Income Tax Appellate Tribunal - Ahmedabad
Torrent Pvt. Ltd.,, Ahmedabad vs Department Of Income Tax on 8 May, 2015
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'B' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, AHMEDABAD
ी एन0एस0 सैनी, लेखा सद य एवं ी कुल भारत, या%यक सद य के सम&
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI KUL BHARAT, JUDICIAL MEMBER
आयकर अपील सं./ ITA No. 3906/Ahd/2008
%नधा)रण वष)/Assessment Year: 2005-2006
ACIT, Cir.No.8 Torrent Pvt. Ltd.
Ahmedabad. Vs "Torrent House", Off Ashram Road
Nr. Dinesh Hall
Ahmedabad.
आयकर अपील सं./ ITA No. 1370/Ahd/2009
With
CO No.107/Ahd/2009
%नधा)रण वष)/Assessment Year: 2006-2007
ACIT, Cir.No.8 Torrent Pvt. Ltd.
Ahmedabad. Vs "Torrent House", Off Ashram Road
Nr. Dinesh Hall
Ahmedabad.
अपीलाथ,/ (Appellant) -.यथ,/ (Respondent)
Revenue by : Shri Roopchand, DR
Assessee(s) by : Shri S.N. Soparkar
सन
ु वाई क तार ख/ Dateof Hearing : 28/04/2015
घोषणा क तार ख / Date of Pronouncement: 08/05/2015
आदे श/O R D E R
PER N.S. SAINI, ACCOUNTANT MEMBER:
1. ITA No.3906/Ahd/2008 is filed by the Revenue against the order of the CIT(A)-XIV, Ahmedabad dated 25.9.2008 for the Asstt.Year 2005-06.
ITA No.3906/Ahd/2008 (3 appeals) 2 ITA No.1370/Ahd/2009 is the appeal filed by the Revenue andCross Objection No.107/Ahd/2009 filed by the assessee against the order of the CIT(A)-XIV, Ahmedabad dated 25.2.2009 for the Asstt.Year 2006-07.
2. The ground no.1 of the appeal of the Revenue for the Asstt.Year 2005-06 is directed against the order of the CIT(A) deleting the disallowance of Rs.4,50,000/- out of total disallowance of Rs.5,00,000/- made by the AO under section 14A of the Act.
3. Brief facts of the case are that the in the Asstt.Year 2005-06, the AO observed that the assessee has earned exempt dividend income of Rs.15,47,57,591/-. The business of the assessee is of investment in shares, debentures and securities of companies etc. Therefore, the staff employed by the assessee was utilized for the purpose of investment portfolio and share trading portfolio of the company. The assessee submitted before the AO that most of investments were made in the earlier years and no major efforts were required for earning dividend income, and these investments have been made out of large amount of interest free funds available with the company in the form of share capital and reserve. However, the AO observed that the part of the employees' cost and administrative expenses is attributable to earning of dividend income, and therefore, made a lumpsum disallowance of Rs.5,00,000/-.
4. On appeal, the CIT(A) in the Asstt.Year 2005-06 observed that the AO has made the addition merely on estimation. The CIT(A) observed that the expenses incurred on account of salary to staff, stamp duty, transfer fee and other such expenses do relate to earning of dividend, and therefore, part of such expenses needed to be apportioned to earning of dividend income on the assumption that the assessee might have incurred such expenditure for earning dividend ITA No.3906/Ahd/2008 (3 appeals) 3 income. The CIT(A) held that in view of the facts, it is held that an ad hoc disallowance of Rs.50,000/- would be proper in the facts of the case, and accordingly restricted the disallowance to Rs.50,000/- in place of Rs.5,00,000/- made by the AO.
5. We have considered rival submissions and perused the orders of the lower authorities and material available on record. We find that the disallowance of Rs.5,00,000/- made by the AO was on ad hoc estimate basis, and the CIT(A) also sustained Rs.50,000/- out of the same on ad hoc estimate basis. The DR could not bring any material before us to show that any amount more than Rs.50,000/- was incurred by the assessee for earning of dividend income. Therefore, we do not find any good reason to interfere with the estimate made by the CIT(A). Thus, this ground of appeal of the Revenue is dismissed.
