ORDER
Nathzi Ram, A.M.
1. The appeal preferred by the assessee-company is directed against the order of the CIT (Appeals) for the assessment year 1990-91. The assessee has raised the following grounds of appeal :-
“(i) On the facts and circumstances of the case (as explained in the Statement of Facts attached hereto as an Appendix) the learned Commissioner of Income-tax (Appeals), erred in law as well as in facts in refusing to accept the contention of this Appellant that the provisions for bad and doubtful debts made in the accounts of appellant for the relevant accounting year should be allowed as deduction while computing the liability to tax under the Special provisions of Section 115-J of the Income-tax Act, 1961.
(ii) On the facts and circumstances of the case the learned Commissioner of Income-tax (Appeals), erred in law as well as in facts in holding that the denial of the plea for rectification made by the assessee, at the hands of the Assessing Officer was justified.
(iii) On the facts and circumstances of the case the learned Commissioner of the Income-tax (Appeals) erred in law as well as in facts in refusing to intervene with the assessment made by the Assessing Officer under the special provisions of section 115(J).”
2. The facts, in brief, are that the assessee-company in the return filed declared net profit for the purpose of Section 115-J at Rs. 19,171.75 lakhs. The Assessing Officer made adjustments on account of the provision for doubtful debts, loan and advances, accrued interest and sundries of Rs. 2869.89 lakhs among others and 30% of the book profit so computed was charged to tax under section 143(1A) of the income-tax Act. The Assessing Officer also charged interest under sections 234B and 234C of the Income-tax Act. The assessee-company moved an application under section 154 before the Assessing Officer wherein it was contended that the adjustment made was beyond the scope of section 143(1A) of the Act and that the demand raised was not valid. It was also contended that provisions of Section 115-J were not applicable to the facts of the assessee-company and in support reliance was placed on the submissions made in the assessment proceedings for the assessment year 1989-90. It was also claimed that the assessee had assessable loss for the current year as per the return and also brought forward losses to be set off against the income. It was also claimed that after the provisions of Section 115-J were attracted the book profit computed in the manner prescribed would amount to a negative figure. It was also contended that the adjustment made on account of provision for doubtful debts, loans, advances etc., was not correct. Interest under sections 234B and 234C has also been wrongly charged, on the total income computed under Section 115-J. The Assessing Officer noted that on the facts of the present case provisions of Section 115-J were applicable. It was also pointed out that in the return filed the assessee itself has given the following computation of total income as per provisions of Section 115-J :-
"Net profit as per profit & loss a/c 224,96.12 lakhs Provisions no longer required 29,74.47 " Adjusted net profit 195,21.65 " Profit on export activities 3,49.90 " Minimum profit 191,71.75 "" 3. The assessee suo motu filed the return showing 3096 of the book profit as per the provisions of Section 115-J. The Assessing Officer, therefore, held the view that provisions of Section 115-J have been correctly applied.
4. As regards the adjustments made, the Assessing Officer noted that the expression “ascertained liability” has not been defined in Section 115-J. The provision by definition in part 3 of Schedule VI of the Companies Act is an amount retained by way of providing for any known liability, the amount of which cannot be determined with substantial accuracy. The provision envisaged that though the existence of liability is known, the amount is not determinable. He further noted that the provision for doubtful debts, loans, advances etc., was in the nature of provision and not ascertained liabilities and hence called for adjustment as per clause (c) below Explanation to Sub-section (1) to Section 115J of the Income-tax Act and there being no apparent mistake the assessee’s objection against adjustment made in this respect was rejected. The Assessing Officer also rejected the claim of the assessee against charging interest under sections 234B and 234C of the Income-tax Act. Aggrieved, the assessee challenged the finding so given by the Assessing Officer before the CIT(A) and the submissions made before the Assessing Officer was reiterated.
5. The main objection raised was against the adjustment made of the provision for bad and doubtful debts, loans and advances etc. It was contended on behalf of the assessee before the CIT (Appeals) that the provisions for bad and doubtful debts is made against the payments from customers where outstandings are more than three years old except where a possibility of realisation is there. In the case of debts from Govt. Departments, public undertakings, provision is made depending upon the merits of each case. It was also explained that provision for doubtful loans and advances is made which are of unsecured nature and considered bad or doubtful from the point of view of realisation and had remained outstanding for a considerable period of time. It was also explained that total amount of the provision made of Rs. 2869.85 lacs comprised of amount of bad and doubtful debts of Rs. 1152.21 lacs and the amount of bad and doubtful sundaries of Rs. 1717.64 lacs. It was further explained that for the purpose of determination of book profits as per provisions of Section 115-J the net profit is ascertained in accordance with the provisions of parts 1 and 2 of Schedule VI to the Companies Act and this is to be increased among other things, by the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities. Clause (c) of Explanation to Section 115-J covers only unascertained or contingent liabilities whereas bad debts are ascertained and represent exact amounts owed to the assessee and which have become irrecoverable. It was, therefore, contended that it is the ascertainability which qualifies the provision made in the accounts for allowance under section 115-J and not the recoverability. According to the assessee ascertained liability has not been defined in the Income-tax Act. It was further pointed out that part 3 of Schedule VI to the Companies Act defines provision as any amount written off or retained by way of providing for diminution in the value of assets or retained by way of a known liability the amount of which cannot be ascertained with substantial accuracy. The provision thus made for bad and doubtful debts etc., is in light of such procedure. It was further contended that the process of ascertainment of liability is related to the computation of a fictional income called as book profit the benefit of interpretation that provisions for bad and doubtful debts are indeed ascertained liabilities should be given to the assessee. It was, therefore, prayed that the adjustment made on account of provision for bad and doubtful debts to the book profit shown was not justified.
