MAT book profit u/s115JB: write-off vs provision for investment diminution and NPAs, add-back under clause (i) rejected

In MAT computation under s.115JB, the dominant issue was whether clause (i) of Explanation 1 to s.115JB(2) required add-back of (a) provision for diminution in investments and (b) provision for non-performing assets (NPAs). The ITAT held that where the assessee not only debited the P&L but also correspondingly reduced the relevant asset values in the balance sheet, the amounts constituted an actual write-off rather than a mere provision, consistent with the HC view relied on. Consequently, clause (i) was inapplicable and neither item could be added back to book profit; the revenue's challenge failed and relief to the assessee was upheld.

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Issues Involved:
1. Computation of book profit/MAT and the addition of provisions for diminution in investment and NPA.
2. Interpretation of clause (i) of Explanation 1 to section 115JB(2) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Computation of Book Profit/MAT and Addition of Provisions
The appeal concerns the computation of book profit/MAT for the assessment year 2002-03, specifically the addition of provisions for diminution in investment (Rs. 29,81,59,433) and NPA (Rs. 19,57,60,485) by the AO. Initially, the CIT(A) had provided relief to the assessee by directing the AO to exclude these provisions while computing book profit, based on the decision in M/s. Usha Martin Industries Ltd. The Tribunal, in the first round, reversed this decision, allowing the revenue's grounds and agreeing with the AO's action.

Issue 2: Interpretation of Clause (i) of Explanation 1 to Section 115JB(2)
The High Court remanded the issue back to the Tribunal, directing it to reconsider in light of the Gujarat High Court's decision in CIT Vs. Vodafone Essar Gujarat Ltd. The core question was whether the amounts reduced against diminution in investments and non-performing loans should be treated as write-offs and not provisions, thus not covered by Clause (i) of Explanation 1 of section 115JB(2).

The Tribunal examined whether the amounts shown by the assessee as provisions were actual write-offs. The assessee argued that the diminution in value of investments and NPAs were actual write-offs, not mere provisions, as they were debited in the Profit & Loss Account and reduced from the asset side of the Balance Sheet. This argument was supported by the Gujarat High Court's ruling in Vodafone Essar Gujarat Ltd., which distinguished between mere provisions and actual write-offs.

The Tribunal noted that the CIT(A) had correctly held that these provisions were not liabilities, and thus, clause (c) of Explanation 1 to section 115JB(2) was not applicable. However, the applicability of clause (i) was under scrutiny. The Tribunal referred to the retrospective amendment by the Finance Act, 2009, which added clause (i) to include provisions for diminution in asset value in the computation of book profits.

The Tribunal analyzed the facts and found that the assessee had indeed written off the amounts by reducing the corresponding assets in the Balance Sheet, thus constituting actual write-offs. This was in line with the Gujarat High Court's interpretation, which stated that actual write-offs, where the provision is removed from the accounts by reducing the corresponding asset, do not attract clause (i) of Explanation 1 to section 115JB(2).

The Tribunal concluded that the provisions for diminution in investments and NPAs were actual write-offs, not mere provisions, and thus, clause (i) of Explanation 1 to section 115JB(2) was not applicable. Consequently, the CIT(A)'s direction to exclude these amounts from the book profit computation was upheld.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming that the provisions for diminution in investments and NPAs should be excluded from the computation of book profit/MAT, as they were actual write-offs and not mere provisions. The decision was pronounced in the open court on 3rd December 2020.

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