6. The ground no.2 of the Cross Objection of the assessee for the Asstt.Year 2006-07 is directed against the order of the CIT(A) confirming the disallowance under section 14A of Rs.6,79,897/-.
7. For the very same reasons as in Asstt.Year 2005-06, the AO made disallowance under section 14A in the Asstt.Year 2006-07. In the Asstt.Year 2005-06, the AO had made a lumpsum disallowance of Rs.5,00,000/- whereas in the Asstt.Year 2006-07, the AO has made disallowance at the rate of 5% of the expenditure of Rs.1,35,97,939/-.
8. The CIT(A) held that the expenditure incurred on account of salary to staff, stamp duty, transfer fee and such other expenses do relate to earning of dividend income, and therefore, a part of such expense needs to be apportioned to earning of dividend income, and in view of that he held that the disallowance made under section 14A amounting to Rs.6,79,897/- was justified and no interference was called for.
ITA No.3906/Ahd/2008 (3 appeals) 49. After hearing both the sides, and perusing of the orders of the lower authorities and material available on record, we find that the AO made disallowance under section 14A at the rate 5% of the dividend income earned during the year by the assessee. The rate 5% is an ad hoc estimate without any basis. On appeal, the CIT(A) confirmed the action of the AO.
10. We find that in similar circumstances, the Hon'ble Madras High Court in the case of M/s.Simpson and Co. Ltd. Vs. DCIT, Tax Case (Appeal) No.2621 of 2006 order dated 15.10.2012 confirmed the disallowance made at the rate 2% of dividend income earned during the year as fair and reasonable. We, therefore, following the same, are of the considered opinion that it shall meet ends of justice to restrict the disallowance under section 14A at the rate of 2% of the dividend income earned during the year by the assessee. We, therefore, set aside the order of the lower authorities on this issue, and direct the AO to disallow 2% of the dividend income earned by the assessee during the year under consideration under section 14A, as expenditure incurred for earning of dividend income. Thus, this ground of appeal of the assessee is partly allowed.
11. The ground no.1 in the Asstt.Year 2006-07 is directed against the order of the CIT(A), directing the AO to accept the gain as short term capital gains and not business income as treated by the AO of an amount of Rs.3,36 ,66,893/-.
The ground no.2 of the appeal of the Revenue in the Asstt.Year 2005-06 is directed against the order of the CIT(A) accepting the gain as short term capital gain and not business income as treated by the AO of an amount of Rs.30,65,299/- u/s.111A of the Act.
12. Brief facts of the case are that the AO Asstt.Year 2005-06, observed that the assessee has shown short term capital gain of ITA No.3906/Ahd/2008 (3 appeals) 5 Rs.30,65,299/- and Rs.3,39,98,565/-. The AO observed that the business of the assessee was of dealing in shares and securities and debentures and is engaged in frequent buying and selling of securities and the quantum of purchase and redemption was Rs.197.81 crores and Rs.200.75 crores. The AO also observed that the assessee had explained that shares and mutual fund investments were not by way of stock-in-trade. It was explained that merely because of frequency of transaction, the income cannot be categorized as business income. The AO observed that the contentions of the assessee were not acceptable for the reason that a perusal of the Schedule-5 of the balance sheet shows that almost entire stock-in-trade comprises of shares of same subsidiary company which were appearing in the investment portfolio, and there was large transactions in mutual funds involving substantial sums of money, and therefore, in view of the fact that the business of the assessee is dealing is shares and securities, and the assessee is engaged in large volume of transactions in shares and securities, the short term capital gains shown by the assessee is business income.
