TMI Blog2017 (8) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (2011 (8) TMI 1209 - GUJARAT HIGH COURT) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corporation Ltd. (2016 (9) TMI 110 - GUJARAT HIGH COURT), fell in the later category. There is no conflict between the two judgments and both operate in different fields. - TAX APPEAL NO. 749 of 2012 - - - Dated:- 4-8-2017 - MR. AKIL KURESHI, MR. J.B.PARDIWALA, A.J. SHASTRI JJ. For The Appellant : Mr Nitin K Mehta, Advocate For The Opponent : Mr B S Soparkar, Advocate CAV JUDGMENT ( PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This reference to the larger Bench was made by the Division Bench by an order dated 23.8.2016. 2. Brief facts leading to the reference are as under. The responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew 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 TaxI 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f HCL Comnet Systems and Services Ltd. (supra) considered the effect of this clause (c) in case of an assessee who had debited certain amount on account of bad and doubtful debt to the Profit and Loss account. The Assessing Officer added the said sum to the book profit for the purpose of section 115JA of the Act relying on clause (c) of the explanation. The issue ultimately reached the Supreme Court in an appeal filed by the Revenue. The Supreme Court held that one of the requirements for the applicability of clause (c) is that the provision should be for unascertained liability. The case concerned the provision for bad and doubtful debt which is made to cover up the probable diminution in the value of the asset. The debt was therefore an amount receivable by the assessee. Therefore, the provision made in such a case cannot be stated to be the provision for liability. 8. The decision in case of HCL Comnet Systems and Services Ltd. (supra) gave rise to introduction of clause (g) to explanation 1 to subsection (2) to section 115JA and clause (i) to explanation 1 to subsection (2) to section 115JB by the Finance Act, 2009, with retrospective effect from 01.04.1998 and 01.04.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etrochemicals Corporation Ltd. (supra), the Court was considering the following question of law : ( E) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the CIT(A) directing not to add provision for doubtful debts amounting to ₹ 25,69,14,000/while calculating book profit u/S.115JA of the Income Tax Act, 1961 without appreciating that it constitute a contingent liability and in other words unascertained liability covered by clause (c) of the Explanation below Section 115JA of the Act? 11. It can be seen that the question was of the applicability of clause (c) of the explanation to section 115JA where the Revenue argued that the provision made was for a contingent liability or a liability which was unascertained. The Court referred to the decisions of Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra) and decided thus : 9. This brings us to the last question raised in the present appeal which pertains to provision for doubtful debts while calculating book profit u/s 115JA of the Act. The said issue has already been answered by the Karn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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. In our view, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f HCL Comnet Systems and Services Ltd. (supra) , would allow the Revenue to make such addition. Delhi High Court in case of Commissioner of Incometax v. ILPEA Paramount (P) Ltd reported in (2011) 336 ITR 54 (Delhi) had come to similar conclusion. Seen from this light and in this context, the decision in case of Deepak Nitrite Limited (supra), lays down the correct proposition. 16. We may however, appreciate the implication of the ratio laid down by the Supreme Court in case of of Vijaya Bank (supra), on the true interpretation of clause(i) to the explanation 1 and the decisions of Karnataka High Court in cases of Yokogawa India Ltd. (supra) and Kirloskar Systems Ltd. (supra). Vijaya Bank (supra) was a case arising under section 36(1)(vii) of the Act. The assessee before the Supreme Court was a bank. The issue considered by the Supreme Court was whether it was imperative for the assessee bank to close the individual account of each of its debtors in its books or a mere reduction in the loans and advances or debtors on the asset side of its balance sheet to the extent of the provision for bad debt, would be sufficient to constitute a writeoff. In this context, the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989. 17. The Supreme Court (in Vijaya Bank) further observed as under : 7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt to the Profit and Loss Account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the Profit and Loss Account would constitute a provision for bad and doubtful debt, it would not constitute actual w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Loss account and makes a corresponding credit to the current liabilities and provisions on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt and in such a case after 1.4.1989, the assessee could claim no deduction under section 36(1)(vii) of the Act. 19. This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assessee besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the bad debt. Thereafter, the Supreme Court rejecting the Revenue's contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assessee. 20. Above decisions of Supreme Court in cases of Southern Technologies Ltd. (supra) and Vijaya Bank ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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