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Joint Commissioner of Income Tax Vs. Usha MartIn Industries Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(2006)105TTJ(Kol.)543
AppellantJoint Commissioner of Income Tax
RespondentUsha MartIn Industries Ltd.
Excerpt:
1. this special bench has been constituted under section 255(3) of the it act, 1961 by the hon'ble president, tribunal in the case of m/s usha martin industries ltd. vide ita no. 1304/cal/2000 for asst. yr. 1997-98 to consider the following questions: whether the provisions made for doubtful debts, advances and investments i.e. for unascertained liabilities, falls within the purview of adjustments under section 115ja of the it act, 1961 and whether the ao was justified to make adjustment of rs. 1,56,00,000 in this case in computing the book profits? 2. the case was fixed for hearing on 5th may, 2006 and on this date the learned authorised representative of the assessee raised preliminary objection against the question referred for the consideration of the special bench. he contended that.....
Judgment:
1. This Special Bench has been constituted under Section 255(3) of the IT Act, 1961 by the Hon'ble President, Tribunal in the case of M/s Usha Martin Industries Ltd. vide ITA No. 1304/Cal/2000 for asst. yr. 1997-98 to consider the following questions: Whether the provisions made for doubtful debts, advances and investments i.e. for unascertained liabilities, falls within the purview of adjustments under Section 115JA of the IT Act, 1961 and whether the AO was justified to make adjustment of Rs. 1,56,00,000 in this case in computing the book profits? 2. The case was fixed for hearing on 5th May, 2006 and on this date the learned Authorised Representative of the assessee raised preliminary objection against the question referred for the consideration of the Special Bench. He contended that the question framed has described the provision made for doubtful debts as unascertained liability. The question is referred with a preconceived notion that the provision for doubtful debts, advances and investments is unascertained liability. In such an event, the issue before the Special Bench would be diluted. The learned Authorised Representative contended that the question may kindly be reframed by expunging the words "unascertained liability".

The learned Departmental Representative, on the other hand, has stated that the question has rightly been framed. The Special Bench referred the matter to the Hon'ble President, Tribunal for necessary orders. The Hon'ble President directed that the entire appeal should be placed for consideration and disposal by the Special Bench. Accordingly, the Special Bench proceeded to decide the Revenue's appeal in the case of Usha Martin Industries Ltd. 3. Balmer Lawrie & Co. Ltd. vide application dt. 19th June, 2006 requested the permission of the Hon'ble President for joining as intervener in the appeal filed by the assessee as well as Revenue for asst. yr. 2002-03 vide ITA No. 2437/Kol/2005 and ITA No. 2449/Kol/2005.

At the time of hearing, it was pointed out by the learned counsel, Sri N.K. Poddar, who appeared on behalf of Balmer Lawrie & Co. Ltd. that the assessee is a public sector undertaking of the Government of India.

Therefore, the permission of the Cabinet Committee on Dispute (in short COD), is required to the appellant before proceeding with this appeal.

The assessee as well as Revenue both has applied to the COD and the COD vide minutes dt. 12th May, 2006 permitted the assessee as well as Revenue to proceed only with regard to ground No. 1 of their respective appeals, which reads as under; 1. That the learned CIT (A) erred in law and on facts in considering the provisions for doubtful debts, loans and advances amounting to Rs. 92,74,305 as provisions for meeting liabilities other than ascertained liabilities and adding it back to "Book profit" under Section 115JB of the Act.

1. That the learned CIT (A) has erred in directing the AO to exclude the addition of Rs. 2,10,41,506 on account of diminution in the value of investments of the assessee-company in US-64 of UTI and the value of equity shares of India Marine Freight Containers Mfg. Ltd. denying the decision in the case of Eyre Smelting (P) Ltd. (supra) and the statutory provisions of Clause (c) of the Explanation to Section 115JB.3.1. He stated that the Special Bench is seized with both the above issues. Therefore, the appeals by the assessee as well as Revenue should be heard and decided by the Special Bench. The Hon'ble President, Tribunal accepted the assessee's request in this regard and, therefore, the Special Bench proceeds to decide the appeal in the case of Balmer Lawrie & Co. Ltd. 4. Another assessee, M/s Indian Container Leasing Co. Ltd. vide application dt. 19th June, 2006 has requested for the permission of the Hon'ble President, Tribunal to join as intervener with regard to Revenue's appeal for asst. yrs. 1997-98 and 1998-99 vide ITA Nos. 1485 and 1486/Kol/2002. The Hon'ble President, Tribunal referred these two appeals also to the Special Bench as the issue raised in these appeals is identical to the issue raised before the Special Bench. Accordingly, we proceed to decide the appeals of the Revenue in the case of Indian Container Leasing Co. Ltd. 5. The learned Departmental Representative, Mr. M.W. Haque on behalf of the Revenue has first stated the fact of the case and submitted that the assessee M/s Usha Martin Industries Ltd. has filed its return of income showing a gross loss of Rs. 38,76,70,246. However, it computed book profit under Section 115JA at Rs. 14.52 crores. The AO while processing the return under Section 143(1)(a) added provision for doubtful debts to the tune of Rs. 1,56,00,000 and provision for wealth-tax of Rs. 1,25,000 in such calculation of book profit under Section 115JA. Such addition made by the AO in computation of book profit were deleted by this Tribunal while disposing ITA No.693/Cal/1999, dt. 24th March, 2000 reported as Usha Maitin Industries Ltd. v. Jt. CIT 6. The AO has thereafter while framing the regular assessment under Section 143(3) has once again added the above provision in the income of the assessee vide order dt. 14th March, 2000 and such addition made by the AO has been deleted by the learned CIT (A) following the order of this Tribunal while disposing the appeal pertaining to assessment framed under Section 143(1)(a). The learned Departmental Representative has also filed the above order and computation of income in his paper book filed before us.

7. The learned Departmental Representative, Shri M.W. Haque has pointed out from the computation of total income filed by the assessee which is also available at p. 1 of the paper book filed by the Revenue that the assessee has itself added such provisions in the net profit while computing its total income. It has, therefore, been contended by the learned Departmental Representative that these provisions made by the assessee for bad and doubtful debts were not ascertained liability in the opinion of the assessee itself.

8. The learned Departmental Representative has submitted that there is a basic difference between the bad debts and the doubtful debts as bad debt denotes the debts which have been ascertained and are not recoverable at all, whereas doubtful debts are always unascertained. It has been pointed out by the learned Departmental Representative that from the perusal of schedule of computation of net profit in accordance with the Section 349 of the Companies Act filed by the assessee before RoC, which is also available at p. 17 of the paper book, it is seen that such provision for doubtful debts has been added in the net profit determined by the assessee for the purpose of directors' remuneration.

It has, therefore, been argued by the learned Departmental Representative that since the Companies Act itself recognizes the concept of adding back of such provision for the purpose of arriving at the net profit under Section 198 of the Companies Act, the AO has no power to disturb such net profit calculated as per Companies Act in view of the decision of the Hon'ble Supreme Court in case of Apollo Tyres Ltd. v. CIT , wherein it has been held that the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c. It has, therefore, been submitted by the learned Departmental Representative that since the AO has disallowed the above provision in the P&L a/c prepared as per Companies Act, such addition should have been upheld by the CIT (A).

9. The learned Departmental Representative has relied on the decision of the Hon'ble Madras High Court in case of Dy. CIT v. Beardsell Ltd. wherein it has been held by the Hon'ble Madras High Court that if a debt had become irrecoverable, the same could be written off and deducted from the profit of the business and a debt, where the recovery was doubtful, could not be termed to be an ascertained liability as mentioned under Section 115J of the Act and could not be excluded from the book profits. The learned Departmental Representative has accordingly pleaded that the facts of the present case are exactly identical to one disposed by the Hon'ble Madras High Court in case of Beardsell Ltd. (supra), which strengthen the action of AO while adding such provisions for the computation of book profits.

