CIT vs. Vodafone Essar Gujarat Ltd (Gujarat High Court) (Full Bench)

(i) The Revenue’s appeal against the said judgement of the Tribunal was admitted for considering the following substantial question of law:

“Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs.6,28,14,653 being provision for bad and doubtful debts to the book profit for computation of MAT liability even when such adjustment was provided for by inserting clause(i) to Explanation (1) to Section 115JB w.e.f. 01.04.2001?”

(ii) When the appeal was taken up for hearing, two judgements were cited before the Court. Revenue relied on the decision of Division Bench in case of Commissioner of Income Tax v. Deepak Nitrite Limited (Tax Appeal No.1918/2009, order dated 17.8.2011) taking the view that after the insertion of clause (g) to explanation 1 to section 115JA by the Finance Act, 2009, with effect from 01.04.1998, the ratio laid down by the Supreme Court in the judgement in case of Commissioner of Income Tax v. HCL Comnet Systems and Services Ltd. reported in (2008) 305 ITR 409(SC), would not apply in cases where the assessee had made the provision for doubtful debts for diminution in the value of any asset. On the other hand, the assessee relied on the decision of this Court in case of Commissioner of Income Tax v. Indian Petrochemicals Corporation Ltd. [Tax Appeal No. 1773/2008 and connected appeals, order dated 19.07.2016] in which the Court relying on the judgments of Karnataka High Court in case of Commissioner of Income Tax vs. Yokogawa India Ltd. reported in [2012] 17 taxmann.com 15 (Kar.) and Commissioner of Income Tax vs. Kirloskar Systems Ltd. reported in [2013] 40 taxmann.com 124 (Karnataka), rejected the Revenue’s appeal involving the question of adding back the provision for doubtful debt in terms of section 115JB of the Act. The Court noticed that decision in case of Deepak Nitrite Limited (supra) was not brought to the notice of the High Court in case of Indian Petrochemicals Corporation Ltd. (supra). On the other hand, counsel for the assessee argued that the decision of Supreme Court in case of Vijaya Bank v. Commissioner of Incometax and another reported in (2010) 323 ITR 166 (SC) was not cited before the Court in case of Deepak Nitrite Limited(supra). Considering such factors, reference was made to the larger Bench for consideration of the following question:

“Whether in view of decision of the Supreme Court in case of Vijaya Bank (supra), judgement in case of Deepak Nitrite Limited(supra) was not correctly decided and, therefore, later judgement in case of Indian Petrochemicals Corporation Ltd. (supra) lays down the correct law?”

HELD By the Full Bench:

(iii) 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.

(iv) 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.”

(v) In case of Kirloskar Systems Ltd. (supra), the Karnataka High Court adopted the same principle.

(vi) 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 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 Limited(supra) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corporation Ltd. (supra), fell in the later category.

(v) 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.