. AR submitted that disallowance made by AO u/s 14A of the Act cannot be applied in terms of clause (f) of the Explanation to Sec. 115JB of the Act.
On the other hand, Ld. DR relied on the orders of Authorities Below.
We have heard the rival contentions and perused the materials available on record. At the outset, we find that similar issue was decided by Delhi Tribunal in the case of Quippo Telecom Infrastructure Ltd. v. ACIT in ITA No.4931/Del/2010 dated 18.02.2011 for the AY 2007-08, the relevant extract of the order is reproduced below:- “11. In the present case, the AO has also made addition of Rs.19,58,253/- on account of alleged expenditure incurred to earn exempt income while computing book profit u/s. 115JB of the Act. The AO's action has been confirmed by the CIT(A). Both the authorities have applied Rule 8D of the Income-tax Rules while computing the amount of expenditure disallowable u/s. 14A of the Act. As already held above, the provisions of Rule 8D are not applicable to the present assessment year under consideration. Therefore, disallowance of expenditure by applying Rule 8D is not justified. Further, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. Therefore, the provision of section 14A cannot be imported into while computing the book profit u/s. 115JB of the Act inasmuch as clause (f) of Explanation to sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s. 115JB of the Act. In this connection, reliance can be placed upon the decision of
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 10 ITAT Delhi Bench in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del), wherein it has been held that provisions of sub-sec. (2) & (3) of section 14A cannot be imported into clause (f) of the Explanation to sec. 115JA of the Act. In this view of the matter, we therefore, delete the disallowance of expenses confirmed by the CIT(A) while computing book profit under sec. 115JB of the Act. In other words, no addition to the book profit shall be made on account of alleged expenditure incurred to earn exempt income while computing income u/s115JB of the Act. Thus, this ground No.2 is decided in favour of the assessee.”
Taking a consistent view in the case of Quippo Telecom Infrastructure Ltd. (supra) and facts and circumstances of the present case, we reverse the orders of Authorities Below and this ground of assessee’s appeal is allowed.
Fourth ground raised by assessee is as regards that Ld. CIT(A) erred in not reducing the lower of loss brought forward or unabsorbed depreciation as per books of account while computing the book profit u/s 115JB of the Act.
At the outset, we find that as per the provision of law, assessee is entitled to claim the deduction for lower of the amount either loss brought forward or unabsorbed depreciation. We accordingly direct the AO to allow the loss brought forward or unabsorbed depreciation whichever is less as per books of account of the assessee in terms of clause (iii) u/s 115JB of the Act. This ground is allowed in favour of assessee accordingly to law.
Last additional ground raised by assessee dated on 14.05.2012 and submitted that Ld. CIT(A) erred in charging interest u/s 234B/C, which is reproduced below:- “Additional ground “For that on the facts and in the circumstances of the case interest u/s. 234B and u/s. 234C of the Income Tax Act, 1961 should not have been charged on the additions made to the net profit as per profit and loss account for provision for NPA and provision for diminution in the value of investments amounting to Rs.26,72,794/- and Rs.5,23,42,633/- respectively for the purposes of section 115JB of the Act.”
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 11 18. At the outset, we observe that this issue is squarely covered in favour of assessee and against the Revenue by the judgment of jurisdictional High Court in the case of Emami Ltd. v. CIT (2011) 337 ITR 470 (Cal) wherein it was held:- “the provisions of sections 234B and 234C of the Income-tax Act, 1961, are mandatory in nature. However, in order to attract these provisions, it must be established that the assessee had the liability to pay advance tax as provided in sections 207 and 208 within the time prescribed under section 211. In order to held an assessee liable for payment of advance tax, the liability to pay such tax must exist on the last date for payment of advance ax as provided under the Act or at least on the last date of the financial year preceding the assessment year in question. If such liability arises subsequently when the last date for payment of advance tax or even he last date of the financial year preceding the assessment year is over, the assessee had no liability to pay advance tax.
For the assessment year 2001-02, the assessee was not liable to tax under section 115JB. By the Finance Act, 2002, section 115JB was amended with retrospective effect from April 1, 2001. In view of the amendment, the assessee was not in a position to deduct the sum of Rs.26.51 crores withdrawn from the revaluation reserves. Thus, the as recomputed the book profit under section 115JB for the assessment year 2001-02 on the basis that the sum of Rs.26.51 crores credited to the profit and loss account was not deductible. On such basis, the assessee worked out the amount of tax payable at Rs.1,55,62,511 and paid the tax. The Assessing Officer computed the tax liability under section 115JB with interest under sections 234B and 234C since the assessee did not pay any advance tax with reference to the liability for tax under the amended section 115JB. The Tribunal upheld the order. On appeal: ‘Held, that the last date of the relevant financial year was March 31, 2001, and on that day, admittedly, the assessee had no liability to pay any amount of advance tax in accordance with the law then prevailing. The amended provisions of section 115JB having come into force with effect from April 1, 2001, the assessee could not be held a default with respect to payment of advance tax. On the last date of the financial year proceeding the relevant assessment year, as the book profits of the assessee in accordance with the then provision of law were nil, there was no advance tax payable within the last day of the financial year preceding the relevant Assessment Year as provided in sections 207 and 208 or within the dates indicated in section 211. Interest could not be levied under sections 234B and 234C.’
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 12 It was held that these additions have been made to the total income of assessee as a result of retrospective amendment in the Statute and assessee paid the tax. But there will be no interest on the aforesaid addition made u/s 234B and 234C in view of the aforesaid judgment of jurisdictional High Court in the case of Emami Ltd. (supra). Accordingly we reverse the orders of Authorities Below and delete the addition made by AO.