10. The learned Departmental Representative has thereafter relied on the decision of the Calcutta Tribunal in case of ICI India Ltd. v. Dy.

CIT in ITA No. 2189/Cal/1995, dt. 18th Nov., 2002, a copy of which placed in the paper book was filed by the Revenue, which is available at pp. 25 to 42, wherein the Tribunal while dealing with identical issue involved in the present case has decided the same in favour of Revenue following the decision of the Hon'ble Madras High Court in case of Beardsell Ltd. (supra). It has also been pointed out by the learned Departmental Representative that the Tribunal while disposing the appeal has noted down the fact that the Hon'ble Madras High Court while deciding this case had applied the principle laid down by the Hon'ble Supreme Court in case of CIT v. Jyoti Ltd. and in case of State Bank of Patiala v. CIT which was 11. The learned Departmental Representative has mentioned that though the learned CIT (A) has deleted the addition made by the AO following the decision of this Tribunal while disposing the appeal against the order framed under Section 143(1)(a), but such order of Tribunal dt.

28th March, 2000 was without taking into consideration the decision of the Hon'ble Madras High Court in case of Beardsell Ltd. (supra) which was passed on 14th March, 2000. Since this Tribunal while disposing the appeal against the order under Section 143(1)(a) had no benefit of the decision of the Hon'ble Madras High Court in case of Beardsell Ltd. (supra), the action of learned CIT (A), in relying on such order of Tribunal is not sustainable.

12. It has, therefore, been pleaded by the learned Departmental Representative Shri M.W. Haque that the AO has added the provisions for doubtful debts after taking into consideration the relevant facts and the legal interpretation as laid down in IT Act and Companies Act and by following the decision of the Hon'ble Madras High Court in case of Beardsell Ltd. (supra) and the decision of this Tribunal in ICI India Ltd. The learned Departmental Representative also submitted that since the learned CIT (A) has deleted the addition only on the basis of the decision of Tribunal in assessee's own case in 143(1)(a) assessment, which was passed without having benefit of the decision of the Hon'ble Madras High Court m case of Beaidsell Ltd. (supra) and, therefore, does not hold good. It has, therefore, been pleaded by the learned Departmental Representative that provision made by the assessee on account of bad and doubtful debts certainly carries the character of unascertained liabilities, which has to be added in the book profit made under Section 115JA. Regarding provision for wealth-tax the learned Departmental Representative has relied on the same argument, advanced by him for provision for doubtful debts.

13. In the rival submission, the learned Authorized Representative for M/s Usha Martin Industries Ltd., Sri Rahul Mitra opening the argument on behalf of the assessee stated that the AO has added back the above provisions on the alleged ground that the same represents a provision made towards unexplained (sic-unascertained) liabilities by invoking provisions of Clause (c) of the Explanation appended below to Section 115JA(2) of the Act. The learned Counsel submitted that the book profits under Section 115JA are to be drawn in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act and Explanation appended below Section 115JA(2) referred to certain adjustments by way of increase in respect of certain items as referred in Clauses. (a) to (f), out of which in the present cases only Clauses (b) and (c) are material i.e. Clause (b) which says that the amount carried to any reserve by whatever name called and Clause (c) says about the amount or amounts set aside to provision made for meeting liabilities other than unascertained liabilities. It has, therefore, been submitted by the learned Counsel for the assessee that Special Bench has to decide as to whether or not the provisions for doubtful debts can be held as an amount carried to any reserve as referred to in Clause (b) or as amount set aside to provision made for meeting unascertained liabilities, as referred to in Clause (c).

14. The learned Counsel for the assessee has thereafter submitted that the terms "reserve" and "provision" have not been defined in the Act and, therefore, in order to interpret the said terms, it was necessary to consider the meanings assigned to them, if any, in the Companies Act, since the relevant section, i.e., Section 115JA of the Act, deals with the assessment of companies. In support of above assertion, he has relied on the decision of the Hon'ble Bombay High Court in case of Petrosil Oil Co. Ltd. v. CIT was rendered by following the decision of the Hon'ble Supreme Court in case of Howrah Trading Co. Ltd. v. CIT .

15. Shri Mitra has submitted that for the purpose of construing the provisions of the Act dealing with the assessment of companies undefined words used in the Act should be interpreted by importing the definition enumerated to them in the Companies Act. He has stated that the terms "provision" and "reserve" have been defined in Clause 7(1) of Part III of Schedule. VI to the Companies Act, where the term "provision" has been defined to mean, subject to Sub-clause (2) of the said clause, any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. Whereas the term "reserve" has been defined in a negative way so as not to include any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability. Shri Mitra has further pointed out that Clause 7(2) of the Part III of the said Schedule provides that if any provision, which is made as per Clause 7(1)(a) is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of the Schedule as a reserve and not as a provision.

16. It has, therefore, been pleaded by Shri Mitra that from the above interpretation of provisions, it is evident that the Companies Act envisages two types of provisions, namely amounts set apart for providing for depreciation, renewals or diminution in value of assets and amounts set apart for providing for any known liability. Shri Mitra has submitted that since Clause (c) of the Explanation appended below Section 115JA(2) of the Act provides that amounts set aside to provisions made for meeting liabilities other than ascertained liabilities should be added back to the net profit as per the P&L a/c for the purpose of computing the "book profit" within the meaning of the said statute, therefore, the provisions, which come within the ambit of Clause (c) of the Explanation are only those made with respect to liabilities and that too on account of unascertained liabilities. It was, therefore, emphasized by Shri Mitra that the said clause does not cover provisions made for diminution in value of assets.

17. Shri Mitra has pointed out that in the instant case, the impugned provision of Rs. 1.56 crores has been made to provide for diminution in the values of certain assets, namely debtors, advances and investments of the assessee-company and not for any liability whether ascertained or unascertained and, therefore, the impugned provisions cannot be added back to the net profit as per the P&L a/c by allegedly invoking the provisions of Clause (c) of the Explanation appended below Section 115JA(2) of the Act.

18. Shri Mitra has also contended that the said provisions cannot also be held to be a "reserve" within the meaning of Clause (b) of the Explanation appended below Section 115JA(2) of the Act as both auditors and directors in their report have opined that, such provision was not in excess of the amount which in their opinion was reasonably necessary for the purpose and, therefore, cannot be added back to the net profit by allegedly invoking the provisions of Clause (b) of the Explanation appended below Section 115JA(2) of the Act.

19. The learned Counsel for the assessee in support of his above argument has placed reliance on the following decisions:Usha Martin Industries Ltd. v. Jt. CIT (iii) Steel Authority of India Ltd. v. Dy. CIT (2001) 70 TTJ (Del) (TM) 849 : (2001) 76 ITD 69 (Del) (TM);Asstt. CIT v. J.G. Vacuum Flasks (P) Ltd. (2002) 83 ITD 242 (Pune).

The learned Counsel Shri Mitra has submitted that the case laws relied by the learned Departmental Representative for the Revenue in case of Beardsell Ltd. (supra) and the decision of this Tribunal in case of ICI India Ltd. (supra) is distinguishable as though this has been dealt with under various perspectives. And at the same time they have not considered the main issue that whether the provision for doubtful debts is a deduction from the value of assets or a liability and such issue has only been discussed by the Hon'ble Calcutta Tribunal in assessee's own case, apart from Pune Bench in case of J.G. Vacuum Flasks (supra), which is very much relevant for determination of the issue for the consideration of this Special Bench.

