2022 (2) TMI 25 - AT - Income Tax

Revision u/s 263 by CIT - CIT directed the A.O. to redo the assessment for the purpose of computation of book profits u/s 115JB - Depreciation on Investment Portfolio - CIT rejected the claim of the assessee that such net depreciation on investment is a valuation loss and cannot be considered for computation of book profit u/s 115JB - HELD THAT - As decided in M/S. TORRENT PRIVATE LIMITED 2019 (6) TMI 709 - GUJARAT HIGH COURT issue decided in favour of the assessee and against the revenue. It is hereby held that the Income Tax Appellate Tribunal was justified in deleting the disallowance of provision for diminution in value of investment while computing book profit under section 115JB of the Income Tax Act, 1961. Also see M/S. RELIANCE WELFARE ASSOCIATION CIRCLE, MUMBAI 2018 (1) TMI 855 - ITAT MUMBAI A.O. is directed to verify whether depreciation / diminution of value of investment to the extent of ₹ 3028.32 crore is concerned, the same has actually been reduced from the assets side of the balance sheet, and is in the nature of write off. Therefore, de hors the observation of the CIT, the AO is directed to complete the assessment in the light of the dictum laid down in the above cited judicial pronouncements. It is ordered accordingly. Hence, ground 3 is allowed for statistical purposes Disallowance u/s 14A for computation of book profit u/s 115JB - As per AO assessee had voluntarily disallowed expenses relatable to exempt income u/s 14A of the I.T.Act to the extent of 5% of income on adhoc basis - HELD THAT - As relying on GUJARAT FLUOROCHEMICALS LTD 2019 (7) TMI 541 - GUJARAT HIGH COURT ,VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI and TATA SONS LIMITED 2018 (12) TMI 916 - ITAT MUMBAI disallowance u/s 14A of the I.T.Act cannot be incorporated in the computation of book profits u/s 115JB of the I.T.Act, we hold that the assessment order is neither erroneous nor prejudicial to the interest of the revenue on this point. It is ordered accordingly. Therefore, ground 4 is allowed. Provision created in Non Performing Assets - as submitted before the CIT that provision for NPA as per RBI Prudential norms is not covered by item (i) to Explanation to section 115JB(2) since it is not a provision but a write off, therefore, it was contended that it has to be treated as write off and not a provision - HELD THAT - As relying on YOKOGAWA INDIA LTD. 2011 (8) TMI 766 - KARNATAKA HIGH COURT A.O. is directed to verify de hors the observations of the CIT whether provisions created for NPA is reduced from the assets side of the balance sheet. If so, the same is to be treated as write off. With these observations, we dispose of ground 5.

Summary

Issues Involved:
1. Depreciation on investment portfolio.
2. Disallowance under section 14A of the Income Tax Act.
3. Provision for Non-Performing Assets (NPA).
4. Jurisdiction of the CIT to invoke section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Depreciation on Investment Portfolio:
The assessee contended that the depreciation of ?3028.32 crore was not debited to the Profit and Loss account and thus should not be adjusted in the book profit. They argued that this amount represents a valuation loss, not a provision for the diminution of asset value. The CIT disagreed, noting that a net depreciation of ?537.32 crore was debited to the profit and loss account, necessitating an adjustment under section 115JB(2). The Tribunal referred to the Gujarat High Court's decision in Pr.CIT v. Torrent Private Limited, which held that a write-off of asset value should not be added to book profits under section 115JB(2). The Tribunal directed the AO to verify if the depreciation was indeed a write-off from the asset side of the balance sheet and to complete the assessment following the judicial pronouncements.

2. Disallowance under Section 14A:
The AO had disallowed ?58.58 crore under section 14A, which was not added back while computing the book profit under section 115JB. The CIT found this omission erroneous and prejudicial to the revenue. The Tribunal referred to the Gujarat High Court's decision in Pr.CIT v. Gujarat Flurochemicals Ltd., which held that disallowance under section 14A cannot be added to book profits under section 115JB. The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the revenue on this point, thus allowing the ground in favor of the assessee.

3. Provision for Non-Performing Assets (NPA):
The assessee argued that the provision for NPA, as per RBI norms, is a write-off and not a provision, as it is reduced from the gross advances in the balance sheet. The CIT rejected this, noting that the AO had not examined whether the provision for NPA was an actual write-off. The Tribunal referred to the Karnataka High Court's decision in CIT v. Yokogawa India Ltd., which held that provisions reduced from the asset side of the balance sheet are considered write-offs and not provisions. The Tribunal directed the AO to verify if the NPA provision was reduced from the asset side and to treat it as a write-off if so.

4. Jurisdiction of the CIT to Invoke Section 263:
The assessee challenged the CIT's jurisdiction to revise the assessment under section 263, arguing that the AO had adopted one of the possible views. Since the Tribunal disposed of grounds 3 to 5 on merits, it did not adjudicate on the CIT's jurisdiction under section 263, leaving this issue open.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to verify the nature of depreciation on investments and provisions for NPA and to follow judicial pronouncements regarding disallowance under section 14A. The jurisdictional challenge under section 263 was not adjudicated.