13. On appeal, the CIT(A) observed that it is seen from the balance sheet of the assessee that the assessee has shown shares and units of mutual fund held as investment in schedule-IV to balance sheet. The same set of shares and units in mutual funds has been shown as investment from earlier years consistently. The other shares which the assessee has traded and held as stock in-trade have been shown as stock-in-trade in schedule-V to balance sheet. The intention of the assessee in holding shares and units of mutual funds as per schedule-IV as investment was clear. In view of the above stated facts, and the fact that the assessee has shown the said income on sale of shares as capital gain in earlier years, which has been accepted by the department, relying on the case law cited by authorized representatives of the assessee, he was of the opinion that motive of the assessee was clear and is certainly not to carry out business of trading in shares and ITA No.3906/Ahd/2008 (3 appeals) 6 securities, and units of mutual funds in respect of shares and mutual fund investments, as shown in Schedule-IV to balance sheet, and hence, the AO was not justified in treating the short term capital gains as business income.
14. Similarly, in the Asstt.Year 2006-07, the AO observed that the assessee is engaged in frequent buying and selling of securities, and quantum of purchase and redemption was Rs.85.56 crores and Rs.88.94 crores, and in reply to show cause notice issued by the AO, the assessee replied that its major investment were in the form of share of subsidiary companies, which were not in the nature of stock-in- trade and the frequency of transaction was not very high, and that the frequency of the buying and selling could not be used to categorise the income as business income. However, the AO did not accept the explanation of the assessee and observed that almost entire stock-in- trade comprises of same subsidiary companies, which were appearing in the investment portfolio, and there were large transactions in shares and securities involving substantial sum of money, therefore, the AO held that short term capital gains shown by the assessee was in fact business income of the assessee.
15. On appeal, the CIT(A) observed that it is seen from the balance sheet filed by the assessee that the assessee has shown the shares and units of mutual fund held as investment as per schedule-5 to the balance sheet. The CIT(A) also observed that the same set of shares and units in mutual funds have been shown as investments from earlier years consistently. The other shares which the assessee had traded and held as stock-in-trade have been show as stock in trade in Schedule-VI to the balance sheet. The intention of the assessee in holding shares and units of mutual funds as per schedule-V as investment is clear. Further, CIT(A) observed that similar issue came up before him in the immediately preceding assessment year, and it ITA No.3906/Ahd/2008 (3 appeals) 7 was held that the AO was not justified in treating the short term capital gain as business income, since the facts are identical to the facts for the Asstt.Year 2005-06, he directed to the AO to accept the income as short term capital gain.
16. The DR supported the order of the AO, whereas, the AR of the assessee submitted that the volume of shares purchase and sale was insignificant. The assessee has purchased and sold view scripts. No borrowed funds have been utilized by the assessee for the purchase and sale of shares. Further, it has been consistently shown by the assessee as capital gains.
17. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant cse, the assessee is holding an investment company. The assessee in its balance sheet disclosed certain acquisition of shares as stock-in-trade, and certain shares of mutual funds as investment. In other words, the assessee claimed itself as a trader in shares as well as, as an investor in shares. The assessee clamed profit from sale of shares and mutual fund, which were disclosed by it as investment as short term capital gains, which was to the tune of Rs.30,65,299/- in the Asstt.Year 2005- 06 and to the tune of Rs.3,36,66,893/- in the Asstt.Year 2006-07. According to the AO, the frequency and volume of transaction on which the assessee claimed to have earned short term capital gains were very high, and therefore, held that the said income is assessable as business income in the hands of the assessee.
18. On appeal, the CIT(A) held that merely the volume cannot determine the character of the income, and he considered that the frequency were not very high and the intention of the assessee to hold shares and units as investment was clear from the fact that these shares and mutual funds were reflected as investment in the audited balance sheet of the assessee. The CIT(A), therefore, allowed the claim ITA No.3906/Ahd/2008 (3 appeals) 8 of the assessee and accepted the income shown as short term capital gains.
19. Before us, the DR relied upon the order of the AO.
20. We find that no material has been brought before us to show, what was the frequency of the transaction in question. It is not the case of the Revenue that any borrowed fund was utilized for acquiring shares or units of mutual funds under consideration. In our considered view, the intention of the assessee at the time of acquiring shares of mutual fund has to be ascertained by taking into consideration all the relevant factors, like utilization of borrowed funds, frequency of transaction, volume of transaction, manner in which the acquisition is reflected in the financial statements etc. No single factor is determinative of actual nature of the transaction. In the absence of any material brought before us by the Revenue to show that same shares or the units of mutual funds were frequently purchased and sold, on which short term capital gain was claimed by the assessee, or that no borrowed funds was utilized by the assessee in acquiring the shares and units in question, we do not find any good reason to interfere with the order of the CIT(A), therefore, this ground of the appeal of the Revenue is dismissed in both the years under consideration.
