Income Tax Act, 1961 – Section 115JB – Assessment of income – Computation of book profits – Addition of bad debts – Sustainability – Appellant/assessee is engaged in business of software development consultancy services – Assessee filed return of income for AY 2012-13 – Assessing Officer completed assessment after making additions to book profits under Section 115JB of the Act towards provision for bad debts – CIT(A) affirmed addition made by AO – Whether CIT(A) has erred in confirming addition of bad debts while computing book profits under Section 115JB of the Act – HELD – Provision for doubtful debt debited to P&L account constitutes an actual write off, if same is simultaneously reduced from loans & advances/debtors to reflect net balance in statement of financials – Assessee has reduced provision for doubtful debts from trade receivables and has shown only the net figure in balance sheet of assessee – Bad debts which is reduced from asset side of debts amounts to actual write off and cannot be adjusted for purpose of book profits under Section 115JB of the Act – Assessee has actually written off the bad debts as of 31-3-2012 – Actual write off of asset cannot be considered as an addition under clause (i) of Explanation 1 to Section 115JB of the Act – Impugned order passed by CIT(A) set aside – Appeal is allowed
2022-VIL-1643-ITAT-BLR
IN THE INCOME TAX APPELLATE TRIBUNAL
“A” BENCH: BANGALORE
ITA No.988/Bang/2022
Assessment year: 2012-13
Date of hearing: 07.12.2022
Date of Pronouncement: 19.12.2022
M/s MINDTREE LIMITED
Vs
THE DEPUTY COMMISSIONER OF INCOME TAX
ITA No.1029/Bang/2022
Assessment year: 2012-13
THE DEPUTY COMMISSIONER OF INCOME TAX
Vs
M/s MINDTREE LIMITED
Assessee by: Shri Tata Krishna, Advocate
Revenue by: Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru
BENCH
SHRI N.V. VASUDEVAN, VICE PRESIDENT
Ms. PADMAVATHY S, ACCOUNTANT MEMBER
ORDER
Per Padmavathy S., Accountant Member
These cross appeals are against the order of CIT(Appeals)-11, Bangalore dated 17.8.2022 for the assessment year 2012-13.
2. The assessee is engaged in the business of software development consultancy services and providing internet enabling technology and providing wireless technology. The assessee filed the return of income for AY 2012-13 on 28.9.2012 declaring a total income of Rs.101,12,19,490. The case was selected for scrutiny and the AO passed an order of assessment making a disallowance of depreciation on goodwill, disallowing deduction u/s. 10AA and disallowing club expenses.
3. Aggrieved, the assessee filed an appeal before the CIT(A), LTU, who partly allowed the appeal in favour of the assessee. In the meanwhile, vide notice dated 11.5.2015, the AO sought to rectify the book profits by adding Rs.50,22,576 towards provision for bad debts. The AO also issued one more notice dated 1.1.2016 again rectifying the book profits wherein besides adding the provision for bad debts, the disallowance u/s. 14A for an amount of Rs.89,98,661 was also added to the book profits. The assessee filed a response on 21.1.2016 and subsequently the AO dropped the proceedings u/s. 154.
4. The CIT(A), LTU subsequently initiated revisionary proceedings by issuing notice u/s. 263 of the Act holding the assessment to be erroneous and prejudicial to the interest of the revenue to the extent that provision for bad debts and the disallowance u/s. 14A were not considered while computing the book profits u/s. 115JB. The AO passed an order giving effect to the order u/s 263 by making the aforesaid additions to the book profits. The assessee filed an appeal against the order of the AO passed u/s. 143(3) r.w.s. 263. The CIT(A) gave relief to the assessee to the extent of disallowance made under section 14A to be added to the book profits u/s. 115JB. The CIT(A) upheld the addition made to the book profits towards provision for bad debts. Aggrieved by the order of the CIT(A), both the revenue and the assessee are in appeal before the Tribunal.
5. During the course of hearing, the ld. AR submitted that the tax effect of the appeal of the revenue is less than Rs.50 lakhs and accordingly to be dismissed on the ground of monetary limit as per CBDT Circular No.7/2019 dated 8.8.2019. The ld DR did not raise any objections to this submission of the ld. AR. Revenue has filed appeal against the order of the CIT(A) for deleting the adjustment to book profits towards section 14A disallowance to the tune of Rs. 89,98,66. The tax effect of the impugned amount is less than Rs.50lakhs and accordingly, the appeal filed by the revenue in ITA No.1029/Bang/2022 is dismissed on the ground that the same is below the monetary limit for filing the appeal before the Tribunal as per the above circular.
6. We will now take up assessee’s appeal in ITA No.988/Bang/2022 in which the assessee has raised the following grounds:-
“1. The Order passed by the CIT(A) is not justified in law and on facts and circumstances of the case.
2. As regards adding back of bad debts of Rs.50,22,576/- while computing book profits under section 115JB:
2.1. The lower authorities have erred in regarding bad debts of Rs.50,22,576/-as provision when the same has to be considered as actually written off as held by the Apex Court and the jurisdictional High Court.
2.2. The lower authorities have failed to appreciate that the aforesaid sum of Rs. 50,22,576/- being in the nature of write off of bad debts, it cannot be added back to book profit as 'the amount or amounts set aside as provision for diminution in the value of any asset' under Clause (i) of Explanation 1 to Section 115JB.
2.3. The Learned CIT(A) has erred in perversely stating that the Appellant tried to mislead by claiming that the amount had actually been written off without appreciating the explanation offered by the appellant as regards the nature of write off as adumbrated in various decisions of the Apex Court and the jurisdictional high court.
2.4. The Learned CIT(A) has erred in perversely stating that the decision in CIT vs. Yokogawa India Ltd., [2012] 204 Taxman 305 (Kar.) is distinguishable by wrongly stating that there was an actual write off of debt without it being carried forward to the subsequent year along with the provision.
3. As regards levy of interest:
3.1. The lower authorities have erred in levying interest under section 234C of IT Act.
3.2. The lower authorities have erred in levying interest under section 220(2) of IT Act.
3.3. The lower authorities have erred in levying interests under section 234B and under section 220(2), when the said disallowance is not tenable, and thus question of levy of interest does not arise.
On the basis of above grounds and other grounds which may be urged at the time of hearing with the consent of the Learned Commissioner of Income Tax (Appeals), it is prayed that the order passed under section 143 (3) r.w.s. 263 of IT Act be quashed and relief sought be granted.”
7. During the year under consideration, the assessee has debited a sum of Rs.50,22,576 to the P&L account and the provision for doubtful debts was accordingly credited. The provision for doubtful debt as on 31.3.2011 stood at Rs.35 million and the same was increased by the amount debited to the P&L account during FY 2011-12 and accordingly the provisions as on 31.3.2012 stood at 40 million. The assessee in the statement of accounts has reduced the provision for doubtful debts from trade receivables and the net amount is shown as trade receivables in the balance sheet. The extract of the relevant portion fo the trade receivables is as given below:-
Trade receivables
|
Particulars |
As at 31st March |
|
|
2012 |
2011 |
|
|
(Unsecured) Debts overdue for a period exceeding six months |
|
|
|
- considered good |
26 |
20 |
|
- considered doubtful |
21 |
33 |
|
Other debts |
|
|
|
- considered good |
4052 |
2805 |
|
- considered doubtful |
19 |
2 |
|
Total |
4,118 |
2,860 |
|
Less: Provision for doubtful debts |
(40) |
(35) |
|
Total |
4,078 |
2,825 |
8. The assessee submitted before the CIT(A) that the amount of Rs.50,22,576 is in the nature of write off of bad debts and accordingly cannot be added back to book profits as what is contemplated in clause (i) of Explanation 1 to section 115JB(2) is the amount or amounts set aside as provision for diminution in the value of any asset. The assessee submitted that the impugned amount is not a provision, but the actual diminution in the value of the asset and therefore cannot be adjusted against the book profits u/s. 115JB. The assessee in this regard relied on the decision of the Hon’ble Supreme Court in the case of Vijaya Bank v. CIT, [2010[ 323 ITR 166 (SC) wherein it is observed that the provision for doubtful debt debited to the P&L account constitutes an actual write off if the same is simultaneously reduced from the loans & advances/debtors and is shown as net of such provision.
9. The CIT(A) did not accept the contentions of the assessee by holding that –
“5.4 The submissions of the appellant have duly been considered. A perusal of the records and the balance sheet of the appellant shows that it had debited an amount of Rs 50,22,576/- to the profit and loss account as a provision for doubtful debts. As per the appellant, this had increased the amount of provision for doubtful debts from Rs 35 million as on 31.03.2011 to Rs 40 million as on 31.03.2012. These provisions are duly reflected in the balance sheet as on 31.03.2011 as well as on 31.03.2012. Although the appellant has claimed that it was not a mere provision but actual write off, however it is not so. The appellant has not actually written off this amount in its books of account and it has just created a ledger account in the books with heading 'provision for doubtful debts' and it is just an accounting entry in the balance sheet which it is trying to show as actual write off. As on 31.03.2011 the actual debts were Rs 2860 million and if the doubtful debts had actually been written off on 31.03.2010 the carry forward would have been Rs 2825 million only and after taking into consideration the new debts during FY 2011-12 the actual debts would have been Rs 4083 million only as against Rs 4118 million shown in the balance sheet as on 31.03.2012 before considering provision (see schedule 3.5.2 as reproduced supra from the appellant's reply). If the amount of Rs 50,22,576/-had actually been written off by the appellant during the year under consideration the carry forward would have been of Rs 4078 million and after taking into consideration the new debts during FY 2012-13 the actual debts would have been only Rs 4514 million as against Rs 4554 million shown in the balance sheet as on 31.03.2013 before considering provision. Net trade receivable i.e after considering provision for doubtful debt are shown at Rs 4508 million as on 31.03.2013. This is also noted that as on 31.03.2011 the 'debts overdue for a period exceeding 6 months' and considered 'doubtful' were Rs 33 million and a provision for the same was created in the books by the appellant. However, the amounts of doubtful debts of this category had reduced to Rs 21 million as on 31.03.2012 and as such the same had reduced by Rs 12 million. If the amount of Rs 33 million had actually been written off in the books of account as on 31.03.2011, the appellant would have shown the recovery from such written off debts as its income during the year under consideration, however this is not so. This also shows that the appellant had not been actually writing off the doubtful debts in its books and it had only been creating a provision year after year. The net figure is reflected in the balance sheet as and when recovery is there or more provision is created if required. The financials of the appellant also show that the amount of Rs 50,22,576/- is also net addition to the provision and not the actual new provision added during the year. That is the reason why the appellant is adding back the amount in the computation of income as the same is not eligible for write off as per provisions of Section 36(1)(vii) of the Act. However, during appellate proceedings it has tried to mislead by claiming that the amount had actually been written off and it was only by mistake that it had added back the amount in the computation of income. Although the appellant has relied upon a number of decisions including that rendered by the Hon'ble Supreme Court, however the ratios of the same do not apply as in the said cases there was actual write off by making entry in the balance sheet on the asset side and no such carry forward of the actual debts and he corresponding provision was there in the subsequent financial year. As regards the applicability of the provision of the clause (i) to Explanation 1 to Section 115JB of the Act, the same is duly attracted as the appellant has only created a provision for diminution in the value of asset being a debt without actually writing it off. The reliance of the appellant on the decision in the case of Yokogawa India Ltd. (Supra) (the SLP against which was dismissed due to low tax effect) is also misplaced as in that case too there was actual write off of the doubtful debt without it being carried forward to the subsequent year along with the provision. Considering above the action of the AO in adding the amount of Rs 50,22,576/- to the book profits while computing the same as per provisions of Section 115.113 of the Act is upheld and the grounds of appeal 3, 3.1 and 3.2 are dismissed.”
10. Aggrieved, the assessee is in appeal before the Tribunal.
11. The ld. AR reiterated the submissions made before the CIT(A). He submitted that the assessee has reduced the provision for doubtful debts from the trade receivables and has shown only the net figure in the balance sheet of the assessee, which would mean that there is an actual write off in the books of accounts. The ld. AR therefore submitted that the assessee’s case is covered by the ratio laid down by the Hon’ble Supreme Court in the case of Vijaya Bank (supra). The ld. AR also brought to our attention the decision of the jurisdictional High Court in the case of CIT v. Yokogawa India Ltd. [2012] 2004 Taxman 305 (Kar) where a similar view has been held.
12. The ld DR, on the other hand, submitted that decision of the Karnataka High Court in the case of Yokogawa India Ltd. (supra) was rendered in the context of adjustment made under clause (c) of Explanation 1 to section 115JB(2) and therefore cannot be applied in assessee’s case where the adjustment is made by invoking clause (i) of Explanation (1) to section 115JB(2). The ld. DR further submitted that the provision debited to the P&L account and credited to the provision account cannot be construed as actual write off.
13. We have heard the rival submission and perused the material on record. We notice that the Supreme Court in the case of Vijaya Bank Ltd. (supra) has considered a similar issue and held that –
“7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1- 4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee-bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision "for impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in its books, as indicated above.”
14. We also notice that the jurisdictional High Court in the case of Yokogawa India Ltd. (supra) has held a similar view with regard to provision for bad debts. From the above, it is clear that the ratio laid down is that if the provision for bad and doubtful debts which is debited to the P&L account would constitute actual write off if the same is reduced from loans & dvances / debtors to reflect the net balance in the statement of financials. In assessee’s case, in the financials for the year ended 31.3.2012 [pg. 30 & 57 of PB], we notice that the assessee had shown the net amount for trade receivables after adjusting the provision for doubtful debts. Considering the ratio laid down by the Hon’ble Supreme Court in the case of Vijaya Bank (supra), in our view the assessee has actually written off the bad debts as of 31.03.2012. The relevant extract of Explanation 1 to section 115JB(2) reads as follows
Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by—
(a) ***
(b) ***
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) ***
(e) ***
(f) ****
(fa) ****
(fb) ****
(fc) ****
(fd) ****
(g) ****
(h) ****
(i) the amount or amounts set aside as provision for diminution in the value of any asset,
(j) ****
(k) ****
15. In the case under consideration the assessee has written of the debts which is an asset and therefore the CIT(A) has correctly considered the issue under clause (i) and not under clause (c). The plain reading of the above provisions make it clear that the provision made towards diminution in the value of asset has to be added. In assessee’s has we have already held that the bad debts have been actually written of and is not a provision following the decision of the Apex Court in the case of Vijaya Bank (supra). Accordingly, the actual write off of the asset cannot be considered as an addition under clause (i) of Explanation 1 to section 115JB.
16. With regard to the contention of the ld DR that the decision of the jurisdictional High Court in the case of Yokogawa India Ltd (supra) is not applicable, in our view though the question of law relates to whether the Appellate Authorities were correct in holding that the provisions made for bad and doubtful debts cannot be added back in accordance with the Explanation (c) to Section 115JB(1) of the Act, the ratio laid down by the Hon’ble High Court is that the if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to Section 115JA or JB is not at all attracted. We therefore hold that the bad debts which is reduced from the asset side of the debts which amounts to actual write off cannot be adjusted for the purpose of book profits u/s.115JB.
17. In the result, the appeal by the assessee is allowed and revenue’s appeal is dismissed.
Pronounced in the open court on this 19th day of December, 2022.
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