2021 (1) TMI 413 - HC - Income Tax

MAT Computation - Entitlement to the reduction of the amount credited to the profit loss account on account of reversal of provision for bad and doubtful debts under section 115JB - HELD THAT - The Supreme Court in 'CIT VS. HCL Comnet Systems and Services Ltd.' 2008 (9) TMI 18 - SUPREME COURT held that provisions for bad and doubtful debts cannot be added under Explanation to Section 115JB. From perusal of para 40.2 of Circular dated 03.06.2010, it is evident that clause (i) in Explanation after Section 115JB(2) has been inserted so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. It is well settled in law that law does not contemplate or require the performance of an impossible act. See LIFE INSURANCE CORPORATION OF INDIA VERSUS COMMISSIONER OF INCOME-TAX 1996 (2) TMI 5 - SUPREME COURT The assessee could not have added back the provision for doubtful debts to the net profit for the purpose of computation under Section 115JB of the Act in the years prior to insertion of clause (i) as those years had already elapsed and the assessee could not have given effect to the provision, which was inserted at a later point of time. The assessee therefore, could not have added back the provision for bad and doubtful debts to the net profit. It is also pertinent to note that even if the provision for doubtful debt is added back to the net profits, the resultant book profit is still negative and even though the assessee was prevented from adding back the provision for bad and doubtful debts to the net profit due to reasons beyond its control, it has at the first opportunity demonstrated to the authorities that book profits are still negative on adding back the provision for bad and doubtful debts and therefore, no adverse inference could have been drawn against the assessee. It is also pertinent to note that the assessee had added the provision for bad and doubtful debts for Assessment Years 1998-99 to 2000-01. Decided in favour of the assessee.

Summary

Issues:
1. Entitlement to reduction of amount credited to profit & loss account for reversal of provision for bad and doubtful debts under section 115JB of the Income Tax Act, 1961.
2. Failure of the Tribunal to consider the retrospective amendment by Finance Act, 2009 in the computation of book profit under MAT provisions.
3. Failure of the Tribunal to grant deduction in respect of reversal of provision for bad and doubtful debts.
4. Justification of adding indirect expenditure disallowed under section 14A to net profit in computation of book profit for MAT purposes.

Analysis:

Issue 1:
The appellant contested the addition of the provision for bad and doubtful debts to the net profit, citing the retrospective effect of the relevant provision inserted by the Finance Act, 2009. The court acknowledged that the provision could not be added back for years prior to the insertion of the clause, and even if added, the resulting book profit remained negative. The court referred to precedents and concluded in favor of the appellant, quashing the tribunal's decision.

Issue 2:
The appellant argued that the Tribunal failed to consider the retrospective amendment by Finance Act, 2009, impacting the computation of book profit under MAT provisions. The court agreed with the appellant's submissions, emphasizing that the provision could not be enforced for past years and that the appellant had demonstrated the negative book profits even after the addition, leading to a ruling in favor of the appellant.

Issue 3:
The appellant contended that the Tribunal overlooked the appellant's previous addition of the provision for bad and doubtful debts for certain years, seeking a deduction for the reversal. The court, after considering the arguments and relevant case laws, sided with the appellant, emphasizing that the appellant had shown negative book profits even after the addition, leading to the quashing of the tribunal's decision.

Issue 4:
Regarding the addition of indirect expenditure disallowed under section 14A to the net profit for MAT purposes, the court analyzed the arguments presented by both parties. The court referred to legal precedents and concluded that the disallowance computed under section 14A pertained to normal provisions and could not be applied to MAT provisions. Relying on relevant case laws, the court ruled in favor of the appellant, quashing the tribunal's decision.

In conclusion, the court ruled in favor of the appellant on all substantial questions of law, quashing the tribunal's decision and allowing the appeal.