provisions made for bad and doubtful debts cannot be added back in accordance wi

[pawansingla]

[2012] 17 taxmann.com 15 (Karnataka)

HIGH COURT OF KARNATAKA

Commissioner of Income-tax

v.

Yokogawa India Ltd.*

N. KUMAR AND RAVI MALIMATH, JJ.

IT APPEAL NO. 1062 OF 2008

AUGUST 29, 2011

Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment year 2004-05 - Whether while computing book profits, provisions made for bad and doubtful debts cannot be added back in accordance with Explanation (c) to section 115JB(1) as same is not an ascertained liability - Held, yes [In favour of assessee]

FACTS

The assessee was engaged in manufacturing, trading and distribution of process control instruments and undertaking related services. In the course of assessment, the Assessing Officer added amount in respect of provision for doubtful debts in computing book profits under section 115JB by treating the same as the provision for meeting liabilities other than ascertained liabilities. On appeal, the Commissioner (Appeals) held that the addition for bad and doubtful debts could not be made to the book profit under item (c) of the Explanation to Section 115JB. The Tribunal agreed with the finding of the Commissioner (Appeals).

On revenue's appeal:

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 theExplanation is not attracted to the facts of the case. Item (c) in section 115JA and 115JB(1) are identical. In order to attract theExplanation the debt which is doubtful or bad should satisfy the requirement contemplated in item (c) of the Explanation. It is the amount or amounts 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 appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising 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 brought 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/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 section 115JA or 115JB is not at all attracted. In that context even if 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. [Para 8]

The parties to bear their own costs.

CASES REFERRED TO

Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 (SC) (para 7) and CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409/174 Taxman 118 (SC) (para 7).

K.V. Aravind and M.V. Seshachala for the Appellant. K.P. Kumar for the Respondent.

JUDGMENT

N. Kumar, J. - The revenue has preferred this appeal challenging the order passed by the Tribunal which upheld the view of the Appellate Commissioner that the addition made by the Assessing Authority on account of provision of doubtful debts claimed by the assessee is not proper.

2. This appeal pertains to the assessment year 2004-05. The assessee is engaged in manufacturing, trading and distribution of process control instruments and undertaking related services and had furnished its return of income for the assessment year 2004-05 on 01.11.2004 declaring a total loss of Rs. 1,07,23,313/-. The return was processed under Section 143(1) of the Act and was subjected to scrutiny. During the scrutiny, the claim of deduction under Section 10A was computed to nil besides effecting certain additions and the order came to be passed on 26.12.2006. Aggrieved by the said order passed by the Assessing Authority, the assessee preferred an appeal raising nine grounds. One such ground raised was the amount added in respect of provision for doubtful debts of Rs. 10,84,33,130/- in computing book profits under Section 115JB of the Act (book profits) by treating the same as the provision for meeting liabilities other than ascertained liabilities. The assessee contended that the debts due to the assessee were provided as doubtful debts and the adjustment; provided under Section 115JB is only in respect of provisions made towards unascertained liabilities. Therefore the Assessing Authority was not justified in facts in adding back the provisions.

3. After considering the several judgments relied on, the Appellate Authority held that the addition for bad and doubtful debts cannot be made to the book profit under item (c) of the Explanation to Section 115JB and therefore, directed the Assessing Authority not to increase the provision for doubtful debts of Rs. 10,84,33,130,/-, made in the assessee's books for the relevant assessment year under appeal in computing the book profits under Section 115JB of the Act. Aggrieved by the same, the revenue preferred an appeal to the Tribunal. The Tribunal agreed with the finding of the Appellate Commissioner dismissed the appeal Aggrieved by the same, the revenue is in appeal.

4. The appeal was admitted to consider the following substantial question of law:

"Whether the Appellate Authorities were correct in holding that the provisions made for bad and doubtful debts cannot be added back in accordance with the Explanation (c) to Section 115JB(1) of the Act as the same is not an ascertained liability when computing the book profits under Section 115JB of the Act?