6. The CIT (Appeals) upheld the finding given by the Assessing Officer about the adjustment made of the provision for bad and doubtful debts with the following observations :-
“I have considered the submissions made on behalf of the appellant company. Under the provisions of Section 143(1)(a) the Assessing Officer is entitled to make prima facie adjustment based on information available in the return filed alongwith accounts and documents filed therewith. According to clause (c) of Explanation to Section 115-J(1A) the Assessing Officer while computing the book profit is expected to make adjustments which inter alia provides for additions of the amounts set aside for provisions made for meeting liabilities other than ascertained liabilities to the net profit as shown in the P&L account for the relevant period to the previous year. The provisions for doubtful debts, loans and advances and accrued interest and sundaries are provisions which cannot be considered as unascertained liabilities. In fact if the amounts had become bad the same would have been written of as bad debts rather than the provisions being made for the same, in the books of the company. Since the amounts in question are not an ascertained liability, provision had been made by the appellant company, has rightly been disallowed by the Assessing Officer. In view of the foregoing, it is held that the Assessing Officer has rightly denied the plea for rectification of the additions made in regard to the above provision, hence the appeal is dismissed on this ground.”
7. The CIT(Appeals) also upheld the action of the Assessing Officer about the applicability of provisions of section 115-J to the facts of the assessee’s company.
8. It was also pleaded before the CIT(Appeals) that the assessee company filed a return on 20-12-1990 declaring loss of Rs. 186889.58 lakhs after adjusting unabsorbed depreciation of past years brought forward. The Assessing Officer processed this return under section 143(1)(a) after subjecting the assessee-company to the sub-provisions of section 115J. It was claimed that return so filed needed revision on account of the following :-
(i) that depreciation in respect of the assets could not be ascertained correctly at the time of filing of the original return;
(ii) figures of minimum profit under section 115J having undergone changes on account of a host of factors.
9. The assessee, therefore, filed a revised return under section 139(5) on 19th September 1991. Based on latest information, claim on account of depreciation was revised to Rs. 82288.24 lakhs. The income from business was revised to Rs. 5223.08 lakhs as against the book profit shown in the original return at Rs. 19171.75 lakhs. The amount of income was ascertained without considering possible deductions on account of losses or depreciation as envisaged under section 115J of the Income-tax Act. It was also explained that the assessee-company was entitled to deduction of an amount equivalent to Rs. 569.78 crores on account of lower of losses or depreciation in respect of past financial year since 1960-61. It was also claimed that for the assessment year 1989-90 the assessee-company claimed deduction of past losses of Rs. 569.78 crores against the net profit of Rs. 358.40 crores. There was, therefore, left an amount of Rs. 217.07 crores unadjusted while computing the book profit for the assessment year 1989-90 and this amount was available for set off while computing the income under section 115J of the current assessment year 1990-91. It was, therefore, claimed that working of the book profit under section 115J has to be computed afresh and there being book loss of Rs. 2534.87 lakhs the provisions of section 115J would not apply for the current year. The CIT(A) also rejected such claim with the following observations :-
“I have considered the submissions made on behalf of the appellant company. An intimation under section 143(1)(a) dated 2-8-1991 has been sent to the appellant company on the basis of the return filed on 20-12-1990. The revised return was filed only on 19-9-1991. As such the revised return filed in September 1991 is not relevant for the purposes of the appeal against the rectification order filed by the appellant company. It is also seen that the Assessing Officer has computed book profit under the provisions of section 115J on the basis Annexure-III filed alongwith the return. The Assessing Officer is expected to determine the book profit under section 115J if the relevant income as per return of income is below 30% of the book profit of the company for the year in question. Since as per return there was returned loss of Rs. 186889.58 lakhs, the Assessing Officer has rightly restored to the provisions of section 115J on the basis of the working at Annexure-III. No claim for deduction on account of carried forward losses or unabsorbed depreciation has been made by the appellant company in Annexure-III. As Annexure-V there is a statement of unabsorbed depreciation of earlier years. There is no statement indicating any loss of earlier years to be carried forward. There is no mention of any deduction on account of carried forward loss or unabsorbed depreciation in Annexure-III. Prima facie it is not possible to allow depreciation as indicated at Annexure-V as liabilities or otherwise on the same is not free from doubt. More so when no such claim had been made in the computation at Annexure-III for the purpose of section 115J.”
