2019 (6) TMI 709 - HC - Income Tax

Tribunal justified in deleting disallowance of investment value diminution provision under Income Tax Act

The Income Tax Appellate Tribunal was justified in deleting the disallowance of provision for diminution in value of investment of Rs. 13,85,00,000/- ... MAT computation u/s 115JB - disallowance of provision for diminution in value of investment while computing book profit - Accounting Standard 13 - HELD THAT:- In view of the decline in the value of the provisions created in the current year the carrying amount of such investments has been reduced and in case of provisions where there was a rise in the value, the provisions are written back and the net amount of provision has been debited to the profit and loss account. Thus, insofar as the provision for diminution of value of investment to the extent of ₹ 13.85 crores is concerned, the same has actually been reduced from the asset side of the balance sheet and, therefore, is in the nature of a write off. Under the circumstances, the amount of ₹ 13.85 crore though bearing the nomenclature of provision for diminution of value of investment, having been actually written off, cannot be added to the book profit u/s 115JB(2)(i). Tribunal has properly appreciated the material on record while holding that the assessee has duly followed the netting principle propounded in the full bench decision of this court in Vodafone Essar Gujarat [2017 (8) TMI 451 - GUJARAT HIGH COURT] No infirmity can be found in the view adopted by the Tribunal so as to warrant interference. The question, therefore, is answered in the affirmative, that is, 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 u/s 115JB Issues Involved:1. Whether the Income Tax Appellate Tribunal was justified in deleting the disallowance of provision for diminution in value of investment of Rs. 13,85,00,000/- while computing book profit under section 115JB of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Background of the Case:The appeal under section 260A of the Income Tax Act, 1961, challenges the order dated 13.4.2018 by the Income Tax Appellate Tribunal, Ahmedabad 'B' Bench. The assessment year in question is 2003-04, with the relevant accounting period being the previous year 2002-03. The assessee filed a return declaring nil total income, and the assessment was completed determining nil total income and book profit at Rs. 16,01,06,069/-. An addition of Rs. 13,85,00,000/- was made for the provision for diminution in the value of investment. The matter was restored to the Assessing Officer by the Tribunal for fresh adjudication, which led to the addition being upheld by the Commissioner (Appeals) but subsequently deleted by the Tribunal.2. Arguments by the Appellant:The appellant's counsel argued that the provision for diminution in value of investment should be added back to the book profit under section 115JB of the Act. It was contended that the provision for bad debt and actual write-off of bad debts under section 36(1)(vii) are different and affect business profits differently. The counsel referred to the decision in Commissioner of Income Tax v. Vodafone Essar Gujarat Ltd. and Vijaya Bank v. Commissioner of Income Tax to argue that the Tribunal failed to address the varied types of investments and the nature of the reduction or gain (long-term or short-term capital gain). The appellant also pointed out non-compliance with Accounting Standards, particularly the lack of write-off as noted by the Commissioner (Appeals).3. Arguments by the Respondent:The respondent's counsel argued that the Commissioner (Appeals) was wrong in stating that the assessee had not shown the details correctly. The counsel highlighted that all facts were clearly reflected in the balance sheet. It was argued that in the absence of any transfer, there is no question of showing capital gain or loss. The Tribunal was justified in holding that the amount of Rs. 13.85 crore shown as diminution in value of investment is not liable to be added while computing the book profit under section 115JB of the Act.4. Legal Provisions and Precedents:The court examined whether the provision for diminution in value of investment should be added to the book profit under section 115JB. The Explanation to sub-section (2) of section 115JB states that 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year increased by certain factors, including the amount set aside as provision for diminution in the value of any asset.5. Examination of Facts:The court referred to the decision in Commissioner of Income Tax v. Vodafone Essar Gujarat Limited, which distinguished between a mere provision for doubtful debt and an actual write-off. The court noted that if the provision for diminution in value of investment is not merely a provision but is actually written off by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet, it would not be hit by clause (i) of the Explanation to section 115JB.6. Accounting Standards:The court referred to Accounting Standard (AS) 13, which deals with 'Accounting for Investments.' Paragraphs 17 to 19 of AS 13 deal with long-term investments and state that when there is a decline, other than temporary, in the value of a long-term investment, the carrying amount is reduced to recognize the decline. The reduction in the carrying amount is charged to the profit and loss statement and reversed when there is a rise in the value of the investment.7. Analysis of Financial Statements:The court examined the financial statements and found that the provision for diminution in value of investment was duly reflected in the Profit and Loss account and the balance sheet. The provision for the year ended 31st March 2003 was Rs. 13,85,00,000/-, which was duly debited to the Profit and Loss account. The provision was actually written off by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet.8. Tribunal's Findings:The Tribunal found that the assessee had duly followed the netting principle in terms of the decision in Vodafone Essar Gujarat Limited. The Tribunal held that the provision for diminution in value of investment, having been actually written off, cannot be added to the book profit under section 115JB(2)(i) of the Act.9. Conclusion:The court found no infirmity in the Tribunal's view and held that the Income Tax Appellate Tribunal was justified in deleting the disallowance of provision for diminution in value of investment of Rs. 13,85,00,000/- while computing book profit under section 115JB of the Income Tax Act, 1961. The appeal was dismissed.