M/S.l.r.n.finance Limited v. The Assistant Commissioner Of Income-Tax,Company Circle, Salem

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MR.JUSTICE N.SESHASAYEE M/s.L.R.N.Finance Limited,No.2, Ramakrishna Road,Salem-636 007. ... Appellant/Respondent Vs. The Assistant Commissioner of Income-tax,Company Circle, Salem. ... Respondent/Appellant Appeal filed in terms of Section 260A of Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,“D” Bench, Chennai, in I.T.A.No.2984/MDS/2004 for the assessmentyear 2000-01 dated 08.06.2007. Appeal against the order of the Commissioner of Income Tax(Appeals) Salem dated 09.09.2004 in I.T.A.No. 224/2003-2004 andagainst the order of the Assistant Commissioner of Income Tax(CompanyCircle),Salemdated02.01.2004inPANGIR.No./AAAFL9075C.For Appellant:Mr.SriramanFor Respondent :Mr.T.R.Senthil Kumar J U D G M E N T (Judgment of the Court was delivered by T.S.SIVAGNANAM, J.) Heard Mr.Sriraman, learned counsel for the assessee andMr.T.R.Senthil Kumar, learned counsel for the Revenue. 2. This tax case appeal by the assessee is directed againstthe order dated 08.06.2007, passed by the Income Tax AppellateTribunal, “D” Bench, Chennai, in I.T.A.No.2984/MDS/2004 for theassessment year 2000-01. 3. This appeal has been admitted on the followingsubstantial questions of law: “1. Whether the Appellate Tribunal is correctin law in concluding that the provisions createdfor sub standard, doubtful and for loss of assetsclaimed as a deduction, were not allowable in the https://hcservices.ecourts.gov.in/hcservices/ computation of book profits in terms of Section 115JA of the Act? 2. Whether the Tribunal is correct in law insustaining the action of the respondent in makingthe disallowances under consideration in thecomputation of book profits under Section 115 JA ofthe Act even though such a claim was accepted bythe respondent in the immediately precedingassessment year on scrutiny?” 4. It is not in dispute that the questions of law, whicharise for consideration have been decided in favour of theassessee and against the Revenue in two decisions of the Hon'bleSupreme Court, first of which being in the case of State Bank ofPatiala vs. Commissioner of Income Tax reported in (1996) 219ITR 0706. The question, which arose for consideration in thesaid case was, whether the Tribunal was right in law in holdingthat the amounts provided by the assessee for bad and doubtfuldebts in the balance sheet of the relevant previous yearqualified as reserves. The Hon'ble Supreme Court pointed outthat, if the sums set apart 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 set apart are“reserves” within the meaning of the Act, the assessee will beentitled to appropriate relief. The Hon'ble Supreme Courtpointed out the finding rendered by the Tribunal to the saidfact and while answering the correctness of the decision, heldas follows: “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 the dateof preparation of the balance-sheet, is the same,as in a case "where the liability has actuallyarisen", (a present known liability) and the fundto meet such liability cannot be treated asreserve". In the view of the High Court, since theassessee is a banking company, it would be"reasonable and legitimate to assume" that in thecourse of its business, "it is bound to have" badand doubtful debts for which "it may" inanticipation, make a provision in the balance-sheetby having a separate fund or an account to meetsuch anticipated liability. We are afraid that theaforesaid assumption is totally unjustified andproceeds on mere surmises and conjectures. This isnot a case, when at the time fund is earmarked,there is a known liability - one which has eitherarisen or anticipated legitimately, by the assessee- and the fund to meet such eventuality cannot be treated as "reserves". The observations of thisCourt that the liability should be one "which hasactually arisen or is anticipated legitimately bythe assessee", cannot be extended to hold, that inthe case of an assessee carrying on bankingbusiness, it is "bound" or "can reasonablyanticipate" on the date of the preparation ofbalance sheet "bad and doubtful debts", for which"it ought", in anticipation, make a provision andsuch provision for anticipated liability should beequated with known and existing liability andshould be construed as a provision. The question insuch cases, is whether the liability was "known" or"anticipated" on the date when the balance-sheetwas prepared. The question is not whether theassessee"cananticipate"or"reasonablyanticipate" on the date when the balance-sheet wasprepared about "the bad and doubtful debts". TheHigh Court was in error in surmising that theassessee being a banking company is bound to havebad and doubtful debts. It need not necessarily beso. It is not bound to anticipate on the date ofpreparation of balance-sheet that all or any of itsdebts "are bound to be bad and doubtful". It alldepends upon facts and circumstances. We are of theview that the High Court misunderstood the scope ofthe observations in Saran Engineering Co.'s case(supra) and surmised that the observations quotedat page 748 will even cover cases, where theliability was not factually anticipated on the dateof the preparation of the balance-sheet, but alsowill apply to cases, where the company "ought andcan" anticipate on the date of preparation of thebalance-sheet.” 5. In the aforementioned decision, the Hon'ble SupremeCourt pointed out that, the question is, whether the liabilitywas “known” or “anticipated” on the date when the balance sheetwas prepared and the question is not whether the assessee “cananticipate” or “reasonably anticipate” on the date when thebalance sheet was prepared about “the bad and doubtful debts”.Further, the Hon'ble Supreme Court pointed that the High Courtwas in error in surmising that the assessee being a bankingcompany is bound to get 'bad and doubtful debts'. 