The Hon’/Ble Mr. Justice v. Srishananda

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 5 DAY OF JANUARY 2071 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’/BLE MR. JUSTICE V. SRISHANANDA BETWEEN: 1.T.A. NO.409/2014 M/S. KARNATAKA STATE INDUSTRIAL ANDINFRASTRUCTURE DEVELOPMENT.CORPORATION LTD.,.REP. BY ITS CHAIRMAN & MANAGING |DIRECTOR SRI. V.P. BALIGARKHANIJA BHAVAN, NO.49_OTH FLOOR, EAST WINGRACE COURSE ROADBANGALORE-560001.(BY MR. A. SHANKAR, SENIOR COUNSEL A/WMR. M. LAVA, ADV.,)AND*DY. COMMISSIONER OF INCOME TAX|CENTRAL CIRCLE-11(5)R.P. BHAVAN, OPP. RBINRUPATHUNGA ROADBANGALORE-56000 1. (BY MR. T.N.C. SRIDHAR, ADV.) ... APPELLAN| ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED O2.05.2014 PASSED IN ITA NO.1547/BANG/2012 FOR THE ASSESSMENT YEAR 2009-10,PRAYING TO: (1) FORMULATE THE SUBSTANTIAL QUESTION OF LAW,STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE.APPELLAN ][ (11) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO)THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY.THE INCOME TAX APPELLANT TRIBUNAL, BANGALORE BENCH IN-ITANOS.1547/BANG/2012DATEDO27-05-2014FORTHE|ASSESSMENT YEAR 2009-10. THIS ITA COMING ON FOR ADMISSION, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter|of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court videorder dated 27.02.2015 on the following substantialquestions of law:| “(1) Whether the Tribunal ts Justified tnlaw in holding that the appellant ts not.entitled to the reduction of the amount ofRs.14,77,53,/74/7/- credited to the profit loss account on account of reversal ofprovision for bad and doubtful debts under section 115JB of the Act, on the facts andcircumstances of the case? (ii) Without prejudice, whether’ theTribunal in law failed to take note of the factof retrospective amendment by Finance(No.2)|Act,ZOOIwith effectfrom01.04.2001, by which the computation ofbook profit as per MAT provisions requiresthe provision for bad and doubtful debts to|be added back and consequently book profitsunder MAT provisions are to computed forsuch earlier assessment years in accordancewith amended scheme of the Act and furthersuch amended computation ought to form.the basis of computation of MAT for thesubsequentYdsandaccordinglytheautnorities below ougnt to nave allowed thereductionofRs.14,77,53,/4/7/-Underproviso to clause (iI) of Explanation 1 tosection115JB(2),OP)thefactsandcircumstances of the case? (iii) Without prejudice, wnether the.Tribunal in law failed to appreciate tnat the:appellant had aaded back the provision for bad and doubtful debts for certain years andhence ought to have granted the deductionin respect of reversal of provision for badand doubtful debts at least to that extent, onthe facts and circumstances of the case? (iv) Whether the Tribunal ts Justified tnlaw in holding that the indirect expenditure.disallowed under section 14A read with rule8D(ill) of Rs.49,75,359/- in computing the.total income under normal provisions of theAct, is to be added to the net profit incomputation of book profit for MAT purposesunder section 115JB and thereby importing|the provision of section 14A read with rule8D into the MAT provisions on the facts andcircumstances of the case? 2 |Thefactualbackground,In|whichtheaforesaid substantial questions of law arise for our.consideration need mention. The assessee is a company.and is an undertaking of Government of Karnataka. The|assessee iS engaged in financing industrial units in theState of Karnataka. The assessee filed the return ot (iv) Whether the Tribunal ts Justified tnlaw in holding that the indirect expenditure.disallowed under section 14A read with rule8D(ill) of Rs.49,75,359/- in computing the.total income under normal provisions of theAct, is to be added to the net profit incomputation of book profit for MAT purposesunder section 115JB and thereby importing|the provision of section 14A read with rule8D into the MAT provisions on the facts andcircumstances of the case? 2 |Thefactualbackground,In|whichtheaforesaid substantial questions of law arise for our.consideration need mention. The assessee is a company.and is an undertaking of Government of Karnataka. The|assessee iS engaged in financing industrial units in theState of Karnataka. The assessee filed the return ot income for the Assessment Year 2009-10 on 30.09.2011.declaring ‘NIL’ income under normal provisions of the.Act. Thereafter, the assessee returned income ofRs.13,60,88,45/7/- under the provisions of Section 115JBof the Act. The return of the assessee was selected for|scrutiny and assessment was completed under Section.143(3) of the Act. The Assessing Officer vide order|dated21.11.7011determined.thelOSSaltRs.1,73,60,700/- under the normal provisions of the Act.and determined the book profits under Section 115JB ofthe Act at Rs.30,01,07,991/-. 