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TMI Blog2018 (1) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... led appeal has been preferred by the Assessee against the order dated 30.05.2012 of the Commissioner of Income Tax (Appeals) 7, Mumbai [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09. 2. The only ground in this appeal is as under:- "1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of ₹ 46,94,62,365/- made by AO u/s.115JB of the I.T. Act under the head 'provision set aside for diminution in the value of investment holding that the same are not in the nature of provision only." 3. The brief facts of the case are as under:- The assessee is a company registered u/s.25 of the Companies Act, 1956 and holding its investment both as current investment and long term investment. The assessee had submitted its return of income declared income of ₹ 21,43,597/- under the normal provisions and ₹ 17,49,45,153/- u/s.115JB of the Act. The Assessing Officer has completed the assessment at total income (book profit) u/s.115JB at ₹ 64,44,07,518/- as against total book profit at ₹ 17,49,45,153/- returned by the appellant. Thus Assessing Officer amended the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t aside as provision for diminution in the value of any asset. Any corporate entity would have various assets which are reflected in the Balance Sheet as Fixed Assets, Investments or Current Assets. The issue is whether the diminution in the value of any asset is covered by this clause or not. Let us consider what happens when there is a fall in value of stock-in-trade. Where the assessee company adopt method of value of stock-in-trade as at cost or market value whichever is less, and consequently stock is valued at less than cost, the difference between cost and market value will not be a provision for diminution in value of any asset as the amount is written off in the Profit and Loss Account and the value of stock in trade is only reflected at the market value. However, if a hypothetical diminution to the value of stock in trade is provided by not reducing the value of stock in trade but showing the amount as set aside as provision in the Balance Sheet, then the same can be added back under clause (i) of Explanation 1 to section 115JB of the Act. The same treatment is also to be given to other current assets viz. Bad and doubtful loans, advances and sundry debtors written off. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been clarified that bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii). To understand the above dichotomy, one must understand how to write off. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute write off an actual debt. However, if an assessee debits doubtful debt to the profit and loss account and makes a corresponding credit to the provisions for doubtful debt on the liabilities side of the balance sheet, then it would constitute a setting aside a provision for doubtful debt. In the later case, the assessee would not be entitled to deduction after April 1, 1989. 4.35 Reliance is also placed on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt is sufficient? The Hon'ble Supreme Court with reference to the first question has held as under:- "One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1981] 130 ITR 95 was prior to the insertion of the Explanation vide the Finance Act, 2001, with effect from April 1, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from April 1, 1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set, there can be no use of any amount having been set aside for diminution in the value of assets. 4.39 Having circumspected the entire spectrum of fact and circumstances of the case vis-à-vis finding of the Assessing Officer and submissions of the appellant, carefully. I have also perused the provisions of Section 115JB of the Income-tax Act, 1961, Section 211 of the Companies Act, 1956 and Accounting Standard - 13 issued by the Institute of Chartered Accountants of India. 4.40 On perusal of provisions of Section 115JB it is very clear that what is appellant company explicit, required to be added to book profit is amount set aside as Provisions for Diminution in value of investment. Under the circumstances, what is required to be decided is whether the amount of ₹ 46,94,62,365/- debited to Profit & Loss Account is set aside as a provisions or has it been write off as a loss against the value of the asset. Before coming to the conclusion and also to make the issue involved in this appellant's case, I wise to narrate the facts of the case as under: 1. The Appellant made investment in units of mutual fund in March,2008. 2. Intention of the appellant was to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that book profit for the purpose of Section 115JB is not required to be increased by ₹ 46,94,62,365/- as the same is not in the nature of provision. Accordingly, these grounds of appeal are allowed. In the result, the addition so made by A.O. to the book profit is deleted. 4.42 Even I find that the A.O.'s alternate argument that the loss occurred to the appellant company subsequent to dividend earning from investment in mutual funds will amounts to expenditure to be disallowed u/s.115JB of the Act in accordance to the provisions of section 14A of the Act is not correct taking note of the decision of ITAT, Indore Bench in the case of ACIT, Indore Vs. Kailash Chandra Dhanuka reported in 13 TTJ 213, wherein the Hon'ble ITAT upheld the order of CIT(A) correct after taking note of Hon'ble ITAT, Mumbai's decision in the case of CIT Vs. Walfort Shares and Stock Brokers Pvt. Ltd. and the Hon'ble Bombay High Court in the same case. The relevant portion of the said order is extracted as under:- "We have considered rival submission and material available on record. The issue is squarely covered in favour of the assessee by the decision of Bombay High Court in the case of Wal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... write off an actual assets. However, if an assessee debits diminution in value of investment to the Profit & Loss Account and makes a corresponding credit to current liabilities and provision on the liabilities side of the balance sheet, then it would constitute a provision of diminution in value of investment and would not be entitled to deduction. 6. On the other hand, learned counsel of the assessee submitted that assessee has not made any provision in books of account of diminution in value of current investment and the current investment is stated in the balance sheet is at lower of the cost and fair value resultant figure of diminution in value amounting to ₹ 46,94,62,365/- is debited the income and expenditure account as diminution value of investment. The learned AR submitted that as per accounting standard 13 is prescribed by the Institute of Chartered Accountants of India for Accounting for investments mandatory for every company, the clause 14,15 and 16 is relevant. As per above accounting standard it is clear that whenever there is decline in the value of current investment, the same should be charged to profit and loss statement and value its investments at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. The current investment is required to be stated in accounts at lower of cost or fair value as on balance sheet date. Whereas when there is fall in the value of investment, provision is required to be made in accounts. As per amended provisions of Section 115JB requires provision for diminution in value of investment to be added back to determine Minimum Alternate Tax. Fair value of units of mutual funds was lower than its cost by ₹ 46,94,62,365/- and the same being current investment, the appellant following mandatory Accounting standard - 13, charged ₹ 46,94,62,365/- to Profit & Loss Account and prepared its accounts in accordance with Schedule VII provided in Section 211 of the Companies Act 1956. The assessee had credited the difference between the sale price and fair value as on 31.03.2008 to Profit & Loss Account and not the difference between sale price and its cost. Such accounting treatment is impossible where the provision is made instead of write off. 8. We find that considering the above facts a debit of ₹ 46,94,62,365/- appearing in Profit & Loss Account is not a provisions set aside for diminution in value of investment but a actual charge to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to section 115JB, as held by the Supreme Court in case of HCL Comnet Systems and Services Ltd. (Supra), then the existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With insertion of clause (i) to the explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JB of the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB. The judgment in the case of Deepak Nitrite Limited (Supra) fell in the former category whereas from t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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