2019 (2) TMI 1439 - HC - Income Tax

MAT computation - provision for non-performing assets to be reduced from the book profits computed under section 115JA - Deemed Income relating to certain companies - rectification application u/s 154 - assessee countered the proposal pointing out that the provision towards non-performing assets had been created in terms of the Prudential Norms issued by the Reserve Bank of India and were ascertained - response was rejected and the rectification effected as per the proposal of the assessing officer - When the order under s.154 as aforesaid was passed by the Assessing Officer, the jurisdictional High Court, had, in the case of Deputy Commissioner of Income Tax V. Beardsell Ltd. (2000 (3) TMI 37 - MADRAS HIGH COURT) considered the identical issue of whether a provision for doubtful debts was liable to be included in the computation of book profits under s.115JA HELD THAT - The settled position in law as on date is that with effect from 01.04.1998 any amount set aside as provision for diminution in value of asset would be liable to be added back to the book profits in terms of s.115JA of the Act. The substantial questions of law that arise for the respective Assessment Years are now answered bearing in mind the dates of the impugned orders. Rectification u/s 154 - Revenue did not have the benefit of the decision of this Court in Beardsell (supra) at the time when the s.154 order was passed and the error cannot be said to be one apparent from the face of record and was debatable. The invocation of section 154 to rectify an intimation u/s 143(1) of the Act is thus incorrect as when the order was passed for Assessment Year 1997-98, the position in regard to the disallowance was debatable. The questions of law in so far as they relate to assessment year 1997-98 are answered in favour of the Assessee and against the Revenue. The order u/s 154 in respect of Assessment Year 2000- 2001 was passed on 26.04.2001, subsequent to the decision of this Court in the case of Beardsell (2000 (3) TMI 37 - MADRAS HIGH COURT). Thus, the substantial questions of law are answered in favour of the Revenue and against the assessee for Assessment Year 2000-2001 - Decided in favour of revenue

Summary

Issues:
- Disallowance of provision for non-performing assets from book profits under section 115JA of the Income Tax Act
- Jurisdiction of assessing officer to rectify intimation under section 143(1)(a) to disallow the provision for non-performing assets

Analysis:
1. Issue 1: Disallowance of provision for non-performing assets
- The appeals were filed against the order passed by the Income Tax Appellate Tribunal regarding the assessment years 1997-98 and 2000-2001.
- The Assessing Officer contended that the provision for non-performing assets represented unascertained liabilities and should have been included in the computation of book profit under section 115JA of the Income Tax Act.
- The assessee argued that the provision was created based on Prudential Norms by the Reserve Bank of India, making it ascertained, but the rectification was still carried out by the assessing officer.
- The High Court, following Supreme Court judgments, held that a provision for non-performing assets should be included in 'book profits' as per Explanation (c) to section 115JA of the Act.
- Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal confirmed the disallowance made by the Assessing Officer.

2. Issue 2: Jurisdiction of assessing officer for rectification
- The assessee challenged the addition on merits and argued that the addition should not have been made under section 154 of the Act, as it related to a debatable issue, not a mistake apparent on record.
- The Supreme Court later clarified that a provision for bad and doubtful debts would not be part of 'book profits' under Explanation (c) to section 115JA, leading to a legislative amendment in 2009 to include such provisions.
- The settled position in law post the amendment is that any amount set aside as provision for diminution in the value of an asset is liable to be added back to 'book profits' under section 115JA of the Act.
- The High Court differentiated between the assessment years 1997-98 and 2000-2001 based on the timeline of the decision in a related case, ruling in favor of the assessee for the former and in favor of the Revenue for the latter.

In conclusion, the High Court allowed one appeal and dismissed the other, highlighting the importance of legal precedents, legislative amendments, and the timeline of decisions in determining the outcome of tax-related disputes.