Deputy Commissioner of Income Tax vs Beardsell Ltd.

P. Thangavel J.

This appeal is filed against the order of the Income Tax Appellate Tribunal, Madras ""A"" Bench, in I. T. A. No. 2225/Mds. of 1991, in

connection with the assessment year 1989-90.

Beardsell Limited, Chennai, the respondent in this reference, is a public limited company. The said company filed its return of income with the

Deputy Commissioner of Income Tax, Special Range-1, Chennai, showing a total income of Rs. 53,49,950, computing as per the provisions of

Section 115J of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""). In the said return, a sum of Rs. 46,64,750 was shown as

provision for doubtful debts"" and the same was claimed to be exempted from including in the taxable profit. The Deputy Commissioner referred to

above disallowed the provision created by the assessee for bad and doubtful debt of Rs. 46,64,750 on the ground that the provision made is not

for ascertained liabilities as mentioned in Section 115J(1)(c) of the Act and, accordingly, included in the net profit in the profit and loss account for

the relevant previous year. The respondent-company filed a petition u/s 154 of the Act for rectification of the order passed by the Deputy

Commissioner of Income Tax referred to above, on the ground that the authority concerned cannot reassess except as mentioned in the return u/s

143(1)(a) of the Act. The Deputy Commissioner of Income Tax referred to above refused to comply with the request made by the respondent-

company on the ground that the provisions of Section 115J do not permit creation of a provision for ""doubtful debt"" which is an unascertained

liability and accordingly confirmed the earlier order of assessment and intimated the same u/s 143(1)(a) of the Act.

The respondent herein preferred an appeal against the order passed u/s 154 of the Act by the Deputy Commissioner, Special Range-I, Madras.

In the said appeal, the respondent herein submitted that the provision for ""doubtful debts"" to the extent of Rs. 46,64,750 does not come under any

of the categories referred to in the Explanation to Section 115J, that the amount in question represents only the reduction in the value of the assets,

which has been charged to the profit and loss account, that the above said amount represents only doubtful debts which have become

irrecoverable and that therefore the amount of Rs. 46,64,750 cannot be disallowed in terms of Section 143(1)(a) of the Act. The appellant herein,

as respondent before the abovesaid appellate authority, contended that the said amount cannot be said to be a non-liability of the company ; that

the respondent-company has not written off the abovesaid debt as irrecoverable one and had not also reduced the same in the profit of the

business of the respondent-company ; that the respondent herein is not correct in claiming the above said debt as non-liability of the assessee and

that therefore, the order passed by the Deputy Commissioner of Income Tax referred to above has to be sustained, The Commissioner of Income

Tax (Appeals), Madras-34, found that the debt shown as ""doubtful debt"" had not been written off in the profit and loss account ; that it is only a

mere provision and not an actual ascertained liability to give relief as claimed by the respondent-company. In view of the fact that adjustment has to

be made on the basis of the information available in the return, accounts and documents, as per Section 143(1)(a) of the Act, the assessing

authority has got a right to disallow the claim made by the respondent-company on the basis of such information available in the return, accounts

and documents before the assessing authority. Accordingly, the Commissioner of Income Tax (Appeals) dismissed the appeal, confirming the

addition of Rs. 46,64,750 made to the book profit by the assessing authority.

Aggrieved by the said order of the Commissioner of Income Tax (Appeals), Madras-34, dated September 11, 1991, in I. T. Appeal No. 35 of

1990-91. Beardsell Limited, Madras-6, as appellant, filed an appeal in I. T. A. No. 2225/Mds. of 1991 before the Income Tax Appellate

Tribunal, Madras Bench ""A"", Madras.

The only contention raised before the said Tribunal by the assessee as appellant was that the Commissioner of Income Tax (Appeals) had

committed an error in confirming the adjustment of a sum of Rs. 46,64,750 as provision made in the accounts for doubtful debts in the computation

of income u/s 115j for the assessment year 1989-90. The learned Departmental representative relied on the order passed by the Commissioner of

Income Tax (Appeals) and the assessing authority, to sustain the said appellate order. The Tribunal has found that a debatable issue or an issue

which requires verification of facts or which requires further investigation cannot be considered as prima facie inadmissible u/s 143(1)(a) of the Act

and, therefore, the assessing authority is not permitted to adjudicate upon any debatable issue u/s 143(1)(a) of the Act. Accordingly, the Tribunal

allowed the appeal of the assessee and directed the assessing authority to rectify the mistake u/s 154 of the Act. It is this order, which formed the

basis for filing this appeal to decide the following point at issue :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the addition of Rs. 46,64,750 u/s

115J(1A) read with Clause (c) of Explanation to Section 115J(1A) by making adjustment u/s 143(1)(a) of the Income Tax Act, 1961 ?