21. The ground no.3 of the appeal in the Asstt.Year 2005-06 and grounds no.2 of the appeal for the Asstt.Year 2006-07 are directed against the order of the CIT(A) directing the AO to allow deduction of preliminary expenses of Rs.7,93,340/- under section 35D of the Act.
22. Brief facts of the case are that the AO observed that the assessee has claimed an amount of Rs.8,03,445/- as preliminary expenditure in the computation of income. From a perusal of the details filed by the assessee it s seen that an amount of Rs.7,93,340/- was paid on account of ROC fees for increase in authoriszed capital. As per the provision of ITA No.3906/Ahd/2008 (3 appeals) 9 section 35D, such payment of ROC fees for increase in the authorized capital is not a deductible expenditure. The AO also observed that in reply to show cause notice dated 27.11.2007, the assessee replied vide letter dated 3.12.2007, wherein, it is submitted that the assessee had incurred said expenditure in the year 1999-2000. According to the provision of section 35D, the assessee is allowed the deduction of 1/10th of total preliminary expenditure for 10 years. Since this is the sixth year, the assessee had claimed 1/10th of the said expenses in the return of income. The assessee has further submitted that the allowability or otherwise of the expenditure has been decided in the first year, and the deduction was allowed in the subsequent year on the basis of the amount determined in the first year. Therefore, no disallowance should be made.
23. The AO observed that the reply of the assessee is not acceptable. Even if the expenditure has been allowed in earlier years, the AO is not bound to accept such allowance in subsequent year also. The proceedings under the Income Tax Act are not covered by the principle of res judicata. It has been held that in the case of CIT Vs. Foss Electronics, 263 ITR 125 (Raj) that if the mistake committed by one AO has not been challenged, it does not confer any legal authority in favour of the assessee that in subsequent years also the mistake should perpetuated. Therefore, the contention of the assessee of not disallowing the expenditure, as it has been allowed in earlier years, was rejected. The AO further observed that it is also seen that the expenditure claimed by the assessee as ROC fees for increase in authorized capital was not allowable under section35D as held in the case of CIT Vs. Hindustan Inspecticides Ltd., 250 ITR 338 (Delhi). He, therefore, disallowed deduction of Rs.7,93,340/- and added the same to the total income of the assessee.
ITA No.3906/Ahd/2008 (3 appeals) 1024. On appeal, the CIT(A) held that the assessee had submitted that it had incurred expenditure in the year 1999-2000, and this is the sixth year, and according to the provision of section 35D, it should be allowed 1/10th of total preliminary expenses. The assessee has submitted before the AO that the allowability of such expenditure has been decided in the first year and deduction has been allowed in subsequent years. The AO did not accept the said reply stating that there was no principle of res judicata in proceedings under the Income Tax Act. The AR has reiterated the same submissions, and that, after considering the facts of the case, the CIT(A) directed the AO to allow the same, if similar claim has been allowed in assessments of earlier years.
25. The DR supported the order of the AO, whereas, the AR of the assessee submitted that the principle of res judicata is not applicable in the income -tax proceedings, but consistency should be maintained in the income-tax proceedings. He relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd. 358 ITR 295. Therefore, he submitted that the order of the CIT(A) should be confirmed the ground of the appeal of the Revenue should be dismissed.
26. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the assessee has claimed that it has incurred preliminary expenses under section 35D of the Act of Rs.79,33,400/- in the previous year relevant to the Asstt.Year 2000-01. Accordingly, it claimed 1/10th of the said expenditure i.e. Rs.7,93,340/- as deduction in the Asstt.year 2005-06 being 6th year and of the same amount in the Asstt.Year 2006-07 being 7th year.
