TaxTMI 
TaxTMI 
2006 (12) TMI 171
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....o consider the following questions:- "Whether, the provisions made for doubtful debts, advances & investments, i.e., for unascertained liabilities, falls within the purview of adjustments under section 115JA of the Income-tax Act, 1961 and whether the Assessing Officer was justified to make adjust of Rs. 1,56,00,000 in this case in computing the books profits?" 2. The case was fixed for hearing on 5-5-2006 and on this date the learned A/R of the assessee raised preliminary objection against the question referred for the consideration of the Special Bench. He contended that the question framed has described the provision made for doubtful debts as unascertained liability. The question is referred with a pre-conceived notion that the provision for doubtful debts, advances and investments is unascertained liability. In such an event, the issue before the Special Bench would be diluted. The Ld. A/R contended that the question may kindly be reframed by expunging the words "unascertained liability". The Ld. D.R., on the other hand, has stated that the question has rightly been framed. The Special Bench referred the matter to the Hon'ble President, I.T.A.T. for necessary o....
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.... M/s. Indian Container Leasing Co. Ltd. vide application dated 19-6-2006 has requested for the permission of the Hon'ble President, I.T.A.T to join as intervener with regard to Revenue's appeal for assessment years 1997-98 and 1998-99 vide I.T.A. Nos. 1485 & 1486 (Kol.)/2002. The Hon'ble President, I.T.A.T. referred these two appeals also to the Special Bench as the issue raised in these appeals is identical to the issue raised before the Special Bench. Accordingly, we proceed to decide the appeals of the revenue in the case of Indian Container Leasing Co. Ltd. 5. The ld. Departmental Representative Mr. M.W. Haque an behalf of the revenue has first stated the fact of the case and submitted that the assessee M/s. Usha Martin Industries Ltd. has filed its return of income showing a gross loss of Rs. 38,76,70,246. However, it computed book profit under section 115JA at Rs. 14.52 crores. The Assessing Officer while processing the return under section 143(1)(a) added provision for doubtful debts to the tune of Rs. 1,56,00,000 and provision for Wealth-tax of Rs. 1,25,000 in such calculation of book profit under section 115JA Such addition made by the Assessing Officer in c....
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..... that since the Assessing Officer has disallowed the above provision in the Profit & Loss A/c prepared as per Companies Act, such addition should have been upheld by the CIT(A). 9. The ld. D.R. has relied on the decision of the Hon'ble Madras High Court in case of Dy. CIT v. Beardsell Ltd. [2000] 244 ITR 256 wherein it has been held by the Hon'ble Madras High Court that if a debt had become irrecoverable, the same could be written off and deducted from the profit of the business and a debt, where the recovery was doubtful, could not be termed to be an ascertained liability as mentioned under section 115J of the Act and could not be excluded from the book profits. The ld. D.R. has accordingly pleaded that the facts of the present case are exactly identical to one disposed by the Hon'ble Madras High Court in case of Beardsell Ltd., which strengthen the action of Assessing Officer while adding such provisions for the computation of book profits. 10. The ld. D.R. has thereafter relied on the decision of the Calcutta Tribunal in case of ICI India Ltd. v. Dy. CIT [IT Appeal No. 2189(Cal.) of 1995, dated 18-11-2002], a copy of which placed in the paper book was filed by....
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....ovision for Wealth-tax, the ld. D.R. has relied on the same argument, advanced by him for provision for doubtful debts. 13. In the rival submission, the ld. Authorized Representative for M/s. Usha Martin Industries Ltd., Sri Rahul Mitra opening the argument on behalf of the assessee stated that the Assessing Officer has added back the above provisions on the alleged ground that the same represents a provision made towards unexplained liabilities by invoking provisions of clause (c) of the Explanation appended below to section 115JA(2) of the Act. The ld. counsel submitted that the book profits under section 115JA are to be drawn in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act and Explanation appended below section 115JA(2) referred to certain adjustments by way of increase in respect of certain items as referred in clauses (a) to (f), out of which in the present cases only clauses (b) and (c) are material i.e., clause (b) which says that the amount carried to any reserve by whatever name called and clause (c) says about the amount or amounts set aside to provision made for meeting liabilities other than unascertained liabilities. It ....