19.1. It has also been contended by the learned Counsel for the assessee that both the Hon'ble Madras High Court and this Tribunal while deciding the issue in case of ICI India Ltd. (supra) has not dealt with the issue regarding provision for diminution in the value of assets as it was neither argued nor adjudicated by both the Hon'ble High Court and this Tribunal. Learned Counsel Shri Mitra has stated that the Tribunal, Pune Bench after carefully considering the relevant provision laid down in Clause (c) of Explanation to Section 115JA has arrived at a conclusion that the provision for doubtful debts cannot be considered as provision for liability, much less than the ascertained liability as by no stretch of imagination, it can be said that there is any liability on an assessee in present or in future when a debt is considered as debt or doubtful. Shri Mitra pointed out that it has further been held by the Tribunal, Pune Bench that there is no obligation on an assessee to pay any sum to anybody in such case and only consequence that follows in considering the bad or doubtful, will reduce or diminish the value of assets of the assessee on account of non-recovery of the debt after observing the above. Sri Rahul Mitra pleaded that it has been held by the Tribunal, Pune Bench that the provision made towards bad or doubtful debts could not be said as provision to meet any liability.

20. Concluding his argument, the learned Counsel Shri Mitra has submitted that the provision for doubtful debts has rightly been deducted by the assessee for computation of book profit under Section 115JA and, therefore, the action of AO in adding back such provision holding the same as unascertained liability was not correct and the learned CIT (A) was justified in reversing the action of AO after carefully understanding the law and following the earlier decision of this Tribunal in assessee's own case and such order of learned CIT (A) is liable to be upheld.21. Learned senior counsel Shri N.K. Poddar appearing on behalf of M/s Balmer Lawrie & Co. Ltd. in ITA Nos. 2437 and 2449/Kol/2005 and in case of Indian containers placed his reliance and endorsement on the arguments advanced by Shri Rahul Mitra, and he further submitted that from the perusal of Schedule. VI of Companies Act, it is evident that by no stretch of imagination, the provision for bad and doubtful debts can be held as unascertained liability. He has filed detailed paper book in which he has annexed extract from the Companies Act and the extract of various publications such as Dictionary for Accountants, terms used in financial statements, text books on accountancy, accounting standard announced by ICAI, etc. and decisions of various Courts and Tribunals.

22. Learned senior counsel Shri Poddar has first drawn the attention of this Bench on pp. 8, 11, 13, 16, 18, 19 and 20 of paper book, wherein the extract from the Companies Act, 1956 has been annexed. It has been pointed out by Shri Poddar that from the perusal of different nature of liabilities and assets as mentioned therein in Schedule VI of Companies Act, it is apparent that all liabilities are specified and clearly mentioned. Learned senior counsel has pointed out that the current liabilities and provisions have been defined in a broader way in Schedule VI of the Companies Act wherein the nature of liabilities and provisions along with the contingent liability has clearly been mentioned and nowhere provision for bad and doubtful debts appeared in such current liabilities and provisions as required to be mentioned under the head "current liabilities and provisions" of the balance sheet prepared as per Schedule VI of Companies Act, 1956.

23. The learned senior counsel Shri N.K. Poddar has thereafter submitted that such provision is in the nature of diminution in the value of assets as also recognized by the Part II of Schedule VI of the Companies Act, which enumerates the requirements as to P&L a/c as per Companies Act.

23.1 Learned senior counsel, Shri N.K. Poddar has pleaded that Part iii of Schedule VI makes the word "provision" and "liability" more clear and understandable while interpreting the various words used therein.

It has been stated by Shri Poddar that as per Part III, Clause 7 to Schedule VI of Companies Act, the word "provision" has been defined as under: The expression 'provision' shall, subject to Sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

The expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities, where (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision.

23.3 Shri Poddar has further contended that the expression "reserve" and "capital reserve" has also been specified by Clauses 7(b) and 7(c) of Part III which mean as under: (b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability; (c) the expression "capital reserve" shall not include any amount regarded as free for distribution through the P&L a/c; and the expression "revenue reserve" shall mean any reserve other than a capital reserve.

23.4 Shri Poddar has thereafter contended that the above provision as laid down in Schedule VI of Companies Act has to be understood with the help of various legal interpretations as laid down in various dictionaries for Accountants and the authority. He thereafter has first referred to the Dictionary for Accountants by Eric L Kohler, for the meaning of the word "provision", wherein it reads as under: Provision 1 - charge for an estimated expense or loss or for a shrinkage in the cost of an asset offsetting an addition to a valuation account such as a reserve or accumulation of depreciation or the accrual of a liability such as an income-tax. 2. (British usage) (a) An amount entered on the books of account covering an estimated or accrued liability, (b) The amount of a reserve for 'depreciation, bad debts or inventory decline; a valuation account.

23.5. He has thereafter referred to the Black's Law Dictionary for the meaning of provision, which reads as under: Foresight of the chance of an event happening, sufficient to indicate that any present undertaking upon which its assumed realization might exert a natural and proper influence was entered upon in full contemplation of it as a future possibility.

In commercial law. Funds remitted by the drawer of a bill of exchange to the drawee in order to meet the bill, or property remaining in the drawee's hands or due from him to the drawer, and appropriated to that purpose.

In ecclesiastical law. A nomination by the Pope to an English benefice before it became void; the term was afterwards indiscriminately applied to any right of patronage exerted or usurped by the Pope.

In French law. An allowance or alimony granted by a Judge to one of the parties in a cause for his or her maintenance until a definite judgment is rendered.

In English History. A name given to certain statutes or Acts of Parliament, particularly those intended to curb the arbitrary or usurped power of the sovereign, and also to certain other ordinances or declarations having the force of law.

A term used in the reign of Henry III. to designate enactments of the King in Council. Perhaps less solemn than statutes. The term 'statutes' was a later term with a changed conception of the solemnity of a statute, and is one that cannot easily be defined. It came into use in Edward I's reign, supplanting 'provisions' which is characteristic of Henry III's reign, which had supplanted 'assize', characteristic of the reign of Henry II Richard and John Maltland, 2 Sel. Essays in Anglo-Am. Leg. Hist.80.

23.6. He has also referred to para 13.14 of Guidance Notes and Terms used for Financial Statements by the Institute of Chartered Accountants of India which specify the provisions as under: Provision - An amount written off or retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability the amount of which cannot be determined with substantial accuracy.

23.7. Shri Poddar has also stated that the word "reserve" has been defined by the ICAI vide its Guidance Notes at para 14.04 as under: Reserve : The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types : capital reserves and revenue reserves.

24. It has been pleaded by the learned senior counsel Shri N.K. Poddar that for the better understanding of the nature of provision for bad and doubtful debts, it is useful to read both "reserve" and "provision" together and has pointed out that these two expressions have been elaborately discussed and interpreted in the books of accountancy by various famous authors and authorities in the field of accountancy and has annexed the extract of such books in the paper book, wherein the word "reserve and surplus" has been interpreted and is being reproduced hereunder for the better convenience: Reserves and Provisions (Extract from Books of Accountancy written by William Pickles (Third Edition) (1) Reserves - amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance sheet.

(2) Provisions-amounts set aside out of profits and other surpluses to provide for- (b) any known liability of which the amount cannot be determined with substantial accuracy. It follows therefore that- (1) Any amount set aside for the purposes described in (2)(a) and (b)(above) in excess of estimated requirements must be regarded as a reserve and (2) Sums set aside to meet known. liabilities of which the amount can be determined with substantial accuracy do not fall within the definition of a provision and should, therefore, be described as accruals or accrued liabilities.

Reserves are in effect part of the undistributed profits of the business and therefore part of the proprietorship, whereas provisions and accruals are a diminution of proprietorship in the form of a liability or diminution of an asset. The former are broadly appropriations of, the latter charges against profits.