6. In a subsequent decision in the case of Commissioner ofIncome Tax vs. HCL Comnet Systems & Services Ltd., reported in(2008) 305 ITR 0409, the Hon'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 loss account can https://hcservices.ecourts.gov.in/hcservices/ 6. In a subsequent decision in the case of Commissioner ofIncome Tax vs. HCL Comnet Systems & Services Ltd., reported in(2008) 305 ITR 0409, the Hon'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 loss account can https://hcservices.ecourts.gov.in/hcservices/ be added back to the net profit for computing thebook profit. In this case, we are concerned withItem No. (c) which refers to the provision for badand doubtful debt. The provision for bad anddoubtful debt can be added back to the net profitonly if Item (c) stands attracted. Item (c) dealswith amount(s) set aside as provision made formeeting liabilities, other than ascertainedliabilities. The assessee's case would, therefore,fall within the ambit of Item (c) only if theamount is set aside as provision; the provision ismade for meeting a liability; and the provisionshould be for other than ascertained liability,i.e., it should be for an unascertained liability.In other words, all the ingredients should besatisfied to attract Item (c) of the Explanation toSection 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 by theassessee is an amount which the assessee has toreceive from others. In the present case "debt"under consideration is "debt receivable" by theassessee. The provision for bad and doubtful debt,therefore, is made to cover up the probablediminution in the value of asset, i.e., debt whichis an amount receivable by the assessee. Therefore,such a provision cannot be said to be a provisionfor liability, because even if a debt is notrecoverable no liability could be fastened upon theassessee. In the present case, the debt is theamount receivable by the assessee and not anyliability payable by the assessee and, therefore,any provision made towards irrecoverability of thedebt cannot be said to be a provision forliability. Therefore, in our view Item (c) of theExplanation is not attracted to the facts of thepresent case. In the circumstances, the AO was notjustified in adding back the provision for doubtfuldebts of Rs.92,15,187/- under clause (c) of theExplanation to Section 115JA of the 1961 Act.” 7. It was pointed out in the aforementioned decision that,an assessee's case would fall within the ambit of Clause (c) ofSection 115JA(1) of the Income Tax Act, 1961 (hereinafterreferred to as “the Act”) only if the amount is set aside asprovision; the provision is made for meeting a liability; andthe provision should be for other than ascertained liabilities,that is, it should be for an unascertained liability. The https://hcservices.ecourts.gov.in/hcservices/ aforementioned decision 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 case not arising in respectof a banking company. 8. Thus, the decisions of the Hon'ble Supreme Court inState Bank of Patiala (referred supra) and HCL Comnet Systems &Services Ltd., (referred supra) are clear answers to both thesubstantial questions of law, which have been framed forconsideration. Thus, we are required to allow the appeal filedby the assessee and answer both the questions in favour of theassessee. https://hcservices.ecourts.gov.in/hcservices/ aforementioned decision 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 case not arising in respectof a banking company. 8. Thus, the decisions of the Hon'ble Supreme Court inState Bank of Patiala (referred supra) and HCL Comnet Systems &Services Ltd., (referred supra) are clear answers to both thesubstantial questions of law, which have been framed forconsideration. Thus, we are required to allow the appeal filedby the assessee and answer both the questions in favour of theassessee. 9. Further, it is a case of the assessee that by applyinga decision of the Hon'ble Supreme Court in the case of ApolloTyres Ltd., vs. Commissioner of Income Tax reported in (2002)255 ITR 0273, both Clause (c) and Clause (g) would beinapplicable to the assessee's case. However, we cannot makeany observation in this regard, since the effect of the Clause(g) in Section 115JA(2) was never considered by the Tribunal,though on the date when the Tribunal took the decision, the saidprovision has already been inserted with retrospective effect.Therefore, to take a decision on the said fact, the matter hasto be necessarily remanded to the assessing officer for freshconsideration. Further, the contention advanced by the learnedcounsel for the assessee is that even assuming that the provisois applicable, then the proviso is not unconditional, as it laysdown various parameters, which are required to be fulfilled. 10. In the result, the tax case appeal filed by theassessee is allowed and the substantial questions of law areanswered in favour of the assessee and against the Revenue. Thematter is remanded to the assessing officer to decide as to theapplicability of amendment to Section 115JA vide Finance (2)Act, 2000 with retrospective effect from 01.04.1998. No costs. Sub-Assistant Registrar abr https://hcservices.ecourts.gov.in/hcservices/ To 1.The Assistant Commissioner of Income-tax, Company Circle, Salem. Company Circle, Salem. 2.The Income Tax Appellate Tribunal, “D” Bench, Chennai. “D” Bench, Chennai. 3. The Commissioner of Income Tax(appeals) Salem. Salem. +1 CC to Mr.S. Sridhar, advocate sr 26653. +1 CC to Mr..T.R. Senthil Kumar, advocate sr 26373. T.C.(Appeal) No.916 of 2008 KK(CO)SP(26/04/2018)