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....een pleaded by Shri Mitra that from the above interpretation of provisions, it is evident that the Companies Act envisages two types of provisions, namely amounts set apart for providing for depreciation, renewals or diminution in value of assets and amounts set apart for providing for any known liability. Shri Mitra has submitted that since clause (c) of the Explanation appended below section 115JA(2) of the Act provides that amounts set aside to provisions made for meeting liabilities other than ascertained liabilities should be added back to the net profit as per the profit and loss account for the purpose of computing the "book profit" within the meaning of the said statute, therefore, the provisions, which come within the ambit of clause (c) of the Explanation are only those made with respect to liabilities and that too on account of unascertained liabilities. It was, therefore, emphasized by Shri Mitra that the said clause does not cover provisions made for diminution in value of assets. 17. Shri Mitra has pointed out that in the instant case, the impugned provision of Rs. 1.56 crores has been made to provide for diminution in the values of certain assets, namely debtors, ....
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.... argued nor adjudicated by both the Hon'ble High Court and this Tribunal. ld. counsel Shri Mitra has stated that the ITAT, Pune Bench after carefully considering the relevant provision laid down in clause (c) of Explanation to section 115JA has arrived at a conclusion that the provision for doubtful debts cannot be considered as provision for liability, much less than the ascertained liability as by no stretch of imagination, it can be said that there is any liability on an assessee in present or in future when a debt is considered as debt or doubtful. Shri Mitra pointed out that it has further been held by the ITAT, Pune Bench that there is no obligation on an assessee to pay any sum to anybody in such case and only consequence, that follows in considering the bad or doubtful, will reduce or diminish the value of assets of the assessee on account of non-recovery of the debt after observing the above. Sri Rahul Mitra pleaded that it has been held by the ITAT, Pune Bench that the provision made towards bad or doubtful debts could not be said as provision to meet any liability. 20. Concluding his argument, the ld. counsel Shri Mitra has submitted that the provision for doubtfu....
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....II of Schedule VI of the Companies Act, which enumerates the requirements as to Profit & Loss A/c as per Companies Act. 23.1 Ld. Senior Counsel Shri N.K. Poddar has pleaded that Part III of Schedule VI makes the words "provision" and "liability" more clear and understandable while interpreting the various words used therein. It has been stated by Shri Poddar that as per Part III clause 7 to 'Schedule VI of Companies Act, the word "provision" has been defined as under:- "The expression 'provision' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy." 23.2 The word "liability" has been defined as under:- "The expression 'liability' shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities, where (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in re....
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....o meet the bill, or property remaining in the drawee's hands or due from him to the drawer, and appropriated to that purpose. In Ecclesiastical law. A nomination by the Pope to an English benefice before it became void; the term was afterwards indiscriminately applied to any right of patronage exerted or usurped by the Pope. In French law. An allowance or alimony granted by a Judge to one of the parties in a cause for his or her maintenance until a definite judgment is rendered. In English History. A name given to certain statutes or acts of Parliament, particularly those intended to curb the arbitrary or usurped power of the sovereign, and also to certain other ordinances or declarations having the force of law. A term used in the reign of Henry III to designate enactments of the King in Council. Perhaps less solemn than statutes. The term 'statutes' was a later term with a changed conception of the solemnity of a statute, and is one that cannot easily be defined. It came into use in Edward I's reign, supplanting 'provisions' which is characteristic of Henry III's reign, which had supplanted 'assize', characte....
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....in excess of estimated requirements much be regarded as a reserve and (2) Sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy do not fall within the definition of a provision and should therefore be described as accruals or accrued liabilities. Reserves are in effect part of the undistributed profits of the business and therefore part of the proprietorship, whereas provisions and accruals are a diminution of proprietorship in the form of a liability or diminution of an asset. The former are broadly appropriations of, the latter charges against profits." 25. Ld. Senior Counsel Shri Poddar has thereafter pointed out that the terminology provision for bad and doubtful debts has been interpreted by Spicer & Pegler, 17th Edition in their book "Book Keeping and Accounts" and has annexed the extract of such book, wherein the provision for bad debts has been defined as under:- "When a debt is found to be irrecoverable, it should be written off as a loss by means of a journal entry debiting bad debts account and crediting the account of the defaulting debtor. At the end of the accounting period the bad debts ....
