2016 (4) TMI 252 - HC - Income Tax

Applicability of Explanation (c) to Section 115JB(1)(MAT) - Provisions made for Bad and Doubtful debts - Held That - The issue is already covered by the referred decision of this Court in the case of CIT v. Yokogawa India Ltd., 2011 (8) TMI 766 - KARNATAKA HIGH COURT held that beside debiting Profit & Loss A/C and creating a provision assessee also reduces the amount from Loan & advances and at the end only net amount is shown in asset side - Therefore when bad or doubtful debts is reduced from the loan & Advances Explanation to Section 115JA or 115JB is not at all attracted. - In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. - Decided in favor of assessee.

Summary

Issues:
1. Interpretation of accounting standards regarding the treatment of provisions in the balance sheet.
2. Application of Section 115JB and Explanation 1 in debiting the P & L account and reducing the value of assets.

Issue 1: Interpretation of accounting standards regarding the treatment of provisions in the balance sheet:

The primary issue in this case revolves around whether the Tribunal correctly interpreted the treatment of provisions in the balance sheet. The Tribunal held that the assessee had reduced the provision made from the sundry debtors in the balance sheet, equating it to a bad debt write-off rather than a provision. This interpretation was supported by the assessee's balance sheet, which showed a deduction from the gross debtors. The Tribunal referred to previous judgments, including one by the Hon'ble Apex Court in Vijaya Bank, to support its stance that the provision made towards irrecoverability of debt did not fall under the provision for liability. The Tribunal concluded that the reduction of the provision from debtors did not attract the Explanation to Section 115JA(2) of the Act. The Tribunal's decision was influenced by the judgment in Yokogawa India Ltd., which had a similar issue related to Section 115JB of the Act. The Tribunal's ruling was based on the understanding that a provision for diminution in the value of assets would not fall within the specific provision of the Act. Therefore, the Tribunal granted relief to the assessee based on this interpretation of the law and accounting standards.

Issue 2: Application of Section 115JB and Explanation 1 in debiting the P & L account and reducing the value of assets:

The second issue in this case pertains to the application of Section 115JB and Explanation 1 in debiting the Profit & Loss (P & L) account and reducing the value of assets. The Tribunal's decision was challenged on the grounds that the net profit as shown in the P & L account should be increased by the amount or amount set aside as provision for diminution in the value of assets, as required by clause (i) of Explanation 1 to Section 115JB. The contention was that the reduction of the provision from debtors was only a requirement under the Companies Act and did not align with the provisions of the Income Tax Act. However, the Tribunal's interpretation, supported by the judgments in Vijaya Bank and Yokogawa India Ltd., emphasized the distinction between actual write-off and provision for bad and doubtful debt. The Tribunal clarified that debiting the P & L account and creating a provision for bad and doubtful debt should be accompanied by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet. This simultaneous reduction ensured that the amount representing bad or doubtful debt was not added to compute book profit. The Tribunal's decision was based on the requirement to reduce bad debt or doubtful debt from the loans and advances or debtors on the assets side of the balance sheet to avoid attracting the Explanation to Section 115JA or JB. Consequently, the Tribunal ruled in favor of the assessee, stating that once debtors were netted off with the provisioning, the retrospective benefit to the amendment would not affect the assessee. Therefore, the Tribunal found no merit in the appeal by the revenue on this ground and decided the issue in favor of the assessee.

In conclusion, the High Court dismissed the appeal, stating that the issue was already covered by a previous decision of the court. However, it allowed the revenue to take further proceedings in accordance with the law if the Apex Court took a different view. The judgment provides a detailed analysis of the interpretation of accounting standards and the application of relevant provisions under the Income Tax Act, emphasizing the importance of correctly treating provisions in the balance sheet and debiting the P & L account in compliance with the law.