M/S.chettinad Cement Corpn., Ltd.,603, Anna Salai, Chennai-600 006 v. The Deputy Commissioner Of Income Tax,Company Circle I (3), Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 12.11.2018 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MR.JUSTICE N.SATHISH KUMAR Tax Case (Appeal) No.166 of 2009 M/s.Chettinad Cement Corpn., Ltd.,603, Anna Salai, Chennai-600 006.... Appellant -vs- The Deputy Commissioner of Income Tax,Company Circle I (3), Chennai.... Respondent Tax Case (Appeal) filed under Section 260-A of the IncomeTax Act, 1961 against the order of the Income-tax AppellateTribunalChennaiABench,dated12.06.2006inI.T.A.No.1619/Mds/2002 for the assessment year 1998-99, againstthe order of the Commissioner of Income-Tax(Appeals)-III, dated21.06.2002 and made in ITA.NO.Tr.347/2001-02/A-III for theAssessment year 1998-99. against the order of the Joint Commissioner of Income tax,Special Range I, Chennai-34 dated 20/03/2001 and made inP.A.NO./G.I.NO.AAACC3130A/8-C for the Assessment year 1998-99. For Appellant:Mr.A.S.SriramanFor Respondent :Mr.T.R.Senthil Kumar,Senior Standing Counsel JUDGMENT (Delivered by T.S.Sivagnanam, J.) This appeal, by the appellant/assessee, is directedagainst the order of the Income-tax Appellate Tribunal Bench “A”Chennai, dated 12.06.2006, in I.T.A.No.1619/Mds/2002 for theassessment year 1998-99. 2.The above appeal has been admitted on 16.03.2009, on thefollowing substantial question of law:-“Whether, on the facts and in thecircumstances of the case, the Appellate Tribunalis correct in confirming the action of the https://hcservices.ecourts.gov.in/hcservices/ Assessing Officer in adding back the provision forbad debts in the computation 'book profits' interms of Section 115 JA of the Act for the purposeof taxation?” 3.It is not disputed by the counsel on either side thatidentical question was answered by this Court in L.R.N.FinanceLtd. vs. Assistant Commissioner of Income-tax, Company Circle,Salem reported in [2018] 93 taxmann.com 106 (Madras). Theoperative portions of the judgment read as follows:- 4. It is not in dispute that the questions oflaw, which arise for consideration have been decidedin favour of the assessee and against the Revenue intwo decisions of the Hon'ble Supreme Court, first ofwhich being in the case of State Bank of Patiala vs.Commissioner of Income Tax reported in (1996) 219ITR 0706. The question, which arose forconsideration in the said case was, whether theTribunal was right in law in holding that theamounts provided by the assessee for bad anddoubtful debts in the balance sheet of the relevantprevious year qualified as reserves. The Hon'bleSupreme Court pointed out that, if the sums setapart in the balance sheet are only “provisions”,the assessee will not be entitled to the reliefclaimed by it. If, on the other hand, the sums setapart are “reserves” within the meaning of the Act,the assessee will be entitled to appropriate relief.The Hon'ble Supreme Court pointed out the findingrendered by the Tribunal to the said fact and whileanswering the correctness of the decision, held asfollows: “14. The High Court has taken the view thatthe "fund created or a sum of money set apart tomeet any liability which the assessee "canreasonably and legitimately anticipate" on thedate of preparation of the balance-sheet, is thesame, as in a case "where the liability hasactually arisen", (a present known liability)and the fund to meet such liability cannot betreated as reserve". In the view of the HighCourt, since the assessee is a banking company,it would be "reasonable and legitimate toassume" that in the course of its business, "itis bound to have" bad and doubtful debts forwhich "it may" in anticipation, make a provisionin the balance-sheet by having a separate fundor an account to meet such anticipatedliability. We are afraid that the aforesaidassumption is totally unjustified and proceedson mere surmises and conjectures. This is not a case, when at the time fund is earmarked, thereis a known liability - one which has eitherarisen or anticipated legitimately, by theassessee - and the fund to meet such eventualitycannot be treated as "reserves". Theobservations of this Court that the liabilityshould be one "which has actually arisen or isanticipated legitimately by the assessee",cannot be extended to hold, that in the case ofan assessee carrying on banking business, it