TaxTMI 
TaxTMI 
2013 (9) TMI 678
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.... erred on facts and in law in confirming the order of the Assessing Officer making addition of provision for doubtful debts amounting to Rs.11,92,14,918, while computing 'book profits' under section 115JB of the Act. 2.1 That the Commissioner of Income-tax (Appeals) has erred on facts and in law in confirming the addition of Rs. 11,92,14,918 without appreciating that clause (i) of Explanation 1 to section 115JB of the Act was not applicable since the provision made by the appellant was not 'provision for diminution in value of any asset'. 2.2 That the Commissioner of Income-tax (Appeals) erred in observing that there is no dispute regarding calculation of 'book profit' under section 115JB of the Act. 3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in confirming the action of the Assessing Officer in charging interest under section 234B of the Act. 3.1 That the Commissioner of Income-tax (Appeals) erred in not deleting interest levied under section 234B of the Act, instead directing that the appellant should file waiver petition before the Commissioner of Income-tax instead of. The appellant craves leave to add, alter, amend or vary from the af....
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.... the validity of the aforesaid retrospective amendment in law. After going through the assessment order and appellant's written submissions and the Finance (No. 2) Act, 2009 which become part of the Income-tax Act, 1961 it is quite clear that on account of retrospective amendments to section 115JB, there is no dispute regarding calculation of book profit under section 115JB as far as provisions for doubtful debts are concerned. For the sake of clarity the amendment is reproduced as below: "(a) in sub-section (1), with effect from the 1st day of April, 2010- (i) for the words, figures and letters 'the 1st day of April, 2007', the words, figures and letters 'the 15th day of April 2010' shall be substituted: (ii) for the words 'ten per cent.' at both the places where they occur, the words 'fifteen per cent.' shall be substituted ; (a) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters 'if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by-'the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of ....
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....er cent. (consisting both actual and deemed generation) for Banskandi and plant load factor (considering with both actual and deemed generation) corresponding to the level of energy generation of 52393700 KWH per annum/or Adamtilla. The payment of fixed charges on monthly basis shall be made proportionate to the electricity generation by the company (considering both actual and deemed generation). Necessary adjustment based on the cumulative generation shall be made at the end of the year (as per Government of India guidelines). Variable part : The total variable cost per month shall be calculated based on gross generation at generator terminals, landed cost of the fuel inclusive of all taxes/levies, declared plant heat rate and gross calorific value of the fuel. The cost of start-up and maintenance power paid for each month by the company shall be added to this cost. The variable part of the tariff per month shall be calculated by division of the total variable cost per month by net units of energy metered. The variable cost is not depended on plant load factor and is payable on all costs associated with actual generation irrespective of plant load factor." "Clause 3.3....
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....n tariff receivable for supply of power to ASEB based on the plant load factor achieved up to 100 per cent. (actual and deemed). However, there has been a consistent dispute between the assessee and the customers of powers, i.e. ASEB, regarding actual capital cost of the plant, plant load factor and consequently, on the tariff for supply of power. learned authorised representative also relied on the various submissions made before the authorities below. On the other hand, the learned Departmental representative vehemently pleaded that the Assessing Officer has given elaborate reasons in the order. The learned Departmental representative submitted that while making the disallowances, the Assessing Officer has considered the factual matrix of the case ranging from agreement with customers of the assessee and observations of the regulatory commission on petition of the assessee. The learned Departmental representative has argued on all relevant issues in detail which have been dealt by the Assessing Officer and the Commissioner of Income-tax (Appeals) and on the reply to the arguments made by the learned authorised representative. The learned Departmental representative also sub....
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....y provided by the assessee is sub judice and therefore, no provision can be calculated by the assessee. No amount can be ascertained since the issues involved in the dispute are not only concerned with the quantification but are challenging the jurisdiction of JCERC on various grounds as mentioned above. Therefore, the rate fixed by the JCERC cannot become a guideline or lead to an ascertained liability for which a provision can be made. Moreso, when the assessee himself is in default of not furnishing the complete details before the prescribed authority which are primarily essential for fixing the tariff from the second year. The assessee cannot take benefit of a situation created by its own conduct. Such a debt cannot be said to have become bad which is due to the assessee's own manipulations and act of not furnishing the documentary evidence of capital investment without which the tariff cannot be determined especially when the other party to the contract is challenging the genuineness of the investment. The assessee has relied on the judgment of the Special Bench of the Tribunal in the case of Joint CIT v. Usha Martin Industries Ltd. [2007] 288 ITR (AT) 63 (Kol) for the prop....