10. The assessee-company being aggrieved with the finding so given by the CIT (Appeals) is now before the Tribunal for redressal.
11. The learned counsel for the assessee reiterated the submissions made before the lower authorities and further advanced extensive arguments in support of the said submissions. The learned counsel also pointed out that on identical facts the Revenue made adjustment on account of provision for bad and doubtful debts etc., in the subsequent assessment year 1991-92 and the same was directed to be deleted by the CIT (Appeals). According to learned counsel the Revenue has not challenged the said decision of the CIT (Appeals) before the Tribunal and the same has been accepted. Having done so there is no justification for making any addition on account of the provision for bad and doubtful debts etc., by way of adjustment in the current assessment year 1990-91.
12. The learned DR. on the other hand has relied upon the orders of the lower authorities and he also made extensive submissions in support thereof.
13. We have carefully considered the facts, material available on records and the rival submissions. The undisputed facts are that the assessee-company was registered as a company on 24th January 1973 under the Companies Act. It is a Government company within the meaning of section 617 of the Companies Act. On its incorporation it started functioning as an holding company with several subsidiaries like Hindustan Steel Ltd., Bokaro Steel Ltd. etc. On its incorporation in January 1973 investments of the Government of India in such of the companies made as subsidiaries of SAIL, were transferred to SAIL. The SAIL made further investments in those companies till it was restructured w.e.f. 1-5-1978. As a result of restructure in the year 1978 some of the subsidiaries like National Mineral Development Corporation Limited became independent Companies and the remaining subsidiaries became operative units of SAIL which became an holding company. These subsidiaries like Hindustan Steel Ltd., Bokaro Steel Ltd. had sustained losses during the period between financial year 1960-61 and the year of restructuring 1978. Some of these units also suffered losses even after restructuring. According to the assessee-company the losses suffered from 1960-61 to 1983-84 were of Rs. 569.78 crores after providing for depreciation of Rs. 892.64 crores and in some of the other financial years during this period these subsidiaries gained profits of Rs. 506.36 crores. We find that for the assessment year 1989-90 the assessee-company claimed lower of the losses or depreciation suffered since 1960-61 as deduction in computation of book profit under section 115J of the Income-tax Act. The assessee company’s appeal for that assessment year was decided by the Tribunal in its order in Steel Authority of India Ltd. v. Dy. CIT [1991] 38 ITD 193 (Delhi) wherein the issue was dealt by the Tribunal in paras 10 to 20 against the assessee-company, and in favour of the revenue. As the loss sustained in earlier years had already been got set off against the profits, the claim made for deduction on account of the lower of the loss or depreciation was therefore rejected. It was also held that provisions of section 115J are fully applicable to the assessee-company. Since the facts are identical to that of the assessment year 1989-90 there is we need not go into the merits of the claim made in this behalf and respectfully following the Tribunal’s decision for the assessment year 1989-90 the claim made for the current year is rejected.
14. As regards the ground raised against the adjustment made of the provision for bad and doubtful debts, loan, advance etc., we find that a similar issue came up for consideration before the CIT (Appeals) for the assessment year 1991-92 the assessee-company made a provision for bad and doubtful debts, loans and advances etc., of Rs. 2540 lakhs net arrived at on account of the following :-
Provision for doubtful debts loans
and advances accrued interest & sundries (+) Rs. 5,276.00 lakhs
Provision no longer required written back (-) Rs. 2,735.95 lakhs
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Net adjustment Rs. 2,540.05 lakhs
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15. The CIT (Appeals) also noted that provision made for bad and doubtful debts etc., comprised of the following :-
Provision for bad and doubtful debts, loans,
advances and accrued interest Rs. 1,705.42 lakhs
Provision for bad and doubtful sundries Rs. 3,570.58 lakhs
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Rs. 5,276.00 lakhs
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16. The CIT (Appeals) considering the provisions of section 143(1)(a) and following the decisions in the cases of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj.); CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom.); Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166/15 Taxman 286 (Guj.) came to the conclusion that adjustment made of provision for bad and doubtful debts, loans, advances etc. was prima facie not valid with the following observations :
“7. Having regard to the provision of law and the ratio of the judgment referred to above, the short question that needs to be answered in the present case is whether there was any material before the Assessing Officer by way of the information available in the return and the accounts or documents accompanying in that show that the deduction claimed by the appellant of Rs. 5,276 lakh’s was prima facie inadmissible. If we peruse the return and the documents accompanying it, it will be seen that in its profits & loss account the appellant has debited a sum of Rs. 40,405.44 lakhs under the head ‘Other expenses and provisions’. Details under this head were available in Schedule 2.11. These details included the following, amongst others –
Year ended Year ended
Provisions 31-3-1991 31-3-1990
Doubtful debts, loans &
advances and accrued Intt. 1705.42 1152.21
Sundries 3570.58 1717.64
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5276.0 2869.85
