2019 (6) TMI 741 - AT - Income Tax

Tribunal upholds AO's decision on provision for doubtful debts under section 115JB

M/s Tata Hitachi Construction Machinery Co. Pvt. Ltd., Bengaluru. Versus The Dy. Commissioner of Income-tax LTU, Bengaluru.

The tribunal overturned the revision order passed by the ld CIT, holding that the AO's decision not to add the provision for doubtful debts to net profit ... Revision u/s 263 - as per CIT order passed by the AO in not adding “Provision for doubtful debts” debited to the profit and loss account to the Net profit while computing book profit u/s 115JB is erroneous and prejudicial to the interests of revenue - CIT took the view that the provision for doubtful debts is only a “prudential write off” and the same cannot be equated with “irrevocable write off” as envisaged in sec. 36(1)(vii) - HELD THAT:- As in the case of Grasim Industries Ltd. V CIT [2010 (2) TMI 4 - BOMBAY HIGH COURT] by taking into account the law laid down in Malabar Industrial Co Ltd [2000 (2) TMI 10 - SUPREME COURT] existence of twin conditions, viz., the assessment order should be erroneous and it should be prejudicial to the interests of revenue, should be shown in the revision order passed u/s 263 - when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law. In the instant case, the view taken by the AO in not adding the Provision for doubtful debts is supported by the binding decision rendered by Hon’ble Karnataka High Court in the case of Kirloskar Systems Ltd [2013 (12) TMI 9 - KARNATAKA HIGH COURT] . The order passed by Hon’ble Karnataka High Court is binding on the authorities below it. Accordingly, the view taken by the AO cannot be termed as erroneous and prejudicial to the interests of revenue. We are unable to sustain the revision order passed by Ld CIT. Accordingly we set aside the same. - Decided in favour of assessee. Issues:Challenge to revision order u/s 263 for asst. year 2011-12 regarding provision for doubtful debts not added to net profit while computing book profit u/s 115JB.Analysis:1. The assessee appealed against the revision order passed by the ld CIT(LTU), Bengaluru u/s 263 for asst. year 2011-12. The ld CIT found the AO's failure to add the 'Provision for doubtful debts' debited to the profit and loss account to the Net profit while computing book profit u/s 115JB as erroneous and prejudicial to revenue's interest. The provision for doubtful debts debited was &8377; 832.23 lakhs. The ld CIT held that this provision should have been added to the net profit as per Explanation 1 to sec. 115JB, as it was not an actual write-off but a 'prudential write-off.'2. The assessee argued that the provision for doubtful debts was reduced from the amount of sundry debtors in the Balance sheet, constituting an actual write-off under sec. 36(1)(vii) of the Act. Citing precedents like the Vijaya Bank case and decisions by the Hon'ble Karnataka High Court, the assessee contended that the provision need not be added back to net profit while computing book profit u/s 115JB. However, the ld CIT rejected these contentions, setting aside the asst. order and remitting it to the AO for fresh examination.3. The appellant contended that the provision for doubtful debts was claimed as a deduction under sec. 36(1)(vii) and was an actual write-off, as accepted by the AO. The ld CIT's decision to add back the provision to net profit under sec. 115JB was challenged, arguing that it contradicted the treatment under normal provisions of the Act. The appellant relied on past decisions and the Hon'ble Karnataka High Court's ruling in support of their stance that the AO's view was legally sound. The appellant emphasized that the ld CIT's order was not in line with the law and should not be sustained.4. The ld DR supported the ld CIT's reasoned order, citing precedents and distinctions made in the VIjaya Bank case. The matter was considered by the tribunal, which discussed the legal position concerning the power of the CIT to invoke revision proceedings under sec. 263 of the Act. Referring to the Malabar Industrial Co Ltd case, the tribunal highlighted the requirement that the assessment order must be both erroneous and prejudicial to revenue's interests for a revision under sec. 263 to be justified.5. Ultimately, the tribunal found that the AO's decision not to add the provision for doubtful debts was supported by a binding decision of the Hon'ble Karnataka High Court, making it a valid interpretation of the law. As the AO's view was not unsustainable in law and the order was not prejudicial to revenue's interests, the tribunal set aside the revision order passed by the ld CIT. Therefore, the appeal filed by the assessee was allowed, and the revision order was overturned.