2021 (2) TMI 1038 - HC - Income Tax

Court denies reduction of bad debts provision under Income Tax Act; allows deduction for indirect expenditure.

The court held that the appellant was not entitled to the reduction of provision for bad and doubtful debts under Section 115JB of the Income Tax Act. It ... MAT Computation - Reduction of the amount credited to the profit and loss account on the account of reversal of provision for bad and doubtful debts under Section 115JB - whether Tribunal in law failed to appreciate that the appellant had added back the provision for bad and doubtful debts for certain years and hence ought to have granted the deduction in respect of reversal of provision for bad and doubtful debts at least to that extent, on the facts and circumstances of the case? - HELD THAT:- As decided in M/S. KARNATAKA STATE INDUSTRIAL AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD [2021 (1) TMI 413 - KARNATAKA HIGH COURT] provisions for bad and doubtful debts cannot be added under Explanation to Section 115JB. From perusal of para 40.2 of Circular dated 03.06.2010, it is evident that clause (i) in Explanation after Section 115JB(2) has been inserted so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. It is well settled in law that law does not contemplate or require the performance of an impossible act. See LIFE INSURANCE CORPORATION OF INDIA VERSUS COMMISSIONER OF INCOME-TAX [1996 (2) TMI 5 - SUPREME COURT]. Even if the provision for doubtful debt is added back to the net profits, the resultant book profit is still negative and even though the assessee was prevented from adding back the provision for bad and doubtful debts to the net profit due to reasons beyond its control, it has at the first opportunity demonstrated to the authorities that book profits are still negative on adding back the provision for bad and doubtful debts and therefore, no adverse inference could have been drawn against the assessee. It is also pertinent to note that the assessee had added the provision for bad and doubtful debts for Assessment Years 1998-99 to 2000-01. Decided in favour of the assessee. Issues Involved:1. Entitlement to reduction of reversal of provision for bad and doubtful debts under Section 115JB of the Income Tax Act.2. Consideration of retrospective amendment by Finance (No.2) Act, 2009 for computation of book profit under MAT provisions.3. Deduction in respect of reversal of provision for bad and doubtful debts for certain years.4. Addition of indirect expenditure disallowed under Section 14A read with Rule 8D(iii) to net profit for MAT purposes.Issue-Wise Detailed Analysis:1. Entitlement to Reduction of Reversal of Provision for Bad and Doubtful Debts under Section 115JB:The Tribunal held that the appellant was not entitled to the reduction of Rs. 7,91,99,195 credited to the profit and loss account on account of reversal of provision for bad and doubtful debts under Section 115JB. The court referred to a similar case for the Assessment Year 2009-10, where it was decided that the provision for bad and doubtful debts could not be added to net profit for the purpose of computation under Section 115JB, as the provision was inserted by Finance Act, 2009 with retrospective effect from 01.04.2001. The court noted that the assessee could not perform the impossible act of adding back the provision for years prior to the insertion of the clause.2. Consideration of Retrospective Amendment by Finance (No.2) Act, 2009:The court acknowledged the retrospective amendment by Finance (No.2) Act, 2009, which required the provision for bad and doubtful debts to be added back for computation of book profit under MAT provisions. The court emphasized that the assessee could not have anticipated this amendment for the years prior to its enactment and thus could not be expected to comply retroactively. The court concluded that the assessee had demonstrated that even if the provision was added back, the resultant book profit would still be negative.3. Deduction in Respect of Reversal of Provision for Bad and Doubtful Debts for Certain Years:The court noted that the appellant had added back the provision for bad and doubtful debts for certain years (Assessment Years 1998-99 to 2000-01). The court found that the Tribunal failed to appreciate this fact and thus should have granted the deduction for the reversal of the provision for bad and doubtful debts at least to that extent.4. Addition of Indirect Expenditure Disallowed under Section 14A Read with Rule 8D(iii) to Net Profit for MAT Purposes:The court referred to its previous judgment in I.T.A.No.203/2015, where it was held that any disallowance computed under Section 14A pertains to computation of income under normal provisions and cannot be read into provisions of Section 115JB pertaining to computation of book profits by levy of MAT. The court reiterated that the indirect expenditure disallowed under Section 14A read with Rule 8D cannot be added back to the net profit for the purpose of computing book profit under MAT provisions.Conclusion:The court concluded that the substantial questions of law involved in the present appeal have already been answered in favor of the assessee and against the revenue, based on the precedent set in the case of M/s. Karnataka State Industrial and Infrastructure Development Corporation Limited Vs. Deputy Commissioner of Income Tax. Consequently, the judgment dated 14.08.2020 by the Tribunal was quashed to the extent it was against the assessee, and the appeal was allowed.