25. Learned senior counsel Shri Poddar has thereafter pointed out that the terminology' "provision for bad and doubtful debts" has been interpreted by Spicer & Pegler, 17th Edn. in their book, - "Book Keeping and Accounts" and has annexed the extract of such book, wherein the provision for bad debts has been defined as under: When a debt is found to be irrecoverable, it should be written off as a loss by means of a journal entry debiting bad debts account and crediting the account of the defaulting debtor. At the end of the accounting period the bad debts account is closed by transfer to the P&L a/c. Should a debt which has been written off as bad be subsequently recovered, in whole or in part, the debtor's personal account should be debited and bad debts account credited, the cash received then being credited to the debtor's account. This is preferable to posting the amount recovered direct from the cash book to the credit of the bad debts account without making any entry in the debtor's personal account, since it is desirable, for future reference, that this account should contain a full history of the occurrence.

After all debts which are known to be irrecoverable have been written off there may still be some doubtful accounts for which it would be prudent to provide. A provision for bad or doubtful debts may be calculated either by reference to the amounts of the specific debts which are regarded as doubtful, or by way of a percentage on the total debts outstanding. In many businesses experience shows that the percentage of bad debts to outstanding debtors does not fluctuate widely from year to year and in such cases this method may, as a rule, quite safely be employed.

25.1. Mr. Poddar has also elaborately pointed out the approach of various Courts on the basis of the following judgments:Metal Box Company of India Ltd. v. Their Workmen ;M.J. Exports Ltd. v. Jt. CIT (2004) 88 TTJ (Mumbai) 272 : (2004) 88 ITD 18 (Mumbai).

26. Concluding his argument, Shri Poddar has submitted that Expln. (c) to Section 115JA(2) is not applicable in case of assessee in view of Clause 7(1)(a) of Part III of Companies Schedule, wherein the word "provision" has clearly been defined as any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. Shri Poddar has submitted that from the above definition and interpretation as mentioned elaborately in different text books of accountancy pointed out by him, it is apparent that the provision in this case is intended to meet the anticipated diminution of the value of assets of the assessee, resulting from unrealized debts and since the contingencies were anticipated at the date of balance sheet and the amounts set apart from this item duly existed at the date of the balance sheet, which has to be deducted for computation of book profit under Section 115JA. Shri Poddar has thereafter referred to his paper book and submitted that the issues involved in the case of both the assessees i.e. Balmer Lawne and Indian Containers are similar which have been referred to in this Special Bench by the Hon'ble President, which should be decided in favour of assessee taking into consideration the various decisions of Tribunal and High Courts and after due interpretation terminology as defined in various books of accountancy in this regard.

27. Replying to the above argument, learned senior Departmental Representative Shri S.K. Jam has submitted that the Hon'ble Madras High Court has already elaborately discussed the issue involved before this Special Bench in case of Beardsell Ltd. (supra), wherein it was clearly held by the Hon'ble Madras High Court that the provision for bad debts falls under Clause (c) to the Expln. (1) of Sub-section (2) of Section 115JA of the Act. Shri Jain has pointed out the above decision of the Hon'ble Madras High Court was made against the order passed under Section 143(1)(a), which strengthen the plea of the Revenue in treating such provision as unascertained liability as the Hon'ble Madras High Court has found such adjustment prima facie correct even in case of intimation under Section 143(1)(a).

28. The learned Departmental Representative Shri Jam has thereafter submitted that the provision for bad and doubtful debts has to be treated as unascertained liability and has submitted following reason in support of his argument: (a) The assessee has not written off such bad debts in the books of account; (b) Such provisions for bad and doubtful debts were not deduced from the respective ledger account; (c) The assessee offered the same for taxation purpose while filing computation of income; (d) Hon'ble Madras High Court has dealt with the issue in an elaborate way and such decision of the Hon'ble Madras High Court has not been overruled by the apex Court; (e) The decision of this Bench in ITA No. 2189/Cal/1995, dt. 18th Nov., 2002 in case of ICI India Ltd. is squarely applicable to the present case as the same has been passed even after considering and discussing the decision of Echjay Forgings (P) Ltd. (supra) by Hon'ble Mumbai High Court which has been relied heavily by the learned Counsel for different assessees, whereas the judgment of Usha Martin Industries Ltd. (supra) by this Tribunal was without considering the decision of the Hon'ble Madras High Court; (f) The decision of Eichar Motors relied by learned Counsel for assessees, has been passed without considering the decision of the Hon'ble Madras High Court; (h) Learned senior Departmental Representative Shri Jain has alternatively submitted that if Clause (c) is held to be inapplicable, then Clause (b) should be invoked which says for disallowance of reserve made by the assessee. The provision made by the assessee for bad and doubtful debt is in the nature of reserve, though it is termed as provision. Therefore, the same is liable for addition to book profit as per Clause (b) of Section 115JA of the IT Act.

29. Shri Poddar in his reply has submitted that the Hon'ble Madras High Court has not dealt with the entire issue and has pointed out that the High Court in case of Beardsell Ltd. (supra) has not dealt with the distinction between assets and liabilities because it was not argued before the Court. He has pointed out that even otherwise Tribunal Pune Bench in case of ICI Ltd. (supra) has dealt with the issue elaborately after taking into consideration the various case laws and by interpreting various terminology used in the books of accountancy, IT law and the company law. It has, therefore, been pleaded by Shri Poddar that the issue has to be decided in favour of assessee.

30. We have carefully considered the rival submissions and perused the material placed before us. We will first take up the Revenue's appeal in the case of Usha Martin Industries Ltd. In this appeal by the Revenue, the following ground has been raised: The learned CIT (A) erred in holding that the sum of Rs. 1,56,00,000 being provision for doubtful debts, advances and investment and Rs. 1,25,000 being provision for wealth-tax could not be added back to the net profit for the purpose of computing the book profit within the meaning of Section 115JA of the IT Act since the same do not fall under any of the Clauses (a) to (f) of the Expln. 2 of Section 115 JA(2)of the Act.

31. The facts of the case are that the assessee has filed a return disclosing total loss of Rs. 38,76,70,250. The AO determined the net loss at Rs. 18,64,93,786. The AO further found that the net profit disclosed by the assessee as per P&L a/c was Rs. 14,51,90,597. He, therefore, determined the book profit as per Section 115JA and charged the tax on the book profit as per Section 115JA. The computation of the book profit made by the AO reads as under:Profit as per P&L a/c 14,51,90,597Add : (a) Provision for doubtful debts, advances 1,56,00,000and investments as discussed.(b) Provision for wealth-tax as per accounts.

1,25,000 1,57,25,000 ____________ _____________30% thereof 4,82.74,680 ______________Tax payable under Section 115JA @ 43% 2,07,58,112 _____________ 32. Before the CIT (A), the assessee challenged the addition of Rs. 1.56 crores and Rs. 1,25,000 made by the AO. Both the above additions were deleted by the CIT (A). Hence this appeal by the Revenue.

33. We will first take up the addition with regard to provision for doubtful debts amounting to Rs. 1.56 crores. Section 115JA as it stood at the relevant time reads as under: 115JA. Deemed income relating to certain companies. - (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation. - For the purposes of this section, "book profit" means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (2), as increased by- (a) the amount of income-tax paid or payable, and the provision therefor; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies, if any amount referred to in Clauses (a) to (f) is debited to the P&L a/c, and as reduced by,- (i) the amount withdrawn from any reserves or provisions if any such amount is credited to the P&L a/c Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the P&L, a/c; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Explanation. - For the purposes of this clause, the loss shall not include depreciation; or (iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or (v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in Sub-clause (b) or Sub-clause (c) of Clause (iv) of Sub-section (2) of Section 80IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under Sub-section (5) of Section 80IA; or (vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined under Sub-section (12) of Section 80IA, and subject to fulfilling the conditions laid down in Sub-section (4A) of Section 80IA; or (vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

Explanation. - For the purposes of this clause, "net worth" shall have the meaning assigned to it in Clause (ga) of Sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of profits eligible for deduction under Section 80HHC, computed under Clause (a), (b) or (c) of Sub-section (3) or Sub-section (3A), as the case may be, of that section, and subject to the conditions specified in Sub-sections. (4) and (4A.) of that section; (ix) the amount of profits eligible for deduction under Section 80HHE, computed under Sub-section (3) of that section.

