2014 (9) TMI 1240 - AT - Income Tax

Disallowance of provision of non-performing assets - HELD THAT - After hearing the rival submissions, we noted that this issue is no more resintegra in view of the decision of Hon ble Suprme Court in the case of Southern Technologies Ltd 2010 (1) TMI 5 - SUPREME COURT wherein held in view of the Explanation which keeps such a provision outside the scope of written off bad debt,section 37 cannot come in. If an item falls under sections 30 to 36, but is excluded by the Explanation to section 36(1)(vii) then section 37 cannot come in. Section 37 applies only to items which do not fall in sections 30 to 36. If a provision for doubtful debt is expressly excluded from section 36(1)(vii) then such a provision cannot claim deduction under section 37 of the Income-tax Act even on the basis of real income theory as explained above. We therefore confirm the order of the CIT(A) sustaining the disallowance for provision for non-performing assets. Addition in the computation of the book profit u/s 115JB - Merely the reserve has to be created under a separate statute, it cannot be converted into a provision for ascertained liabilities. Under sub-clause c of explanation 1 to section 115JB(2), the amount / amounts set aside to provisions made for meeting liabilities, other than the ascertained liabilities are also to be added for computing the book profit. No doubt the provisions made for ascertained liabilities has not to be added. The ld. A.R even though vehemently contended that the reserve has to be created as per the provision of RBI Act but could not convince us against what ascertained liability it has been created. The reserve created as per the RBI in our opinion cannot be converted into a provision unless it is proved it is against a liability. The reserve is always created in order to meet future exigencies. This reserve in our opinion cannot be regarded to have been created against a particular liability. We therefore do not find any illegality or infirmity in the order of the CIT(A) in sustaining the addition u/s 115JB. Thus this ground stands dismissed. Addition while computing the book profit u/s 115JB being the amount transferred to Debenture Redemption Reserve - HELD THAT - The amount so transferred therefore cannot be regarded to be the reserve or provision made for meeting the liabilities other than ascertain liabilities. Our aforesaid view is duly supported by the decision of Mumbai High Court in the case of CIT vs Raymond Ltd, 2012 (4) TMI 127 - BOMBAY HIGH COURT No contrary decision taken by any other High Court was brought to our knowledge by the ld. D.R. The decision of Rayon Corporation vs CIT, 1997 (7) TMI 113 - SUPREME COURT rather support the case of the assessee that it is a provision for a known liability. We therefore, set aside the order of the CIT(A) on this issue and allow the ground no.3 taken by the assessee. Provision for NPA added in the computation of book profit - This issue in our opinion is to be decided in favour of the revenue in view of clause (i) inserted to explanation 1 to section 115JB(2) by the Finance Act, 2009 w.e.f. 1.4.2001. Therefore, after hearing the rival submissions and carefully considering the same the addition made by the assessing officer has to be sustained. The provision for NPA account is created for diminution in the value of the asset. This fact cannot be denied. The ld. A.R even though vehemently contended but could not convince us how the provision so made does not represent diminution in the value of the assets. We therefore, dismiss this ground. Levy of the interest u/s 234B and 234C - HELD THAT - The interest u/s 234B and 234C is leviable even though automatic only when the liability to pay the advance tax u/s 208, 209 or 210 arise. This addition could have not been subject to advance tax at the time when the liability to pay the advance tax arise. The impugned assessment year is assessment 2008-09 and therefore due to the retrospective amendment in our opinion interest u/s 234B and 234C cannot be imposed due to the non-addition of ₹ 3,66,00,000/- in the book profit of the assessee while estimating the liability for advance tax. To that extent, we set aside the order of the CIT(A) and direct the assessing officer not to include provision for NPA for the purpose of calculation of the interest u/s 234B and 234C. Thus this ground is partly allowed.

Summary

Issues:
1. Disallowance of provision for non-performing assets
2. Addition of amount transferred to Special Reserve in computing book profit
3. Addition of amount transferred to Debenture Redemption Reserve in computing book profit
4. Addition of provision for non-performing assets in computing book profit
5. Imposition of interest under sections 234B and 234C of the Income Tax Act

Analysis:

1. The first issue pertains to the disallowance of the provision for non-performing assets (NPA). The assessing officer added the amount to the income as per normal provisions. The Tribunal referred to a Supreme Court decision highlighting the distinction between write off and provision for doubtful debt. It was noted that the provision for NPA created by a scheduled bank is added back before any deduction is allowed. The Tribunal upheld the disallowance of the provision for NPA.

2. The second issue concerns the addition of an amount transferred to the Special Reserve in computing book profit under section 115JB. The Tribunal analyzed the statutory requirement for creating the reserve and concluded that it should be added to the book profit. The Tribunal dismissed the appeal on this ground.

3. The third issue involves the addition of an amount transferred to the Debenture Redemption Reserve in computing book profit. The Tribunal found that this provision was made for a specific liability arising at the time of debenture redemption. Citing relevant case law, the Tribunal allowed the appeal on this ground.

4. The fourth issue addresses the addition of the provision for NPA in computing book profit. The Tribunal upheld this addition based on the amendment to explanation 1 of section 115JB(2) by the Finance Act, 2009. The provision for NPA was considered to represent a diminution in the value of assets.

5. The final issue relates to the imposition of interest under sections 234B and 234C of the Income Tax Act. The Tribunal noted that the retrospective amendment affected the liability for advance tax, and thus, interest under these sections should not be imposed due to the non-addition of the provision for NPA. The Tribunal partly allowed this ground of appeal.

In conclusion, the Tribunal partly allowed the appeal filed by the assessee, addressing various issues related to the disallowance of provisions, addition of reserves in book profit computation, and imposition of interest under relevant tax sections.