2016 (5) TMI 713 - HC - Income Tax

MAT - Computing income under section 115J - ITAT making addition to the book profit in respect of assessment years 1997-98 and 1998-99 respectively and directing for deletion of the said amounts while computing the book profit of the assessee for the purpose of section 115J - Held that - Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J. Once there is no dispute that the books of account were maintained in accordance with law and were duly certified, the assessing officer s limited jurisdiction is as indicated by Their Lordships in the case of Apollo Tyres (2002 (5) TMI 5 - SUPREME Court). It was therefore not open to the assessing officer to disallow the debit entry of a sum of ₹ 120.39 crores. Therefore, the order passed by the learned Tribunal is a perfectly justified order. In that view of the matter, the first question is answered in the affirmative and in favour of the assessee. It is, however, clarified that similar disallowance was there by the assessing officer of a sum of ₹ 325.15 crores for the assessment year 1998-99 which has also been set aside by the learned Tribunal and we confirm that order. Addition on account of provision for doubtful debt on account of provision for diminution in value of investment while computing book profit of the assessee - Held that - All the ingredients should be satisfied to attract item (c) of the Explanation to section 115JA. In our view, item (c) is not attracted. There are two types of debt . A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case, the debt under consideration is a debt receivable by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view, item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the Assessing Officer was not justified in adding back the provision for doubtful debts under clause (c) of the Explanation to section 115JA of the 1961 Act. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Justifiability of the addition of ?120.39 crores and ?325.15 crores to the book profit for assessment years 1997-98 and 1998-99 respectively.
2. Deletion of the addition of ?16.2 crores on account of provision for doubtful debt and ?15.36 crores on account of provision for diminution in the value of investment while computing book profit.

Detailed Analysis:

Issue 1: Addition to Book Profit
The primary issue revolves around whether the Assessing Officer was justified in adding ?120.39 crores and ?325.15 crores to the book profit for the assessment years 1997-98 and 1998-99 respectively. The Tribunal held that the Assessing Officer made a fundamental mistake by mixing up the claim of the assessee while computing the regular income for the assessment year 1996-97 with the computation of book profit for the assessment year 1997-98. It emphasized that the computation of total income under the Income Tax Act and the computation of book profit under section 115JA are two distinct processes. The Tribunal clarified that the deduction of ?613.21 crores was claimed in the assessment year 1996-97 while computing total income as per the Income Tax Act, and not from the book profit for that year. Consequently, the claim of ?120.39 crores in the subsequent year was justified and not a case of double deduction. The High Court upheld this view, reiterating that the normal computation and computation under section 115JA are separate channels and that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except as provided in the Explanation to section 115J. The Court confirmed the Tribunal's decision to delete the addition of ?120.39 crores and ?325.15 crores from the book profit for the respective years.

Issue 2: Provision for Doubtful Debt and Diminution in Value of Investment
The second issue pertains to the deletion of additions of ?16.2 crores on account of provision for doubtful debt and ?15.36 crores on account of provision for diminution in the value of investment. The Tribunal's decision was based on the fact that these provisions were covered by Explanation (g) to sub-section (2) of section 115JA, which was introduced with effect from April 1, 1998. Since the disallowances were made for the assessment year 1997-98, the amendment could not be applied retrospectively. The High Court supported this view, citing the Supreme Court judgment in CIT vs. HCL Comnet Systems & Services Ltd., which clarified that a provision for bad and doubtful debts is made to cover probable diminution in the value of an asset and cannot be considered a provision for liability. Consequently, the Court concluded that item (c) of the Explanation to section 115JA did not apply, and the Assessing Officer was not justified in adding back the provisions for doubtful debts and diminution in value of investment to the book profit.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decisions on both issues. It held that the additions to book profit for the assessment years 1997-98 and 1998-99 were not justified and that the provisions for doubtful debts and diminution in value of investment were correctly deleted from the book profit computation. The parties were directed to bear their own costs.