5. The assessee in the balance sheet as at 31st March 2004 showed a sum of Rs. 7,131.51 lakhs as amount from the debtors. For the relevant assessment year a sum of Rs. 296.30 lakhs was shown as doubtful debt. Infact a sum of Rs. 1,212.26 lakhs is the accumulated doubtful debt and it is shown as opening balance. However, under debtors, (unsecured) a total amount of Rs. 8640.07 is the amount shown as debt due to the Company. Out of the said amount a sum of Rs. 1,508.56 lakhs which represents the doubtful debts was given deduction to in the balance sheet and the total debts due is shown as Rs. 7,131.51 lakhs. In other words, provision for doubtful debts is deducted from the total assets of the Company and therefore they had claimed the aforesaid deductions. In addition, to that, in the expenses column in the balance sheet a sum of Rs. 801.77 lakhs has been written off as bad debts. Therefore now a sum of Rs. 10,84,33,130/- was claimed as bad debts thus written off. The assessing authority in the assessment order passed by him under Section 143(3) of the Act added the provision for doubtful debts, book profit, for the purpose of computation of income under Section 115J of the Act. In the entire order there is no whisper about the reason for adding back the said amount. Aggrieved by the same, when the assessee preferred an appeal, the appellate Commissioner held that the addition for doubtful debts cannot be made to the book profit under Item (c) of Explanation to Section 115JB as the same is not contemplated in Explanation (1) to the said provision. The order has been affirmed by the Tribunal.

6. Section 115JB is a special provision for payment of tax of certain Companies. If the income-tax payable by a Company on the total income is less than 18% of 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 18%. Explanation added to the said provision makes it clear that for the purpose of this Section book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-Section (2) is increased by the amounts mentioned therein at Clauses (a) to (h) as doubtful debts. The doubtful debts written off are not mentioned in the said Explanation as what is added is only to arrive at the book profit. Under those circumstances the appellate Commissioner as well as the Tribunal were justified in setting aside the addition made by the assessing officer.

7. The learned counsel for the Revenue submitted that Clause (i) stands added to the said Explanation which has come into effect from 1-4-2001 and therefore as the said amounts are set aside as provision for diminishing in the value of assets by virtue of retrospective operation, the said amounts have to be added only to arrive at the book profit and therefore the order passed by the Tribunal is illegal and requires to be set aside. In that context, he also relied on the Judgment of the Apex Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 and CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409/174 Taxman 118. After referring to items (a) to (f) as provided in the Explanation it was held that even doubtful debts can be added back to the net profit if Item (c) stands attracted. Item(c) deals with amounts set aside as provisions made for meeting the liabilities, other than ascertained liabilities, 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 ascertained liability, that is, it should be for unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of Explanation to Section 115JA. It was further held that 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 debt receivable by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up probably the diminution in the value of assets that is debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee.

8. In the present 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 it was held that Item (c) of theExplanation is not attracted to the facts of the case. Item (c) in Section 115JA and 115-JB(1) are identical. In order to attract theExplanation the debt which is doubtful or bad should satisfy the requirement contemplated in Item (c) of the Explanation. It is the amount or amounts 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) ofExplanation (i). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising 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, in case of the assessee falls under Item (c). In meeting the aforesaid case, the learned counsel for the assessee brought to our notice the judgment of the Apex Court in the case of Vijaya Bank (supra) where the Apex Court had an occasion to consider his 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) of the 1961 Act 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, consequentially, 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 theExplanation 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/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 Section 115JA or JB is not at all attracted. In that context even if 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, we do not see any merit in this appeal.

9. The substantial question of law is answered in favour of the assessee and against the Revenue, Accordingly, this appeal is dismissed.

The parties to bear their own costs.

[camanojgupta]

  The Finance (No. 2) Act, 2009 has already provided for such add back vide clause (i) to Explanation 1 to section 115JB that too effective from 1-4-2001 . Clause (i) reads as under  [(i) the amount or amounts set aside as provision for diminution in the value of any asset
It is strange that the High Court kept its discussion limited to clause c only.
In CIT v. HCL Comnet Systems & Services Ltd. (2008) 23 (I) ITCL 501 (SC), the question for consideration was whether assessing officer justified in adding back the provision for doubtful debts of Rs. 92,15,187 to the net profit under clause (c) of the Explanation to section 115JA of the Income Tax Act, 1961.
It was held that the provision for bad and doubtful debt can be added back to the net profit only if item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. 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 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. 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 "debt" under consideration is "debt receivable" by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for 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, item (c) of the Explanation was not attracted to the facts of the present case. In the circumstances, the assessing officer was not justified in adding back the provision for doubtful debts of Rs. 92,15,187 under clause (c) of the Explanation to section 115JA of the 1961 Act.
To reverse the effect of HCL judgment The Finance (No. 2) Act, 2009 has inserted a new clause (i) in Explanation 1 after sub-section (2) of the section 115JB so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. The amendment to section 115JB is effective retrospectively from assessment year 2001-02.

CA MANOJ GUPTA
JODHPUR
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