(3) Nothing contained in Sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3) of Section 74A. (4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.

34. From the above it is evident that the provision of Section 115JA has an overriding effect upon the other provisions of the IT Act. It is applicable only in the case of a company. As per this section, the AO has to first compute the total income of the assessee as per the provisions of the IT Act. Thereafter, he has to compute 30 per cent of the book profit. Then he has to compare the total income as computed as per the provisions of IT Act with 30 per cent of book profit computed as per Section 115JA. If 30 per cent of the book profit is more than the total income, then 30 per cent of the book profit shall be deemed to be the total income of the assessee for such previous year. As per Sub-section (2) the assessee has to prepare the P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. The Explanation defines the words "book profit" which means net profit as shown in the P&L a/c for the relevant previous year. Such book profit has to be increased by the items Nos. (a) to (f) of the Explanation if they are debited to the P&L a/c and from such profit items Nos. (i) to (ix) of the Explanation are to be reduced. The figure arrived at after the above exercise would be the book profit of the assessee for the relevant previous year.

35. Hon'ble apex Court has examined the powers of the AO while computing the book profit for the purpose of Section 115J in the case of Apollo Tyres Ltd. (supra), wherein their Lordships observed as under: The AO, while computing the book profits of a company under Section 115J of the IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in Section 151J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company.

While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by the Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.

36. From the above it is evident that the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts II and III of Schedule. VI to the Companies Act, which are certified by the auditors and approved by the company in the general meeting. He has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act.

The AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation.

Thereafter AO has to make adjustment permissible under Explanation given in Section 115J. The above observation of the Hon'ble apex Court given with reference to Section 115J would be squarely applicable with regard to the provision of Section 115JA also because both the provisions are pan matetia.

36.1. It was contended by the learned Departmental Representative that the assessee itself added the provision for bad and doubtful debt while computing its total income. Therefore, the same should also be included in the book profit for the purpose of Section 115JA. We are unable to accept this contention of the learned Departmental Representative because the computation of total income for the purpose of IT Act is not relevant while computing the book profit. As we have already observed that the AO has to prepare two parallel computations - one for determining the total income as per provisions of the IT Act and other for determining the book profit as per Section 115JA. While computing the total income, he has to make the additions and allow deductions as per provisions of the IT Act. However, those additions or deductions as permissible under the various provisions of the IT Act would not be relevant while determining the book profit. While determining the book profit, additions/deductions are to be made as given in the Explanation. The assessee might have added the provision for bad and doubtful debt while determining its total income, because the deduction for the provision for bad and doubtful debt is not permissible while computing the total income for the purpose of IT Act. However, merely because the deduction of provision for bad and doubtful debt is not allowable in computing the total income of the assessee would be no ground for including the same in the book profit.

37. It was further contended by the learned Departmental Representative that for the purpose of computing the net profit for directors' remuneration under Section 349 of the Companies Act, the assessee itself has included the provision for bad and doubtful debt in the net profit. In this regard, he referred to p. 17 of the Revenue's paper book. He contended that when for the purpose of Companies Act the assessee itself has included the provision for bad and doubtful debt in the net profit, the same has also to be included for the purpose of computing the book profit, because for the purpose of Section 115JA the assessee has to prepare the P&L a/c and balance sheet as per the provisions of the Companies Act. We find that the assessee has computed the net profit for computing the director's remuneration as under:Profit before taxation as per P&L a/c 1,46,280Add : Depreciation as per account 80,765Loss on sale of fixed assets as per account 306Provision for doubtful debts, advances andinvestments 15,600Provision for wealth tax as per account 125Profit on sale of fixed assets consideringdepreciation under Section 350 128 96,924 ______ __________Less : Depreciation under Section 350 1,21,286 ___________Add : Directors' remuneration 5,639 1,27,557 38. We find that Section 198 of the Companies Act provides overall maximum limit for managerial remuneration payable to the directors which is at 11 per cent of the net profit of the company computed in the manner laid down in Sections 349 to 351 of the Companies Act.

Section 349 of the Companies Act reads as under: 349. Determination of net profits. - (1) In computing for the purpose of Section 348, the net profits of a company in any financial year- (a) credit shall be given for the sums specified in Sub-section (2), and credit shall not be given for those specified in Sub-section (3); and (b) the sums specified in Sub-section (4) shall be deducted, and those specified in Sub-section (5) shall not be deducted.

(2) In making the computation aforesaid, credit shall be given for the following sums :bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government, unless and except insofar as the Central Government otherwise directs.

(3) In making the computation aforesaid, credit shall not be given for the following sums: (a) profits, by way of premium, on shares or debentures of the company, which are issued or sold by the company; (c) profits of a capital nature including profits from the sale of the undertaking or any of the undertakings of the company or of any part thereof; (d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets; Provided that where the amount for which any fixed asset is sold exceeds the written down value thereof referred to in Section 350, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value.

(4) In making the computation aforesaid, the following sums shall be deducted: (c) bonus or commission paid or payable to any member of the company's staff, or to any engineer, technician or person employed or engaged by the company, whether on a wholetime or on a part-time basis; (d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits; (e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in its behalf; (g) interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets; (i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature; (j) outgoings inclusive of contributions made under Clause (e) of Sub-section (1) of Section 293; (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, insofar as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained; (m) any compensation of damages to be paid by virtue of any legal liability, including a liability arising from a breach of contract; (n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in Clause (m); (o) debts considered bad and written off or adjusted during the year of account.

(5) In making the computation aforesaid, the following sums shall not be deducted: (b) income-tax and super-tax payable by the company under the Indian IT Act; 1922 (11 of 1922), or any other tax on the income of the company not falling under Clauses. (d) and (e) of Sub-section (4); (c) any compensation, damages or payments made voluntarily, that is to say, otherwise than by virtue of a liability such as is referred to in Clause (m) of Sub-section (4); (d) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess referred to in the proviso to Section 350 of the written down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value.

39. From the above it is evident that as per Section 349 of the Companies Act, various items are to be included into and excluded from the net profit as disclosed in the P&L a/c. However, for the purpose of computation of book profit under Section 115JA, the assessee has to first prepare the P&L a/c as per Parts II and III of Schedule. VI to the Companies Act and thereafter make adjustment as provided in Explanation to Section 115JA. That the adjustments required to be made to the net profit disclosed in the P&L a/c for the purpose of Section 349 of the Companies Act are quite different than the adjustment required to be made under Explanation to Section 115JA of the IT Act, Therefore, merely because some item debited to P&L a/c is required to be added to the net profit for the purpose of computing the directors' remuneration, it is not necessary that the same is to be included in the book profit for the purpose of Section 115JA. For the purpose of Section 115JA, the AO can increase the net profit determined as per P&L a/c prepared as per Parts II and III of Schedule. VI to the Companies Act only to the extent permissible under Explanation thereto. The Explanation has provided six items i.e. items Nos. (a) to (f) which if debited to the P&L a/c can be added back to the net profit for computing the book profit. The provision for bad and doubtful debt has been debited to the P&L a/c. Therefore, it can be added back to the net profit if it falls within any of the items provided under the Explanation. As per Revenue, it falls within the category of item (c) and alternatively within item No. (b). We will first deal with item No.(c) which reads as under: The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.

Thus, the assessee's case would fall within the ambit of item (c) if (i) the amount is set aside to any provision; (ii) the provision is made for meeting liability; and (iii) the provision should be for other than ascertained liability i.e. it should be for unascertained liability. All the above three ingredients should be satisfied so as to bring the provision within the ambit of item (c) of the Explanation to Section 115JA.40. In the case of the assessee it is not in dispute that a sum of Rs. 1.56 crores has been set aside as provision for bad and doubtful debts.

