2017 (5) TMI 1092 - AT - Income Tax

Reopening of assessment - wrong claim of carry forward of unabsorbed depreciation - Held that - It is difficult to accept the cause/justification recorded by the AO in this regard. Admittedly, the AY 2006-07 is merely a transient year where the carry forward of earlier year has been brought forward to this year and again carried forward to next year for set off in the appropriate assessment year. AY 2006-07 only seeks to disclose the pending entitlement of the assessee in respect of unabsorbed depreciation rightfully or wrongfully. This has no impact on the chargeable income of the AY 2006-07 which is alleged to have escaped assessment. Therefore, the precondition for invoking jurisdiction under section 147 in so far as this reason is concerned is untenable in law and cannot be upheld. - Decided in favour of assessee. Failure to increase the book profit computed under section 115JB of the Act on account of bad debts reserves debited to P&L Account - Held that - A bare reading of Explaantion-1(c) to section 115JB would suggest that the aforesaid clause is meant to increase the book profit in respect of provisions towards unascertained liabilities. It is apparent that bad debts reserves is not on account of any provision towards any liability far less unascertained liabilities. The provision, as pleaded by the assessee, is in the nature of amounts set aside for diminution in the value of sundry debtors which is an asset rather than a liability. Therefore, the entire basis for the formation of belief to invoke section 147 is a damp squib. As a Corollary, the reasons recorded are not in sync with section 147 of the Act and are marred by wrong application of law and therefore cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) to reopen the assessment under section 147 of the Income Tax Act.
2. Denial of carry forward of unabsorbed depreciation pertaining to AY 1998-99.
3. Recalculation of book profits by adding bad debt reserve to Net Profit.

Detailed Analysis:

Issue 1: Jurisdiction of the AO to Reopen the Assessment under Section 147
- The assessee challenged the jurisdiction of the AO to reopen the assessment under section 147 of the Income Tax Act for AY 2006-07, arguing that there was no escapement of income which is a prerequisite for reopening the assessment.
- The AO issued a notice under section 148 dated 21/02/2011 for AY 2006-07 to reopen the assessment based on two reasons: disallowance of unabsorbed depreciation and recalculation of book profits.
- The Tribunal noted that the AY 2006-07 was merely a transient year for rolling over the unabsorbed depreciation to the next year, having no impact on the chargeable income for AY 2006-07. Hence, the precondition for invoking jurisdiction under section 147 was untenable.
- Regarding the second reason, the AO’s reliance on clause (c) of Explanation-1 to section 115JB was found to be incorrect as bad debt reserves are not provisions for liabilities but for diminution in the value of sundry debtors.
- The Tribunal concluded that the reasons recorded for reopening the assessment were not in sync with section 147 and were based on wrongful application of law. Consequently, the reassessment order was set aside and quashed for want of jurisdiction.

Issue 2: Denial of Carry Forward of Unabsorbed Depreciation Pertaining to AY 1998-99
- The AO denied the carry forward of unabsorbed depreciation of ?58,34,352/- pertaining to AY 1998-99, arguing that it should not be carried forward beyond eight years as per the erstwhile section 32(2) of the Act.
- The CIT(A) granted relief to the assessee, allowing the carry forward of unabsorbed depreciation based on the judgment of the Hon’ble Gujarat High Court in the case of General Motors India (P.) Ltd.
- The Tribunal upheld the CIT(A)’s decision, noting that the issue is squarely covered in favor of the assessee by the jurisdictional High Court’s judgment.

Issue 3: Recalculation of Book Profits by Adding Bad Debt Reserve to Net Profit
- The AO recalculated the book profits by adding bad debt reserve of ?3,40,855/- to the Net Profit, based on Explanation-1(c) to section 115JB.
- The Tribunal found that bad debt reserves are not provisions for liabilities but for diminution in the value of sundry debtors, thus the AO’s basis for recalculating book profits was incorrect.
- On merits, the Tribunal relied on the judgment of the Hon’ble Apex Court in the case of CIT vs. HCL Comnet Systems & Services Ltd., which supported the assessee’s position.

Separate Judgments Delivered:
- The Tribunal quashed the reassessment order for AY 2006-07, allowing the assessee’s appeal and dismissing the Revenue’s appeal.
- For AYs 2007-08 and 2008-09, the Tribunal dismissed the Revenue’s appeals, noting that the issue was covered by the High Court’s judgment and the reassessment order for AY 2006-07 had been quashed, rendering the consequential orders under section 155(4) infructuous.

Conclusion:
- The appeal of the Assessee for AY 2006-07 was allowed.
- The appeals of the Revenue for AYs 2006-07, 2007-08, and 2008-09 were dismissed.