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....tely in different text books of accountancy pointed out by him, it is apparent that the provision in this case is intended to meet the anticipated diminution of the value of assets of the assessee, resulting from unrealized debts and since the contingencies were anticipated at the date of balance sheet and the amounts set apart from this item duly existed at the date of the balance sheet, which has to be deducted for computation of book profit under section 115JA. Shri Poddar has thereafter referred to his paper book and submitted that the issues involved in the case of both the assessees i.e., Balmer Lawrie and Indian Containers are similar which have been referred to in this Special Bench by the Hon'ble President, which should be decided in favour of assessee taking into consideration the various decisions of Tribunal and High Courts and after due interpretation terminology as defined in various books of accountancy in this regard. 27. Replying to the above argument, Ld. Senior D.R. Shri S.K Jain has submitted that the Hon'ble Chennai High Court has already elaborately discussed the issue involved before this Special Bench in case of Beardsell Ltd., wherein it was clea....
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....o book profit as per clause (b) of section 115JA of the Income-tax Act. 29. Shri Poddar in his reply has submitted that the Hon'ble Chennai High Court has not dealt with the entire issue and has pointed out that the High Court in case of Beardsell Ltd. has not dealt with the distinction between assets and liabilities because it was not argued before the Court. He has pointed out that even otherwise ITAT Pune Bench in case of ICI Ltd. has dealt with the issue elaborately after taking into consideration the various case laws and by interpreting various terminology used in the books of accountancy, Income-tax law and the Company Law. It has, therefore, been pleaded by Shri Poddar that the issue has to be decided in favour of assessee. 30. We have carefully considered the rival submissions and perused the material placed before us. We will first take up the Revenue's appeal in the case of Usha Martin Industries Ltd. In this appeal by the revenue, the following ground has been raised:- "The Ld. CIT(A) erred in holding that the sum of Rs. 1,56,00,000 being provision for Doubtful debts, Advances & Investment and Rs. 1,25,000 being provision for wealth-tax could not ....
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....r the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation.- For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepar....
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....infrastructure facility as defined under sub-section (12) of section 80-IA, and subject to fulfilling the conditions laid down in sub-section (4A) of section 80-IA; or (vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.- For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of profits eligible for deduction under section 80HHC, computed under clause (a), (b) or (c) of subsection (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in subsections (4) and (4A) of that section; (ix) the amount of profits eligible for de....
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....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 section 1151. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so 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 the Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obl....
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....le determining its total income, because the deduction for the provision for bad and doubtful debt is not permissible while computing the total income for the purpose of Income-tax Act. However, merely because the deduction of provision for bad and doubtful debt is not allowable in computing the total income of the assessee would be no ground for including the same in the book profit. 37. It was further contended by the Ld. D.R. that for the purpose of computing the net profit for Director's remuneration under secti9n 349 of the Companies Act, the assessee itself has included the provision for bad and doubtful debt in the net profit. In this regard, he referred to page-17 of the revenue's paper book. He contended that when for the purpose of Companies Act the assessee itself has included the provision for bad and doubtful debt in the net profit, the same has also to be included for the purpose of computing the book profit, because for the purpose of section 115JA the assessee has to prepare the Profit & Loss Account and balance sheet as per the provisions of the Companies Act. We find that the assessee has computed the net profit for computing the Director's remunera....
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....he undertaking or any of the undertakings of the company or of any part thereof; (d) profits from the sale of any immovable property or fixed assets of a capital nature 'comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets: Provided that where the amount for which any fixed asset is sold exceeds the written down value. thereof referred to in section 350, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value. (4) In making the computation aforesaid, the following sums shall be deducted:- (a) all the usual working charges; (b) directors' remuneration; (c) bonus or commission paid or payable to any member of the company's staff, or to any engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis; (d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits; (e....