27. On appeal, the AO disallowed this expenditure for both the years under consideration on the ground that the expenditure incurred was on ITA No.3906/Ahd/2008 (3 appeals) 11 account of filing fees paid to Registrar of Companies which does not qualify as preliminary expenditure under section 35D(2) of the Act.
28. On appeal, the CIT(A) allowed the claim of the assessee for both the years on the ground that similar deduction was allowed to the assessee in the earlier years.
29. We find that first proviso to section 35D(1) reads as under:
"Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted."
30. In the instant case, it is not in dispute that the expenditure in respect of which the deduction was claimed by the assessee under section 35D was incurred after 31st March, 1998. Thus, in any view of the matter, the deduction is to be allowed to the assessee for five years only. The assessee has submitted that deduction has already been allowed for five years to it, and of course at the rate of 10% and not at the rate of 20%. Be that as it may, the year under consideration being 6th and 7th year, the deduction under section 35D is not allowable to the assessee in view of the proviso quoted above. Therefore, this ground of the appeal of the Revenue is allowed.
31. In the Asstt.Year 2005-06, the Revenue has taken the addition ground of appeal, which reads as under:
"The ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.11,00,00,000/- made on account of provision for doubtful loans while computing book profit u/s.115JB of the Act."
32. Brief facts of the case that during the course of assessment proceedings, the AO observed that the assessee has calculated book profit under section 115JB after deducting the share in profit of Torrent ITA No.3906/Ahd/2008 (3 appeals) 12 Financiers and share of dividend earned and no adjustment to book profit has been made in respect of provision for doubtful loans debited by the assessee in profit & loss account. The AO show caused the assessee as to why the said provision, amounting to Rs.11 crores should not be added to the book profit, and in, response to the same, it was explained by the assessee that the provision for doubtful advances are not for making liabilities and are not covered by clause (c) of Explanation below section 11JB(2), for which the assessee placed reliance on the decision of Puna Bench of the Tribunal in the case of ACIT Vs. J.G. Vaccum Flask Pvt. Ltd., 83 ITD 242 (Pune) and Mumbai Bench of the Tribunal in the case of MSEB Vs. JCIT, 82 ITD 422 (Mum). The assessee further relied on the decision of the Hon'ble Apex Court in the case of Apollo Tyres Vs. CIT, 255 ITR 273, and contended before the AO that he has limited power of increase or decreasing the book profit, and he has no jurisdiction go behind the net profit shown in the profit & Loss account except to the extent provided in the explanation. The AO did not accept the explanation of the assessee by observing that the AO can adjust the book profit as per Explanation to section 115JB(2), and the addition of provision for doubtful loans to book profit is proposed to be made as per clause (c) under the explanation to section 115JB(2). The AO relied on the decision of Hon'ble Madras high Court in the case of CIT Vs. Beardsell Ltd., 244 ITR 256 and held that the provision for bad and doubtful debts is an unascertained liability and is liable to be added to book profit, and the assessee very well could have claimed the same by writing it off in the profit & loss account, rather than making a provision for such loan. The AO, therefore, added Rs.11 crores to the book profit of the assessee.
33. On appeal, the CIT(A) held that the provision for bad debt has made in order to reflect the true state of affairs of the company. The Company has not provided for a contingent liability but in fact it has provided for diminution in the value of an asset i.e. provision for ITA No.3906/Ahd/2008 (3 appeals) 13 doubtful advances. Further, if the provisions made by the assessee is for the diminution in the value of the assets, it would not be covered by clause (c) of the Explanation below section 115JB(2). The CIT(A) observed that this view is also supported by the decisions of the JCIT Vs. Usha Martin Industries Ltd., 288 ITR (AT) 63 (Cal)(SB). Hence, he deleted the addition made to the book profit on account of provision for bad debts.
