TaxTMI 
TaxTMI 
2003 (5) TMI 196
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....y, on June 19, 1998 it filed a revised return declaring loss of Rs. 26,83,740 under the normal provisions of the Act and nil income under section 115JA of the Act. The only issue for consideration in this case is the computation of the taxable income under the provisions of section 115JA of the Act. The Assessing Officer observed that the assessee's annual report shows a net profit of Rs.5,62,42,271 which includes write back of liabilities of earlier years of Rs. 4,18,63,960. Regarding the write back, the Assessing Officer has stated that during the relevant year the assessee arrived at one time settlement with the Financial Institutions. By letter dated 31-3-1997, the Industrial Credit and Investment Corporation of India Ltd. informed the assessee company that as per the terms of one-time settlement a total amount of Rs. 7 crores has to be paid by the assessee to three Financial Institutions (IDBI, ICICI payable in five three-monthly instalments beginning from 31-1-1997 and ending on 15-3-1998. The original loan availed by the assessee from three Financial Institutions was Rs.4.9 crores. As a result of one settlement, the assessee wrote back in its books an amount of Rs.418.....
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....sing Officer has misled the aforesaid proviso which refers to such provision which is made in the previous year relevant to the assessment year commencing on or after 1-4-1997 and not in any earlier assessment year. The relevant provisions of interest having been made during the period from 1-4-1988 to 31-3-1996, therefore, the said proviso does not apply so as to create a bar against the reduction of book-profit by the amount credited to the profit and loss account in this year out of the said provision. The learned CIT(A) referred Xo the Explanation (i) which provides for reduction of book-profit by the amount withdrawn and credited to the profit and loss account from any reserve and provision, however, the proviso to Explanation (i) excludes from reduction such amount credited to the profit and loss Recount which is out of the reserve treated or provision made in the previous year relevant to the assessment year commencing on or after 1-4-1907. The learned CIT(A) has, thus, concluded that in the present case, it is Undisputed; fact that the relevant provision for interest out of which the amount was withdrawn and credited to the profit and loss account in this year was made in t....
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....n of 'Book Profits' for the current year only. The learned counsel argued that the facts of this case are undisputed as has been confirmed by the Assessing Officer in his order passed under section 154 of the Act. The Assessing Officer has confirmed that there was a waiver of Rs. 418 lakhs out of the existing liability of the assessee towards the said Financial Institutions, which consisted entirely of interest and liquidated damages etc. It has also been acknowledged that there was no waiver in respect of the principal amount of loans of Rs. 490 lakhs. The Assessing Officer has also acknowledged that the above-mentioned waived amount of interest had been taken in the books prior to 1-4-1996 and also the interest amounts were not allowed as deduction in the assessments of any of the earlier years. The learned counsel, therefore, argued that the Assessing Officer ultimately held in the said order under section 154 that the amount of Rs. 418 lakhs credited to the accounts by ways of amount written back is not to form income of the assessee to be computed in the ordinary way. The learned counsel also referred to the order of the learned CIT(A) and has submitted that the learned CIT(A)....
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....iabilities towards payment of interest to the Financial Institutions were provided in the accounts of the assessee in different years prior to 1997-98. The liabilities were existing liabilities. The subsequent fact that the liabilities were ultimately waived shows that the actual liabilities could not have been ascertained exactly. The learned counsel, therefore, referred to the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. and contended that a provision was made in the accounts of the assessee in respect of the liabilities towards payment of interest to the Financial Institutions. During the year correspond to assessment year 1997-98, the interest was waived to the extent of Rs. 418 lakhs and the corresponding amount was written back in the accounts of the assessee. The learned counsel, therefore, argued that the amount was withdrawn from the earlier provisions created in respect of meeting the liability towards payment of interest to Financial Institutions. The learned counsel also referred to clause (i) of the Explanation to section 115JA(2) and contended that simply the expression 'provision' has been used. The same expression has been used in earlier....
