2019 (6) TMI 739 - AT - Income Tax

Deduction u/s. 80IB - disallowance of a deduction claimed by the assessee being loss incurred on assignment of advances - Admission of additional ground - Whether it enhances the profits of the appellant and consequently on the enhanced income the appellant is entitled for deduction under section 80-IB of the Act as per the Circular issued by the Central Board of Direct Taxes in Circular No. 37/2016, dated 02/11/2016? - HELD THAT - Prima facie the claim made by the assessee in the additional ground of appeal deserves to be accepted. However, it requires to be verified whether the impugned disallowance would go to enhance the profits on which the assessee had claimed deduction u/s. 80IB of the Act. We therefore set aside the order of CIT(Appeals) on this issue and restore the same to the file of AO to examine this aspect and if the claim made by the assessee is found to be correct, then assessee should be allowed deduction u/s. 80IB on the enhanced profit and consequently the disallowance made by the AO will have no effect. Therefore, the question whether the disallowance is justified or not is left open MAT computation - addition on account of provision for bad and doubtful advances while computing book profits u/s. 115JB - HELD THAT - As relying on M/S KIRLOSKAR SYSTEMS LTD 2013 (12) TMI 9 - KARNATAKA HIGH COURT provision for bad and doubtful advances debited in the P L account and its simultaneous reduction in the loans advances in the balance sheet will not only mean that there was an actual write off of bad and doubtful advances in the P L account, but also that there was no deduction claimed on account of provision by the assessee. Consequently, the addition made by the AO in determining the book profits of the assessee is not warranted and the said addition directed to be deleted. Consequently, the second issue is decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of a deduction claimed by the assessee for a loss incurred on the assignment of advances.
2. Addition of a sum to the profit as per the Profit & Loss (P&L) account on account of provision for bad and doubtful advances while computing book profits under Section 115JB of the Income-Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Deduction for Loss on Assignment of Advances
- Facts and Background: The assessee, engaged in the business of construction and real estate, claimed a deduction of ?4,62,53,175 for a loss incurred on the assignment of advances. These advances were initially made to secure contracts but were later assigned at a 75% discount to Aishwarya Finance Ltd. due to the improbability of securing contracts.
- AO’s Decision: The Assessing Officer (AO) disallowed the claim, treating the loss as a capital loss, not incidental to the business. The AO reasoned that the advances were akin to capital receipts (share application money) and not revenue expenditure.
- CIT(Appeals) Decision: The CIT(A) upheld the AO’s decision, stating that the investment in shares was capital in nature and not eligible for deduction under Section 37 of the Act, as it was not incurred wholly and exclusively for business purposes.
- Tribunal’s Decision: The Tribunal admitted an additional ground for appeal, where the assessee argued that the disallowance should enhance the business profits eligible for deduction under Section 80-IB, as per CBDT Circular No. 37/2016. The Tribunal remanded the issue to the AO to verify if the disallowance would indeed enhance the profits on which the assessee claimed the 80-IB deduction. If verified, the disallowance would have no tax implications.

2. Addition to Profit for Provision for Bad and Doubtful Advances under Section 115JB
- Facts and Background: The AO added ?14,50,66,953 to the book profits under Section 115JB, which was a provision for bad and doubtful advances debited in the P&L account. This addition was based on Explanation 1 clause (i) to Section 115JB, which mandates increasing the net profit by provisions for diminution in the value of any asset.
- CIT(Appeals) Decision: The CIT(A) confirmed the AO’s addition.
- Tribunal’s Decision: The Tribunal referred to the Karnataka High Court’s decision in CIT v. Kirloskar Systems Ltd., which held that if a provision for bad and doubtful debts is debited in the P&L account and simultaneously reduced from the advances in the balance sheet, it is akin to a write-off. The Tribunal concluded that the provision for bad and doubtful advances should not be added to the book profits under Section 115JB, following the principle established in the Kirloskar Systems Ltd. case and the Supreme Court’s decision in Vijaya Bank v. CIT. Consequently, the Tribunal directed the deletion of the addition made by the AO.

Conclusion:
The appeal by the assessee is partly allowed. The first issue regarding the disallowance of the loss on assignment of advances is remanded to the AO for verification related to the Section 80-IB deduction. The second issue concerning the addition to book profits for the provision for bad and doubtful advances is decided in favor of the assessee, directing the deletion of the addition by the AO.