2022 (12) TMI 761 - HC - Income Tax

Deemed income relating to certain companies u/s 115JA - amount towards provision for doubtful advance was not added back to the book profit, while completing the assessment u/s 143(3) r/w 147 - whether provisions of bad and doubtful debt cannot be added by the Assessing Officer vehicle computing book profit u/s 115 JA especially in view of the retrospective amendment to the explanation to Section 115 JA with effect from 01.04.1998 substituted by Finance Act, No.2, 2009? - As submitted that explanation to Section 115 JA (ii) has been amended vide finance (2) Act, 2009 with retrospective effect from 01.04.1998 and therefore on this count alone the impugned order of the Appellate Tribunal is not sustainable - HELD THAT - Clause(g) was inserted by Finance (No.2) Act, 2009, with effect from 01.04.1998. Similarly, the phrase beginning with if any amount referred to clauses (a) to (f) is debited to the profit and loss account and as reduced by , was substituted with the phrase if any amount referred to clauses (a) to (g) is debited to the profit and loss account and as reduced by . The above amendment was not considered by the Hon ble Supreme Court when it gave its verdict in Commissioner of Income Tax vs. HCL Comnet Systems Services Ltd . 2008 (9) TMI 18 - SUPREME COURT for the Assessment Year 1997-98. The above amendment vide Finance (No.2) Act, 2009 was not relevant for the Assessment year 1997-1998 which fell for consideration. The above decision is therefore not relevant. The Tribunal therefore ought to have examined the issue in the light of the inserted Clause (g) to Explanation Sub-Section 2 to Section 115JA of the Act with effect from 1.4.1998 vide Finance (No.2) Act, 2009 which was relevant for the present case. Therefore, we are of the view that the impugned order deserves to be set aside and the case should be remitted back to the Tribunal to reexamine the issue fresh in the light of the above amendment brought to the definition of Book Profit by Finance (No.2) Act, 2009 with effect from 01.04.1998. Otherwise, the above amendment would be rendered otiose. Therefore, we remit the case back to the Tribunal without answering to the substantial questions of law raised to re-examine the issue afresh in the light of the above observation, leaving all issues open to be canvassed by both the appellant and the respondent. Considering the fact that the impugned order pertains to the Assessment Year 1998-99, the Tribunal may endeavour to pass a final order in the denovo proceeding within a period of six months from the date of receipt of a copy of this order.

Summary

Issues Involved:
1. Whether the provisions for bad and doubtful debt can be added by the Assessing Officer while computing book profit under Section 115JA of the Income Tax Act, 1961.
2. The impact of the retrospective amendment to the explanation to Section 115JA of the Act, with effect from 01.04.1998, substituted by Finance Act, No.2, 2009.

Detailed Analysis:

Issue 1: Provisions for Bad and Doubtful Debt under Section 115JA

The core issue in this appeal is whether the provisions for bad and doubtful debts can be added back to the book profits under Section 115JA of the Income Tax Act, 1961. The Tribunal had initially ruled in favor of the assessee, referencing the Supreme Court's decision in CIT vs. HCL Comnet Systems and Services Ltd. (305 ITR 409), which held that item (c) of the Explanation to Section 115JA does not apply to provisions for bad and doubtful debts. The Supreme Court reasoned that such provisions are made to cover probable diminution in the value of assets and cannot be considered a provision for liability because no liability is fastened on the assessee even if the debt is not recoverable.

Issue 2: Retrospective Amendment to Section 115JA

The Revenue challenged the Tribunal's decision, arguing that the retrospective amendment to the explanation to Section 115JA, effective from 01.04.1998, should be considered. The amendment, introduced by Finance Act, No.2, 2009, included clause (g) in the explanation, which was not considered by the Tribunal or the Supreme Court in the HCL Comnet case. The Revenue cited several cases, including Commissioner of Income Tax vs. Ilpea Paramount (P) Ltd., Commissioner of Income Tax vs. Tamil Nadu Small Industries Development Corporation Ltd., and Eid Parry (India) Limited vs. Assistant Commissioner of Income Tax, to support their position.

The Tribunal's decision was based on the legal framework and judicial precedents existing at the time of their judgment. However, the retrospective amendment necessitated a re-examination of the issue. The amendment to Section 115JA was not in force during the original assessment or the subsequent appellate proceedings, making the Tribunal's reliance on the Supreme Court's decision in HCL Comnet Systems and Services Ltd. potentially outdated.

Court's Conclusion:

The High Court concluded that the Tribunal's decision needed reconsideration in light of the retrospective amendment to Section 115JA. The amendment, which included clause (g) in the explanation, was crucial for determining the treatment of provisions for bad and doubtful debts in computing book profits. The court noted that the amendment was not considered by the Supreme Court in the HCL Comnet case, as it was relevant for a different assessment year.

The High Court set aside the Tribunal's order and remitted the case back to the Tribunal for re-examination in light of the retrospective amendment. The Tribunal was directed to pass a final order within six months, considering the amendment and leaving all issues open for both parties to argue.

Final Disposition:

The Tax Case Appeal was disposed of by remanding the case to the Tribunal for a fresh examination, considering the retrospective amendment to Section 115JA. The Tribunal was instructed to pass a final order within six months, ensuring that the amendment's implications were fully considered. No costs were awarded.