TMI Blog2018 (1) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is not a provisions set aside for diminution in value of investment but a actual charge to the Profit & Loss account which has been written off against the value of the current asset. Debit of ₹ 46,94,62,365/- appearing in Profit & Loss Account is not a provision of set aside for diminution in value of investment but the actual charged for the loss in the diminution in value of investment. Therefore, we are of the view that for the book profit purpose of section 115JB is not required to be increased by ₹ 46,94,62,365/- as the same is not in the nature of provision. - Decided against revenue - ITA No.5976/M/2012 - - - Dated:- 15-1-2018 - D. T. GARASIA, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER For The Revenue : Shri B. Pruseth For The Assessee : Shri Jahangir Mistri, Sr. Advocate and Shri Madhur Agarwal ORDER Per D.T. GARASIA, Judicial Member: The above titled appeal has been preferred by the Assessee against the order dated 30.05.2012 of the Commissioner of Income Tax (Appeals) 7, Mumbai [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09. 2. The only ground in this appeal is as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n scientific manner) and such loss is written off against the value of assets, then this clause will not apply because clause (i) of Explanation 1 of section 115JB of the Act provides for increase of book profit by the amount set aside as provision for diminution in the value of any asset even if such loss is not allowed in computation of normal income. For example if a company adopts a method of valuing its current investments are valued at market value of investments, then such debit will be allowable in computation of book profit and it cannot be added back under the proposed value (g) / (i) of Explanation in s.115JA / 115JB respectively. This is in spite of fact that such debit will have to be added while computing total income because in case of capital assets, computation will be made when capital asset is transferred. Clause (i) of Explanation 1 of section 115JB of the Act provides for increase of book profit by the amount set aside as provision for diminution in the value of any asset. Any corporate entity would have various assets which are reflected in the Balance Sheet as Fixed Assets, Investments or Current Assets. The issue is whether the diminution in the value of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the accounts of the assessee. In support, reliance is placed on para 25 of the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. Vs. Joint CIT reported in 320 ITR 577 which reads as under: Prior to April 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled 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 April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated. Lastly, according to the Tribunal, loans and advances or the sundry debtors of the assessee as at the end of the year lying in the balance sheet was shown as net of provisions for doubtful debt created by way of debit to the profit and loss account of the year. 4.37 In the aforesaid facts, the Hon ble Supreme Court held that in the appeal, broadly, two questions arise for determination. The first question which arises for determination concerns the manner in which actual write off takes place under the accounting principles. The second question which arises for determination, is whether it is imperative for the assessee bank to close the individual account of each debtor in its books or a mere reduction in the loans and advances account or debtors to the extent of the provision for bad and doubtful debt is sufficient? The Hon ble Supreme Court with reference to the first question has held as under:- One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. This aspect is lost sight of by the High Court in its impugned judgment. 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 actual write off by the assessee in its books, as indicate above. 4.38 Having regard to the aforesaid discussion, it is held that the amount of provision for diminution in the value of investments is not set aside by the appellant as the amount is written off against the current investments held by the appellant. The write off of the amount against the asset has obliterated the provision and the current assets are reflected in the books of account net of provision. Once the amount of diminution in the value of investments is written off against the asset, there can be no use of any amount having been set aside for diminution in the value of assets. 4.39 Having circumspected the entire spectrum of fact and circumstances of the case vis- -vis finding of the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent year, the Appellant has credited difference between sale price and fair value as on 31/03/2008 to Profit Loss Account and not the difference between sale price and its cost. Such accounting treatment is impossible where the provision is made instead of write off. 4.41. On perusal of the above facts, I am of the considered view that debit of ₹ 46,94,62,365/- appearing in Profit Loss Account is not a provisions set aside for diminution in value of investment but a actual charge to the Profit Loss account which has been written off against the value of the current asset. Thus considering all facts and provisions of Income-tax Act, 1961 and Companies Act, 1956, I am of the considered view that debit of ₹ 46,94,62,365/- appearing in Profit Loss Account is not a Provisions set aside for diminution in value of investment but it is actual charged for the loss in the diminution in value of investment. Having held that this is not provision set aside, I held that book profit for the purpose of Section 115JB is not required to be increased by ₹ 46,94,62,365/- as the same is not in the nature of provision. Accordingly, these grounds of appeal are allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving taken note of the aforesaid decision of Hon ble ITAT, Indore which is based on jurisdictional Bombay High Court decision reported in 310 ITR 421, I am not in agreement with the A.O. s alternatively action also that the loss of ₹ 46,94,62,365/-, which was incurred to the appellant will amounts to expenditure in relation to exempt income and hence to be added to book profit u/s.115JB of the Act. Accordingly the A.O. s this finding is also considered to be not correct and justified. Accordingly the appellant s request, as made above in its submission is accepted and the appellant s appeal is allowed holding that the loss cannot be held to be expenditure as claimed by the A.O. in relation to exempt income. Accordingly, the addition so made by the A.O. to book profit is deleted. Thus, the appellant s appeal is allowed. 5. The learned DR submitted that assessee debited an amount of diminution in value of investment to Profit Loss Account and credit the assets then it would constitute a write off an actual assets. However, if an assessee debits diminution in value of investment to the Profit Loss Account and makes a corresponding credit to current liabilities and provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appellant company require to added back the book profit set aside as provision for diminution in value of investment under the circumstances what is required to be decided whether the amount of ₹ 46,94,62,365/- debited to Profit Loss account set aside a provision or has been write off as a loss against the value of assets. The assessee has made investment in mutual fund in March 2008. The intention of the assessee was to hold a short period and accordingly classified the said investment as current investment in balance sheet of the assessee company as on 31.03.2008. The assessee company sold this unit in April, 2008 i.e. within a period of one month. The assessee company required to draw its accounts in accordance with Part II of Schedule VI of the Companies Act as provided in section 211 of the Companies Act, 1956. As per accounting standard the standard for accounting of investment is mandatory in nature classifies different treatment of accounting of current investment and long term investment. The current investment is required to be stated in accounts at lower of cost or fair value as on balance sheet date. Whereas when there is fall in the value of investment, provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, later judgement in case of Indian Petrochemicals Corporation Ltd. (Supra) lays down the correct law? The Hon ble High Court of Gujarat observed the followings: 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 debts and a case where the assessee may make a provision for doubtful debts and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet. The later would be an instance of write-off and not a mere provision. Further observed that: 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), then the existing clause (c) did not cover a case wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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