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....l has also referred to the Companies Act wherein the word "provision" occurs in the Proforma of Balance-sheet as per Schedule VI, Part-I. The expression "Provision" comes under the head "Current liabilities and Provisions" in the "Liability" side of the balance-sheet. The classifications of provisions as given in Companies Act in this regard are as follows : "[ (8) Provision for taxation (9) Proposed Dividends (10) For contingencies (11) For provident fund scheme (12) For insurance, pension and similar staff benefits schemes (13) Other provision ]" The learned counsel has, thus pointed out that most of the types mentioned therein are in respect of liabilities whose nature is certain. Only "Provisions for contingencies and other Provisions" may be considered to be provision relating to liabilities whose nature is not certain. The learned counsel therefore, referred to clause (c) of Explanation to section 115 JA(2). This refers to "the amount or amounts set aside to provision made for meeting liabilities, other than ascertained liabilities". The learned counsel has, thus, stated that the implication of this particular clause is that the amount debited to profit a....
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....ssessing Officer. Thus, according to the learned counsel, it amounts to enhancement and the learned CIT(A) should have given an opportunity to the assessee before making the disallowance. The learned counsel, therefore, contended that the order passed by the learned CIT(A) is bad in law and the same deserves to be quashed. 10. The learned Departmental Representative contended that the provisions of clause (i) of the Explanation to section 115JA of the Act are not applicable to the instant case. He mainly relied on the order of the learned CIT(A) and contended that Explanation (i) provides for reduction of book-profit by the amount withdrawn and credited to the profit and loss account in this year out of the said provision. The proviso to Explanation (i) excludes from reduction such amount credited to the profit and loss account which is out of Reserve created or provisions made in the previous year relevant to the assessment year commencing on or after 1-4-1997. The learned Departmental Representative supported the findings of the learned CIT(A) by arguing that in the present case, the relevant provision for interest out of which the amount was withdrawn and credited to the prof....
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....pplicable. Consequently, he included the above write back in the computation of book profit for the year. The learned CIT(A) however, held that the proviso to clause (i) of the Explanation does not come in the way of reduction of the book profit by the amount of provisions withdrawn and credited to the profit and loss account in this year. However, the CIT(A) disallowed the claim of the assessee form a completely different and new angle. According to him when clause (i) of the Explanation refers to reserve or provision, it clearly refers to such reserve or provision as are mentioned in clauses (b) and (c) of the Explanation. According to him the meaning of the words "Reserve and Provision" in clause (i) should be the same as used in clauses (b) and (c). In his opinion, a reserve denotes transfer of profit below the line, or on account created out of capital receipt and the same does not form part of profit. Regarding clause (c) of the Explanation, the CIT(A) has stated that the same refers to amount or amounts to provisions made for meeting liabilities, other than ascertained liabilities. According to him, a provision for interest could not be said to be a provision for meeting an ....
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....to arrive at 'book profit'. Clause (i) of the Explanation reads as follows : "The amount withdrawn from any reserves or provision if such amount is credited to the profit and loss account, provided that such amount withdrawn shall not be reduced from the book-profits where such reserves or provisions were made after 1-4-1997 unless the book-profit of such year has been earlier increased by this reserves or provision." The language of this clause is, therefore, without any ambiguity and it clearly lays down that any amount withdrawn from any reserves or provisions if such amount is credited to the profit and loss account. This clause also does not mention that the reserves or provisions should pertain to the assessment year under consideration. It appears that the learned CIT(A) has got confused with the provisions of clause (c) and clause (i) of the Explanation which are in fact twp different provisions and also operates differently in two different situations, clause (c) operates when the assessee has made a provision for la liability which may be unascertained or ascertained. In case, the liability is unascertained, the book-profit has to be increased by that amount. The in....
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....AT. The comparison drawn by the learned CIT(A) is, therefore, without any basis and the same does not require any consideration. 13. The next important issue is regarding the provision made towards unascertained liability. According to the CIT(A) a provision for interest could not be said to be a provision for meeting an unascertained liability within the meaning of clause (c) of the Explanation. It is stated that if the interest was not allowed as deduction under the Income-tax Act by virtue of section 43B, it does not render it a provision towards unascertained liability within the meaning of the Companies Act. We do not find any force in the finding of the learned CIT(A). A provision made for a certain future liability, which can be ascertained with substantial accuracy, is an accrued liability. If such known liability cannot be ascertained and can only be estimated and a provision is made, such provision being a charge on the profits will be deductible. If the liability is anticipated but cannot be determined, it may be only contingent for which a Reserve may be created by way of appropriation from profits and hence such amount will not be eligible for deduction. In the pres....