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....s order is reproduced below : 'During the appellate proceedings, the appellant-company, made the written submissions vide its letter dated August 27, 2009 as under : "In fairness, it was further pointed out during the course of hearing on August 19, 2009 and also in the supplementary submissions filed on that date that in view of recent insertion of clause (i) in Explanation 1 to section 115JB of the Act by the Finance (No. 2) Act 2009 with retrospective effect from April 1, 2001 the aforesaid issue is, prime facie, covered against the appellant. It may, in this regard be further pointed out that the management of the appellant is, however, still advised that despite the aforesaid amendment by way of insertion of clause (i) in Explanation 1 to section 115JB of the Act, provisions for bad and doubtful debts debited by the appellant to the profit and loss account cannot be adjusted since the same could not be regarded as provisions for diminution in the value of any asset. The management is also seeking further legal advise in the matter and is also contemplating challenging the validity of the aforesaid retrospective amendment in law. After going through the assessment o....
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....sessee is sub judice, as the assessee-company and the CCL are in litigation over the power tariff. (elaborated reasons have been mentioned by the Assessing Officer in the order of the assessee for the assessment year 2005-06). Therefore, this year also, on the basis of principle of consistency the provision for doubtful debts amounting to Rs. 18,26,02,000 is added to the book profit for the purpose of provisions of section 115JB." (emphasis supplied). 3.1 The assessee-company preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has dismissed the appeal vide the order dated November 3, 2009. For the sake of convenience, the relevant portion of the Commissioner of Income-tax (Appeals) order is reproduced below: 'After going through the assessment order and the appellant's written submissions and the Finance (No. 2) Act, 2009 which become part of the Income-tax Act, 1961 it is quite clear that on account of retrospective amendments to section 115JB, there is no dispute regarding calculation of book profit under section 115JB as far as provisions for doubtful debts are concerned. For the sake of clarity the amendment is rep....
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....debts amounting to Rs. 13,75,00,000 debited to the profit and loss account and justify its claim. The assessee was also asked to show cause why not the same be added to its book profit for the financial year under consideration, keeping in view the facts of the case in the preceding two assessment years, viz., 2005-06 and 2006-07 wherein similar addition was made in this case. In response to the above the assessee filed its reply vide letter dated September 25, 2009 as under : 'Since several years the claim of the company is not being accepted, but in its account books it has to charge the full amount as per its own calculation. If it does not do so, its case for recovery of its full claims gets prejudiced. Accordingly the company has been crediting to its profit and loss account the full amount cleared by it. But later on it makes a provision in its account books for a part of the bill sent to the clients. The calculation of provisions of Rs. 1, 375 lakhs and copy of opinion of Sh. S.S. Bagai an eminent person in the field of taxation, are attached.' The above reply and submission of the assessee-company are unfavourable for the following reasons: 1. The decision of th....
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....company preferred appeal before the Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) has dismissed the appeal with following observations : 'I have carefully considered the submission made above by the appellant and also persuade the assessment order. It is noticed that the appellant itself has recognised the said provision as 'provision for doubtful debts' in the profit and loss account. The said provision, in my view, clearly falls in newly inserted clause (1) of Explanation 1 to section 115JB of the Income-tax Act brought vide the Finance (No. 2) Act, 2009, and with retrospective effect from April 1, 2001. Further the observation of the honourable Supreme Court in case of CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) are quite relevant on the issue. The extracts from the judgment are as follows (page 414) : "There are two types of 'debt'. A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In....
