2013 (12) TMI 9 - HC - Income Tax

Court clarifies computation of book profit under Section 115JB, liability for interest, and advance tax

The court held that provisions for diminution in asset value and doubtful debts do not need to be increased for computing book profit under Section 115JB. ... Provision for bad debts – Held that:- The assessee is entitled to the benefit of rejection under Section 36(1)(vii) of the Income Tax Act, 1961 (for short ‘the Act’) when there is an actual write off by the assessee in its book – Following COMMISSIONER OF INCOME TAX VS. YOKOGAWA INDIA LTD [2011 (8) TMI 766 - KARNATAKA HIGH COURT] - Adjustment of provision for bad and doubtful debts is reduced from the loans and advances or the debtors from the assets side of the balance sheet - The assessee is now required not only to debit the P and L account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet – Decided against Revenue. Provision for gratuity and leave encashment – Held that:- Following Bharat Earth Movers Vs. Commissioner Of Income Tax Reported [2000 (8) TMI 4 - SUPREME Court] - An assessee who is maintaining the accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business – Keeping in view the accepted principles of commercial practice and accountancy - The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date - The gratuity payable and encashment of earned leave is not a contingent liability and provision thereof is deducted – Decided against Revenue. Issues:1. Whether provision for diminution in value of assets and provision for doubtful debts debited to P and L account need to be increased to compute book profit under Section 115JB of the ActRs.2. Whether provision made towards gratuity and leave encashment are contingent liabilitiesRs.3. Can interest u/s.234B and 234C of the Act be levied for default in payment of advance tax when Section 115JB of the Act is invokedRs.4. Is the assessee liable for payment of advance tax but not liable for payment of interest u/s.234B and 234C of the ActRs.Analysis:1. The first issue raised in the appeal concerns the treatment of provisions for diminution in value of assets and doubtful debts debited to the Profit and Loss account for computing book profit under Section 115JB of the Act. The Tribunal held that these provisions do not need to be increased as per the Explanation-1 to Section 115JB. The court referred to previous judgments to support this view. In one case, it was established that when there is an actual write-off by the assessee, the benefit of rejection under Section 36(1)(vii) of the Income Tax Act is applicable. Additionally, it was clarified that the Explanation to Section 115JA and JB is not attracted when the adjustment of provision for bad and doubtful debts is made. Therefore, the court dismissed this issue, following the settled principles laid down by the Apex Court.2. The second issue pertains to whether provisions made towards gratuity and leave encashment are contingent liabilities. The Tribunal held that these provisions were not contingent liabilities as the assessee failed to provide evidence to substantiate their nature. The court, however, referred to a judgment that clarified that liabilities accrued, even if to be discharged in the future, are proper deductions while calculating profits and gains. It was emphasized that such liabilities do not convert into conditional ones merely because they are to be discharged later. Therefore, the court dismissed this issue based on the principles established by the Apex Court.3. Moving on to the third issue, the Tribunal's decision regarding the levy of interest u/s.234B and 234C of the Act for default in payment of advance tax when Section 115JB is invoked was challenged. The court referred to a case where it was held that the assessee is liable to pay advance tax but not liable to pay interest on the amount due as per the amended provisions. However, if the advance tax was not paid as per the previous provisions, interest would be applicable on the difference. The court upheld this view and dismissed the appeal accordingly.4. Lastly, the issue of the assessee's liability for advance tax payment but exemption from interest u/s.234B and 234C was raised. The Tribunal had held that although the assessee was liable for advance tax payment under Section 115JB, they were not liable for interest u/s.234B and 234C. The court supported this decision based on the established principles and judgments cited. Consequently, the court dismissed the appeal, stating that no substantial questions of law arose for consideration.