Clause I of explanation to Section 115JB does not apply to actual write-offs

Facts and issues of the cases

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-1, Ahmedabad [“CIT(A) in short]” dated 07.06.2019. At the time of hearing, the learned Counsel for the assessee has not pressed ground No.1 raised by the assessee in this appeal, the same is accordingly dismissed as not pressed.

Apropos the issues raised in Ground Nos. 2 & 3, the relevant facts of the case are that the assessee is a company which is engaged in the business of manufacturing of gas turbine blades, engineering services, contract of gas turbine and trading of spare parts. The return of income for the year under consideration was filed by it on 14.10.2013 declaring a total income of the assessee at Rs.1,56,89,960/-. In the assessment originally completed under Section 143(3) of the Act vide an order dated 28.12.2015, the total income of the assessee was determined by the Assessing Officer at Rs.2,43,30,933/- after making certain additions and disallowances. Thereafter, it was noticed by the Assessing officer that the assessee-company in its Profit and Loss Account had debited Rs.6,03,098/- and Rs.31,00,000/- on account of provision for doubtful debts and provision for diminution in value of investment respectively.

Since both these provisions, according to the Assessing Officer, were liable to be added for the purpose of computation of book profit under Section 115JB of the Act, which was neither done by the assessee in its return of income nor even by the Assessing Officer in the assessment originally completed under Section 143(3) of the Act, the assessment was reopened by the Assessing Officer and a notice under Section 148 of the Act was issued by him to the assessee after recording the reasons and after taking approval of the competent authority. During the course of assessment proceedings before the Assessing Officer, the following contentions were raised on behalf of the assessee in support of its case that the provision for doubtful debts and provision for diminution in value of investment were not required to be added while computing book profit under Section 115JB of the Act.

The stand of the assessee was not found tenable by the Assessing Officer. According to him, the amount(s) set aside for provision made for meeting liability was liable to be added for the purpose of computing book profit. He also relied on the amendment made in Section 115JB of the Act by the Finance Act, 2009, with retrospective effect from 01.04.2001, whereby it was made clear that the amounts set aside as provision for diminution in value of the asset was required to be added to the book profit. He accordingly added the provision for doubtful debts amounting to Rs.6,03,098/- and the provision for diminution in the value of investment amounting to Rs.31,00,000/- to the book profit under Section 115JB of the Act in the assessment completed under Section 143(3) r.w.s. 147 of the Act vide an order dated 28.09.2018.

Against the order passed by the Assessing Officer under Section 143(3) r.w.s. 147 of the Act, an appeal was preferred by the assessee before the learned CIT(A) challenging both the additions made by the Assessing Officer to the book profit under Section 115JB of the Act on account of provision for doubtful debts and provision for diminution in the value of investment. During the course of appellate proceedings before the learned CIT(A), a detailed submission was made on behalf of the assessee relying mainly on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Vodafone Essar Gujarat Ltd, [2017] 397 ITR 55 (Guj.),to contend that it was not the case of mere provision made by the assessee for doubtful debts and diminution in the value of investment but such provision was actually reduced from the corresponding amounts of debts and investments as appearing on the asset side of the balance-sheet.

Observation by the court

Court had heard the arguments of both the sides and also perused the relevant material available on record. The learned Counsel for the assessee, at the outset, has submitted that none of the two provisions made by the assessee- company is for any liability. He has contended that the same in fact were not provisions made by the assessee by merely debiting the profit and loss account and crediting the provision for bad and doubtful debts and diminution in the value of investment. He has invited our attention to page Nos. 39 & 40 of paper- book to show that the provision for doubtful debts and provision for diminution in the value of investment was actually reduced by the assessee from the corresponding amounts of trade receivables and investments as appearing on the asset side of the balance-sheet of the assessee-company.

He submitted that the trade receivables and investments at the end of the year as reflected on the asset side of the balance-sheet thus were net of the provisions and since it was a case of actual write off; it would not be hit by clause (i) of the Explanation to Section115JB of the Act as held by the Hon’ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd (supra). In the said case, the amendment made to Section 115JB of the Act by inserting clause (i) to Explanation with retrospective effect was taken note of by the Hon’ble Gujarat High Court whereby any amount set aside for provision for diminution in the value of asset made by the assessee was liable to be added back for computation of book profit under Section 115JB of the Act. Hon’ble Gujarat High Court, however, made a distinction between a mere provision and actual write off and held that actual write off could not be hit by clause (i) of the Explanation to Section 115JB of the Act. Explaining further, it was held by the Hon’ble Gujarat High Court that a mere provision is made by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debts; but if such provision is simultaneously obliterated by the assessee from its account by reducing the corresponding amount from the loans and advances on the asset side of the balance-sheet thereby showing the loans and advances on the asset side of the balance-sheet as net of the provision at the end of the year, it would amount to a write off and such actual write off could not be hit by clause (i) of the Explanation to Section 115JB of the Act.

As demonstrated by the learned Counsel for the assessee from the annual account of the assessee-company, the provision made for doubtful debts as well as for diminution in the value of investment was reduced by the assessee from the corresponding amount of trade receivables and investments as reflected in the balance-sheet at the end of the year and this being so, we hold, respectfully following the decision of the Hon’ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd that it is not merely a case of provision but an actual write off which would not be hit by clause (i) of Explanation to Section 115 JB of the Act. Court accordingly delete both the additions made by the Assessing Officer and confirmed by the learned CIT(A) to the book profit of the assessee-company under Section 115JB of the Act on account of provision for doubtful debts and provision for diminution in the value of investment and allow ground Nos. 2 & 3 of the assessee’s appeal.