THE COMMISSIONER OF INCOME TAX V. M/S. TELCO CONSTRUCTION

ITA/245/2015

AI Insights

The case involves the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax as appellants against M/S. TELCO Construction Equipment Co. Ltd. as the respondent. The appeal was filed under Section 260-A of the Income Tax Act, 1961, challenging the order passed by the ITAT, Bangalore, which confirmed the order of the Appellate Commissioner. The main legal contention revolved around the treatment of provisions for bad debts and their impact on the balance sheet and profit & loss account under the accounting standards and the Companies Act. The High Court referenced a similar case, ITA No.244/2015, where it had previously ruled on the matter, leading to the dismissal of the current appeal.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 744369 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 07-06-2016
• Assessment Year: misc
• Other Referred Cases: CIT v. Yokogawa India Ltd., [(2012) 204 taxman 305]
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: DILIP ADV
• Keywords: Assessment year 2001-2002; Income Tax; Provision for bad debts; Write off of Bad Debts
• Section: 115JB; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 7TH DAY OF JUNE 2016 PRESENT THE HON’BLE MR.JUSTICE JAYANT PATEL AND THE HON’BLE MR.JUSTICE B.SREENIVASE GOWDA ITA NO.245/2015 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX C. R. BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-12 (3), RASHTROTHANA BHAVAN, NRUPATHUNGA ROAD, BANGALORE-560001. ... APPELLANTS (BY SRI DILIP ADV. FOR SRI K. V. ARAVIND, ADV.) AND: M/S. TELCO CONSTRUCTION EQUIPMENT CO. LTD., NO.45, JUBILEE BUILDING, MUSEUM ROAD, 2 BANGALORE-560026, PAN: AAACT 9077B. ... RESPONDENT THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 22/01/2015 PASSED IN ITA NO.561/BANG/2005, FOR THE ASSESSMENT YEAR 2001-2002 PRAYING TO I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.561/BANG/2005 DATED 22/01/2015 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(3), Bangalore. THIS APPEAL COMING ON FOR ORDERS THIS DAY, JAYANT PATEL J., DELIVERED THE FOLLOWING: JUDGMENT When the matter was listed for orders, at the request of the learned Counsel for the appellant, we have taken up the main matter itself. 2. We may record that the office has raised the objection that the tax effect is less than the prescribed limit and therefore the appeal could not be said to be maintainable. 3 3. However, the learned Counsel for the appellant by relying upon paragraph-5 of the Circular dated 10.12.2015 contends that as it was a common order of the Tribunal in respect of a different assessment year and in the other matter where the value of tax effect was exceeding Rs.20,00,000/- (Rupees twenty lakhs), ITA No.244/2015 was preferred and this Court vide order dated 10.03.2016 disposed of the appeal. He submitted that as such, the present matter will be covered by the aforesaid decision of this Court but as it is a common order, the present appeal can be said as maintainable even if the tax effect is less than the prescribed limit. 4. In view of the above, we have further found it proper to consider the main matter. 5. The appellant-Revenue has preferred the present appeal by raising the following substantial questions of law: 4 “1. Whether the Tribunal was correct in holding that the assessee has reduced the provision so made from the sundry debtors in the balance sheet and hence the same cannot be considered as provision but is the write off of bad debts without appreciating that as per the accounting standards the provisions are either shown separately in the balance sheet or may be reduced from the concerned asset/liability as per the practice followed by the assessee for writing its books of accounts? 2. Whether the Tribunal is correct in debiting the P & L account, the assessee as reduced the amount from the debtors thereby reducing the value of the asset without appreciating that provision of clause (i) of explanation 1 to section 115JB require that the net profit as shown in P & L account should be increased by the 5 amount, or amount set aside as provision for diminution in the value of asset if any debited to the P & L account and reduction of the provision from the debtors is only a requirement under the companies Act?” 6. We have heard Mr.Dilip, learned Counsel for Mr.K.V.Aravind, learned Counsel appearing for the appellant. 7. The learned Counsel for the appellant fairly conceded that this matter is already covered by the decision of this Court dated 10.03.2016 in ITA No.244/2015. 