By Jagdish T. Punjabi | Prachi Parekh | Chartered Accountants
Devendra Jain | Advocate
33 Dy. Commissioner of Income Tax vs. Peerless General Finance and Investment Co. Ltd. [2021] 85 ITR(T) 1 (Kol-Trib)] IT Appeal No. 50 (Kol) of 2009 A.Y.: 2002-03; Date of order: 3rd December, 2020
Section 115JB(2)(i) – Where an amount debited for diminution in value of Investments and Non-Performing Assets is in nature of an actual write-off, clause (i) of Explanation (1) to sub-section (2) of section 115JB is not attracted and thus the aforesaid amount is not to be added back while computing book profits
FACTS
While computing profit for the year, the assessee had debited an amount in the Profit & Loss Account for diminution in value of Investments and Non-Performing Loans & Advances and had reduced the same from the asset side of the balance sheet to the extent of the corresponding amount. The assessee contended that the amount so debited to the P&L account is in the nature of an actual write-off and not in the nature of mere provision and, thus, should not be added back while computing book profits u/s 115JB.
The A.O. added back the amount debited for diminution in Investment and NPA (Non-Performing Assets) while computing the book profits treating it as unascertained liability as envisaged in clause (c) of Explanation (1) to sub-section (2) of section 115JB. The CIT(A) held that the said amount could not be treated as unascertained liability and allowed the assessee’s appeal.
Aggrieved by the order, Revenue filed an appeal before the Tribunal and the Tribunal upheld the action of the A.O. Aggrieved by this order, the assessee filed an appeal before High Court which remanded back the matter with a direction to proceed and determine the issue in the light of the decision of the Gujarat High Court in CIT vs. Vodafone Essar Gujarat Ltd. [2017] 397 ITR 55 (Guj), i.e., whether clause (i) of Explanation (1) to sub-section (2) of section 115JB would be attracted or not in the facts of this case.
HELD
To determine whether the amount so debited to the P&L account for diminution in Investment and NPA was an instance of write-off or a provision, the Tribunal observed that the Gujarat High Court in
CIT vs. Vodafone Essar Gujarat Ltd. (Supra) explained a situation where a provision created in respect of assets would be considered as a write-off and not as a provision as per clause (i) of Explanation (1) to sub-section (2) of section 115JB.
The Gujarat High Court had held that
a) where an assessee debits an amount to the P&L account and simultaneously obliterates such provision from its account by reducing the corresponding amount from the respective assets on the asset side of the balance sheet, and
b) consequently, at the end of the year, shows the respective assets as net of the provision, it would amount to an actual write-off and such actual write-off would not attract clause (i) of the Explanation (1) to sub-section (2) of section 115JB.
In the present case, the Tribunal observed that the provision for diminution in Investment / Provision for NPA was not a mere provision but an actual write-off. Provision for Investments / Provision for NPA was created by the assessee by debiting the P&L account and simultaneously the corresponding amount from Investments / Loans & Advances shown on the asset side of the balance sheet was also reduced / adjusted and Investments / Loans & Advances were recorded in the books, net of provision.
Hence, applying the above principle laid down by the Gujarat High Court, the Tribunal finally held that the said provision for diminution in Investments and Provision for NPA would amount to an actual ‘write-off’ and therefore would not attract clause (i) of the Explanation.
Thus, the action of the CIT(A) on the issue was confirmed by the Tribunal and the Revenue’s appeal was dismissed.