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....from April 1, 2001, by the Finance (No. 2) Act, 2009, the appellant should not be held to be in default in payment of advance tax and consequential imposition of interest under section 234B of the Income-tax Act. In this regard, the authorised representative for the appellant has cited a number of decisions of the Tribunal wherein it has been held that interest under section 234B/234C should not be levied where demand arises on account of retrospective amendment in law. This issue was to be considered by my predecessor in the assessment years 2005-06 and 2006-07 decided in Appeal Nos. 228/ 07-08 vide order dated September 2, 2009 and Appeal No. 120/ 08-09 and order dated November 3, 2009 respectively, wherein this issue has been decided against the assessee observing as under : The next ground is regarding levying of interest under section 234B. In his written submission the appellant has mentioned that the Central Board of Direct Taxes has issued the following notification orders for waiver of interest under section 234B leviable due to retrospective amendment. Notification No. F. No. 212/495/92-IT(A-11) dated May 2, 1994 ([1995] 208 ITR (St.) 3) ; Notification F. No. ....
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....ne of the proceedings either before the Electricity Regulatory Commission or before the Appellate Tribunal for electricity the assessee-company has taken the plea that they have raised inflated bills. On the contrary, they have claimed that the bills have been raised on the basis of power purchase agreement. Therefore, the submissions of the learned authorised representative that bills were inflated needs to be rejected. (iii) It is respectfully submitted that if the assessee is claiming that it was a unilateral claim then why they have filed a civil suit to recover the amount and why they have gone for arbitration to recover the amount on the basis of bills raised. It may be mentioned that the Electricity Regulatory Commission vide order dated December 4, 2004 as amended by the order dated February 28, 2005 determined the cost of the project in favour of the assessee-company. The CCL further filed appeal against the order of the commission before the Appellate Tribunal for Electricity which was dismissed vide order dated May 11, 2006 (page 159 of paper book filed by the assessee for the assessment year 2007-08). Pages 65 to 82 of the Paper Book contains the copy of the petition....
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....hey are of no help to the assessee as the Legislature has brought the amendment to overcome the judgment of the hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC). The provision of law as it stands today mandates the Assessing Officer to add the amount on account of provision made for bad and doubtful debts in calculating book profit under section 115JB. Since the provision is mandatory, the Assessing Officer does not have any choice of not making the addition. (vi) The perusal of Schedule 8 (generation, construction and other expenses) to the profit and loss account (page 21 of the paper book submitted by the appellant in I. T. A. No. 4471) clearly shows that the appellant has made provision for doubtful debts amounting to Rs.1375 lakhs in the assessment year 2007-08 and Rs. 1826.02 lakhs in the assessment year 2006-07. Similarly schedule 8 to the profit and loss account for the assessment year 2005-06 (page 100 of the paper book submitted by the learned authorised representative in I. T. A. No. 4463) shows that the appellant-company has made of provision for doubtful debts amounting to Rs. 1192.51 lakhs for the assessment y....
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....unt of provision is hit by section 115JB. 7. Furthermore, without prejudice to the above submissions, the case laws cited by the learned authorised representative are distinguishable on facts as discussed below: (i) CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC)-In view of the amendment brought by way of insertion of clause (i) in Explanation 1 to section 115JB, the decision is not applicable. (ii) CIT v. Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom)-In this case there was an agreement between the assesse company and Nadiad Municipality under which the assessee-company was to supply electricity to the Nadiad Municipality for street lighting, etc., purposes at rate fixed in the agreement at 19 paisa per unit. The assessee-company raised the bills at 30 paise per unit as against the agreed rate of 19 paise per unit. Therefore, in view of the claim of 30 paise provided in the agreement, the court held that any amount for the electricity supply to the municipality calculated at any rate other than rate of 19 paise per unit amounted to making a claim not legally enforceable by the assesse company, nor a corresponding legal enforceable obligation o....
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....nies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income-tax Act with a deeming provisions which makes the company liable to pay tax on at least 30 per cent. of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authority of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its accounts in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and w....
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....tion 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.' A perusal of the above judgment in Apollo Tyres Ltd. [2002] 255 ITR 273 (SC) makes it clear that the Assessing Officer has limited power of making increases and reduction as provided in Explanation 1 of section 115JB brought with retrospective effect from April 1, 2001. It was held that the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J. Therefore, it is not correct on the part of the learned authorised representative to contend that the Assessing Officer should have gone behind the net profit shown in th....