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....be included into and excluded from the net profit as disclosed in the P/L Account. However, for the purpose of computation of book profit under section 115JA, the assessee has to first prepare the P/L Account as per Parts-II & III of Schedule VI to the Companies Act and thereafter makes adjustment as provided in Explanation to section 115JA. That the adjustments required to be made to the net profit disclosed in the P/L Account for the purpose of section 349 of the Companies Act are quite different than the adjustment required to be made under Explanation to section 11sJA of the Income-tax Act. Therefore, merely because some item debited to P/L Account is required to be added to the net profit for the purpose of computing the Director's remuneration, it is not necessary that the same is to be included in the book profit for the purpose of section 115JA. For the purpose of section 115JA, the Assessing Officer can increase the net profit determined as per P/L Account prepared as per Parts-II & III of Schedule VI to the Companies Act only to the extent permissible under Explanation thereto. The Explanation has provided six items, i.e., item Nos. (a) to (f) which if debited to the ....
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....eted the addition. On further appeal by the revenue, Their Lordships of Madras High Court allowed the revenue's appeal and held at page 259 of 244 ITR as under:- 'The only contention raised by the appellant herein is that the sum of Rs. 4,6,64,750 is not an ascertained liability to be excluded in the profit and loss account for the relevant previous year under section 115J of the Act and that, therefore, the Tribunal was not right in directing the assessing authority to rectify the alleged mistake of inclusion of the abovesaid amount in the book profit under section 154 of the Act. Learned counsel appearing for the respondent company contends contra stating that the provision made for bad and irrecoverable debt in the return has to be sustained by the assessing authority and he has no right to make adjustment to include the same in the book profit, under section 143(1)(a) of the Act and, therefore, the Tribunal was right in setting aside the order of the Commissioner of Income-tax (Appeals) who sustained the order of the assessing authority to include the sum of Rs. 46,64,750 in the book profit as an unascertained liability under section 115J(1A)(c) of the Act. Cla....
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.... v. Beardsell Ltd. wherein similar adjustment on account of doubtful debts was made to the net profit in course of processing the return of income under section 143(1)(a) by treating the same as a provision made for unascertained liability." 43. However, at the time of hearing before us, it was vehemently contended by the assessees' learned counsels, Sri Mitra and Sri Poddar that the provision for bad and doubtful debt is not a provision for meeting the liability. They also contended that this argument was neither raised before the Hon'ble Madras High Court nor before the I.T.A.T., Kolkata Bench. Once a provision is not for meeting the liability, the question whether the liability is ascertained or unascertained does not arise. It was also contended that a provision can be for a diminution in the value of asset and also for meeting the liability. In support of this contention, reliance has been placed upon the meaning of the word "provision" given in Companies Act, various dictionaries, Books of Accountancy as well as by the Institute of Chartered Accountants of India. As per section 115JA, the P/L Account is to be prepared as per Parts-II & III of Schedule VI to the Com....
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....akhs for bad and doubtful debts. By making this provision, the assessee is valuing its asset, viz., debt, at Rs. 90 lakhs as against the book figure of Rs. 1 crore. Thus, the provision for bad and doubtful debt is the provision for diminution in the value of asset, i.e., debt. The provision for bad and doubtful debt cannot be said to be a provision for liability, because even if a debt is not recovered, no liability would be fastened upon the assessee. In the above example if as against the outstanding debt of Rs. 1 crore only Rs. 90 lakhs has been realized, then due to non-realisation of the debt of Rs. 10 lakhs there is no question of any liability upon the assessee. The debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision towards irrecoverability of the debt cannot be said to be provision for liability. Once it is held that the provision for bad and doubtful debt is not a provision for any liability, the question whether the liability is ascertained liability or unascertained liability does not arise. 43.2 Reverting back to the decision of Hon'ble Madras High Court in the case of Beardsell Ltd., we find ....
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....rd Member, it was pointed out by the assessee's counsel that, in fact, there was no increase in the provision in the year under consideration. The Third Member called for the report from the Assessing Officer who affirmed that during the year under consideration there was no increase in the provision for bad and doubtful debts. Accordingly, the issue was decided in favour of the assessee. Thus the learned Third Member had no occasion to consider whether the provision for bad and doubtful debt was a provision for liability or the provision for diminution in the value of assets. Therefore, this decision would also not be of much help to the assessee. 43.4 We find that the ITAT, Pune Bench in the case of J.G. Vacuum Flasks (P.) Ltd. has considered the issue whether the provision for doubtful debt can at all be said to be liability and held as under:- "The provision for doubtful debt cannot be considered as provision for liability, much less the ascertained liability. By no stretch of imagination, it can be said that there is any liability on an assessee in praesenti or in futuro when a debt is considered as bad or doubtful. There is no obligation on an assessee to pay ....