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8. It is apparent from here that the Assessing Officer has picked up the figures for adjustment in his adjustment explanatory sheet. If we carefully look at the above narration, it will be seen that doubtful debts constituted one part only of the total 1705.42 lakhs, and this figure also included, Provision on account of loans and advances and accrued interest. Apparently the figure of 3507.58 lakhs appearing under the narration ‘sundries’ was an independent sub head and did not have anything to do with either the doubtful debts or the loans and advances or the accrued interest. Thus unless and until the Assessing Officer bid obtained the details and information regarding the exact bifurcation of provisions under various heads described above, it could not have been said as to what amount pertained to which particular head and whether the head ‘sundries’ also included any doubtful debts. As has already been stated above if any further enquiry was necessary in connection with the claim of deduction, the deduction cannot be said to be prima facie inadmissible. If we further peruse the documents accompanying the return it will be seen that in Schedule No. 1.9 (which is a schedule to the Balance Sheet) the figure of provision for doubtful debts as on 31-3-1991 is Rs. 1679.74 lakhs. Such provision as on 31-3-1990 as per this schedule is of a sum of Rs. 1450.53 lakhs. It could thus perhaps be said that there was a further provision during the year only of Rs. 229.21 lakhs i.e., the difference between 1679.74 lakhs and 1450.53 lakhs. But then there was no information available in the return or the documents accompanying the return on the basis of which it could be conclusively said that provision during the year was only of Rs. 229.21 lakhs and not more. Similar is the position with regard to Schedule 1.11 which makes a mention of provision for doubtful interest and schedule 1.13 which makes a mention of provision for doubtful loans and advances and Schedule 1.8 which makes a mention of provision for stores and spares and raw materials. Further if the adjustment made by the Assessing Officer of Rs. 5276 lakhs in respect of provisions referred to above was correct, then there was no scope for adjusting the sum of Rs. 2,735.95 lakhs shown as an income in the Profit & Loss Account being provisions no longer required written back, as these provisions written back apparently related to the earlier years and could not have any relevance to the provision made during the year.
9. In his order of rectification the Assessing Officer has rejected the application of the appellant only on the ground that section 36 authorised deduction in respect of bad debts on the basis of actual write off. It would thus be seen that this order is confined only to one portion of the several provisions made as per schedule 2.11. Furthermore, it is to be noted that no particular form or method of writing off of bad debt is prescribed or provided for. According to the Dictionary for Accountants by Eric L. Kobler, Fifth Edition, page 497 the expression “Written off” means, “to transfer the balance of an account previously recorded as an asset to an expense account or to the Profit & Loss Account”. It has been held in the cases of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj.); CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom.), Sarangpur Cotton Mfg. Co. ITD v. CIT [1983] 143 ITR 166/15 Taxman 286 (Guj.) that it is not essential that the debtors’ individual account should be squared of by an appropriate credit entry for writing off to be complete. Even if the credit is made in ‘Bad Debt Reserve Account’ against debit to the Profit & Loss Account, the writing off is complete. In view of the above, it cannot be said that the writing off done by the present appellant was defective. If we examine the Tax Audit Report, it will be observed that in their report in Form No. 3CD, Item 9C the Auditors have left the space in front of the column “Particulars of any liability of a contingent nature debited to the Profit & Loss Account” blank. It is thus apparent that there was no information in the return or the accompanying documents to show prima facie that the sum of Rs. 5276 lakhs debited to the Profit & Loss Account was on account of provision for any liability of a contingent nature.
10. Having regard to all the aforementioned facts and circumstances I am of the view that there was no information or material available in the return and the accounts or documents accompanying it on the basis of which it could be said that deduction claimed of a sum of Rs. 5,276 lakhs was prima facie inadmissible, so as to disallow it at the intimation stage. The Assessing Officer was, therefore, not justified in rejecting the application of the appellant under section 154.”
17. It is claimed by the learned counsel of the assessee that the finding given above by the CIT (Appeals) for the assessment year 1991-92 has not been further challenged by the Revenue and the learned D.R. has not disputed his version.
18. The book profits as per section 115J is required to be computed in accordance with the provisions of Parts I and II of Schedule VI to the Companies act subject to the adjustment made therein as per various clauses of the Explanation to the section. The assessee-company has computed the book profit as per provisions of Parts II and III of Schedule VI to the Companies Act. This has not been disputed by the revenue. The revenue has also not pointed out any defect or variation in computation of the book profit as per Parts II & III of Schedule VI to the Companies Act. We find that while preparing balance-sheet as Part II of Schedule VI to the Companies Act the amount of debt is to be reduced by the provision for bad and doubtful debts and for doing provision for bad and doubtful debts is to be debited to Profit & Loss Account. The assessee-company under a consistent method followed has been making such provision for bad and doubtful debts each year and to the extent recoveries are made in respect of the provision for bad and doubtful debts in earlier years the same is adjusted against the provision for bad and doubtful debts in the current year under the head “Provision no longer required written off”. The assessee-company has thus made provision for bad and doubtful debts while computing the book profit as per Part II of Schedule VI to the Companies Act.