Therefore, now the question remains whether this provision is for meeting the liability? If answer is yes, whether such liability was unascertained liability.

41. It is vehemently contended by the learned Departmental Representative that the provision of bad and doubtful debt is a provision for unascertained liability, in support of which heavy reliance has been placed upon the decision of Hon'ble Madras High Court in the case of Dy. CIT v. Beardshell Ltd. (supra) and the decision of Tribunal, Kolkata Bench in the case of ICI India Ltd. v. Dy. CIT (supra).

41.1. In the case of Beardshell Ltd. (supra), the assessee is a public sector company which filed the return showing total income of Rs. 33,49,950 computed as per the provisions of Section 115J of the IT Act.

The AO in the order passed under Section 143(1)(a) added the provision created by the assessee for bad and doubtful debt amounting to Rs. 46,64,750 on the ground that the provision made is not for the ascertained liabilities. The assessee-company filed the petition under Section 154 for rectification of the order passed by the AO under Section 143(1)(a) of the IT Act. The same was rejected by the AO The CIT (A) also upheld the order passed by the AO On appeal, the Tribunal deleted the addition. On further appeal by the Revenue, their Lordships of Madras High Court allowed the Revenue's appeal and held at p. 259 of 244 ITR as under: The only contention raised by the appellant herein is that the sum of Rs. 46,64,750 is not an ascertained liability to be excluded in the P&L a/c for the relevant previous year under Section 115J of the Act and that, therefore, the Tribunal was not right in directing the assessing authority to rectify the alleged mistake of inclusion of the abovesaid amount in the book profit under Section 154 of the Act. Learned Counsel appearing for the respondent company contends contra stating that the provision made for bad and irrecoverable debt in the return has to be sustained by the assessing authority and he has no right to make adjustment to include the same in the book profit, under Section 143(1)(a) of the Act and, therefore, the Tribunal was right in setting aside the order of the CIT (A) who sustained the order of the assessing authority to include the sum of Rs. 46,64,750 in the book profit as an unascertained liability under Section 115J(1A)(c) of the Act. Clause (c) of the Explanation to Section 115J of the Act would reveal that "book profit" means the net profit as shown in the P&L a/c for the relevant previous year prepared under Sub-section (1A) as increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. It is evident from the abovesaid section that unless a provision is made for ascertained liabilities, the provision made has to be included in book profit, for the purpose of taxation under Section 115J of the Act. The respondent claimed exclusion for the sum of Rs. 46,64,750 from the P&L a/c on the ground that the same has been made as provision for irrecoverable debts due to the respondent company. If a debt has become irrecoverable as claimed by the respondent company the said company ought to have written off the debt and should have deducted it from the profit of the business to the extent written off. A debt, the recovery of which is doubtful, will not amount to writing off the same by the assessee concerned. It cannot also be termed to be an ascertained liability as mentioned in Section 115J of the Act.

42. The Tribunal, Kolkata Bench in the case of ICI India Ltd. (supra) followed the above decision and held as under: 6. We have considered the rival contentions of both the parties and have gone through the orders of the authorities below. We observe that the AO has made a prima facie adjustment of provision made for bad and doubtful debts and advances treating the same as uncertained liability by passing of order under Section 154 of the Act with a view to rectifying the intimation processed under Section 143(1)(a).

We further observe that the CIT (A) has made a categorical finding that the provision for bad and doubtful debts and advances was a provision for unascertained liability thereby attracting the provisions as contained in Clause (c) of Explanation to Section 115J(1A) of the Act. We further observe that it is not the case of the assessee that the provision made for bad and doubtful debts and advances was for an ascertained bad and doubtful debts. It is, therefore, clear that the provision for doubtful debts made by the assessee is a liability of an unascertained nature. A similar issue had come for consideration before the Hon'ble Madras High Court in the case of Dy. CIT v. Beardsell Ltd. (supra) wherein similar adjustment on account of doubtful debts was made to the net profit in course of processing the return of income under Section 143(1)(a) by treating the same as a provision made for unascertained liability.

43. However, at the time of hearing before us, it was vehemently contended by the assessees' learned Counsel Sri Mitra and Sri Poddar that the provision for bad and doubtful debt is not a provision for meeting the liability. They also contended that this argument was neither raised before the Hon'ble Madras High Court nor before the Tribunal, Kolkata Bench. Once a provision is not for meeting the liability, the question whether the liability is ascertained or unascertained does not arise. It was also contended that a provision can be for a diminution in the value of asset and also for meeting the liability. In support of this contention, reliance has been placed upon the meaning of the word "provision" given in Companies Act, various dictionaries, books of accountancy as well as by the Institute of Chartered Accountants of India. As per Section 115JA, the P&L a/c is to be prepared as per Parts II and HI of Schedule. VI to the Companies Act. We find that Part III of Schedule. VI to the Companies Act defines the expression "provision" which means any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. The identical definition of the word "provision" is given by the Institute of Chartered Accountants of India in the guidance notes issued for its members. Similar definition is given in the books of accountancy by William Pickles. Thus, the provision can be for (i) depreciation; (ii) renewals; (iii) diminution in the value of assets; and (iv) for any known liability of which the amount cannot be determined with substantial accuracy.

43.1. Now the question is whether the provision for bad and doubtful debt is the provision for diminution in the value of asset or for known liability of which the amount cannot be determined with substantial accuracy. The provision for bad and doubtful debt is made when the assessee is of the opinion that its entire debt may not be realized and part of the debt may become irrecoverable. However, when the amount of such irrecoverable debt cannot be ascertained with substantial accuracy, the provision is made for bad and doubtful debt. Debts are of two types. One - debt payable by the assessee i.e. where the assessee has to pay amount to others. This would be liability in the hands of the assessee. Second debt receivable by the assessee i.e. where the assessee has to receive the amount from others. This would be asset in the hands of the assessee. Admittedly, the "debt" under consideration is "debt receivable" by the assessee. The provision for bad and doubtful debt would always be made with reference to debt receivable, where there is doubt about full realization of debt. The provision is made to cover up the probable diminution in the value of asset i.e.

debt which is amount receivable by the assessee. The following example would make the position more clear. In the accounts of an assessee there are outstanding debts in the names of several parties totalling to Rs. 1 crore. The assessee is of the opinion that the entire debt of Rs. 1 crore may not be realized. It opines that only 90 per cent of the debt would be realized and, therefore, it made a provision for Rs. 10 lacs for bad and doubtful debts. By making this provision, the assessee is valuing its asset, viz., debt, at Rs. 90 lacs as against the book figure of Rs. 1 crore. Thus, the provision for bad and doubtful debt is the provision for diminution in the value of asset i.e. debt. The provision for bad and doubtful debt cannot be said to be a provision for liability, because even if a debt is not recovered, no liability would be fastened upon the assessee. In the above example if as against the outstanding debt of Rs. 1 crore only Rs. 90 lacs has been realized, then due to non-realisation of the debt of Rs. 10 lacs there is no question of any liability upon the assessee. The debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision towards irrecoverability of the debt cannot be said to be provision for liability. Once it is held that the provision for bad and doubtful debt is not a provision for any liability, the question whether the liability is ascertained liability or unascertained liability does not arise.

43.2. Reverting back to the decision of Hon'ble Madras High Court in the case of Beardsell Ltd. (supra), we find that in the above case the Hon'ble Madras High Court considered whether the provision for bad and doubtful debt is an ascertained liability or is not an ascertained liability. It was never contended before their Lordships that the provision for bad and doubtful debt is not a liability at all but the provision is only for diminution in the value of asset. Therefore, their Lordships had no occasion to deal with this vital aspect i.e.

whether the provision for bad and doubtful debt is a provision of the diminution of the value of the asset or a provision of known liability.