is"bound" or "can reasonably anticipate" on thedate of the preparation of balance sheet "badand doubtful debts", for which "it ought", inanticipation, make a provision and suchprovision for anticipated liability should beequated with known and existing liability andshould be construed as a provision. The questionin such cases, is whether the liability was"known" or "anticipated" on the date when thebalance-sheet was prepared. The question is notwhether the assessee "can anticipate" or"reasonably anticipate" on the date when thebalance-sheet was prepared about "the bad anddoubtful debts". The High Court was in error insurmising that the assessee being a bankingcompany is bound to have bad and doubtful debts.It need not necessarily be so. It is not boundto anticipate on the date of preparation ofbalance-sheet that all or any of its debts "arebound to be bad and doubtful". It all dependsupon facts and circumstances. We are of the viewthat the High Court misunderstood the scope ofthe observations in Saran Engineering Co.'s case(supra) and surmised that the observationsquoted at page 748 will even cover cases, wherethe liability was not factually anticipated onthe date of the preparation of the balance-sheet, but also will apply to cases, where thecompany "ought and can" anticipate on the dateof preparation of the balance-sheet.” 5. In the aforementioned decision, the Hon'bleSupreme Court pointed out that, the question is,whether the liability was “known” or “anticipated”on the date when the balance sheet was prepared andthe question is not whether the assessee “cananticipate” or “reasonably anticipate” on the datewhen the balance sheet was prepared about “the badand doubtful debts”. Further, the Hon'ble SupremeCourt pointed that the High Court was in error insurmising that the assessee being a banking company https://hcservices.ecourts.gov.in/hcservices/ is bound to get 'bad and doubtful debts'. 6. In a subsequent decision in the case ofCommissioner of Income Tax vs. HCL Comnet Systems &Services Ltd., reported in (2008) 305 ITR 0409, theHon'be Supreme Court held as follows: 5. In the aforementioned decision, the Hon'bleSupreme Court pointed out that, the question is,whether the liability was “known” or “anticipated”on the date when the balance sheet was prepared andthe question is not whether the assessee “cananticipate” or “reasonably anticipate” on the datewhen the balance sheet was prepared about “the badand doubtful debts”. Further, the Hon'ble SupremeCourt pointed that the High Court was in error insurmising that the assessee being a banking company https://hcservices.ecourts.gov.in/hcservices/ is bound to get 'bad and doubtful debts'. 6. In a subsequent decision in the case ofCommissioner of Income Tax vs. HCL Comnet Systems &Services Ltd., reported in (2008) 305 ITR 0409, theHon'be Supreme Court held as follows: “10. As stated above, the said Explanationhas provided six items, i.e., Item Nos.(a) to(f) which if debited to the profit and lossaccount can be added back to the net profit forcomputing the book profit. In this case, we areconcerned with Item No. (c) which refers to theprovision for bad and doubtful debt. Theprovision for bad and doubtful debt can be addedback to the net profit only if Item (c) standsattracted. Item (c) deals with amount(s) setaside as provision made for meeting liabilities,other than ascertained liabilities. Theassessee's case would, therefore, fall withinthe ambit of Item (c) only if the amount is setaside as provision; the provision is made formeeting a liability; and the provision should befor other than ascertained liability, i.e., itshould be for an unascertained liability. Inother words, all the ingredients should besatisfied to attract Item (c) of the Explanationto Section 115JA. In our view, Item (c) is notattracted. There are two types of "debt". A debtpayable by the assessee is different from a debtreceivable by the assessee. A debt is payable bythe assessee where the assessee has to pay theamount to others whereas the debt receivable bythe assessee is an amount which the assessee hasto receive from others. In the present case"debt" under consideration is "debt receivable"by the assessee. The provision for bad anddoubtful debt, therefore, is made to cover upthe probable diminution in the value of asset,i.e., debt which is an amount receivable by theassessee. Therefore, such