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Commissioner of Income Tax IV Vodafone Essar Gujarat Ltd.

MAT computation - Provision for bad and doubtful debts - to be treated as provision for liability or not - computation of book profit for the purpose of MAT liability u/s 115JB - Held that:- Referring to statutory provisions, the situation that arises is that prior to the introduction of clause(i) to the explanation to section 115JB, as held in case of HCL Comnet Systems and Services Ltd. (2008 (9)18 - SUPREME COURT) the then existing clause (c) did not cover a case where the assessee made a pro .....

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rating 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 (2011 (8)1209 - GUJARAT HIGH COURT .....

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ate 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 respondent assessee is a company registered under the Companies Act. For the assessment year 2003-2004, the assessee had filed return of income declaring nil income. The Assessing Officer framed the order of assessment on 27.03.2006, after which, notice under section 148 of the Incom .....

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ter in appeal. The Commissioner (Appeals) allowed the appeal, upon which, the Revenue approached the Tribunal. The Tribunal, by the judgement which is challenged in this Tax Appeal, observed that the assessee had made provision for bad and doubtful debts and the same has been charged to the Profit and Loss Account for the year ended 31st March 2003. In the Balance Sheet as on 31st March 2003 of the assessee, it can be seen that the provision of bad and doubtful debts has been reduced from the gr .....

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tial question of law: Whether the Appellate Tribunal is right in law and on facts in deleting the addition of ₹ 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? 4. 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 Commi .....

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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. rep .....

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cometax 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 .....

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provisions but were applied during different periods. Since in our case what is applicable is section 115JB, we may refer to the said section. Under subsection (1) of section 115JB, notwithstanding anything contained in any other provision of the Act, in case of a company where the tax payable on the total income is less than the prescribed percentage of its book profit, the book profit would be deemed to be total income of the assessee and the assessee would pay tax at such prescribed rate on s .....

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(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or 7. The Supreme Court in case of 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 explana .....

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e 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 01.04.2001 respectively. Clause (i) reads as under: (i) the amount or amounts set aside as provision for diminution in the value of any asset. 9. In Deepak Nitrite Li .....

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ions for the doubtful debt cannot be added for the computation of book profit for Section 115JA of the Act since there is no clause which speaks of adding back such provisions for diminution of value of assets. It is not in dispute that such provisions for doubtful debts would be which amount to diminution of value of assets. That being the position, in our opinion the case of the assessee is squarely covered under the clause (g) to explanation to Section 115JA. As already held by Delhi High Cou .....

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) to the explanation, the said decision would no longer apply in the present case since the Apex Court had examined the position from the angle of the existing statutory provisions. 17.0 We are unable to see any demarcation between the provisions which would reduce the value of the assets against a situation where the value of the assets may come down to 'Nil'. In either case there would be diminution in the value of assets. Even when the value of the assets is brought down to 'Nil&# .....

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377; 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 .....

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taka) and in the case of Commissioner of Income Tax vs. Yokogawa India Ltd. reported in [2012] 17 taxmann.com 15 (Kar.) ........10. Similarly, in the case of Yokogawa India Ltd. (supra), the Karnataka High Court has held that 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. In that view o the matter, we are of the opinion that the Tribunal was justified in .....

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the said two decisions. In order to do so, we may revisit the judgement of Supreme Court in case of HCL Comnet Systems and Services Ltd. (supra) more minutely. As noted, it was a case where the assessee had debited certain sum on account of bad debts to the Profit and Loss account. The Assessing Officer added the said sum for computation of book profit for the purpose of section 115JA of the Act with the aid of clause (c) to the explanation. The Court held that in such a case, clause (c) would .....

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et 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. In our view, Item .....

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on 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, .....

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ovision and provision is made for meeting a liability other than ascertained liability, clause (c) would come into force and such provision would be added in computation of book profit for the purpose of 115JA of the Act. This clause, however, would not cover a provision made for a debt which is receivable by the assessee. It was observed that the provision for bad and doubtful debts which is made to cover up probable diminution in the value of the asset, cannot be said to be a provision for lia .....

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r introduction of such amendment clarified that the new clause (i) was inserted 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. This legislative change thus was clearly necessitated on account of the judgment of the Supreme Court in case of HCL Comnet Systems and Services Ltd. (supra) holding th .....

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(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). Vijay .....

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urt considered the issue as to the manner in which the actual write off takes place under the accounting principle. It was noticed that prior to 1.4.1989 amendment in section 36(1)(vii), even the provision for the bad debt could be treated as write off. After 1.4.1989 however, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. v. .....

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d to deduction under section 36(1)(vii). [See CIT v. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 130 ITR 95 (Guj)] Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful deb .....

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t of doubtful debt to the profit and loss account and credits the asset account like sundry debtor s account, it would constitute a write off of an actual debt. However, if an assessee debits provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the current liabilities and provisions' on the liabilities side of the balancesheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduc .....

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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 pr .....

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ount per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the Profit and Loss Account and creating a provision for bad and doubtful debt, the assesseeBank had correspondingly/simultaneously obliterated the said provision from it's accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and, conseque .....

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also reduce loans and advances or the debtors from the asset 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 provisions for impugned bad debt. This aspect is lost sight of by the High Court in it's impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under Section 36(1)(vii) of 1961 Act as there was an .....

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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 obli .....

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ecided the question in favour of the assessee. 20. 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 .....

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ng 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 .....

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or the debtors from the assets side of the balance sheet the Explanation to s. 115JA or JB is not at all attracted. 22. In case of Kirloskar Systems Ltd. (supra), the Karnataka High Court adopted the same principle. 23. 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 .....

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