19. As per provisions of section 115J where in the case of a company the total income chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of book profit, book profit is to be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Such book profit is to be increased as per the Explanation to the section. Explanation to section 115J is reproduced hereunder :-
“1115J. (1). ……
Explanation – For the purposes of this section, “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 –
(a) the amount of income-tax paid or payable, and the provision therefore; or
(b) the amounts carried to any reserves other than the reserves specified in section 80HHD or sub-section (1) of section 33AC, by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or
(g) the amount withdrawn from the reserve account under section 80HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section; or
(h) the amount credited to the reserve account under section 80HHD, to the extent that amount has not been utilised within the period specified in sub-section (4) of that section.
20. It would be seen from above that none of the clauses under the Explanation provides for add back of the amount representing provision for bad and doubtful debts. The Assessing Officer has, however, made the adjustment of provision for bad and doubtful debts as per clause (c) which refers to the amount or amounts set aside to provision made for meeting liabilities other than ascertained liabilities. The adjustment, therefore, could be made under clause (c) of the amount provided for unascertained liabilities or contingent liabilities. The provision in the present case made and added back by the Assessing Officer is not for meeting the unascertained or contingent liability but it is for bad and doubtful debts which are in fact assets and not liabilities. Therefore, in our considered opinion no adjustment could be made for the provision of bad and doubtful debts etc., under clause (c) of the Explanation to section 115J in the book profit prepared as per Parts II & III of Schedule VI to the Companies Act. In case where in view of CIT(A) order for 1991-92 it is debatable needing long drawn arguments for and against the claim.
21. Having regard to the above, finding given by the CIT (Appeals) for the assessment year 1991-92 on the issue and which has been accepted by the revenue, the adjustment made of the provision for bad and doubtful debts in the current year under section 143(1)(a) is not held valid and the addition made is directed to be deleted. Since the addition made on account of bad and doubtful debts, loans, advances etc., stand deleted, the interest charged under sections 234B and 234C would no longer be leviable.
22. Moreover, the Tribunal in its order for the assessment year 1989-90 Steel Authority of India case (supra) has deleted the interest charged under section 234B under similar circumstances. Considering the facts and respectfully following the aforecited decision, the interest charged under sections 234B and 234C is directed to be deleted.
23. In the result, assessee’s appeal is allowed.
U. B. S. Bedi, J.M.
24. I have gone through the proposed order of learned Brother and despite my best efforts and persuasion. I am not able to agree with his findings or conclusions as arrived at by him and my reasons for the same are given here below.
2. The grounds raised in this appeal are as under :
Grounds of Appeal
(i) On the facts and circumstances of the case (as explained in the Statement of Facts attached hereto as an Appendix) the learned CIT (Appeals) erred in law as well as in facts in refusing to accept the contention to this appellant that the provisions for bad and doubtful debts made in the accounts of appellant for the relevant accounting year should be allowed as deduction while computing the liability to tax under the special provisions of section 115(J) of the Income-tax Act, 1961.
(ii) On the facts and circumstances of the case, the learned CIT(Appeals) erred in law as well as in facts in holding that the denial of the plea for rectification made by the assessee at the hands of the Assessing Officer was justified.
(iii) On the facts and circumstances of the case, the learned CIT (Appeals) erred in law as well as in facts in refusing to intervene with the assessment made by the Assessing Officer under the special provisions of Section 115(J).
Relief claimed on appeal
(i) The Assessing Officer having jurisdiction over this appellant be directed to accept the contention of this appellant that the provisions made for bad and doubtful debts and doubtful advances etc., in the appellant’s accounts for the relevant accounting year, in fact denoted the provisions for ascertained liabilities entitled to the deduction envisaged by Clause-C of the first part of the explanation below sub-section IA of Section 115J of the Income-tax Act, 1961.
(ii) The Assessing Officer having jurisdiction over this appellant be directed to rectify the assessment made by him after taking into consideration the relief indicated in (i) above and to conclude the assessment accordingly.
(iii) The Assessing Officer having jurisdiction over appellant be directed to refund the extra income-tax including surcharge of Rs. 4,64,92,000 paid on account of the addition made in respect of the provisions for bad and doubtful debts while computing the liability under section 115J, and
(iv) The Assessing Officer having jurisdiction over this appellant be directed to give any such additional/consequential relief that may be available in this regard.
