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Judgment
R. Sudhakar, J.—The appeal filed against the order of the Income-tax Appellate Tribunal "B" Bench, Chennai, dated October 6, 2006, passed in Income Tax Appeal No. 1381(Mds)/2004. The issue relates to the assessment year 1998-99. The assessee, in this case, in its profit and loss account, has claimed the deduction for provision for bad and doubtful debts at Rs. 13,62,479.
The Assessing Officer held that in terms of Explanation (c) to the second proviso to section 115JA, the provision for unascertained liabilities is to be added to the book profit and it cannot be claimed as deduction. In so far as certain bad debts that have been claimed separately in the profit and loss account as bad debts, the same were written off. Since the provision for bad debts does not represent any ascertained liability, in the case of the assessee, the Assessing Officer added the same to the net profit as per the profit and loss account for the purpose of computing book profit in terms of section 115JA and that order was passed based on the decision of Madras High Court reported in Deputy Commissioner of Income Tax Vs. Beardsell Ltd., .
The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who held in favour of the assessee. The Commissioner (Appeals) held as follows :
"2.3 It is the Assessing Officer''s rinding that the bad debt provision does not represent ascertained liability. It is the appellant''s case that the provision for bad debts is not a liability at all but only an adjustment to set off money lost on account of bad debts. It was also submitted that the work ''liability'' has been defined in the publication of the Chartered Accountant Institute of India under the name ''Guidance note on terms used in financial statements'' in which liability is defined in paragraph 9.02 as ''the financial obligation of an enterprise other than owner''s funds''.
2.4 The appellant''s submissions have been considered. I agree with the contention of the appellant. From the guidance note quoted by the appellant it is clear that liability should be amounts obtained from third parties similar to the owner''s funds. Hence, write off of an amount due from a party to the assessee, is not a liability at all."
As against the same, the Revenue went on appeal before the Income-tax Appellate Tribunal and the Tribunal relied upon the larger Bench decision of the Income-tax Appellate Tribunal, Calcutta, in the case of Deputy Commissioner of Income Tax Vs. Beardsell Ltd., wherein the Calcutta Tribunal came to the conclusion that clause (c) of the Explanation to section 115JB is not applicable to the provision for doubtful debts. Paragraph 3 of the order is reproduced hereunder :
"3. A similar issue was considered by the Special Bench of the Income-tax Appellate Tribunal, Calcutta, in the case of Deputy Commissioner of Income Tax Vs. Beardsell Ltd., , wherein it has been held as under :
"Clause (c) of the Explanation to section 115JB is not applicable to the provision for doubtful debts and the provision for diminution in the value of assets and there being no evidence on record to prove that the provision made by the assessee is unreasonable or excessive clause (b) of the Explanation is also not applicable and, therefore, addition could not be made in respect of the provision for doubtful debts and the provision for diminution in the value of investment to arrive at book profits under section 115JB."
and dismissed the appeal filed by the Revenue. Aggrieved against the same, the Revenue has filed the present appeal.
The appeal was admitted on the following question of law :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in deleting the disallowance of Rs. 13,62,497 being the provision bad and doubtful debts from the computation of book profits under section 115JA of the Income-tax Act, 1961?"
On considering the rival arguments, we propose to modify the question of law as follows :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that, while computing the book profits under section 115JA/115JB, the provision for bad and doubtful debts could not be added back, without taking into account the amendment made by the Finance (No. 2) Act, 2009, with effect from April 1, 1998, with the insertion of clause (i) under Explanation 1 to section 115JA/115JB?"
We have put the learned counsel for the respondent on notice on the above plea and heard both the counsel.
Mr. T.S. Ravikumar, learned counsel for the Revenue, contended that clause (c) of the Explanation to section 115JB is applicable to the facts of the present case and placed reliance upon the judgment in Tax Case (Appeal) No. 2511 of 2006, dated October 30, 2012, wherein, similar question of law was answered in favour of the Revenue.
"4. Going by the retrospective amendment, even though prior to the amendment the said issue was covered in favour of the assessee by reason of the decision reported in Indo Rama Synthetics (I) Ltd. Vs. Commissioner of Income Tax , New Delhi, . Yet the amendment thus goes directly against the assessee. In the circumstances, we agree with the decision of the Delhi High Court reported in Commissioner of Income Tax Vs. ILPEA Paramount (P.) Ltd., Accordingly, the third question of law is also answered against the assessee."