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.... In that case the issue was whether the Assessing Officer, while computing book profit of a company under section 115JB, has only power of examining whether books of account are certified by authrities under the Companies Act, 1956, as having been properly maintained in accordance with the Companies Act, and the Assessing Officer thereafter has limited power of making increases and reductions as provided for in the Explanation to section 115J-Held, yes, the hon'ble Bench has observed as under : "It is not the intention of the Legislature to substitute the other provisions of the Act in place of what is specifically made available in section 115JB in so far as the computation of book profit under section 115JB is concerned. The entire mechanism for the computation of book profit is clearly set out in sub-section (1) of section 115JB read with the Explanation thereto. The starting point being the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act but also the items, which are to be increased as stipulated in clauses (a) to (h), and the items, which are to be reduced as specified in c....
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....Act, in the case of an assessee being a company. If the total income is less than 30 per cent. of its book profits then the total income of such company shall be deemed to be an amount equal to 30 per cent. of such book profit and such income shall be chargeable to tax. The important thing to be noted is that while calculating the total income under the Income-tax Act, the assessee is required to take into account income by way of capital gains under section 45 of the Income-tax Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gains for computing the book profits under section 115J. Even under clause 3(xii)(b) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profits.' Therefore, the above case is of no help to the assessee. (ix) E. D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) In that case the issue was whether commission to managing agents accrued on annual net profits and whether c....
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....convenience the relevant portion of the order of the hon'ble Bench is reproduced as under : "Paragraph 4 (page 2) '6. The learned authorised representative also placed on record copy of the extract of memorandum explaining provisions in the Finance Bill 1987, copy of extract of budget speech of the Finance Minister introducing Finance Bill, 1978, copy of extract of memorandum explaining provisions in the Finance Bill, 1996, memorandum explaining provisions in Finance Bill, 2000 and Finance (No. 2) Act, 2009. Shri Dinodia also placed on record copy of Accounting Standard regarding revenue recognition as provided under AS-9 and also copy of the Accounting Standard regarding accounting of investment as provided under AS-13. 9. We have considered the rival contentions in the light of material placed on record vis-a-vis amendment brought in provisions of section 115JB by the Finance (No. 2) Act 2009 by insertion of new clause (i). According to the amended provision, amount set aside as provision for diminution in value of any asset is required to be added in the book profit. Clause (i) has been inserted retrospectively with effect from April 1, 2001 meaning thereby from the ass....
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....oubtful debts and doubtful advances did not fall within clause (c) of the said Explanation inasmuch as they amounted to provision in respect of diminution in the value of asset. Now, with the introduction of the said amendment with retrospective effect from April 1, 1998, the provision for doubtful debts and the provision for doubtful advances, which are nothing but provision for diminution in the value of asset, are specifically covered under clause (g) of the said Explanation. Consequently, the question in so far as it relates to provision for doubtful debts and provision for doubtful advances, required to be answered in favour of the Revenue and against the assessee. It is so answered.' 10. The hon'ble Income-tax Appellate Tribunal, Mumbai E-Bench has considered the similar issue in the case of ITO v. TCFC Finance Ltd. [2011] 11 ITR (Trib) 153 (Mum) after discussing the factual and legal position it was held as under : 'Section 115JB has to be considered as code in itself. This section is a special provision for payment of tax by certain companies and opens with non obstante clause thereby excluding any other provisions of this Act in the matter of determination of paym....
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....n the value of any asset' has not been defined in this section. In common parlance the word 'diminution' indicates the state of reduction. The meaning of the word 'diminution' in the value of any asset has to be construed as reduction from its original value which may still be a positive value or nil. If the reduced value happens to be cipher, the diminution will be the original value of the asset itself. There is not even a remotest hint in the language of clause (i) of Explanation 1 to section 115JB that some value of the asset must remain after diminution, as a pre-condition for adding it to the net profit. Explanation 1 contemplates the adding back of the provision for diminution in the value of any asset to the amount of net profit. Once the provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. In view of the foregoing discussion it is manifest that as Explanation 1 to section 115JB(2) deals with the computation of book profit and specifically provides that the net profit as shown in the profit and loss account for the relevant previous year has to b....