The only contention raised by the appellant herein is that the sum of Rs. 46,64,750 is not an ascertained liability to be excluded in the profit and

loss account for the relevant previous year u/s 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 u/s 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, u/s 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 u/s 115J(1A)(c) of the Act. Clause (c) of the Explanation to

Section 115J of the Act would reveal that ""book profit"" means the net profit as shown in the profit and loss account for the relevant previous year

prepared under Sub-section (1A) as increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained

liabilities. It is evident from the abovesaid section that unless a provision is made for ascertained liabilities, the provision made has to be included in

book profit, for the purpose of taxation u/s 115J of the Act. The respondent claimed exclusion for the sum of Rs. 46,64,750 from the profit and

loss account on the ground that the same has been made as provision for irrecoverable debts due to the respondent-company. If a debt has

become irrecoverable as claimed by the respondent-company, the said company ought to have written off the debt and should have deducted it

from the profit of the business to the extent written off. A debt, the recovery of which is doubtful, will not amount to writing off the same by the

assessee concerned. It cannot also be termed to be an ascertained liability as mentioned in Section 115J of the Act. It is not in dispute that the

respondent-company had filed a return for the assessment year referred to above, wherein the said sum of Rs. 46,64,750 has been shown as a

provision for bad and irrecoverable debt claiming exemption. While disallowing the exemption claimed from inclusion in the book profit, the

assessing authority as well as the appellate authority had considered the return, accounts and documents available with the assessing authority. It

cannot be said that the authority concerned had exceeded his jurisdiction while passing the order and intimating the same u/s 143(1)(a) of the Act.

As per the proviso to the abovesaid section, an intimation for Income Tax or interest due under this clause shall not be sent after the expiry of two

years from the end of the assessment year in which the income was first assessable. It is not the case of the respondents that the abovesaid proviso

has not been complied with by the authority concerned.

Learned counsel for the appellant relied on a decision reported in Commissioner of Income Tax Vs. Jyoti Ltd., , to substantiate the claim of the

appellant. It has been held by the apex court in the case above that (headnote) ""an amount set aside out of profits and other surpluses, not

designed to meet a liability, contingency, commitment or diminution in 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 has also been held that (headnote) ""where the liability has actually arisen or been anticipated legitimately by

the assessee though the quantum of the liability has not been determined, a fund to meet such present liability cannot be treated as a ''reserve''. A

fund, however, created for payment of a liability which had not already arisen or fallen due but is only a provision with regard to the sum that might

become liable to be paid is ''other reserves'' within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964,

and should be taken into account in computing the capital of the company for the purpose of the Act.

The apex court has also held in State Bank of Patiala, Patiala Vs. Commissioner of Income Tax, Patiala, ""if the sums set apart in the balance-

sheets are only ''provisions'' the assessee will not be entitled to the relief claimed by it. If, on the other hand, the sums set apart are ''reserves''

within the meaning of the Act, the assessee will be entitled to appropriate relief.

The principles laid down by the apex court in the cases cited above would lend support to the conclusion that if a provision is made for

unascertained liability, the assessee is not entitled to get any relief claimed by him and if reserves have been made with regard to ascertained

liabilities, such reserve can be excluded from the book profit. In this case, as already pointed out, the provision made to an extent of Rs.

46,64,750 towards the alleged irrecoverable debt, which is not an ascertained one, cannot be excluded from the book profit, as rightly decided by

the assessing authority as well as the Commissioner of Income Tax (Appeals).

Learned counsel for the respondent relied on a decision reported in Mahalakshmi Glass Works Ltd. and another Vs. Sunil Gupta, Assistant

Commissioner of Income Tax and another, , wherein the High Court of Bombay has held that (headnote) ""the Assessing Officer has no jurisdiction

u/s 143(1)(a) to recalculate the quantum of book profits u/s 115J of the Income Tax Act, 1961, by not allowing any amount under Clause (b) of

the first proviso to Section 205(1) of the Companies Act, 1956"". Of course, the Bombay High Court has held as submitted by learned counsel for

the respondent. However, in view of the discussion made above by us and in view of the decisions of the apex court mentioned above, which are

more apt to apply to the case, on hand than the one rendered by the High Court of Bombay, relied on by learned counsel for the respondent, we

are not able to agree with the conclusion arrived at by the Tribunal in directing the assessing authority to rectify the alleged mistake of inclusion of

the unascertained liability in the book profit and communicating the same to the respondent u/s 143(1)(a) of the Act.

In the result, this appeal is allowed. There will be no order as to costs.