3. Facts are like this that assessee is a public sector undertaking running several steel plants. The Assessing Officer invoked the provisions (if Section 115-J, as, according to him, total income computed after taking into consideration unabsorbed depreciation of past years was less than 30% of its book profits of the year in question. The assessee raised certain objections before the Assessing Officer regarding applicability of the provisions of section 115J etc. These are dealt with by the Assessing Officer in detail on pages 4 to 8 of his order. While arring at his conclusions, the Assessing Officer has taken support from the CBDT Circular No. 495 dated 22-9-1987 and the example given in para 36.5 of the said circular illustrating how the new section will be applied. He has thus computed the book profits at Rs. 3,52,71,32 lakhs and the amount liable to advance tax under section 115J at Rs. 1058170 lakhs.
4. Assessee preferred appeal against the order of Assessing Officer before the first appellate authority and challenged in first appeal the computation of book profit at Rs. 352.71 lacs without allowing benefit of deduction of loss of past financial years amounting to Rs. 489.60 crores (revised figure as per additional ground of appeal Rs. 569.78 crores) being lower than the past depreciation of Rs. 892.64 crores.
5. It was contended on behalf of the assessee that section 115-J of the Income-tax Act is in the nature of a legal fiction deeming 30% of the adjusted book profits of a company under the provisions of Companies Act, 1956. However, the quantum of the adjusted book profit is further to be reduced, inter alia, as per clause (iv) of Explanation to Section 115-J(1) according to which the said book profit of a company is to be reduced by the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the 1st proviso to section 205(1) of the Companies Act, 1956 are applicable. As this provision is in the nature of a relief or deduction or exemption to the assesses it has to be construed strictly and in favour of assessee only. The amount of loss or depreciation which has to be set off against the book profits is thus as per the provisions of clause (b) of the 1st proviso to section 205(1) of the Companies Act, 1956. The said provisions of the Companies Act only speaks of reduction of the lower of the business loss or depreciation of the different years since 1960 and does not give any indication by any express words that if there is any profit during the intervening years, the same is also to be adjusted against the amount of loss or depreciation to be deducted from the year for which dividend is to be declared. Hence the provisions of clause (b) of the 1st proviso to section 205(1) of the Companies Act stipulates deduction from the book profits of the lower of the business loss or depreciation of the past several years and not the loss or depreciation after adjustment of any profit during the intervening period, as has been interpreted by the Board Circular quoted by the Assessing Officer in his assessment order. It was also submitted that the circular cannot enlarge or clarify the intention of the legislature by adversely effecting the interest of the assessee. This is in tune with the accepted principles of interpretation of taxing statutes according to which a taxing statute has to receive a strict construction in favour of the subject and that it is not open to the court to debar from the normal rule of construction as the intention of the legislature has to be primarily gathered from the words that are used in the statute. To support this view certain case law has also been quoted. Further, it was contended that lower of the cumulative loss or depreciation would work to Rs. 569.77 crores. However, if the lower of two sums being the depreciation for 1983-84 is considered within the amount available for set off as per clause (iv) of the Explanation to section 115J(i) then it would come to Rs. 489.60 crores.
6. The learned CIT(A) while considering the submissions of the assessee and deliberating upon this issue in paras 6, 7, 8 and 9 held as under :
“I have considered the submissions made on behalf of both the sides. I have also examined the relevant records. The grounds raised in this appeal mainly relate to set off of book loss as per clause (iv) of Explanation to sub-section 1A of section 115J. The argument of the learned counsel is that if there is any profit in the intervening years, same should be ignored for the purpose of set off as contemplated by clause (iv) of Explanation to sub-section IA of section 115J. However, set off of loss or depreciation is governed by the provisions of clause (b) of first proviso to sub-section (1) of section 205 of the Companies Act, 1956. The appellant company, as can be seen from the records has drawn its balance sheet, trading and profit and loss accounts according to sixth schedule to the companies Act. In format given in that schedule it is specifically mentioned that ‘show here the debit balance of Profit and loss account carried forward after deduction of the uncommitted reserves, if any. On page 47 of the printed account for the period ending 31-3-88 (relevant to assessment year 1988-89) the company showed profit and loss account balance as profit of Rs. 7526.99 lakhs against which it adjusted losses of earlier years to the extent of Rs. 11,228.85 lakhs leaving a debit of Rs. 3701.86 lakhs, which is after-providing depreciation as per Companies Act.
7. Again for the period ended 31-3-89 (relevant to assessment year 1989-90) the company deducted loss of Rs. 3701.80 lakhs of earlier years on page 30 of the printed account that it was done after set off of depreciation from the book profits of Rs. 27,364.36 lakhs, leaving a net balance of Rs. 23,662.50 lakhs, which was carried forward to the company’s balance sheet. It would, therefore, appear that there was no book loss as is put forth by the appellant company.
