1998 (9) TMI 139 - AT - Income Tax

Summary

Issues Involved:
1. Re-computation of book profits under section 115J of the IT Act, 1961.
2. Inclusion of loss on revaluation of investments in book profits.
3. Inclusion of provision for doubtful debts in book profits.
4. Validity of the CIT's order under section 263 of the IT Act, 1961.

Detailed Analysis:

1. Re-computation of Book Profits under Section 115J:
The primary issue in this appeal was the direction by the CIT to the AO to recompute the book profits under section 115J by including the loss on revaluation of investments and the provision for doubtful debts. The CIT found the original assessment order to be erroneous and prejudicial to the interest of the Revenue.

2. Inclusion of Loss on Revaluation of Investments:
The assessee had debited Rs. 40,19,920 to its P&L account as a loss on revaluation of investments. The CIT directed this amount to be added back to the book profits, which the assessee contested. The assessee argued that the loss on revaluation does not fall under the items specified in the Explanation to section 115J(1). However, the Tribunal found that the loss on revaluation of investment had not accrued during the year and was merely a contingent loss. Therefore, it should not have been debited to the P&L account as per the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956. The Tribunal upheld the CIT's direction to add this loss to the book profits.

3. Inclusion of Provision for Doubtful Debts:
The assessee had also debited Rs. 6,80,560 as a provision for doubtful debts. The CIT directed this amount to be added back to the book profits. The assessee argued that a provision for doubtful debts does not constitute a liability and hence should not be added back. The Tribunal noted that the nature of the provision (whether it is a provision or a reserve) was not clear from the material available. It directed the AO to determine the true nature of the provision for doubtful debts and add it back to the book profits if it was found to be a reserve, as per clause (b) of the Explanation to section 115J.

4. Validity of the CIT's Order under Section 263:
The Tribunal examined whether the CIT had the jurisdiction to pass the order under section 263. It noted that the CIT can exercise this power if the assessment order is erroneous and prejudicial to the interests of the Revenue. The Tribunal found that the CIT had given a specific finding that the assessment order was erroneous and prejudicial to the Revenue. The Tribunal upheld the CIT's order, stating that the debiting of such expenses under section 115J was a colorable device to avoid tax and was not allowable under the provisions of law.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT's order under section 263. It confirmed that the loss on revaluation of investments and the provision for doubtful debts should be added back to the book profits for the purpose of section 115J. The Tribunal emphasized that the claims made by the assessee were not allowable under the provisions of law and were an attempt to avoid tax.