Coming to assessee’s additional ground filed on 13.01.2015, which reproduced below:- Additional Grounds 1. For that on the facts and n the circumstances of the case, the CIT(A) erred in upholding the addition to the book profit u/s.115JB of Rs.26,72,794/- being Provision for NP and Provision for Dimunition in value of investments by placing reliance on Clause (i) of the Explanation to Sec. 115JB of the IT Act.
For that on the facts and in the circumstances of the case, the appellant in its Balance Sheet while disclosing the “assets” by way of debtors, loans and advances, accrued interest and Investments having reduced the said provisions and only the net value of the assets were disclosed in the Balance Sheet, the authorities below ought to have held the said Provisions were in the nature of “actual write off” and in that view of the matter, these provisions should not have been added in arriving at “book profits” u/s 115JB of the Act.
Assessee submitted that Ld. CIT(A) erred in upholding the addition to the book profit u/s 115JB of the Act in terms of the clause (i) to the Explanation of Sec.115JB of the Act on account of following:- (i) Provision for sundry debtors of Rs. 26,72,794/-; (ii) Provision of diminution in the value of investment of Rs.5,23,42,633/- During the year, assessee has written off the aforesaid amount by reducing the respective items of its balance-sheet reflected on the asset side. The assessee submitted that provision against the debtors and investment has actually been written off from the respective assets. However, AO during the course of assessment proceeding disallowed both the aforesaid items after having reliance on clause (i) of the Explanation to Section 115JB of the Act.
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 13 21. Matter was carried before Ld. CIT(A) who after hearing assessee has sustained the addition made by AO for working out the book profit u/s 115JB of the Act. Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
Before us Ld. AR submitted that assessee has not credited any provision against sundry debtors and investment as envisaged in clause (i) to the Explanation to Sec.115JB of the Act. The assessee has actually written off the respective assets and therefore these transactions are out of purview of the provision of clause (i) to the Explanation of Sec.115JB of the Act.
On the other hand, Ld DR relied on the order of Authorities Below.
From the aforesaid discussion, we find that assessee has actually written off bad debts from the sundry debtors and also written off the diminution in the value of investment from the respective items as appearing in the balance-sheet of assessee. From the facts of the case we find that assessee has not shown the bad debts and diminution in the value of investment on the liability side of its balance-sheet by creating any provision. Now the question before us is as to whether the amount actually written off against the sundry debtors and the value of investment requires any addition for working out the book profit u/s 115JB of the Act. We, with regard to the bad debt actually written off in the books of account, find that the action of the assessee is within the purview of law and outside the purview of the provisions of section 115JB of the Act. In this connection, we rely on the judgment of Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. (2012) 17 taxmann.com 15 (Kar), wherein it was held:- “In the instant 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, item (c) of the Explanation is not
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 14 attracted to the facts of the case. Item (c) in section 115JA and 115JB(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 amount 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 (1). It is in that context the appellant Commissioner as well as the Tribunal has granted relief to the assessee. Realizing 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, if case of the assessee falls under item (c). In meeting the aforesaid case, the assessee ought on record the judgment of the Apex Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 where the Apex Court had an occasion to consider this 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(1)(vii) 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 consequently, 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/debtor is shown a net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced form the loans and advances or the debtor from the assets side of the balance sheet the Explanation to section 115JA or 115JB is not at all attracted. In that context even if
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 15 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, there is not merit in this appeal.”
Respectfully following the precedents, as above, we allow this ground of assessee’s appeal with regard to bad debts written off in its books of account. However, with regard to the amount of diminution in the value of investment which was written off against the amount of the investment value shown on the asset side of assessee’s balance sheet, we differ with the argument advanced by Ld. AR of the assessee. We find that the diminution in the value of investment is not permanent in nature. The value of investment made in the shares and securities keep on changing depending upon the market rate. Therefore, there can be a case for a particular year that there will be diminution in the value investment but in the next year but there will be appreciation in the value of investment. So we should not consider the diminution and appreciation in the value of investment unless it is not permanent in nature. In this connection, we find that the Institute of Chartered Accountant of India in terms of its Accounting Standard 13 has recommended to identify the loss in the books on account of diminution in the value of investment until and unless it is permanent in nature. The relevant extract of the AS 13 is reproduced below:- “32. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually”
In addition to above, the case law CIT v. Yokogawa India Ltd. (2012) 17 taxmann.com 15 (Kar) as discussed above speak only about bad debt written in the books of account and do not talk about the diminution in the value of investment. Therefore we hold that facts of the aforesaid case are different from the facts of the present case before us. Therefore, in our considered view, the action taken by Authorities Below in connection the diminution in the value of investment is correct and within the ambit of law. Hence, we confirm
ITA No.1838/Kol/2010 A.Y. 2007-08 Universal Industrial Fund Ltd. v. DCIT, Cir-6, Kol. Page 16 the order of lower authorities with regard to addition made by Authorities Below under clause (i) to the Explanation of Sec. 115B of the Act as far as Investment is concern. This ground of assessee’s appeal is partly allowed.
In the result, assessee’s appeal stands partly allowed. Order pronounced in the open court 27/05/2016 Sd/- Sd/- (S.S.Vishwanethra Ravi) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 27/05/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Universal Industrial Fund Ltd., 31, Netaji Subhas Road, Kolkata-01 2. ��यथ�/Respondent-DCIT, Circle-6, P7, Chowringhee Square, Kolkata-69 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।