Income Tax Appellate Tribunal - Pune
Assistant Commissioner Of Income-Tax vs J.G. Vacuum Flasks (P.) Ltd. on 3 April, 2001
Equivalent citations: [2002]83ITD242(PUNE)
ORDER
K.C. Singhal, Judicial Member
1. The only issue arising out of this appeal relates to the computation of book profits under Section 115J(1A) of the Act for assessment year 1989-90.
2. The assessee is a private limited company which declared total income at nil for assessment year 1989-90 and book profit under Section 115J at net loss of Rs. 1,79,90,302. The Assessing Officer noticed from the audited statement of accounts that provisions for doubtful debts had been made by the assessee for Rs. 2,30,31,442 which had been debited to the P&L a/c. A reference was also made by the Assessing Officer to the Auditor's note No. 4 which, for the benefit of this order, is being reproduced as under:
Dues of Rs. 3,95,28,975 from M/s. Anchemedue Ltd. in respect of Tanzania Project are outstanding. The company had taken Export Credit Guarantee Corporation insurance cover to the extent of 90% of the dues Le. Rs. 3,55,76,078. The project Exports made by the Company was under an unconditional and irrevocable guarantee issued by National Bank of Commerce, Tanzania. The customer viz., M/s. Anchemedue Ltd. as well as the guarantor bank have failed to pay the instalments of Rs. 2,08,68,416 which have become due upto 31-3-1989. The claim of the Company for recovery of the amount from Export Credit Guarantee Corporation Ltd. in terms of the insurance cover has been rejected by Export Credit Guarantee Corporation Ltd. on technical grounds. In view of this, a provision for doubtful debts has been made for Rs. 2,08,68,416 being the amount of instalments that have fallen due by 31-3-1989. No provision has been made for the balance of Rs. 1,86,60,559. The Company is however, making all efforts for recovery of the dues from M/s. Anchemedue Ltd. and/or Guarantor National Bank of Commerce and from Export Credit Guarantee Corporation Ltd. under the insurance cover.
In view of the above Note, Assessing Officer observed as under :
A perusal of the above said note has shown that what has been provided is only of provision being the amount of instalments that was due to the assessee company by 31-3-1989 in Tanzania. The assessee is still persuing for the recovery of the said amount at various levels and in the circumstances it cannot be accepted that the amount has fallen bad and irrecoverable.
Accordingly, it was held by him that the amount represented by the provisions for doubtful debts should not be allowed as a deduction while computing the book profits under Section 115 J. Consequently, the Assessing Officer determined the profits at Rs. 9,19,607 as under :
Rs.
Net loss as per P&L a/c (-) 1,79,90,302
Less : Provision for doubtful debts 2,08,68,416
-----------------
28,78,114
Less : Deduction under Section 80HHC 19,58,507
-----------------
9,19,607
-----------------
A sum of Rs. 2,75,882 was held to be income chargeable to tax (30% of the above amount of book profits).
3. The matter was carried before the CIT(A) who held that provisions for doubtful debts was not on account of any contingencies but was on account of real loss which was ascertainable at the time of completion of the accounts and was not covered by any clause of the Explanation to Section 115J. It was also held by him that the issue was covered by two decisions of the Tribunal as Apollo Tyres Ltd. v. Dy. CIT[1992] 43 ITD 464 (Coch.) and ITO v. Kesho Ram [1993] 199 ITR 164' (Punj. & Har.). Aggrieved by the same, revenue is in appeal before the Tribunal.
4. The learned Sr. D.R. has vehemently assailed the order of the CIT(A) by submitting that CIT(A) erred in holding that the issue before him was not covered by any clause of Explanation to Section 115J. According to the learned Sr. D.R. the issue is covered by Clause (c) of the Explanation to Section 115J which provides that net profit as prepared under Sub-section (1 A) shall be increased by the amount set aside to the provisions made for meeting the liabilities other than the ascertained liabilities. It was further submitted by him that the provisions made for doubtful debts was not for ascertained liabilities but was towards contingent liability. He drew our attention to the auditor's note which clearly provides that the company was making all efforts for recovery of the dues from the party or guarantor bank. Even, according to the assessee, there were hopes of recovery and therefore, it could not be said that provisions were made for ascertained liability. It was also submitted by him that party account was not written off by the assessee which also shows that the liability was not ascertained. According to him, if there was ascertained liability, then assessee should have written off the account of the party itself instead of reducing the sundry debtors in the balance-sheet. In this connection, he relied on the decision of the Madras High Court in the case of Dy. CITv. Beardsell Ltd. which directly covers the issue before us.
4.1 In the course of hearing, a query was raised from the Bench as to how the amount for doubtful debts could be described on account of any liability, inasmuch as the assessee was not required to pay any sum to any person. Faced with the situation, the learned Sr. D.R. submitted that this aspect should be considered in broader sense. According to him, the legislature intended to add back all the provisions made by the assessee and therefore, such provision should also be considered as liability. He again relied on the decision of the Madras High Court mentioned above, wherein such issue was considered on the footing that it was a case of liability. He has also referred to the recent decision of the Bombay High Court in the case of CIT v. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322 wherein the provisions, for doubtful debts was considered as liability though the case was decided in favour of the assessee, because the Revenue had not disputed the contention of the assessee that such provision was for ascertained liability.