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....tenance cost. Fixed tariff based on actual capital cost and plant load factor (PLF) of the power plant. The company had recognised tariff receivable for supply of power as per PPA (power purchase agreement). The assessee is following the mercantile system of accounting. Thus, recognitions of income was as per accounting principles. The assessee had recognised revenue tariff as per bills raised in accordance with power purchase agreement. There is dispute with respect of recovery of part of amount raised in bills. The assessee had made provision for doubtful debt in the profit and loss account. Now, the assessee pleads that the assessee had recognised excess income. The assessee claims that income shown in profit and loss account is inflated. Now the assessee pleads that the Assessing Officer should recast the accounts to arrive at the correct profit. In our considered view, this proposition of the assessee is not as per law laid down by the hon'ble Supreme Court in the case of Apollo Tyres Ltd. [2002] 255 ITR 273 (SC). In this case, it is held that the Assessing Officer has no power to adjust the net profit except to the extent provided in Explanation 1 to section 115JB of the Act.....
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....looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by the statutory auditor and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies which has statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. The hon'ble Supreme Court has clearly debarred the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. Further, we also held that the assessee is following the mercantile system of accounting and also preparing the accounts under the mercantile system. In this system, the income has recognised when it was credited in the books of account. The bills were raised on the basis of written power purchase agreement with the customer. The assessee is legally entitled to recover the same and the assessee has filed a civil suit to claim t....
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....ver, the assessee-company raised the bill at 30 paisa per unit. In view of these facts, the hon'ble court has held that any rate other than the rate of 19 paisa per unit not legally enforceable by the assessee. However, in the assessee's case, the bill was raised as per the power purchase agreement with the customer. In the case of Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom), it was not as per agreed rate. The reliance of the learned authorised representative on the case of CIT v. Western India Engineering Co. [1971] 81 ITR 712 (Guj) is also of no help as in that case the assessee was doing the business of building and construction on the basis of accepted tenders. The additional work was not included in the tenders for which the rates were not settled. The assessee was crediting the amount of bills for non-tender work in his works account but was making provision in the profit and loss account only such amount as he is expected to receive and retain the works amount as kasar. Thus, the facts of the case were completely at variance. In the case of Apollo Tyres Ltd. [2002] 255 ITR 273 (SC), the hon'ble Supreme Court has clearly disagree with the arguments of the Revenue ....
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....n, amount set aside as the provision for diminution in value of any asset is required to be added in the book profit. Clause (i) has been inserted retrospectively with effect from April 1, 2001 meaning thereby from the assessment year 2001-02, such provision for bad debts is to be added in the book profit while computing book profit under section 115JB. The ratio laid down by the hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) is no more applicable in view of the amended provisions brought in the statute with retrospective effect. The relevant assessment year under consideration is the assessment year 2005-06 to which the amended provisions are applicable. Recently the hon'ble Delhi High Court in the case of CIT v. Ilpea Paramount P. Ltd. [2011] 336 ITR 54 (Delhi), vide order dated February 18, 2010 after considering the decision of the hon'ble Supreme Court in the case of HCL Comnet System and Services Ltd. held that amendment brought in section 115JA was brought with retrospective effect, accordingly provision for doubtful debts are nothing but provision for diminution in the value of the asset covered under clause (g) of t....
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.... amounts to the net profit as shown in the profit and loss account which have been debited to the profit and loss account and thereafter reductions start, which have been specified in the later part of the Explanation in clauses (i) to (viii) if such amounts have been credited to the profit and loss account. From here it follows that if the amount set aside as provision for diminution in the value of any asset, appears on the debit side of the profit and loss account, which implies that the amount of net profit as per the profit and loss account is after the amount of such provisions, then such amount will be added back to the net profit for computing 'book profit' as per Explanation 1 to section 115JB(2). There is no other requirement in the language of the section for the addition or non-addition of the amount of provision for diminution in the value of any asset to the amount of net profit as shown in the profit and loss account, depending on the way in which such provision has been shown in the balance-sheet. The reflection of the amount of the provision for diminution in the value of investment separately on the liability side of the balance-sheet or by way of reduction from t....