2013 (5) TMI 123 - HC - Income Tax

Deduction U/s 36(1)(viii) - long term finance - penal interest and pre-closure charges - amount transferred to special reserve - Income U/s 115JA of the Act - Held that - All these amounts, which are paid by the debtor to the assessee, have a direct nexus with the business, which he is carrying on. All these incomes are derived from the business, which he is carrying on. It is also on record except this long term finance business, the assessee is not carrying on any other business much less any short term finance business - Therefore, all these categories of incomes which the assessee is receiving as a direct nexus with the long term finance and therefore Section 36(1)(viii) of the Act is attracted - Decided in favor of assessee. Addition of Provision for doubtful debts/advance to the book profit U/s 115JA of the Act - Held that - By Finance Act No.2 of 2009 w.e.f. 1.4.1998, the present Clause (g) has been substituted by including the amount or amounts set aside as provision for diminution in the value of any asset - In the instant case, Rs.12,30,220/- has been set apart to meet the contingencies. The said amount has not been included in the book profit - It was unascertained liability. Even this amount is earmarked as provision for diminution in the value of any asset for the purpose of arriving at the book profit for the purpose of Section 115JA which ought to have been included - The Assessing Authority was justified in adding the said amount to the book profit. Both the Appellate Authorities committed a serious error in deleting the said amount - Decided against the assessee.

Summary

Issues Involved:
1. Eligibility of miscellaneous income for deduction under Section 36(1)(viii) of the Income Tax Act.
2. Inclusion of provision for doubtful debts/advance in the book profit for computing income under Section 115JA of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Eligibility of Miscellaneous Income for Deduction under Section 36(1)(viii):
The primary issue is whether the miscellaneous income derived from penal charges, processing fees, and other incomes can be treated as eligible profit for the purpose of deduction under Section 36(1)(viii) of the Income Tax Act. The assessee, a company engaged in long-term finance, included fees, penal interest, and other charges in its long-term income. The Assessing Authority excluded these from the long-term finance income, arguing that such incomes are not derived from long-term finance but are incidental business activities. The Appellate Authority and the Tribunal, however, held that these incomes have a direct nexus with the long-term finance business and should be included under Section 36(1)(viii).

The court noted that the assessee is engaged solely in long-term finance, and the miscellaneous incomes have a direct nexus with this business. The processing charges, fore closure charges, and penalty for late payment are all directly related to the long-term finance agreements. Therefore, the court upheld the Tribunal's decision, concluding that these incomes are derived from the business of long-term finance and are eligible for deduction under Section 36(1)(viii).

2. Inclusion of Provision for Doubtful Debts/Advance in Book Profit for Section 115JA:
The second issue pertains to whether the provision for doubtful debts/advance should be added back to the book profit of the company as per the explanation to Section 115JA for computing income. The assessee had added back the provision for contingencies and lease equalization reserve while computing regular income but failed to do so for MAT income. The Assessing Authority added these provisions back, treating them as unascertained liabilities.

The court examined Section 115JA, which mandates that certain amounts, including provisions for unascertained liabilities, should be added back to the book profit. The court found that the provision for contingencies and lease equalization reserve are unascertained liabilities and should be included in the book profit. The Appellate Authority's decision to delete these additions was contrary to statutory provisions. Consequently, the court set aside the Tribunal's order on this issue and ruled in favor of the Revenue, directing the Assessing Authority to recompute the income in conformity with this order.

Conclusion:
In summary, the court ruled in favor of the assessee regarding the eligibility of miscellaneous income for deduction under Section 36(1)(viii) but in favor of the Revenue regarding the inclusion of provisions for doubtful debts/advance in the book profit under Section 115JA. The court dismissed ITA No.918/2006 and allowed ITA Nos.341 and 343 of 2007 concerning the computation of income under Section 115JA.