8. Further even according to accountancy principles there could be only one profit and loss account and not two separate profit and loss accounts, one for profits and other for losses. That is perhaps the only cogent and fair way of depicting the true and correct affairs of a company. The appellant’s arguments that profit in the intervening years should be ignored add another fiction to a fiction (as called by the learned representative of the appellant) which is neither intended by the legislature, nor is feasible, if the language of section 115J is interpreted in proper perspective. The intention of the legislature has been clearly brought out in the explanatory notes on the Finance Act, 1987 (CBDT Circular No. 495 dated 22-9-1987 reported in 168 ITR) which has been relief upon by this Assessing Officer for his calculation and conclusions. It is not the case of the appellant that the Assessing Officer has wrongly interpreted the Board’s Circular or the calculation made on the basis of this circular are incorrect. The appellant’s only objection is that the said circular cannot enlarge the intention of the legislature by adversely affecting the interest of the assessee. As will be observed from a perusal of the said circular the Board has only stated or clarified the intention of the legislature and not enlarged it and that being so, I am afraid the case law quoted by the appellant also cannot be of any assistance to it, judgments having been delivered in a different context.
9. Having regard to the aforementioned facts and circumstances, no interference is called for to the order of the Assessing Officer in this behalf and the action taken by him is upheld.”
25. Aggrieved by this order of CIT(A), the assessee has filed further appeal and is before us. While reiterating the submissions as made before the CIT(A) has further contended that CIT(A) was unjustified in refusing to accept the contention of the assessee that the provision for bad and doubtful debts made in the accounts of the assessee for the relevant accounting year should be allowed as deduction while computing the liability to tax under the sub-provision of section 115J of the Income-tax Act, 1961. It was further submitted that CIT(A) has erred in law as well as in fact in holding that denial of plea for rectification, made by the assessee, at the hands of the Assessing Officer was justified. He was further unjustified in refusing to intervene that the assessment made by the Assessing Officer under sub-provisions of section 115J. The learned CIT(A) was unjustified in not directing the Assessing Officer to accept the contention of the assessee that the provisions made for bad and doubtful debts etc., in the assessee’s accounts for the relevant accounting year in fact denoted the provisions for ascertained liability entitled to deduction envisaged by clause (c) of the first part of the explanation below sub-section (1A) of section 115J of the Income-tax Act, 1961. It was further submitted that learned CIT(A) should have directed the Assessing Officer to rectify the assessment made by him after taking into consideration the relief as indicated above and to conclude the assessment accordingly. The learned counsel for the assessee pointed out that on identical facts, the revenue made adjustment on account of provision for bad and doubtful debt etc., in the subsequent assessment year 1991-92 and same was directed to be deleted by CIT(A). According to the learned counsel, the revenue has not challenged the said decision of the CIT(A) before Tribunal and same has been accepted. Having done so, there is no justification for making any addition on account of provision for bad and doubtful debts etc., by way of adjustment in current assessment year i.e., 1990-91.
26. The learned DR, on the other hand, has relied upon the orders of authorities and he also made extensive submissions in support thereof. It was submitted that Assessing Officer has validly made the adjustment with regard to provisions for bad and doubtful debts as same is not allowable and CIT(A) has justifiably confirmed the action of Assessing Officer. In view of facts and circumstances and on the basis and reasoning given by lower authorities order impugned requires to be confirmed.
27. Facts of the case have been carefully considered alongwith material available on record to which attention of the Bench was drawn. The undisputed facts are that the assessee-company was registered as a company on 24th January, 1973 under the Companies Act, It is a Government Company within the meaning of section 617 of the Companies Act. On its incorporation it started functioning as a holding company with several subsidiaries like Hindustan Steel Ltd., Bokaro Steel Ltd. etc. On its incorporation in January 1973 investments of the Government of India in such of the companies made as subsidiaries of SAIL, were transferred to SAIL. The SAIL, made further investments in those companies till it was restructured w.e.f. 1-5-1978. As a result of restructure in the year 1978 some of the subsidiaries like National Mineral Development Corporation Limited became a holding company. These subsidiaries like Hindustan Steel Ltd., Bokaro Steel Ltd. as a consequence of restructure sustained losses during the period between financial year 1960-61 and the year of restructuring 1978. Some of these units also suffered losses even after restructuring. According to the assessee-company the losses suffered from 1960-61 to 1983-84 were of Rs. 569.78 crores after providing for depreciation of Rs. 892.64 crores and in some of the other financial years during this period these subsidiaries gained profits of Rs. 506.36 crores. It was observed that for the assessment year 1989-90 the assessee-company claimed lower of the losses or depreciation suffered since 1960-61 as deduction in computation of book profit under section 115J of the Income-tax Act. The assessee-company’s appeal for the assessment year was decided by the Tribunal in its order in Steel Authority of India Ltd. (supra) wherein the issue was dealt by the Tribunal in paras 10 to 20 against the assessee-company and in favour of the Revenue. As the loss sustained in earlier years had already been got set off against the profits the claim made for deduction on account of the lower of the loss or depreciation was therefore rejected. It was also held that provisions of section 115J are fully applicable to the assessee-company. Since the facts are identical to that of the assessment year 1989-90 there is no need to go into the merits of the claim made in this behalf and respectfully following the Tribunal’s decision for the assessment year 1989-90 the claim made for the current year is rejected.