3.)Tne assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 31.08.2012 partly allowed the claim.of the assessee with regard to gratuity and leave|encashment and partial relief was granted in respect of disallowance under Section 14A read witn Rule 8D of tne|Income Tax Rules to the extent of Rs.1,03,08,426/-..However, the Assessing Officer did not grant any relief in respect of disallowance of provision for bad anddoubtful debts written back. Being aggrieved, theassessee as well as the revenue filed appeals before theIncome Tax Appellate Tribunal (hereinafter referred to.as ‘the tribunal for short). The tribunal vide order dated02.05.2014 held that write back of provision for bad anddoubtful debts to the extent of Rs.14,77,53,/747/- isliable to be added to the profits for determination of.book profits under Section 115JB of the Act and heldthat disallowance of Rs.49,75,359/- under Section 14A.of the Act deserves to be added back while computing|book profits under Section 115JB of the Act. In theaforesaid factual background, the assessee has filed this.appeal. 4Learned Senior counsel for the assesseesubmitted that provision for bad and doubtful debts.could not have been added to the net profit by theassessee as the provision under which the same Nad to.be increased was inserted by Finance Act, 2009 with. retrospective effect i.e., from 01.04.2001 and therevenue cannot expect the assessee to add back theprovisions for doubtful debts to the net profits for thepurpose of computation under Section 115JB of the Act.in the years prior to insertion of clause (i) to Explanation.to Section 115JB of the Act as those years have alreadyelapsed and the assessee cannot give effect to a/provision, which was inserted at a later point of time.5.|Alternatively,ItIS|Submitted|that|theassessee could not have added back the provision fordoubtful debts to the net profit as even if the same isadded to the net profits, the resultant book profit is stillnegative. It is also contended that though the assesseewas prevented from adding back the provision for bad.and doubtful debts to the net profit due to reasonsbeyond its control, it has at the first subsequentopportunity demonstrated to the authorities that Dookprofits are still negative on adding back the provision forbad and doubtful debts and therefore, no adverse. inference can be drawn as the assessee cannot perform.the impossible i.e., adding back to the net profit of theprovision for bad and doubtful debts, based on aprovision, which was inserted later. It is also pointed outthat|theaSS@ Years 1998-99 to 2000-01. It is also arguedthat any disallowance computed under Section 14A of.the Act pertains to computation of income under normalprovisions of the Act and cannot be read into provisions.of Section 115JB of the Act pertaining to computation of book profits by levy of Minimum Alternate Tax (MAT)..In support of aforesaid submissions, reliance has been.placedON|decisions.In|"LIFEINSURANCECORPORATION OF INDIA VS. CIT (1996) 219 ITR401 (SC), ‘CITY UNION BANK LTD. VS. ACIT,(2020) 425 ITR 475 (MADRAS), ‘HUDA ANDANOTHERVS,DR,BABESWARKANHARAND|ANOTHER’, (2005) 1 SCC 191, ‘CIT VS. GOKALDAS|IMAGES P. LTD.', (2020) 122 TAXMANN.COM 160. (KAR. ),'CIT|VS,BENGALFINANCE&|INVESTMENTS PVT LTD.', ITA NO.337 OF 2013.DATED 10.02.2015and‘CIT VS. M/S ESSAR|TELEHOLDINGS LTD.', ITA NO.438 OF 2012 DATED|07.08.2014. 6.|On the other hand, learned counsel for therevenue submitted that the assessee has earned income.which is exempt under Section 10(2A) and Section.10(35) of the Act and the expenditure incurred on the|exempt income has been calculated under Rule 8D of.the Rules. It is also urged that he provisions of Section|115JB of the Act are attracted in the fact situation of thecase. It is also argued that Section 10(2A) of the Actexempts income of a person being partner of a firmbeing separately assessed and its share in the total|income of the firm, whereas, Section 10(35) exempts.income exempts income by way of units of mutualfunds. It is also contended that income referred to iInSection 10A of the Act is exempt and income not includable in total income referred to in Section 14A Is.with respect to exempt income under Section 10 of theAct. Therefore, any expenditure incurred for earning the|exempt income under Section10 of the Act has to bedisallowed under Section 14A of the Act. It Is