2016 (9) TMI 154 - HC - Income Tax

Liability under MAT provisions - effect of insertion of clause (i) to explanation (1) of subsection( 2) of section 115JB of the Income Tax Act, 1961 with effect from 1.4.2001 - Held that - Having gone through the judgement of the Supreme Court in case of Vijaya Bank (2010 (4) TMI 46 - SUPREME COURT ) and decisions of Karnataka High Court in cases of Kirloskar Systems Ltd. (2013 (12) TMI 9 - KARNATAKA HIGH COURT ) and Yokogawa India Ltd.(2011 (8) TMI 766 - KARNATAKA HIGH COURT ), we are of the opinion that irresolvable conflict has arisen between the two judgements of Division Benches of this Court which cannot be resolved by having resort to the decision of the Supreme Court in case of Vijaya Bank (supra). In the said decision Supreme Court interpreted explanation(1) to section 36(1)(viii) of the Act which provides that for the purposes of the said clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee, shall not include any provision for bad and doubtful debts made in the account of the assessee. The Supreme Court held and observed that said explanation would not govern a situation where there was an actual write off by the assessee in his books in the manner explained in the judgement. Counsel for the assessee would therefore, contend that in the present case also the same legal philosophy would apply and clause(i) of explanation below subsection( 2) of section 115JB would not come into play. Undisputedly, the decision of the Supreme Court in case of Vijaya Bank (supra), was not rendered in context of newly inserted clause(i) of explanation(1) below subsection( 2) of section 115JB. In that sense it cannot be said that the decision of this Court in case of Deepak Nitrite Limited(supra) was rendered per incuriam though it is true that the said decision of the Supreme Court was available by the time judgement of High Court in case of Deepak Nitrite Limited(supra) was rendered, was not noticed. In view of the judgement of the Supreme Court in case of Vijaya Bank (supra), whether this Court would have taken a view as was adopted by Deepak Nitrite Limited(supra), is neither possible nor proper on our part to speculate upon. The situation therefore, has arisen where the decision in case of Deepak Nitrite Limited(supra) was rendered without the aid of Supreme Court judgement in case of Vijaya Bank (supra), which though may have some bearing on the interpretation of the relevant statutory provisions, would not render the decision in case of Deepak Nitrite Limited(supra) per incuria. Let there be a reference to the Larger Bench to consider the following question Whether in view of decision of the Supreme Court in case of Vijaya Bank (supra), judgement in case of Deepak Nitrite Limited (2011 (8) TMI 1209 - GUJARAT HIGH COURT ) was not correctly decided and, therefore, later judgement in case of Indian Petrochemicals Corporation Ltd. (2016 (9) TMI 110 - GUJARAT HIGH COURT) lays down the correct law?

Summary

Issues:
1. Effect of insertion of clause (i) to explanation (1) of subsection(2) of section 115JB of the Income Tax Act, 1961 on computation of assessee's liability under MAT provisions.
2. Conflict between judicial pronouncements regarding the treatment of provisions for bad and doubtful debts in computing income for MAT provisions.

Issue 1: The primary issue in this judgment pertains to the effect of the insertion of clause (i) to explanation (1) of subsection(2) of section 115JB of the Income Tax Act, 1961 on the computation of the assessee's liability under Minimum Alternate Tax (MAT) provisions. The Supreme Court's judgment in the case of Commissioner of Income Tax v. HCL Comnet Systems and Services Ltd. established that provisions made towards irrecoverability of bad debts cannot be considered as a provision for liability. However, this judgment was rendered before the introduction of clause (i) in the explanation (1) of section 115JB in 2001. The High Court in the case of Commissioner of Income TaxI v. Deepak Nitrite Limited analyzed the impact of this changed statutory provision and held that the decision in the HCL Comnet case may not apply due to the new clause (i) in the explanation. The court emphasized that the decision in the HCL Comnet case cannot be applied due to the change in statutory provisions, specifically clause (g) to the explanation, which alters the treatment of provisions for doubtful debts as diminution of asset value. The court highlighted that the change in statutory provisions overrides the previous Supreme Court decision.

Issue 2: Subsequently, another issue arose regarding the conflicting views on the treatment of provisions for bad and doubtful debts in computing income for MAT provisions. The Division Bench in the case of Indian Petrochemicals Corporation Ltd. held that provisions made for bad and doubtful debts should not be added back in computing book profits under section 115JB(1) as they are not an ascertained liability. This decision was supported by earlier judgments of the Karnataka High Court. The court noted a conflict between this decision and the one in the Deepak Nitrite case, where a different view was taken regarding the treatment of such provisions. The court acknowledged the need for resolution of this conflict by a Larger Bench and referred the question of correct interpretation to be considered in light of the Supreme Court's decision in the Vijaya Bank case. The court highlighted the necessity of resolving the conflict between the two judgments of the Division Benches and the relevance of the Supreme Court's interpretation in similar cases.

In conclusion, the judgment delves into the intricate legal nuances surrounding the interpretation of statutory provisions related to MAT provisions and the treatment of provisions for bad and doubtful debts. The conflicting views presented in different cases necessitated a thorough analysis of the statutory amendments and previous judicial decisions to arrive at a conclusive interpretation. The reference to a Larger Bench underscores the importance of resolving such conflicts to ensure consistency and clarity in legal interpretation.