ORDER
S.C. Tiwari, Accountant Member
1. This appeal has been filed by the assessee on 17th October, 2000 against the order of the learned Commissioner of Income Tax (Appeals)-XV, Mumbai dated 10th July, 2000 in the case of the assessee in relation to assessment order under Section 143(3) for Asst. Year 1997-98.
2. In this case, the Assessing Officer made an order under Section 143(3) determining total income at matter setting of brought forward business losses for Asst. Year 1993-94 amounting to Rs. 3,94,57,284. Thereafter the Assessing Officer also made an order under Section 115JA determining book profit at Rs. 2,74,06,748. While computing the profit under Section 115JA, the Assessing Officer increased the net profit as shown in the Profit & Loss account by Rs. 2,54,05,539. Out of this increase, the assessee has challenged the sum of Rs. 2,50,80,539 as not includible in the computation under Section 115JA. This sum comprises of the following amounts :-
Provision for doubtful debts/advances Rs. 2,49,73,218
Income tax of earlier years Rs. 1,07,321
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Total Rs. 2,50,80,539
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3. The assessee’s grounds of appeal Nos. 1 to 5 are directed against inclusion of these two amounts. Facts of the case in this respect briefly are that the assessee debited an amount of Rs. 2,49,73,218 to the Profit & Loss account under the sub-head “provision for doubtful debts/advances”. In the course of assessment proceedings the assessee gave break-up of this provision, which has been enumerated at page 6 of the assessment order. The major amount in this provision pertains to the debts owed to the assessee by M/s. Regal International Inc. USA amounting to Rs. 2,35,27,628. This amount was stated to be due to the assessee on account of export of medicines to the party from 2nd November, 1995 to 14lh May, 1996. Total export to the party was to the extent of Rs. 3,82,11,388 out of which Rs. 1,46,83,760 had been received as at the end of the previous year-relevant to Asst. Year 1997-98 and the balance amount was outstanding. The assessee claimed to have filed a suit against the party in the Superior Court, New Jersey on 21st February, 1997 for recovery of the amount. The Assessing Officer found that the export of goods to M/s. Regal International Inc. USA was undertaken by the assessee during the later part of assessment year 1996-97 and the earlier part of assessment year 1997-98. No entries were made by the assessee to write off any amount as irrecoverable in the ledger account of the party in the books of account of the assessee and the entire amount of Rs. 2,35,27,628 was shown as outstanding against the party in the ledger account. The Assessing Officer-found that the assessee had regular export transactions with the party and while certain export bills were pending as on 31-3-1997, others had been paid up by the party. In view of these facts, the learned Assessing Officer found that the assessee had not written off any amount as irrecoverable as required under Section 36(1)(vii) of the Act. Secondly, the learned Assessing Officer held the view that the provisions of Section 36(1)(vii) applied to a “bad debt” and not to any debt whatsoever. In other words, for applicability of the provisions of Section 36(1)(vii), the debts should have become bad at the first instance and the burden to prove that the debt had become bad was on the assessee. The assessee was required to show that he had no reasonable expectation of the recovery of the said debt at the time the debt was written off as bad debt and that there was no ray of hope for recovery of the amount in future. For this purpose the learned Assessing Officer has relied upon a number of Court pronouncements as enumerated in the assessment order. Thus, while making the assessment under Section 143(3), the learned Assessing Officer held that the amount could not be allowed as deduction under Section 36(1)(vii) because the same had not been written off as irrecoverable in the accounts of the previous year and because on merits also the assessee had not been able to establish that the debt had become bad. In respect of the remaining amounts also, the learned Assessing Officer gave similar findings. Accordingly in computation of total income under Section 143(3), the learned Assessing Officer disallowed the assessee’s claim of deduction on account of provision for doubtful debts amounting to Rs. 2,49,73,218.
4. While computing the book profit under Section 115JA apart from relying upon the contentions in the main body of the assessment order, the learned Assessing Officer further held that the sum of Rs. 2,49,73,218 was required to be added to the profits as per the Profit & Loss account in view of addition envisaged under Clause (c) of Explanation to Section 115JA(2). According to the Assessing Officer, the provision was not towards any ascertained liabilities as the assessee was still making efforts to recover the amount. Thus, the Assessing Officer apart from disallowing the assessee’s claim of deduction of this provision in computation of total income under Section 143(3) also included the amount in the computation of book profit under Section 115JA of the Act.