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....ined liabilities. The said clause does not cover provision made for diminution in value of assets. Therefore, we agree with the Ld. A.R. of the assessee that the provision of Rs. 1,56,00,000 could not be added back to the net profit as per the P&L Account by invoking the provision of clause (c) of the Explanation appended to section 115JA(2) of the Act." Thus, ITAT, Kolkata Bench has come to the conclusion that the provision for bad and doubtful debt is not for liability but for diminution in the value of assets and, therefore, not covered by clause (c) of the Explanation to section 115JA. 43.7 After considering the entire legal position, arguments of both the sides and the various case laws referred to before us, we agree with the view taken by the ITA T, Pune Bench in the case 'of I.G. VacuumPlasks (P.)Ltd. (supra), !TAT, Delhi Bench in the case of Eicher Motors Ltd. (supra) and the !TAT, KolkataBench in the assessee's own case. At the cost of repetition, we reiterate that the provision for bad and doubtful debt is not a provision for liability but it is a provision for diminution in the value of the assets. Once the provision is not for any liability, the question ....
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....wn as part of the proprietor's interest. As amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance sheet is a reserve, but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision." It was further held that - "... accordingly, on the facts, that substantial amounts were set apart by the assessee, a banking company, as reserves. No amount of bad debt was actually written off or adjusted against the amount Claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as 'reserves' and not as 'provisions' designed to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of the balance sheets. T....
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....in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision." Thus, if the provisions made by the assessee for depreciation, renewals and diminution in the value of the assets are for any known liability, if it is in excess of the amount which is reasonably necessary for the purpose for which the provision is made, the excess shall be treated as a "reserve" and not a "provision". It would depend upon the facts of each case whether the provision made is in excess of the necessary requirement for the purpose for which the provision is made. The Hon'ble jurisdictional High Court after considering the facts in the case of Jugantar (P.) Ltd. held the provision for bad and doubtful debts to be not in excess of the requirement and, therefore, held not to be reserve. In the case of Jyoti Ltd. and State Bank of Patiala, after considering the facts of those cases, the Hon'ble Apex Court held the ....
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....at for the purpose of section 115JA the addition to the book profit, which is computed as per Parts-II & III of Schedule-VI to the Companies Act, can be made only if it is permissible by item Nos. (a) to (f) of the Explanation to section 115J A. We find that as per clause (a) to Explanation "any amount of income-tax paid or payable and the provision therefore" is liable to be added to the book profit. However, there is no such provision for making the addition with regard to wealth-tax. Since the provision for wealth-tax does not fall within any of the items of the Explanation to section 115JA, we hold that the CIT(A) was justified in deleting the addition made by the Assessing Officer in this regard. In view' of the above, we reject the revenue's appeal in the case of Usha Martin Industries Ltd. 47. Now we will take up the assessee's appeal for assessment year 2002-03 in the case of M/s. Balmer Lawrie & Co. Ltd. vide ITA No. 2437 (Kol.)/2005. The only ground raised in this appeal by the assessee is against the addition of Rs. 92,74,305 being the provision for bad and doubtful debt, which is added by the Assessing Officer to the book profit under section 115JB of the....
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....d doubtful debt. At page-36 there are details of the provision for bad and doubtful debts. The assessee has identified each and every debtors from whom the recovery is considered doubtful. From pages 37 to 44, the assessee has given the explanation with regard to each and every debtor why the recovery from them is considered as doubtful. The revenue has not doubted the correctness of the above detailed submission made before the Assessing Officer. In view of the above, we are unable to accept the revenue's submission that the provision made for bad and doubtful debt is excessive or unreasonable for the purpose for which the provision is made. Accordingly, the addition of Rs. 92,74,305 to the hook profit made by the Assessing Officer and sustained by the CIT(A) is deleted. 48. In the revenue's appeal in ITA No. 2449 (Kol.)/2005, the only ground which is permitted by the COD to be proceeded with is against the deletion of the addition of Rs. 2,10,41,506 made by the Assessing Officer on account of diminution in the value of investment of the assessee-company. 48.1 We have heard both the parties and perused the material placed before us. The Assessing Officer has made the....