2011 (9) TMI 136 - HC - Income Tax

Computation of book profit - minimum alternate tax (MAT) - Adjustment on account of provision for bad and doubtful debts and advances - rectification u/s 154 - adjustment on account of depreciation provision prior to 1.4.1998 written back in the profit and loss account is to be included as part of book profit - Held that - it is apparent that the sum of Rs.11,71,39,380/- which is the depreciation on fixed assets and which were sold or disposed of was provided for in the previous year ending on 30th September, 1987 and had been credited/written back to the Profit & Loss Account for the current year. Clause (i) of Explanation to Section 115J(1A) is clearly attracted and the said amount is to be reduced from the book profit. - the authorities below committed substantial error of law in adding the amount of Rs.11,71,39,380/- by totally misinterpreting the provisions of Section 115J of the Act and ignoring the aforesaid observations of the Supreme Court in Apollo Tyres Ltd. Vs. CIT, reported in AIR (2002 -TMI - 6081 - SUPREME Court) - Decided in favor of assessee.

Issues Involved:

1. Disallowance of provision for bad and doubtful debts and advances under Section 115J of the Income-tax Act.
2. Invocation of Section 154 of the Income-tax Act for rectification of an alleged mistake.
3. Inclusion of depreciation provision prior to 1st April 1988 in the computation of book profit under Section 115J.
4. Non-reduction of depreciation amount provided up to 30th September 1987 from the book profit.
5. Misinterpretation of Section 115J of the Income-tax Act.
6. Assessing Officer's jurisdiction to go beyond the profit and loss account prepared according to the Companies Act.
7. Non-reflection of depreciation amount under the head provision as on 30th September 1987.
8. Tribunal's observations being contrary to the facts on record.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Bad and Doubtful Debts and Advances:

The Tribunal disallowed the provision for bad and doubtful debts and advances on the grounds that it was not an amount set aside for meeting liabilities which are not ascertained liabilities. The assessee contended that the provision for bad and doubtful debts is for diminution in the value of assets, not for meeting liabilities. The Supreme Court in Commissioner of Income-tax Vs. HCL Comnet Systems and Services Ltd. clarified that a provision for bad and doubtful debts, being a debt receivable, cannot be considered a provision for liability. Thus, Clause (c) of the Explanation to Section 115J is not attracted, and the Tribunal's decision was erroneous.

2. Invocation of Section 154 of the Income-tax Act:

The Assessing Officer invoked Section 154 to rectify an alleged mistake in the computation of income under Section 115J. The assessee argued that the original order was correct and in line with the Supreme Court's ruling in HCL Comnet Systems and Services Ltd. The Court held that since the decision on merit was not tenable in law, there was no necessity for invoking Section 154.

3. Inclusion of Depreciation Provision Prior to 1st April 1988:

The Assessing Officer included the depreciation provision made prior to 1st April 1988 in the computation of book profit under Section 115J, treating it as income escaping assessment. The assessee argued that the computation was in accordance with the provisions of the Act. The Court found that the depreciation on fixed assets sold, amounting to Rs.11,71,39,380/-, was credited to the Profit & Loss Account and should be reduced from the book profit as per Clause (i) of the Explanation to Section 115J(1A).

4. Non-reduction of Depreciation Amount Provided up to 30th September 1987:

The Tribunal failed to appreciate that the amount of depreciation provided up to 30th September 1987 should be reduced from the book profit. The Court held that the amount of Rs.11,71,39,380/- provided for depreciation on assets sold should be reduced from the book profit, as it was credited to the Profit & Loss Account.

5. Misinterpretation of Section 115J of the Income-tax Act:

The Tribunal misinterpreted Section 115J by adding the amount of Rs.11,71,39,380/- to the book profit. The Court referred to the Supreme Court's ruling in Apollo Tyres Ltd. Vs. CIT, which stated that the Assessing Officer cannot question the correctness of the profit and loss account prepared and certified according to the Companies Act.

6. Assessing Officer's Jurisdiction:

The Tribunal erred in allowing the Assessing Officer to go beyond the profit and loss account prepared according to the Companies Act. The Court reiterated that the Assessing Officer has no jurisdiction to reassess the company's income beyond the net profit shown in the profit and loss account, except as provided in the Explanation to Section 115J.

7. Non-reflection of Depreciation Amount:

The Tribunal's observation that the amount of Rs.11,71,39,380/- was not reflected under the head provision as on 30th September 1987 was found to be incorrect. The Court noted that the amount was indeed credited to the Profit & Loss Account and should be reduced from the book profit.

8. Tribunal's Observations:

The Tribunal's observations were found to be contrary to the facts on record. The Court directed the Assessing Officer to delete the amount of Rs.11,71,39,380/- in terms of Section 115J of the Act.

Conclusion:

The appeal was allowed, and the order of the Tribunal was set aside. The points formulated were answered in favor of the assessee and against the Revenue, with no order as to costs.

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