Similarly, Tribunal, Kolkata Bench in the case of ICI India Ltd. (supra) also proceeded with the presumption that the provision made for bad and doubtful debt was a provision for liability and, therefore, relying upon the decision of Hon'ble Madras High Court in the case of Beardsell Ltd. (supra) confirmed the addition in this regard. The learned Counsel for the assessee has relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. Echjay Forgings (P) Ltd. (supra). However, we find that in the above case also the question whether the provision for bad and doubtful debt is diminution in the value of the asset or a provision for liability was neither argued nor considered. The Hon'ble High Court deleted the addition because they agreed with the assessee's contention that the provision was for ascertained liability. Therefore, the above case would also not be applicable while considering whether the provision for bad and doubtful debt is at all a provision for liability.

43.3. The learned Counsel for the assessee has relied upon the decision in the case of Steel Authority of India Ltd. (supra) wherein the AO has made the addition for provision for bad and doubtful debts by way of prima facie adjustment under Section 143(1)(a). On appeal to the Tribunal, the learned JM upheld the addition on the ground that the provision for bad and doubtful debt was unascertained liability.

However, the learned AM was of the view that the provision was not for liability but it was for bad and doubtful debts which were, in fact, assets and not liabilities. Therefore, the learned AM was of the view that the adjustment could not be made for provision for bad and doubtful debts under Clause (c) of Explanation to Section 115J of the IT Act. When the matter came up for consideration before the Third Member, it was pointed out by the assessee's counsel that, in fact, there was no increase in the provision in the year under consideration.

The Third Member called for the report from the AO who affirmed that during the year under consideration there was no increase in the provision for bad and doubtful debts. Accordingly, the issue was decided in favour of the assessee. Thus the learned Third Member had no occasion to consider whether the provision for bad and doubtful debt was a provision for liability or the provisionfor diminution in the value of assets. Therefore, this decision would also not be of much help to the assessee.Asstt. CIT v. J.G Vacuum Flasks (P) Ltd. (supra) has considered the issue whether the provision for doubtful debt can at. all be said to be liability and held as under: The provision for doubtful debt cannot be considered as provision for liability, much less the ascertained liability. By no stretch of imagination, it can be said that there is any liability on an assessee in prasenti or in futuro when a debt is considered as bad or doubtful. There is no obligation on an assessee to pay any sum to anybody in such cases. The only consequence that follows in considering the debt as bad or doubtful is that it will reduce or diminish the value of the asset of the assessee on account of non-recovery of the debt.

43.5. Tribunal, Delhi Bench "C" in the case of Eicher Ltd. (supra) while dealing with Expln. (c) to Section 115JA held as under: Counsel for the assessee raised a plea that this is not a provision for meeting a liability at all. No doubt, this plea was not taken before the CIT (A), but having regard to the nature of the plea, which is purely a legal plea requiring no investigation into facts, he is permitted to raise the same. A provision for bad and doubtful debts is made with the view to guarding against the non-recovery of certain debts which are considered by the company as bad and doubtful. It implies that monies receivable by the company may not be realized. Expln. (c) refers to amount set aside to provisions made "for meeting liabilities". By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The ICAI, in its guidance note on "Terms used in Financial Statements" had defined a "liability" as "the financial obligation of an enterprise other than owners' funds". Therefore, on this ground also, the decision of the CIT (A) requires to be upheld.43.6. The Tribunal, Kolkata Bench in the assessee's own case for the assessment year under consideration, i.e. 1997-98, while disposing of the assessee's appeal against the addition of Rs. 1.56 crores made by the AO by way of prima facie adjustment under Section 143(1)(a) in ITA No. 683/Cal/1999 held as under: 6.5. On perusal of Clauses. (a) to (f) of Explanation to Section 115JA(2) of the Act, we find that the only relevant clause for the purpose of provision for doubtful debts of Rs. 1,56,00,000 made by the assessee can be Clause (c) but this clause is only for those provisions with respect to liabilities and that too unascertained liabilities. The said clause does not cover provision made for diminution in value of assets. Therefore, we agree with the learned Authorised Representative of the assessee that the provision of Rs. 1,56,00,000 could hot be added back to the net profit as per the P&L a/c by invoking the provision of Clause (c) of the explanation appended to Section 115JA(2) of the Act.

Thus, Tribunal, Kolkata Bench has come to the conclusion that the provision for bad and doubtful debt is not for liability but for diminution in the value of assets and, therefore, not covered by Clause (c) of the Explanation to Section 115JA.43.7. After considering the entire legal position, arguments of both the sides and the various case law referred to before us, we agree with the view taken by the Tribunal, Pune Bench in the case of J.G. Vacuum Flasks (supra), Tribunal, Delhi Bench in the case of Eicher Ltd. (supra) and the Tribunal, Kolkata Bench in the assessee's own case. At the cost of repetition, we reiterate that the provision for bad and doubtful debt is not a provision for liability but it is a provision for diminution in the value of the assets. Once the provision is not for any liability, the question whether the liability is ascertained or unascertained does not arise. We, therefore, hold that Clause (c) of the Explanation to Section 115JA would not be applicable in respect of provision for bad and doubtful debts.

44. Now we come to the alternate argument of the learned Departmental Representative that the provision for bad and doubtful debt would be covered by Clause (b) of the Explanation to Section 115JA which reads-"the amounts carried to any reserves by whatever name called".

44.1. The learned Departmental Representative has relied upon the judgment of the Hon'ble Supreme Court in case of CIT v. Jyoti Ltd. (supra), wherein the Hon'ble Supreme Court has held as under: That a clear finding of fact was reached by the Tribunal that the bad debt reserve was created by the assessee-company out of the P&L a/c without reference to the outstanding sundry debtors and was not created with a view to meeting any anticipated liability. It was also not the Revenue's case that the amount set apart for bad and doubtful debts reserve was less than or equal to the amount necessary to be provided for meeting an ascertained liability. On the other hand, the amount appeared to be more than what was reasonably necessary to be provided for, in respect of the bad and doubtful debts as the amount of bad and doubtful debts itself was not an ascertained amount. The provision of Rs. 85,000 for doubtful debts had to be treated as a reserve which could be legitimately included in computing the capital base of the assessee.

44.2. The learned Departmental Representative has further relied on the judgment of the Hon'ble Supreme Court in case of State Bank of Patiala v. CIT (supra), wherein the Hon'ble Supreme Court has held as under: The distinction between a provision and a reserve is, in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P&L a/c and the balance sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance sheet by way of deductions' from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest. As amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance sheet is a reserve, hut an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.

accordingly, on the facts, that substantial amounts were set apart by the assessee, a banking company, as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as "reserves" and not as "provisions" designed to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of the balance sheets. The facts had been found by the Tribunal. Hence, the amounts set apart towards bad and doubtful debts in these cases were "reserves" qualifying for appropriate relief under Rule 1(xi)(b) of the First Schedule and Rule 1(iii) of the Second Schedule to the Act.

44.3. The learned Counsel for the assessee, Mr. Poddar, on the other hand, relied upon the decision of Hon'ble jurisdictional High Court in the case of Eyre Smelting (P) Ltd. (supra) and Jugantar (P) Ltd. (supra) in support of his contention that the provision for bad and doubtful debt is made for anticipatory contingencies to meet the diminution in the value of assets from unrealized debts and, therefore, the same cannot be treated as reserve for the purpose of computing the capital under the Companies (Profits) Surtax Act, 1964. He has also relied upon the decision of Hon'ble apex Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) wherein the Hon'ble apex Court has considered the meaning of words "provision and reserves" for the purpose of Super Profits Tax Act, 1963. However, in the cases under consideration before us we are concerned with the meaning of the word "reserve" for the purpose of Section 115JA of the IT Act. As per Section 115JA, accounts are to be prepared as per Parts II and III of Schedule VI to the Companies Act. Part III of Schedule VI to the Companies Act defined the words "provision" and "reserve".