34. DR supported the order of the AO.
35. On the other hand, the AR of the assessee relied on the decision of the Hon'ble Karntaka High Court in the case of CIT Vs. Yokogawa India Ltd., 17 taxmann.com 15 (Kar.) and submitted that the Hon'ble Karnataka High Court after taking into consideration the decision of the Hon'ble Apex Court in the case of Vijaya Bank Vs. CIT, 323 ITR 166 and CIT Vs. HCL Comnet Systems & Services Ltd. 305 ITR 409 and held as under:
"In the instant case, the debt is an amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, item (c ) of the Explanation is not attracted to the facts of the case. Item
(c) in section 115JA and 115JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in item (c ) of the Explanation. It is the amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision is made which is in the nature of diminution in the value of any asset would not fall within item (c) of Explanation (1). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (i) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, if case of the assessee falls under item (c). In meeting the aforesaid case, the assessee brought on record the judgment of the Apex Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 / 190 Taxman 257 where the Apex Court had an occasion to consider this Explanation . It accepted the argument on behalf of the revenue to the effect that ITA No.3906/Ahd/2008 (3 appeals) 14 the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. A mere debit to the profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the Explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under section 36(1)(vii ) by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However, it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to section 115JA or 115JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. In that view of the matter, there is not merit in this appeal."
36. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee debited Rs.11 crores in its profit & loss account under the head "provision for bad debts". The AO while computing the book profit of the assessee under section 115JB of the Act added back the aforesaid provision by invoking the provision of clause (c) of Explanation (1) of ITA No.3906/Ahd/2008 (3 appeals) 15 Section 115JB of the Act. The said clause (c) provides for amount set aside as provision for meeting liabilities other than ascertained liability.
37. On appeal, the CIT(A) deleted the above addition by observing that the said provision was not made in respect of any liability, and therefore, the clause (c) of Explanation (1) to section 115JB is not attracted. We find that the clause (i) has been inserted in Explanation (1) to section 115JB by the Finance (2) Act, 2009 with retrospective effect from 1.4.2001 and the said clause provides for increase of net profit by the amount set aside as provision for diminution in the value of any assets for calculating the book profit under section 115JB of the Act. The Hon'ble Karnataka High Court had an occasion to interpret the scope of above cited clause (i) in the case of CIT Vs. Yokogawa India Ltd. (supra) wherein it was held as under:
"In the instant case, the debt is an amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, item (c ) of the Explanation is not attracted to the facts of the case. Item
(c) in section 115JA and 115JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in item (c ) of the Explanation. It is the amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision is made which is in the nature of diminution in the value of any asset would not fall within item (c) of Explanation (1). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (i) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, if case of the assessee falls under item (c). In meeting the aforesaid case, the assessee brought on record the judgment of the Apex Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 / 190 Taxman 257 where the Apex Court had an occasion to consider this Explanation . It accepted the argument on behalf of the revenue to the effect that the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. A mere debit to the profit and loss ITA No.3906/Ahd/2008 (3 appeals) 16 account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the Explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under section 36(1)(vii ) by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However, it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to section 115JA or 115JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. In that view of the matter, there is not merit in this appeal."
38. We find that the complete facts for applying the above decision are not available before us. We, therefore, set aside the orders of the lower authorities on this issue, and remit the matter back to the file of AO for deciding the issue afresh in the light of the above cited decision of the Hon'ble Karnataka High Court after verifying the facts of the instant case. It is needless to mention that the AO shall allow reasonable opportunity of hearing to the assessee before deciding the ITA No.3906/Ahd/2008 (3 appeals) 17 issue afresh. Therefore, the ground of the appeal of the Revenue is to be treated as allowed for statistical purpose.
39. In the result, the appeals of the Revenue for the Asstt.Year 2005- 06 and 2006-07 are partly allowed as above, and the Cross Objection of the assessee is also partly allowed.
Order pronounced in the Court on Friday the 8th May, 2015 at Ahmedabad.
Sd/- Sd/-
(KUL BHARAT) ( N.S. SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 08/05/2015
आदे श क0 -%त1ल2प अ3े2षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं धत आयकर आयु!त / Concerned CIT
4. आयकर आयु!त(अपील) / The CIT(A)-III
5. $वभागीय 'त'न ध, आयकर अपील य अ धकरण / DR, ITAT,
6. गाड* फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad