TMI Blog2011 (3) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... two segments - The splitting of expenses on the basis of turnover, in the absence of other reasonable measure suggested by the learned A.R., is reasonable - Issue is decided in favour of Revenue. Adjustment u/s 115JB - diminution in the value of investments - Rs.1.25 crores - Once provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of the fact whether or not there is any balance value of the asset. - as the Explanation 1 to section 115JB(2) deals with the computation of book profit and specifically provides that the net profit as shown in the profit and loss account for the relevant previous year has to be increased inter alia by the amount of provision for diminution in the value of any asset, the amount of provision for diminution in the value of any asset debited to the profit and loss account before the determination of net profit has necessarily to be added. - Decided in favor of revenue. - ITA NO. 1299/MUM/2009 - - - Dated:- 9-3-2011 - Shri R.S.Syal, AM Shri Vijay Pal Rao, JM Appellant by : Shri Hemant Lal Respondent by : Shri Vijay Mehta ORDER Per R.S. Syal, AM. - This appeal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses relating to such F O transactions could not be allowed against the income of non speculation business income. Taking the figure of total turnover of the assessee from share trading at Rs.75.50 crores and from F O transactions at Rs.8.99 crores totalling to Rs.84.49 crores, the AO found out the percentage of turnover of F O transactions to total turnover at 10.64%. Applying this percentage to the administrative expenses of Rs.46,48,955 he determined a sum of Rs.4,94,649 as relatable to F O transactions, which was held to be not allowable against non-speculation business income. Since the learned CIT(A) held the loss from futures and options to be non-speculation, he allowed deduction for entire expenses accordingly. 5. We have heard the rival submissions and perused the relevant material on record. The action of the learned CIT(A) in treating the loss from F O transactions amounting to Rs.2.04 crores as non-speculation loss has been set aside by us in an earlier para. In that view of the matter, the conclusion drawn by the ld. first appellate authority on the deductibility of entire expenses against the total receipts would automatically witness reversal. Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for diminution in the value of investments of Rs.1.25 crores should not be added to the book profit u/s. 115JB. The assessee submitted that it made investment in unquoted shares of RFB Latex Limited on 11.08.2000 which was included in the earlier balance sheet under the head investment . As RFB Latex Limited had discontinued the operation, the assessee filed an application before the Company Law Board alleging that the affairs of that company were mismanaged. In that view of the matter the assessee entertained the view that the amount was irrecoverable and hence a sum of Rs.1.25 crores was written off as provision for diminution in value of investment. Not convinced with the assessee s submission, the Assessing Officer came to hold that this amount was required to be added to book profit u/s. 115JB. The learned CIT(A) deleted the said addition. 8. We have heard the rival submissions and perused the relevant material on record. Section 115JB was inserted by the Finance Act, 2000, with effect from 1.4.2001. Its marginal note is : Special provision for payment of tax by certain companies . Sub-section (1) of this section provides that notwithstanding anything contained in any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce any provision made towards non-recoverability of the debt could not be said to be a provision for liability. In the final analysis it was held that clause (c) of Explanation to section 115JA was not attracted and the provisions for doubtful debts could not be added to the net profit. It is vital to note that the Finance (No.2) Act, 2009 inserted clause (g) to Explanation to section 115JA(2) which reads : "the amount or amounts set aside as provision for diminution in the value of asset". This amendment, with retrospective effect, has been aimed at neutralizing the judgment of the Hon ble Supreme Court in HCL Comnet Systems and Services Limited (supra). On the same line, amendment has also been carried out to section 115JB by the same Finance (No.2) Act, 2001 and that too, with retrospective effect from 1.4.2001, by inserting clause (i) to Explanation 1 to section 115JB(2). This clause reads : "the amount or amounts set aside as provision for diminution in the value of any asset". The effect of amendment to section 115JB also remains the same, that is, while computing "book profit", net profit as shown in the profit and loss account for the relevant previous year is to be increa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount and credits the asset account like sundry debtors which would constitute a write off of an actual debt and, secondly, in which the assessee debits provision for doubtful debts to the Profit and loss account and makes a corresponding credit on the liability side of the balance sheet, in which case it would constitute provision for doubtful debts. Drawing analogy from this judgment, the learned A.R. contended that the amount of Investments of the assessee stood at Rs.27.62 crores, which included the value of unquoted shares of RFB Latex Limited worth Rs.1.25 crores. As the entire amount was found to be unrealizable, the assessee created provision for this sum of Rs.1.25 crores and the total amount of the such provision including that of the opening balance, was shown by way of reduction from the value of Investment in its balance sheet. It was thus contended that the treatment given by the assessee to the amount of diminution in the value of investment should not be seen as a provision itself, notwithstanding the wrong nomenclature given by the assessee, but it was, in effect, writing off of bad debt , which could not be added to the book profit. Per contra, the learned Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly alien for computing book profit. What is relevant for this purpose is to find out if any provision for diminution in the value of any asset has been debited to the profit and loss account. If it is so debited, the same will automatically stand added to the amount of net profit for working out the amount of book profit. 12. The judgment of the Hon ble Supreme Court in the case of Vijay Bank (supra), as heavily banked upon by the learned A.R., is in the context of deduction u/s. 36(l)(vii). The Hon ble Apex Court was called upon to decide on the deductibility or otherwise of the amount of bad debt u/s. 36(1)(vii). The Department argued in that case that since the deduction could be allowed on actual write off of the bad debt, the provision made by the assessee bank without writing off the individual accounts of debtors, did not satisfy the condition for deduction. It was in that context that the Hon ble Supreme Court held that there was no need to write off each account of debtor separately and it would be the sufficient compliance of the provision if the debtors have been shown in the asset side of the balance sheet as net of the provision. There was no consideration or decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it was not a case of diminution in the value of any asset and hence application of clause (i) of Explanation 1 was ousted. Countering this submission, the learned Departmental Representative contended that the word "zero" has been defined in Concise Oxford Dictionary to mean lowest possible value . He argued that reduction in the value of shares of RFB Latex Limited to zero also amounted to diminution in the value of investment and the same was rightly considered by the Assessing Officer. 14. Having regard to the rival submissions we find that the Legislature has employed the expression "provision for diminution in the value of any asset" in clause (i) to Explanation 1 to section 115JB(2). The expression "diminution in the value of any asset" has not been defined in this section. In common parlance the word "diminution" indicates the state of reduction. The Concise Oxford Dictionary gives the meaning of the word "diminution" as "the act or an instance of diminishing; the amount by which something diminishes". Almost to the same extent is the meaning of this word, given in other dictionaries relied on by the learned A.R. If an asset worth Rs. 100 is reduced to the value of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that here is a case in which provision has been made at 100% of the value of investment. He submitted that when, at a later stage, this amount becomes bad and irrecoverable, the value of investment as well as provision to that extent will be reduced to the extent of Rs. 1.25 crores and there will not be any debit or credit to the profit and loss account at that point of time. In his opinion the working out of the amount of book profit as per Explanation 1 would, therefore, show the distorted picture. 16. On this count also we express our inability to agree with him. Later part of Explanation 1 to section 115JB(2) enumerates certain items, which are required to be reduced from the amount of net profit, if they are credited to P L account. Clause (i) provides that the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account shall be reduced from the amount of net profit as per profit and loss account for computing book profit. The upshot of this provision is that if any amount of reserve or prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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