2014 (1) TMI 941 - AT - Income Tax

Computation of book profit u/s 115JB of the Act Addition of provision for doubtful debts Held that - The word 'set aside' in clause (i) is followed by the word 'as' and not by the word 'to' as has been followed in clause (c) - When the amount is claimed or earmarked for meeting a certain future liability then the word 'set aside' in that context will mean that the amount earmarked 'to' the provision made for future liability - The amount is calculated on certain percentage basis and according to the age of the asset in question - It is the simple process of calculating the present value of the asset in comparison to its purchase value, taking into consideration the depreciation in its value with the use and passage of time - For this purpose, neither there can be any requirement of creating a fund, nor such type of fund can ever be required for its use at appropriate time. While interpreting a legal provision, a single word cannot be taken out to interpret the provision, rather the whole of the provision as well the inter correlation of words used therein is to be seen. When we read the entire clause (i) of Explanation 1 to Section 115JB, the simple meaning of the word 'set aside' used therein comes out with reference to the amounts as 'reduced, on account of diminution in the value of the asset - Decided against Assessee.

Summary

Issues:
1. Interpretation of provisions of Section 115JB regarding the treatment of provision for doubtful advances in the computation of book profit.

Analysis:
The appeal was filed against the order of CIT(A) concerning the treatment of a provision for doubtful advances in the computation of book profit under Section 115JB for the assessment year 2007-08. The Assessing Officer (AO) added back the provision for doubtful advances to the total income of the assessee and book profit under Section 115JB, as it was claimed under the profit and loss account but not added back in the computation of income. The assessee argued that the provision was not a liability provision, and therefore, clause (c) of Section 115JB was not applicable. The contention was that the provision did not meet the criteria of being 'set aside' as required by the Explanation 1 to Section 115JB. However, the CIT(A) upheld the AO's action, emphasizing that the provision was set apart and kept separate in the balance sheet, meeting the criteria of 'set aside' as per the provisions of Section 115JB.

In the subsequent appeal, the assessee reiterated the argument that the provision made was not 'set aside' as required by the law. The AR contended that the provision for diminution in the value of assets did not necessitate the creation of a separate fund or reserve, as the value of certain assets had been reduced, and provision was made for that reduction. The AR highlighted the distinction between 'making a provision' and 'amount set aside as a provision,' emphasizing that the wording of clause (i) in Explanation 1 to Section 115JB required the amount to be appropriated 'as' a provision for diminution in the value of the asset. The AR's interpretation was that the provision did not require the creation of a fund for future use, as the diminution in the value of assets was a straightforward accounting process based on depreciation and use.

The Tribunal dismissed the appeal, stating that the word 'set aside' in clause (i) of Explanation 1 to Section 115JB was significant, indicating that the amount earmarked for future liability should be separated out as a reserve fund. The Tribunal emphasized that the provision for diminution in the value of assets needed to be included in the book profit, as it was appropriated as a provision for the reduction in asset value. The Tribunal rejected the assessee's argument that no separate fund was created, as the provision was specifically for diminution in asset value, not for asset improvement. The Tribunal concluded that the provision for diminution in asset value should be considered in the computation of book profit under Section 115JB, as per the provisions of the law.

In summary, the Tribunal's decision upheld the AO's action of adding back the provision for doubtful advances in the computation of book profit under Section 115JB, emphasizing the significance of the term 'set aside' in the context of provisions made for diminution in the value of assets.