2014 (5) TMI 1063 - HC - Income Tax

Revision u/s 263 - MAT computation - Whether doubtful loans written off as bad debts and subsequently credited to the profit and loss account by way of contra-entry, could be deducted from the book profits under clause (i) of Explanation 1 to section 115JB , especially when such doubtful loans had not been included in the book profits of the relevant years for the purposes of section 115JA or 115 JB? - Held that - It would be seen that it had not been disputed before the ITAT that the sum represents the provision for non-performing assets created earlier years, not out of reserve created before 1.4.1997. Therefore, the same had to be reduced for computation of book profit in accordance with section 115JB. The ITAT has come to categorical findings of fact that following provisions were available for credit to the profit and loss account, which had been made after 1.4.1997 and not prior to it.Therefore, in the given facts and circumstances, we have left with no option but to uphold the order passed by the ITAT. from the exposition of law, it can be safely concluded that the power of the Commissioner Income Tax to exercise suo motu revisional power in terms of Section 263(1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein viz (i) the order is erroneous ; (ii) by virtue of the erroneous order prejudice has been caused to the interest of the Revenue, however, every loss of revenue as a consequence of an order of Assessing Officer cannot be treated to be prejudicial to the interest of revenue. Both the conditions precedent for exercising the jurisdiction under section 263 of the Act are conjunctive and not disjunctive. The order of assessment passed by an Income Tax Officer, therefore, should not be interfered with only because another view is possible. The ITAT has correctly interpreted the provisions of section 115JB of the Act and thereafter applied the same to the facts of each case(s). - Decided in favour of assessee.

Issues Involved:
1. Whether doubtful loans written off as bad debts and subsequently credited to the profit and loss account by way of contra-entry could be deducted from the book profits under clause (i) of Explanation 1 to Section 115JB.
2. Whether action under Section 263 is justified when there is an incorrect assumption of law and facts by the Assessing Officer resulting in an order which is erroneous and prejudicial to the interest of revenue.

Issue-wise Detailed Analysis:

Issue 1: Deduction of Doubtful Loans from Book Profits
The primary question was whether doubtful loans written off as bad debts and subsequently credited to the profit and loss account by way of contra-entry could be deducted from the book profits under clause (i) of Explanation 1 to Section 115JB. The court examined the provisions of Section 115JB and the relevant clauses of the Income Tax Act. It was argued by the appellant that an amount withdrawn from a reserve and credited to the P&L account could not be reduced from the book profit if such credit was merely a contra entry and not an effective credit. The court referred to the judgment of the Hon'ble Supreme Court in Indo Rama Synthetics India Limited vs. Commissioner of Income Tax, New Delhi, which clarified that the book profit means the net profit as shown in the P&L account for the relevant previous year prepared under Section 115JB(2), subject to certain adjustments.

The court held that any amount withdrawn from any reserve or provision credited to the profit and loss account had to be reduced from the net profit as shown in the profit and loss account for the computation of book profit in accordance with Section 115JB. However, this reduction is only permissible if the reserve was created after 1st April 1997 and not by way of debit to the profit and loss account. The court found that the sum of Rs. 2,37,76,034/- represented the provision for non-performing assets created in earlier years, not out of reserve created before 1.4.1997, and therefore, had to be reduced for the computation of book profit.

Issue 2: Justification of Action under Section 263
The second issue was whether the action under Section 263 was justified when there was an incorrect assumption of law and facts by the Assessing Officer resulting in an order which was erroneous and prejudicial to the interest of revenue. The court referred to the judgments in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax and Commissioner of Income Tax (Central) Ludhiana v. Max India Limited, which clarified that the Commissioner could exercise suo motu revisional power under Section 263 only if the order of the Assessing Officer was both erroneous and prejudicial to the interests of the revenue.

The court held that the power of the Commissioner to exercise suo motu revisional power is in the nature of supervisory jurisdiction and can be exercised only if the conditions specified therein are met. The court found that the ITAT had correctly interpreted the provisions of Section 115JB and applied them to the facts of each case, concluding that the Commissioner was not justified in invoking the provisions of Section 263 as there was no positive material to establish that the order of the Assessing Officer was erroneous and prejudicial to the interest of revenue.

Conclusion:
The court affirmed the findings recorded by the ITAT in all the cases, holding that the ITAT had correctly interpreted the provisions of Section 115JB and applied them to the facts. The substantial questions of law raised in all the appeals were answered accordingly, and all the appeals were dismissed, leaving the parties to bear their own costs.

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