8. We may record that this Court in the aforesaid decision observed thus: “The revenue has preferred the present appeal by raising the following substantial questions of law: 6 1. Whether the Tribunal was correct in holding that the assessee has reduced the provision so made from the sundry debtors in the balance sheet and hence the same cannot be considered as provision but is the write off of bad debts without appreciating that as per the accounting standards the provisions are either shown separately in the balance sheet or may be reduced from the concerned asset/liability as per the practice followed by the assessee for writing its books of accounts? 2. Whether the Tribunal is correct in debiting the P & L account, the assessee as reduced the amount from the debtors thereby reducing the value of the asset without appreciating that provision of clause (i) of explanation 1 to section 115JB require that the net profit as shown in P & L account should be increased by the amount, or amount set 7 aside as provision for diminution in the value of asset if any debited to the P & L account and reduction of the provision from the debtors is only a requirement under the Companies Act? 2. We have heard Mr. K.V.Aravind, learned counsel appearing for appellants-revenue and Mr.A.Shankar, learned counsel appearing for respondent-assessee. 3. We may record that the Tribunal, while considering the appeal, at paragraphs 25 and 26 has observed thus: “25. We have perused the orders and heard rival contentions. Claim of assessee is that though it had termed the sum as provision for bad debts, having deducted such amount from its gross debtors, it was equivalent to a bad debt write off. In other words, it was no more a provision. Thus, it would not fall within the ambit of clause (g) of 8 Explanation to Section 115JA(2) of the Act. We are inclined to accept this contention since Balance sheet as on 31.3.2000 of assessee, at its Schedule VIII, copy of which has been placed before us, shows that aggregate amount of sundry debtors was Rs.107,34,96,981 from which assessee had deducted the provision of Rs.2,04,24,768. What was reflected by assessee in its balance sheet under the head ‘debtors’ was only the net amount. In such circumstances, we are of the opinion that judgment of Hon’ble Apex Court in Vijaya Bank (Supra) as well as that of Hon’ble jurisdictional High Court in Yokogawa India Ltd., (supra), would come to its aid. In the case of Yokogawa India Ltd., (supra), the issue involved was very similar, though the computation was with reference to section 115JB of the Act. At para 8 of its judgment, it was held as under by Their Lordships:- “8. In the present 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. 9 Therefore it was held that Item (c) of the Explanation is not attracted to the facts of the case. Item (c) in s. 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 Expln. (1). It is in that context the CIT(A) 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, in case of the assessee falls under Item (c). In meeting the aforesaid case, the learned counsel for the assessee brought to our notice the judgment of the apex Court in the case of Vijaya Bank vs. CIT (supra) where the apex Court had an occasion to consider his explanation. It accepted the argument on behalf of the Revenue to the effect 10 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 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 assesses used to take the benefit of deduction under s. 36(1)(vii) of the 1961 Act 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 P&L a/c 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, consequentially, at the end of the year, the figure in the loans and advances or 11 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 P&L as/c 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 s. 115JA or JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the CIT(A) to the assessee is in no way affected. In that view of the matter, we do not see any merit in this appeal.” 26. It has been clearly held by Their Lordships that retrospective benefit to the amendment will 12 not affect an assessee, once debtors were netted off with the provisioning. We are, therefore, of the view that Revenue cannot succeed on this ground. This issue is decided in favour of assessee.” The aforesaid paragraphs shows that the issue is already covered by the above referred decision of this Court in the case of CIT v. Yokogawa India Ltd., [(2012) 204 taxman 305]. However, learned counsel appearing for the appellants did contend that the aforesaid decision of this court in the case of Yokogawa India Ltd., supra has been carried before the Apex Court. 4. Be that as it may, when the issue is already covered by the decision of this court, we do not find any substantial question of law would arise for our consideration. However, in the event the Apex Court takes a different view, the revenue may take proceedings in accordance with law. 13 5. Subject to the aforesaid observation, appeal is dismissed.” 9. Under the circumstances, subject to the aforesaid observation, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE JT/- "