5. On the other hand, the learned counsel for the assessee has fully supported the order of the CIT(A). According to him, the provision for doubtful debts was for diminishing the value of the assets and not for any liability. Therefore, CIT(A) was right in holding that the issue was not covered by any clause of the Explanation to Section 1,151. He also relied on the decision of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.) for the proposition that the net profit could not be disturbed unless inclusion of any item is called for under any clause of the Explanation to Section 115J. Regarding the entries in the books of account, it was admitted by him that party account had not been written off but it was contended that for claiming a debt as bad debt, it is not necessary to write off the party account. According to him, a debt could be written off either by crediting the party account or by giving corresponding entry of credit to the bad and doubtful account. In this regard, he relied on the decision of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd v. CIT[1983] 143 ITR 1661 which has also been followed by the Bombay High Court in the case of CITv. General Insurance Corpn. of India [2001] 114 Taxman 13. It was further submitted by him that such amount could not be written off without the permission of Reserve Bank of India.
Therefore, the claim of the assessee cannot be rejected on the ground that party account was not written off. He also relied on the decision of the Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT[1979] 120 ITR 792 wherein it has been held that honest judgment of businessman has to be seen from the facts of the case for allowing the claim of bad debt and such claim of assessee cannot be rejected merely because the assessee had not taken recourse to recover the amount by filing suits in Court of Law. Regarding the decision of the Bombay High Court in the case of Echjay Forgings (P.) Ltd. (supra) it was submitted by him that the said judgment rather helps the assessee, inasmuch as the Court held that no addition could be made if such provision was made for ascertained liability. Regarding Madras High Court decision, it was submitted by him that it was not argued before that Court that provision was made for ascertained liability. He also took us through the paper book to show that provision for doubtful debts was made in respect of real loss as the party and the guarantor bank had refused to make payment.
6. Rival submissions of the parties have been considered carefully. We have gone through the provisions of Section 115J and case-law referred to by the parties. Perusal of Section 115J shows that it is a code in itself for computing the book profits in the case of companies. Sub-section (1A) provides that P&L a/c shall be prepared in accordance with provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Explanation to this section provides that such net profit shall be adjusted by increase or decrease as the case may be and the amounts in respect of items specified therein. The case of the Revenue is that the issue in the present case is governed by Clause (c) of the Explanation which provides that amounts set aside to the provision made for meeting the liabilities other than the ascertained liabilities. So the question for our consideration is whether the provision made by the assessee for doubtful debts fall within the Clause (c) of the above Explanation.
7. The perusal of the aforesaid clause shows that (1) there must be provision made by the assessee; (2) such provision must be to meet the liability of the assessee; and (3) such liability should be other than the ascertained liability. Further, it is seen that Clause (d) of the Explanation speaks of the adjustment of the 'provision for losses of subsidiary companies'. This makes it clear that the legislature did not intend for adjustment to all types of provisions irrespective of their nature. Had it been so intended, it could have mentioned as "all provisions made by assessee" instead of specifying the two types of provisions. Consequently, if any provision made by the assessee does not fall either in Clause (c) or Clause (d), then, in our opinion no adjustment can be made in this section.
8. We have given our deep thoughts to the issue before us and are of the 'considered opinion that the provision for doubtful debt cannot be considered as provision for liability, much less the ascertained liability. By no stretch of imagination it cannot be said that there is any liability of the assessee in prasenti or in futuro when a debt is considered as bad or doubtful. There is no obligation of the assessee to pay any sum to anybody in such cases. The only consequence that follows in considering the debt is bad or doubtful is that it would reduce or diminish the value of the asset of the assessee on account of non-recovery of the debt. Therefore, we have no hesitation in holding that the provision made towards bad or doubtful debts cannot be said as provision to meet any liability much less the ascertained liability. Consequently, it is not necessary for us to consider the factual aspect of the issue as to whether the debt had become bad or not in the year under consideration.
9. Before parting with our order, we would like to discuss the case law relied upon by the learned Sr. DR. The decision of the Madras High Court in the case of Beardsell Ltd. (supra) proceeds on the assumption that provision for doubtful debt was the provision for liability. It is on this basis, it was held that the provision towards irrecoverable debt could not be excluded unless it was ascertained one. The aspect of the issue considered by us was neither argued nor considered before/by the Court and hence the said case is quite distinguishable. Similarly the Bombay High Court in the case of Echjay Forgings (P.) Ltd. (supra) did not consider the aforesaid aspect. The Court decided the issue in favour of the assessee on the ground that the contention of the assessee that provision for bad and doubtful debts was towards ascertained liability, was not disputed by the Revenue. This case also proceeded on the assumption that such provisions were towards liability. Hence this decision also does not touch the issue considered by us.
10. In view of the above discussion, the issue before us is decided in favour of the assessee. The order of the CIT(A) is therefore, upheld.
11. In the result, the appeal of the Revenue is dismissed.