5. Aggrieved by the assessment order and the computation under Section 115JA, the assessee preferred appeal before the learned CIT(A). The assessee argued that it had made provision for doubtful debt on the basis of suit filed by him against the debtor. The assessee also pointed out that only a sum of Rs. 1,46,83,760 could be recovered as against the total exports to the tune of Rs. 3,82,11,388 within the time stipulated in Rule 8 of Foreign Exchange Regulation Rules, 1974. The assessee had also filed a suit against the party in New Jersey. As per the provisions of Foreign Exchange Manual, 1997 issued by Reserve Bank of India, if any amount remained outstanding for more than 360 days, the same could be provided for as non-recoverable and if after two years, the authorised dealer granted the certificate for write off of the amount, the assessee could also write off the amount as bad debt. The assessee submitted that as on 14th June, 1997, when the final accounts were prepared for the previous year ended on 31st March, 1997, the sum of Rs. 2,35,27,628 remained outstanding from more than 360 days and therefore in accordance with the Foreign Exchange Manual issued by Reserve Bank of India the assessee could deduct this amount as provision for doubtful debts.
6. The learned CIT(A) found that after filing a suit in 1997 against M/s. Regal International Inc. USA, there was a settlement with the party under which the US party agreed to pay US$ 338840 in monthly instalments commencing April 1999. As a matter of fact, till March 2000 that party had actually paid to the assessee Rs. 39,35,907. The assessee submitted that this sum had been credited in the books of account and would be offered for taxation under Section 41(2) of the Act.
7. The learned CIT(A) noted that under para 6C14 of Foreign Exchange Mannual, 1997, where the exporter has not been able to realize the outstanding export clues despite his best efforts, he may approach the authorised dealer with the appropriate supporting documentary evidences for write off of the unrealized portion. The authorised dealer may acceed to accept this on certain conditions, one of which is that the relevant amount has remained outstanding for 360 days or more. In the case of the assessee, the period of export was 2nd November, 1995 to 14th November, 1996. Thus on the last date of the accounting year i.e. 31st March, 1997, the period of 360 clays had not yet expired. Thus, under the provisions of Foreign Exchange Manual, request of the assessee could not have been acceded to. The assessee tried to justify the provisioning by stating that the financial statements of the assessee were prepared on 14th June, 1997 and on that date the unrealized amount was outstanding for more than 360 clays. The learned CIT(A) did not accept the interpretation of the assessee on the ground that the material elate was 31st March, 1997 when the accounting year for assessment year 1997-98 ended. The learned CIT(A) also held that insofar as actual write off was concerned the permission could not have been obtained by the assessee as late as two years from the last transaction. According to the learned CIT(A) to allow assessee’s claim of deduction under Section 36(1)(vii) of the sum of Rs. 2,35,27,628 would amount to deviating from the guidelines of Reserve Bank of India. Thirdly, the learned CIT(A) held that the assessee had regular export transaction with M/s. Regal International Inc. USA and the assessee had not established that the debt had become irrecoverable during the previous year relevant to assessment year 1997-98 itself. As a matter1 of tact in the earlier part of the previous year, the export transactions with the party were still continuing. The assessee had also filed a suit for recovery against the party which too had not been finalized. On the contrary as a result of this suit, the assessee company was subsequently able to recover substantial amounts from the party. In the books of account also the amount of bad debt actually written off was only Rs. 1,76,521 whereas the assessee debited an amount of Rs. 2,49,73,218 towards provision for doubtful debts/advances. According to the learned CIT(A) it was an admitted position that the amounts were not finally written off because it could not be said that there was no chance of recovery. It was also admitted that in the subsequent period the assessee had actually received a sum of Rs. 39,35,907 from M/s. Regal International Inc. USA and a sum of Rs. 6,77,260 from two Indian parties from out of other amounts. From these facts, it was clear that wherever the amount had actually become bad the same was written off by the assessee in the books of account itself. The amounts provided for doubtful debts/advances represented the debts that had not become bad. The Assessing Officer was justified in not allowing deduction of provision for doubtful debts/advances under the provisions of Section 36(1)(vii) of the Act.
8. So far as the provisions of Section 115JA were concerned, the learned CIT(A) referred to Explanation to Section 115JA(2). The learned CIT(A) held that the Assessing Officer was not justified while invoking the provisions of Clause (c) of this Explanation. At the same time the learned CIT(A) held that the increase of book profit made by the Assessing Officer was justified under Clause (b) of the Explanation which provide that the amount carried to any reserve by whatever name called has to be added to the book profit. The words “provision” and “reserve” as explained in Part III of Schedule VI of the Companies Act, 1956 envisage that any amount which is in excess of a reasonable and necessary amount for the purpose of provision has to be treated as reserve and not as a provision. As the amount of Rs. 2,49,73,218 had been provided towards bad debts prematurely, the whole of the amount was unnecessary, hence the same was required to be treated as ‘reserve’ and not as ‘provision’. In view of this the book profit was required to be increased applying Clause (£>) of Explanation to Section 115JA(2).
9. During the course of hearing before us, the learned Counsel for the assesses argued that there was no dispute that Profit & Loss account drawn up by the assesses was in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Assessing Officer also started the computation of profits under Section 115JA from net profit as declared in the Profit & Loss account, of the assess. He, however, increased such net profit by the sum of Rs. 2,49,73,218 on the ground that provision for doubtful debts/advances was required to be added in view of Clause (c) of Explanation to Section 115JA(2). This Clause (c) pertained to the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. Provision for doubtful debts debited to Profit & Loss account of the assessee had nothing to do with any of the liabilities payable by the assessee. It concerned itself with the amount of debts due to the assessee which constituted an asset in the hands of the assessee and not liability. Thus, Explanation (c) had no relevance at all insofar as the amount in question was concerned. The learned CIT(A) instead invoked Clause (b) of the Explanation. According to the learned CIT(A), the provision for doubtful debts was uncalled for and it was in fact a reserve which was required to be added to the net profit as shown in the Profit & Loss account. Both the expressions “provision” and “reserve” have been defined in Part III of Schedule VI to the Companies Act, 1956. It was not open to the Income Tax Authorities to assign any other meaning or interpretation to these terms. In the case of Vazir Sultan Tobacco v. CIT [1981] 132 ITR 559′, the Hon’ble Supreme Court held that these terms have to be understood and applied in accordance with the provisions of the Companies Act. Hence as the assesses account having been drawn up in accordance with Part II and Part III of Schedule VI to the Companies Act, it was not open to either the Assessing Officer or the learned CIT(A) to question the treatment as given in the assesses accounts. The learned Counsel for the assessee referred to page 10 of the Annual Accounts and pointed out that provision for doubtful debts/advances was duly debited to the Profit & Loss account. He further referred to Schedule G to the Annual Accounts, wherein it was noted that the debts considered doubtful amounted to Rs. 2,81,02,754 as on 31st March, 1997 as against Rs. 31,73,472 as on 31st March, 1996. Thus, the provision was an integral part of the account of the assessee. That being so, it was not open to the Assessing Officer or the learned CIT(A) to arrive at any different finding or conclusion. The accounts of the assessee had been duly audited in accordance with the Companies Act. The Hon’ble Supreme Court had clearly held in the judgment in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 2732 that the Assessing Officer had no powers to go beyond the accounts prepared in .accordance with Parts II and III of Schedule VI to Companies Act, as duly furnished by the assessee before the statutory authorities under the Companies Act.
10. The learned Counsel for the assessee argued that in the impugned order, the learned CIT(A) had blurred the distinction between “provision” and “reserve”. A reserve was in the nature of an apportionment of profits in the accounts of a company. The amount of reserve would therefore represent capital available with the company. It could never go to reduce the value of the assets. It was only a provision made that could have the effect of reduction in the value of assets. A reserve could never reduce the value of an asset. In Schedule VI to the Companies Act, reserve was defined negatively and provision positively. It is only when an amount did not qualify to be a provision that it could be treated as reserve. In the case of the assesses, the amount debited to Profit & Loss account was prima facie in the nature of provision and therefore the learned CIT(A) grossly erred in ignoring provisions of Clause 7(i) of Part III of Schedule VI of the Companies Act.
11. Thereafter the learned Counsel for the assesses also placed strong reliance on the judgment of 1TAT Mumbai Bench ‘C’ in the case of Rashtriya Chemicals & Fertilisers Ltd. [IT Appeal No. 5127 (Bom.) of 1994, dated 29-11-1997] for assessment year 1990-91 and on the judgment of IT AT Mumbai Bench ‘D’ in the case of Maharashtra State Electricity Board [IT Appeal No. 955 (Mum.) of 2001, dated 6-8-2001] for assessment year 1997-98.
12. The learned D.R. argued that under the provisions of Section 211(2) of the Companies Act, it has been laid down that the accounts of a company must give true and fair view of the profits of the company. Provisions of Part II of Schedules VI to the Companies Act also laid down that the profit and loss account of a company shall be so made out as to disclose clearly the results of the working of the company during the period covered by the account. The provisions of Part II and Part III of Schedule VI arc therefore subservient to the basic requirement of true and fair view of the profits of the company. Thus, even under the Companies Act, an assesses could not write off a part of debt which had not actually become bad. The learned DR further argued that there was no mention to provision for bad and doubtful debt without actual write off of the corresponding debt either in Part II or Part III of Schedule VI. In the instant case, the assesses did not touch the asset side at all and directly created a provision in the balance sheet by debiting certain amounts to the profit and loss account. Such a course of action was not permissible at all under Part II and Part III of Schedule VI to the Companies Act. The judgment in the case of Apollo Tyres Ltd. (supra) laid down that the Assessing Officer cannot dispute the accounts maintained in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act. Thus, the power of the Assessing Officer to decide whether or not the accounts were prepared in accordance with Part II and Part III of Schedule VI has not been affected by the judgment. The same also applied to the power of the assessing authority or appellate authority to determine whether a particular amount debited to profit and loss account and appearing in the balance sheet was in substance a ‘provision’ or a ‘reserve’. Whether an amount was in the nature of ‘provision’ or ‘reserve’, would depend upon the facts of the case and not on the nomenclature given by the assesses.
13. We have carefully considered the rival submissions. During the course of hearing before us, the learned Counsel for the assesses has relied upon the decisions of the Tribunal in the case of Maharashtra Slate Electricity Board (supra) and in the case of Rashtriya Chemicals & Fertilizers Lid. (supra). Both these decisions arc to the effect that Explanation (c) to Section 115JA(2) cannot be invoked in respect of a provision for bad and doubtful debts. The learned CIT(A) has also held the same view in the impugned order. Thus, both these decisions of the Tribunal strengthen the impugned order and have nothing therein to oppose the final view taken by the learned C1T(A) that the adjustment made by the Assessing Officer purporting to act under Explanation (c) should have been made under Explanation (b) instead of (c). It is true that the Assessing Officer had invoked Explanation (b), but it has not been disputed before us that the learned CIT(A) had the powers and jurisdiction to invoke Explanation (c) instead of Explanation (b). It is settled legal position that CIT(A) has plenary of powers over the assessment order in appeal before him and he can do what the Assessing Officer has omitted or failed to do. The CIT(A) also has powers of enhancement of income as assessed by the Assessing Officer. Moreover, it is settled legal position now that wrong reference to a section does not vitiate an order if the order is lawfully made under some other section of the Act. The mention of a particular section or the label or nomenclature stated is not determinative of the correctness or validity of the assessment. Reference in this behalf may be made to the judgments Hukum Chand Mills Ltd. v. State of MP [1964] 52 ITR 583 (SC), L. Hazari Mal Kuthiala v. ITO [1961] 41 ITR 12 (SC), CIT v. Motilal Padampal Sugar Mills Co. (P.) Ltd. [1979] 118 ITR 825 (All.) and CIT v. National Builders [1991] 192 ITR 250 (Delhi).
14. Apart from the two decisions of the Tribunal discussed in the preceding paragraph, the learned Counsel for the assessee placed heavy reliance upon the judgment of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra). According to the learned Counsel for the assessee in view of this judgment, the Assessing Officer had no powers to question the accounts of the assessee. On consideration, we do not see any assistance at all to the case of the assess from the judgment. The learned CIT(A) as well as the learned Assessing Officer have not substituted any figures of amounts by their own figures. Both the Assessing Officer as well as the learned CIT(A) have invoked certain specific provisions of Explanation appended to Section 115JA(2). In the judgment in the case of Apollo Tyres Ltd. (supra), the Hon’ble Supreme Court has recognized that the Assessing Officer had power of making increases and reductions as provided for in the Explanation. This inspect is clear from the following-extract at page 280 :-
Therefore, we arc of the opinion, the Assessing Officer while computing the income under Section 1 15J has only the power of examining 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 the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J.
We, therefore, hold that the learned CIT(A) had the jurisdiction to make such adjustments as he considered necessary under the provisions of Explanation to Section 115JA(2). The crux of the matter in this appeal is therefore as to whether or not the CIT(A) has correctly applied Explanation (b) to Section 115JA(2) that reads as under :-
(b) the amounts carried to any reserves by whatever name called
During the course of hearing before us, the learned Counsel for the assessee has argued that both the expressions “provision” and “reserve” have been defined in Part III of Schedule VI to the Companies Act, 1956 and therefore, no different meaning or interpretation should be assigned to these terms. For this purpose, the learned Counsel has placed reliance on the judgment in the case of Vazir Sultan Tobacco (supra). We find, in the first instance, the expression “reserves” appearing in Explanation (b) has been qualified to be “by whatever name called”. It is therefore clear that the Assessing Officer while proceeding to make an adjustment under Explanation (b) has power to examine whether any “provision” created in the accounts of the assessee may be considered or construed to be a ‘reserve’ and not ‘provision’. Further, we find that such a course of action has been contemplated in Clause 7(2) of Part III of Schedule VI to the Companies Act itself. This Clause 7 reads as under :-
7(1) For the purpose of Parts I and II of this Schedule, unless the context otherwise requires,-
(a) 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;
(b) the expression “reserve” shall not, subject as aforesaid, include 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;
(c) the expression “capital reserve” shall not include any amount regarded as free for distribution through the profit and loss account; and the expression “revenue reserve” shall mean any reserve other than a capital reserve;
and in this sub-clause the expression “liability” shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
(2) 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 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.