28. As regards the ground raised against the adjustment made of provision for bad and doubtful debts, it is seen that the books profit as per section 115J requires to be computed in accordance with the provisions of Parts I to XI of Schedule VI to the Companies Act subject to the adjustment made therein as per various clauses of the Explanation to the section. The assessee-company has computed the book profit as per provisions of Parts II and III of Schedule VI of the Companies Act. Though in Schedule VI Part II, B vertical form provides for deduction of provisions from current liabilities and proviso but Part III of this Schedule does interpret in sub-clause (1) of clause 7 of Part III of Schedule VI, “For the purpose of Parts I and II of this Schedule, unless context otherwise require
(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 dissolution in value of asset, or retain by way of providing for any known liability of which the amount can’t be determined with substantial accuracy;
And sub-clause 2(b) of this clause 7 provides
“(b) any amount retained by way of providing for any known liability.”
29. And section 115J(1A) Explanation (f) reads as under :
“For the provisions of this section book profit means the net profit as shown in the profit and loss account for relevant previous year prepared under sub-section (1A) as increased by –
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or”
36(1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable.
30. Since only provision has been made and no bad or doubtful debt has actually been written off, it cannot be held that liability was ascertained. Moreover, keeping it as a reserve and when and if recovered, including it in income proves that it is not ascertained. Otherwise such allowance is not permissible, Assessing Officer could, therefore, make such adjustment by disallowing the claim made as same is not allowable deduction. Since there is no clear law which permits allowing provision for bad and doubtful debt, it cannot be said that issue is debatable. It is within the purview and domain of Assessing Officer of making adjustment in processing of the case. As law does not provide for giving of such relief and if for some reasons CIT(A) grants relief in some other year, it cannot be said that decision of CIT(A) is binding upon the Tribunal. When issue is before Tribunal, it is within its right and duty to decide the same as per law and moreover in tax proceedings res judicata is not applicable. Therefore, while upholding the action of CIT(A) on the basis and reasoning given by him, the appeal of the assessee in this regard is dismissed.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
31. Since in the above captioned appeal we have difference of opinion on the following point, the matter is submitted to the Hon’ble President for reference to the Third member :
“Whether, on the facts and circumstances of the case the Assessing Officer was justified in adding back the provision for doubtful debts, loans and advances in the book profit computed under section 115J by way of adjustment under section 143(1)(a) of the Income-tax Act, 1961 ?”
ORDER THIRD MEMBER
Shri M. K. Chaturvedi, Vice President
32. This appeal came before me as a Third Member to express my opinion on the following question :
“Whether, on the facts and circumstances of the case, the Assessing Officer was justified in adding back the provision for doubtful debts, loans and advances in the book profit computed under section 115J by way of adjustment under section 143(1)(a) of the Income-tax Act, 1961 ?”
33. I have heard the rival submissions in the light of material placed before me. Shri Ganesan, the learned counsel for the assessee appeared before me and argued the case. The Revenue was represented by Shri Satish Goel. The assessee is a public sector undertaking running several steel plants. It declared net profit in the return for the purpose of section 115J of the Income-tax Act, 1961, at Rs. 19171.75 lakhs. The Assessing Officer made adjustments on account of the provision for doubtful debts, loan and advances, accrued interest and sundries of Rs. 2869.89 lakhs for the purpose of computing the book profit.
34. Shri Ganesan invited my attention on para 8 of the Tribunal’s order. It was submitted that, no extra provision has resulted in the relevant assessment year. Thus, the adjustment made by the Assessing Officer in his order under section 143(1)(a) won’t survive. The learned counsel submitted a chart to demonstrate that there was no accretion to the provision, but it was a case of depletion to the provision. Para 8 of the order of the Tribunal was read out. It was submitted that this fact was brought to the notice of the Tribunal at the time of hearing.
35. In order to verify the veracity of the claim made by the learned counsel the matter was referred to the Assessing Officer, who in his reply vide letter dated 22nd August, 2000 stated as under :
“I have examined the assessment records of the company for the assessment year 1990-91 and find that the contention of the assessee is correct to the extent that there has been no increase in provision for doubtful debts, loans and advances as compared to the previous year. Therefore, the contention of the assessee that no addition to the book profit under section 115J on account of provision for doubtful debts, loans and advances was warranted seems correct.”
36. In view of the comments given by the Assessing Officer and after hearing both the parties on the point, I decide the issue in favour of the assessee and against the Revenue. I agree with the findings given by the learned Accountant Member.
37. The matter will now go before the Regular Bench for deciding the appeal in accordance with the opinion of the majority view.
