2018 (1) TMI 855 - AT - Income Tax

ITAT rules write-off not a provision for diminution in value under Income Tax Act

The ITAT upheld the CIT(A)'s decision that the amount of Rs. 46,94,62,365 was an actual write-off and not a provision for diminution in the value of ... Addition u/s.115JB 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.” - MAT - Held that:- 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. 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 the Profit & Loss account which has been written off against the value of the current asset. Debit of ₹ 46,94,62,365/- appearing in Profit & Loss Account is not a provision of set aside for diminution in value of investment but the actual charged for the loss in the diminution in value of investment. Therefore, we are of the view that for the book profit 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. - Decided against revenue Issues Involved:1. Whether the CIT(A) was justified in deleting the addition of Rs. 46,94,62,365 made by the AO under Section 115JB of the I.T. Act, considering it as a provision for diminution in the value of investment.Issue-wise Detailed Analysis:1. Justification of Deletion of Addition under Section 115JB:The primary issue revolves around whether the amount of Rs. 46,94,62,365 debited by the assessee in the Profit and Loss Account as diminution in the value of current investments should be added back to the book profit under Section 115JB of the Income Tax Act as a provision for diminution in the value of investment.Facts of the Case:The assessee, a company registered under Section 25 of the Companies Act, 1956, held investments as both current and long-term investments. For the assessment year 2008-09, the assessee declared an income of Rs. 21,43,597 under normal provisions and Rs. 17,49,45,153 under Section 115JB. The Assessing Officer (AO) assessed the total income at Rs. 64,44,07,518 by adding Rs. 46,94,62,365, treating it as a provision for diminution in the value of investments.CIT(A) Observations:The CIT(A) allowed the assessee's claim, stating that the amount debited was not a provision but an actual write-off. The CIT(A) clarified that only amounts set aside as provisions should be added back to the book profit under clause (i) of Explanation 1 to Section 115JB. The CIT(A) differentiated between retaining an amount as a provision and writing off an amount as an actual loss.Legal Precedents:The CIT(A) relied on various legal precedents, including:- Southern Technologies Ltd. vs. Joint CIT (320 ITR 577): The Supreme Court clarified that after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii).- Vijaya Bank vs. CIT (323 ITR 166): The Supreme Court held that actual write-off involves debiting the profit and loss account and simultaneously reducing the corresponding amount from loans and advances on the asset side of the balance sheet.CIT(A) Findings:The CIT(A) concluded that the amount of Rs. 46,94,62,365 was not a provision but an actual charge to the Profit and Loss Account, written off against the current investments. The current investments were reflected in the books net of the provision, indicating an actual write-off rather than a provision set aside. Therefore, the book profit under Section 115JB should not be increased by this amount.ITAT Decision:The ITAT upheld the CIT(A)'s decision, agreeing that the amount was an actual charge and not a provision. The ITAT referred to the Gujarat High Court's decision in Vodafone Essar Gujarat Ltd., which distinguished between a mere provision and an actual write-off. The ITAT found that the assessee's treatment of the investment was consistent with accounting standards and the Companies Act, and the amount should not be added back to the book profit under Section 115JB.Conclusion:The ITAT dismissed the departmental appeal, confirming that the amount of Rs. 46,94,62,365 was an actual write-off and not a provision for diminution in the value of investments. Therefore, it should not be added back to the book profit under Section 115JB. The assessee's appeal was allowed, and the addition made by the AO was deleted.