It is therefore seen that under Section 7(2) any excess amount of provision, even if resulting into diminution in value of assets has to be treated as a ‘reserve’ and not as a ‘provision’. In the impugned order, the learned CIT(A) has on the basis of admitted facts of the case held that the assessee’s claim of provision for bad and doubtful debts was premature. He has held that where the amounts had become bad or doubtful, the assessee had proceeded to write the same off in the ledger account and in other cases, the assessee simply created a provision without affecting the accounts of the parties in any manner whatsoever. The learned CIT(A) has also taken note of the fact that under the provisions of Foreign Exchange Manual, the assessee was not entitled to write off these amounts for want of expiry of prescribed period of time. The learned CIT(A) has also taken note of the fact that as at the end of the accounting year, the assessee had reasonable hopes of recovery of the amount and such hopes indeed materialized in subsequent accounting periods. In our opinion, the learned CIT(A) has arrived at the conclusion that the whole of the amount of the provision was unnecessary on valid and cogent reasons. That being so, the learned CIT(A) had the jurisdiction under Explanation (b) as well as the sanction of clause 7(2) of Part III of Schedule VI to the Companies Act for treating the amount as ‘reserve’ and not as ‘provision’ and thereby adding the same back in accordance with Explanation (b) to Section 115JA(2) of the Act. We, therefore, uphold the order of the learned CIT(A) in this respect.
15. The second issue raised in this appeal relates to the sum of Rs. 1,07,321 in respect of the amount debited to the profit and loss account under the head “income tax of earlier years”. The learned Counsel for the assessee explained that in respect of interest receivable from M/s. Mahendra G. Mehta, the assesses had credited gross interest of Rs. 4,73,309. The party deducted tax at source amounting to Rs. 1,07,321 but failed to give necessary certificate of deduction of tax at source to the assessee. In spite of best efforts, such certificate could never be obtained from the party and therefore finally the assesses had to write off the amount as representing short recovery of the income. The learned CIT(A) has rejected the assessee’s contention on the ground that no such amount had been written off in the ledger account of the party. During the course of hearing before us, the learned Counsel for the assessee argued that as the assessee included the amount as provision for bad and doubtful debts, it was not written off in the accounts of the party. This however did not alter the basic position that the amount had become irrecoverable. On consideration of the matter, we are of the view that the authorities below should have based their findings on the facts of the case rather than on technicalities. If inspite of diligent efforts, the accesses could not recover the full amount due from M/s. Mahendra G. Mehta already credited as income in the accounts of the assesses either in cash or in the form of certificate of lax deducted, the assesses was justified in claiming the deduction of the same during the previous year. We, there fore, direct the Assessing Officer to allow the assessee deduction of Rs. 1,07,321 in respect of computation under Section 115JA.
16. In this appeal, the assessee has also disputed disallowance of assessee’s claim of bad debt under Section 36(1)(vii) in the regular assessment. This claim of the assessee cannot be accepted for the reasons as mentioned in the order of the learned CIT(A) as well as in view of the amendment to Section 36(1)(W;) by way of insertion of Explanation by the Finance Act, 2001 with retrospective effect from 1-4-1989.
17. Lastly, the assessee has disputed levy of interest under Sections 234B and 234C of the Act. The short basis for the assessee’s challenge is that the assessee was not liable to make any payment of advance tax in respect of amount of tax payable under the provisions of Section 115JA of the Act. The learned Counsel for the assessee has relied upon the some Tribunal decisions and the judgments of Hon’ble Karnataka High Court in Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519. The learned D.R. has relied upon the decision of Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.) and the judgments of various High Courts in Kerala Suite Coir Corporation Ltd. v. Union of India [1994] 210 ITR 1212 (Ker.), Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862 (Gauhati) and Itarsi Oils & Flours (P.) Ltd. v. CIT [2001] 250 ITR 6863 (MP). We find that the preponderance of judicial opinion is in favors of the Revenue and against the assessee. Respectfully following the view supported by various High Courts’ judgments relied upon by the learned D.R., we reject this ground of appeal of the assessee.
18. In the result, this appeal is partly allowed.