also'argued that any expenditure relatable to earning of income exempt under Section 10(2A) and Section10(35) of the Act has to be disallowed under Section|14A of the Act and has to be added back to book profit|under Section 115JB of the Act. It is further submitted.that the view taken by this court in|COMMISSTONER|OF INCOME TAX, BANGALORE VS. GOKALDAS|IMAGES(P) LTD. (2020) 122 TAXMANN.COM 160(.KARNATAKA)requiresreconsideration asthedisallowance of expenditure in relation to the incomereferred to in Section 10 of the Act is provided only in.Section 14A the Act is not referred to in Clause (f) toExplanation 1 to Section 115JB of the Act, would render.the provisions of Section 14A of the Act otiose. J.It is also argued tnat in the absence of anyprovision excluding the applicability of Section 14A of the Act to compute book profit under Section 115JB ofthe Act, it is implied and unambiguous that the Section|14A of the Act is applicable to computation of book profitunder Section 115JB of the Act. In support of aforesaidSUDMmIssion reliance has beenplaced on |JOINTCOMMISSIONER OF INCOME TAX VS. ROLTA INDIALTD.’ (2011) 330 ITR 470 (SC)and 'MAXOPPINVESTMENT LTD. VS, COMMISSIONER OF INCOME|TAX, NEW DELHI’ (2018) 402 ITR 640(SC).|It Isfurtner submitted that the Assessing Officer nas rightlyapplied the law, which was prevailing on the date on.which an order of assessment was passed. It is also.contended that clause (i) in Explanation to Section.115JB(2) has been inserted by Finance Act, 2009 with|retrospective effect i.e., from 01.04.2001 and therefore,no fault can be found with the view taken by theautnorities. It is also urged that the decisions relied upon by the learned Senior counsel for the assesseewere rendered prior to 2009. upon by the learned Senior counsel for the assesseewere rendered prior to 2009. 8 _We have considered the submissions made.by learned counsel for the parties and have perused therecord. The Supreme Court in.‘CIT VS. HCL ComnerSystems and Services Ltd.', (2008) 305 ITR 409(SC)held that provisions for bad and doubtful debts.cannot be added under Explanation to Section 115JB ofthe Act. In order to ensure that provision for bad and.doubtful debts debited to profit and loss account, is.increased to the net profit for the purposes ofcomputation of book profit under Section 115JB of theAct. Clause (i) in Explanation to Section 115JB(2) has.been inserted by Finance Act, 2009 with retrospectiveeffect i.e., from 01.04.2001. From perusal of para 40.2of Circular dated 03.06.2010, it is evident that clause (i).in Explanation after Section 115JB(2) has been insertedso as to provide tnat if any provision for diminution in-the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown.in the profit and loss account for the purpose of.computation of book profit. It is well settled in law thatlaw does not contemplate or require the performance of.an impossible act. [See: Life Insurance Corporation ofIndia supra]. The assessee could not have added backthe provision for doubtful debts to the net profit for thepurpose of computation under Section 115JB of the Act.in the years prior to insertion of clause (i) as those years.had already elapsed and the assessee could not have.given effect to the provision, which was inserted at a|later point of time. The assessee therefore, could notNave added back the provision for bad and doubtfuldepts to the net profit. It is also pertinent to note tnateven if the provision for doubtful debt is added back to.the net profits, the resultant book profit is still negative|and even though the assessee was prevented from.adding back the provision for bad and doubtful debts tothe net profit due to reasons Deyond its control, it nas at the first opportunity demonstrated to the authoritiesthat book profits are still negative on adding back theprovision for bad and doubtful debts and therefore, noadverse inference could have been drawn against the|assessee. It is also pertinent to note that the assesseehad added the provision for bad and doubtful debts for.Assessment Years 1998-99 to JOOO0-01. In view of preceding analysis, the substantial|questions of law 1, 2 and 3 are answered in favour of.the assessee and against the revenue. For the reasons|assigned by us in the judgment in I.T.A.No.203/2015|dated 04.01.2021, the substantial question of law No.4.is alSO answered in favour of the assessee and againstthe revenue. In the result, the judgment dated02.05.2014 passed by the tribunal to the extent it isagainst the assessee is hereby quashed. ��� �������������������������������������� ����������� �����������