2011 (8) TMI 765 - HC - Income Tax

MAT - Provision for Doubtful advances and Investments - Held That - The ascertained liability continues to be reflected in the subsequent assessment years under the head Sundry Debtors . If these were ascertained liabilities then the assessee has not written it off from the books in accordance with the provisions of 36(i)(vii). The copies of sundry debtors for the assessment years 1999-2000 2000-01 and 2001-02 produced by the assessee discloses that they were forming part of NPA but were not reflected in sundry debtors for the current assessment year but also in the subsequent assessment years with the same sum. Therefore the said liability is not NPA but the performing assets as they have continued to be forming part of sundry debtors. As the aforesaid doubtful debts were not actually written off under Section 36(i)(vi) from the books the said amount is to be added in arriving at the net income from the book profits. - Appeal decided in favour of revenue.

Summary

Issues:
Challenging order granting benefit of not adding back doubtful investments and advances for computing book profits under Section 115JA of Income Tax Act, 1961.

Analysis:
The appeals were filed by the revenue challenging the Tribunal's order granting the benefit of not adding back doubtful investments and advances for computing book profits under Section 115JA of the Income Tax Act, 1961. The case pertained to the assessment years 1998-99 and 1999-2000. The assessee, a financial institution, had not added back provisions for non-performing assets while computing income under Section 115JA. The Assessing Authority added back the provision for non-performing assets, leading to an appeal by the assessee to the Commissioner of Appeals. The Commissioner held that the provision for non-performing assets was created in accordance with RBI Guidelines and not against any liabilities, thus deleting the addition. The revenue appealed to the Tribunal, which held that the Assessing Officer was not justified in adding back the provisions for doubtful debts, investments, and advances for computing book profit under Section 115JB, dismissing the appeal. The revenue contended that the Tribunal's order was illegal due to an amendment to Section 115JA by Finance Act (No. 2) of 2009, made retrospectively from 01.04.1998.

The Tribunal's order was deemed correct under the existing law prior to the retrospective amendment to Section 115JA. However, post-amendment, provisions for diminution in the value of assets were to be added for computing net profit out of book profit. The Assessing Authority found that the disputed items were reserves created for doubtful debts, which were assets and not ascertained liabilities. As the doubtful debts were not written off from the books, they were to be added in arriving at the net income from book profits. The Tribunal and the Appellate Commissioner's orders were set aside, and the Assessing Authority's order was restored, favoring the revenue against the assessee.

In conclusion, the judgment addressed the issue of adding back provisions for doubtful investments and advances for computing book profits under Section 115JA of the Income Tax Act, 1961. It highlighted the impact of a retrospective amendment to the law, emphasizing the treatment of reserves created for doubtful debts as assets and not liabilities. The decision favored the revenue, setting aside previous orders and restoring the Assessing Authority's order.