a provision cannot besaid to be a provision for liability, becauseeven if a debt is not recoverable no liabilitycould be fastened upon the assessee. In thepresent case, the debt is the amount receivableby the assessee and not any liability payable bythe assessee and, therefore, any provision madetowards irrecoverability of the debt cannot besaid to be a provision for liability. Therefore,in our view Item (c) of the Explanation is notattracted to the facts of the present case. Inthe circumstances, the AO was not justified in adding back the provision for doubtful debts ofRs.92,15,187/- under clause (c) of theExplanation to Section 115JA of the 1961 Act.” 7. It was pointed out in the aforementioneddecision that, an assessee's case would fall withinthe ambit of Clause (c) of Section 115JA(1) of theIncome Tax Act, 1961 (hereinafter referred to as“the Act”) only if the amount is set aside asprovision; the provision is made for meeting aliability; and the provision should be for otherthan ascertained liabilities, that is, it should befor an unascertained liability. The aforementioneddecision squarely covers the case on hand and thedecision relied on by the ITAT in the case of DeputyCommissioner of Income Tax vs. Beardsell Ltd.,reported in (2000) 244 ITR 0256, pertains to a casenot arising in respect of a banking company. 7. It was pointed out in the aforementioneddecision that, an assessee's case would fall withinthe ambit of Clause (c) of Section 115JA(1) of theIncome Tax Act, 1961 (hereinafter referred to as“the Act”) only if the amount is set aside asprovision; the provision is made for meeting aliability; and the provision should be for otherthan ascertained liabilities, that is, it should befor an unascertained liability. The aforementioneddecision squarely covers the case on hand and thedecision relied on by the ITAT in the case of DeputyCommissioner of Income Tax vs. Beardsell Ltd.,reported in (2000) 244 ITR 0256, pertains to a casenot arising in respect of a banking company. 8. Thus, the decisions of the Hon'ble SupremeCourt in State Bank of Patiala (referred supra) andHCL Comnet Systems & Services Ltd., (referred supra)are clear answers to both the substantial questionsof law, which have been framed for consideration.Thus, we are required to allow the appeal filed bythe assessee and answer both the questions in favourof the assessee. 9. Further, it is a case of the assessee thatby applying a decision of the Hon'ble Supreme Courtin the case of Apollo Tyres Ltd., vs. Commissionerof Income Tax reported in (2002) 255 ITR 0273, bothClause (c) and Clause (g) would be inapplicable tothe assessee's case. However, we cannot make anyobservation in this regard, since the effect of theClause (g) in Section 115JA(2) was never consideredby the Tribunal, though on the date when theTribunal took the decision, the said provision hasalready been inserted with retrospective effect.Therefore, to take a decision on the said fact, thematter has to be necessarily remanded to theassessing officer for fresh consideration. Further,the contention advanced by the learned counsel forthe assessee is that even assuming that the provisois applicable, then the proviso is notunconditional, as it lays down various parameters,which are required to be fulfilled. 10. In the result, the tax case appeal filedby the assessee is allowed and the substantialquestions of law are answered in favour of theassessee and against the Revenue. The matter isremanded to the assessing officer to decide as tothe applicability of amendment to Section 115JA vide Finance (2) Act, 2000 with retrospective effect from01.04.1998. No costs.” 4.Thus, following the above referred decision, thesubstantial question of law is answered in favour of theassessee, the appeal is allowed accordingly, and the matter isremanded to the Assessing Officer to decide as to theapplicability of amendment to Section 115JA vide Finance (2)Act, 2000 with retrospective effect from 1[st] April, 1998. Nocosts. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrar abrTo 1.The Income-tax Appellate Tribunal “A” Bench Chennai.2.The Commissioner of Income Tax(Appeal)III,Chennai-34. 3.The Joint Commissioner of Income TaxSpecial Range-I, Chennai-34. +1cc to Mr.S.Sridhar, Advocate sr.no.77488 +1cc to Mr.T.R.Senthil Kumar, Advocate sr.no.77213 T.C.(A) No.166 of 2009 sv(co)nr 07/12/2018