This was followed in T.C. (A.) No. 353 and 356 of 2010 dated February 27, 2013, wherein, it is held as follows :
"2. The assessment years under consideration are 2004-05 and 2005-06. Both the learned counsel appearing for the assessee and the learned standing counsel appearing for the Revenue submits that the issue involved in the above tax case (appeals) is covered by a judgment of this court dated June 28, 2012, in T.C. (A.) Nos. 2511 of 2006 dated October 30, 2012, in which, one of us was a member (K. Ravichandrabaabu, J.) wherein the Division Bench of this court held as follows :
''3. As far as the third question of law is concerned, learned standing counsel appearing for the Revenue, placed before this court a decision of the Delhi High Court reported in Commissioner of Income Tax Vs. ILPEA Paramount (P.) Ltd., , which considered the effect of insertion of clause (g) in the Explanation contained in section 115JA(2) of the Income-tax Act, 1961, with retrospective effect from April 1, 1998. As regards the provision for gratuity, it held that it could not be added to the book profits. The Delhi High Court pointed out that by virtue of the Finance (No. 2) Act, 2009, clause (g) has been inserted in the Explanation in section 115JA(2) of the Income-tax Act with retrospective effect from April 1, 1998, and the provision for doubtful debts and the provision for doubtful advances which are nothing but provision for diminution in the value of the asset, are specifically covered under clause (g) of the said Explanation and the provision for gratuity could not be added to the book profits while computing the income of a company under section 115JA of the Act.
Going by the retrospective amendment, even though prior to the amendment the said issue was covered in favour of the assessee by reason of decision reported in Indo Rama Synthetics (I) Ltd. Vs. Commissioner of Income Tax , New Delhi, , Yet, the amendment thus goes directly against the assessee. In the circumstances, we agree with the decision of the Delhi High Court reported in Commissioner of Income Tax Vs. ILPEA Paramount (P.) Ltd., . Accordingly, the third question of law is also answered against the assessee."
Since the issue is covered in favour of the Revenue, the above tax case (appeals) are allowed and the substantial question of law is answered in favour of the Revenue."
The learned counsel for the Revenue relied upon the Central Board of Direct Taxes Circular No. 5 of 2010, dated June 3, 2010 (see [2010] 324 ITR (St.) 293, 334), particularly, paragraph 40.4, to buttress his plea as above. The circular reads as follows :
"40.4. Applicability.--The amendment to section 115JA has been made applicable with retrospective effect from April 1, 1998, and will accordingly apply in relation to the assessment year 1998-99 and subsequent years. The amendment to section 115JB has been made applicable with retrospective effect from April 1, 2001, and will accordingly apply in relation to the assessment year 2001-02 and subsequent years."
The objection raised by the learned counsel for the respondent-assessee that this amendment would come into effect for the assessment year 1999-2000 cannot be sustained as evidenced from the reading of section 115JA itself, i.e., deemed income relating to certain companies that "where in the case of an assessee, being a company, the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997, is deemed to be the relevant previous year". The previous year relevant to the assessment year is 1997-98. Therefore, the amendment to section 115JA will be made applicable for the assessment year 1998-99, the period in the present appeal.
We find no error in the Revenue''s plea that the amount claimed as deduction of provision for bad and doubtful debts representing unascertained liability should not be deducted from the book profit for the purpose of determining the income, in view of the retrospective amendment, vide Explanation (g) to section 115JA with effect from April 1, 1998, applicable to the assessment year 1998-99. The decision in the case of Commissioner of Income Tax-IV, Delhi Vs. HCL Comnet Systems and Services Ltd., will not come to the aid of the assessee in view of the above amendment with retrospective effect as per the Explanatory Notes to the Finance (No. 2) Act, 2009, vide the Central Board of Direct Taxes Circulars mentioned above.
Accordingly, we answer the question of law in favour of the Revenue. In the result, the tax case appeal is allowed and the order dated April 25, 2007, passed by the Income-tax Appellate Tribunal "B" Bench, Chennai, in Income Tax Appeal No. 107(Mds)/2003 is set aside. No costs.