2016 (7) TMI 1323 - HC - Income Tax

Disallowing the provisions for non performing assets debited to Profit and Loss Account - Held that - Having regard to the retrospective effect of the amendment from 1/4/1998, both the learned counsel for the parties submitted that the issue as to whether adding up of sums under Lease Equalisation Reserve and special depreciation reserve, would fall under clause (g) to the explanation to the second provisio to Section 115 JA of the Income Tax Act, 1961 requires to be addressed, and adjudged by the assessing Officer. In the light of the subsequent amendment with effect from 1/4/1998, now brought before this Court, and the submissions stated supra, we are of the view that the substantial questions of law involved in the instant appeal requires to be suitably framed and therefore, in exercise of powers conferred under Sub-Section 3 of Section 260 A of the Income Tax Act, 1961, the following substantial question of law is framed. Whether Lease Equalisation Reserve and Special Depreciation Reserve would fall under clause g to the explanation to the second provisio of Section 115 JA of the Income Tax Act. To adjudge the above issue, we are also of the view that the matter requires to be remanded to the Assessing officer.

Summary

Issues:
1. Treatment of provisions for non-performing assets in profit and loss account.
2. Inclusion of a sum not received as income.
3. Adding overdues as income on a notional basis.
4. Tax liability on accrued income not actually received.
5. Treatment of income not recoverable under the mercantile system of accounting.
6. Addition of Lease Equalisation Reserve and Special Depreciation Reserve to Book Profits.

Analysis:

Issue 1:
The appellant, a finance company, argued that provisions for non-performing assets (NPAs) should not be shown as part of income. The Assessing Officer added the NPA amount to the income during assessment. The Commissioner of Income Tax (Appeals) III upheld this decision, stating that income accrues when due. However, Lease Equalisation and Special Depreciation Reserves were not added back to book profits as they were considered ascertained liabilities and not directly added to profits.

Issue 2:
The appellant questioned the inclusion of a sum not received as income. The Tribunal upheld the decision to treat the sum as income, emphasizing that income accrues when due, regardless of actual receipt. The appellant argued against this treatment, especially when recovery was doubtful.

Issue 3:
The Tribunal added overdues as income on a notional basis, which the appellant contested. The Tribunal's view was that once income accrues, it is taxable even if not received. The appellant challenged this notion, questioning the treatment of income that may not be recoverable under the mercantile system of accounting.

Issue 4:
The Tribunal considered accrued income as taxable, even if not received and doubtful of recovery. The appellant raised concerns about treating income not recoverable as income solely based on following the mercantile system of accounting.

Issue 5:
The Tribunal added Lease Equalisation and Special Depreciation Reserves to Book Profits, which the appellant disputed as they were seen as charges on profits. The subsequent amendment to the Income Tax Act raised questions about the classification of these reserves under the amended clause (g) to the explanation to the second proviso of Section 115JA.

Conclusion:
The High Court allowed the Tax Case Appeal, setting aside the Tribunal's order. The matter was directed to the Assessing Officer for further consideration in light of the amended provisions. The Court framed a substantial question of law regarding the classification of Lease Equalisation and Special Depreciation Reserves under the amended clause. The appellant was granted the opportunity to present all relevant materials for a thorough adjudication of the issues.