As per Clause 7(11)(b) of Part III of Schedule VI to the Companies Act, the expression "reserves" means as under: the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.

From the above it is seen that the expression "reserve" has been defined in a negative manner and it only says that the reserve shall not include any amount written off or retained by way of providing for depreciation, renewals, diminution in the value of assets or retained by way of providing for any known liability. However, Sub-clause (2) of Clause 7 of Part III of Schedule VI to the Companies Act provides as under: (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision.

Thus, if the provisions made by the assessee for depreciation, renewals and diminution in the value of the assets are for any known liability, if it is in excess of the amount which is reasonably necessary for the purpose for which the provision is made, the excess shall be treated as a "reserve" and not a "provision". It would depend upon the facts of each case whether the provision made is in excess of the necessary requirement for the purpose for which the provision is made. The Hon'ble jurisdictional High Court after considering the facts in the case of Jugantar (P) Ltd. (supra) held the provision for bad and doubtful debts to be not in excess of the requirement and, therefore, held not to be reserve. In the case of Jyoti Ltd. (supra) and State Bank of Patiala (supra), after considering the facts of those cases, the Hon'ble apex Court held the provision made for bad and doubtful debts in those cases to be reserve. Therefore, whether the amount set apart by the assessee by way of provision is, in fact, provision or it is in the nature of reserve will have to be examined with reference to peculiar facts of each case.

45. Now reverting back to the facts in the case of Usha Martin Industries Ltd., we find that in the accounts, the assessee had made the provision for bad and doubtful debts of Rs. 2.20 crores as on 31st March, 1997. The provision as on 31st March, 1996 was Rs. 64 lacs. Thus the additional provision of Rs. 1.56 crores is made for the year under consideration. The balance sheet of the assessee is duly audited and certified by the chartered accountants and it has nowhere reported that the provision for bad and doubtful debt is excessive in the opinion of either directors or auditors. We also find that the total outstanding debt as on 31st March, 1997 was more than Rs. 86 crores against which the provision for bad and doubtful debt was Rs. 2.20 crores, which is even less than 3 per cent of the total debt. The AO in the assessment order has nowhere stated that the provision made by the assessee for bad and doubtful debt is excessive or unreasonable considering the purpose for which the provision is made. At the time of hearing before us also, the Revenue except making a claim that the provision for bad and doubtful debt should be considered as 'reserve' under Clause (b) of Explanation to Section 115JA, has not proved how the provision made for bad and doubtful debt is excessive or unreasonable. In view of the above, we are unable to accept the Revenue's claim that the provision for, bad and doubtful debt in the case of the assessee, viz., Usha Martin Industries Ltd. would fall within Clause (b) of the Explanation to Section 115JA of the IT Act. Accordingly, we uphold the order of the CIT (A) deleting the addition of Rs. 1.56 crores made by the AO in respect of provision for bad and doubtful debt.

46. In the case of Usha Martin Industries Ltd., the AO has also made the addition of Rs. 1,25,000 in respect of provision for wealth-tax.

The same was deleted by the CIT (A). The Revenue aggrieved with the order of the CIT (A) is in appeal before us. We have heard both the parties and perused the material placed before us. We have already stated above that for the purpose of Section 115JA the addition to the book profit, which is computed as per Parts II and III of Schedule VI to the Companies Act, can be made only if it is permissible by items Nos. (a) to (f) of the Explanation to Section 115JA. We find that as per Clause (a) to Explanation "any amount of income-tax paid or payable and the provision therefor" is liable to be added to the book profit.

However, there is no such provision for making the addition with regard to wealth-tax. Since the provision for wealth-tax does not fall within any of the items of the Explanation to Section 115JA, we hold that the CIT (A) was justified in deleting the addition made by the AO in this regard. In view of the above, we reject the Revenue's appeal in the case of M/s Usha Martin Industries Ltd. 47. Now we will take up the assessee's appeal for asst. yr. 2002-03 in the case of Balmer Lawrie & Co. Ltd. vide (ITA No. 2437/Kol/2005). The only ground raised in this appeal by the assessee is against the addition of Rs. 92,74,305 being the provision for bad and doubtful debt, which is added by the AO to the book profit under Section 115JB of the IT Act and sustained by the CIT (A).

47.1. The facts of the case are that for the year under consideration, the assessee filed the return disclosing loss of Rs. 11,41,09,915.

However, the book profit computed under Section 115JB was disclosed at Rs. 8,08,18,867. The AO determined the book profit at Rs. 11,25,21,939 wherein he made the following additions:(a) Provision for doubtful debts, loans and advances Rs. 92,74,305(b) Provision for diminution in the value of assets Rs. 2,10,41,506 The CIT (A) deleted the addition of Rs. 2,10,41,506 against which the Revenue is in appeal vide ITA No. 2449/Kol/2005. The assessee is in appeal against the addition for provision for doubtful debts, loans and advances sustained by the CIT (A). We find that the AO has made the addition under Expln. (c) to Section 115JB. The CIT (A) has upheld the finding of the AO following the decision of Hon'ble Madras High Court in the case of Beardsell Ltd. (supra). However, he has alternatively upheld the addition under Clause (b) of Explanation to Section 115JB.47.2. After considering the arguments of the parties in the case of Usha Martin Industries Ltd., we have already held that the provision for bad and doubtful debt does not fall within the ambit of item (c) of the Explanation to Section 115JA. Items under Explanation in Section 115JA and in Section 115JB are identical. Therefore, our finding given with regard to item (c) of the Explanation to Section 115JA would be squarely applicable to the case of the assessee i.e. Balmer Lawrie Co.

Ltd. Accordingly, we hold that the addition for bad and doubtful debt cannot be made to the book profit under item (c) of the Explanation to Section 115JB.47.3. Coming to item (b) of the Explanation while adjudicating the case of Usha Martin Industries Ltd., we have held that it would depend upon the facts of each case whether the provision made is in excess of the purpose for which the provision is made. Coming to the facts of the assessee's case, we find that the AO has nowhere pointed out that the provision made by the assessee is excess or unreasonable. Moreover, from the assessee's paper book pp. 32 to 44, we find that the assessee has given the detailed explanation before the AO with regard to provision for bad and doubtful debt. At p. 36 there are details of the provision for bad and doubtful debts. The assessee has identified each and every debtor from whom the recovery is considered doubtful. From pp. 37 to 44, the assessee has given the explanation with regard to each and every debtor why the recovery from them is considered as doubtful. The Revenue has not doubted the correctness of the above detailed submission made before the AO. In view of the above, we are unable to accept the Revenue's submission that the provision made for bad and doubtful debt is excessive or unreasonable for the purpose for which the provision is made. Accordingly, the addition of Rs. 92,74,30b to the book profit made by the AO and sustained by the CIT (A) is deleted.

48. In the Revenue's appeal in ITA No. 2449/Kol/2005, the only ground which is permitted by the COD to be proceeded with is against the deletion of the addition of Rs. 2,10,41,506 made by the AO on account of diminution in the value of investment of the assessee-company, 48.1. We have heard both the parties and perused the material placed before us. The AO has made the addition under Expln. (c) to Section 115JB. For the detailed discussions earlier in this order, we hold that for diminution in the value of the assets, Expln. (c) to Section 115JB would not be applicable. Coming to Expln. (b) to Section 115JB, we find that the assessee has given the detailed note before the AO explaining the diminution in the value of investment amounting to Rs. 210.42 lacs.

It was nowhere pointed out by the Revenue that the above explanation of the assessee is improper or incorrect. The AO has also not given any finding that the provision made by the assessee for diminution in the value of investment is unreasonable or incorrect. At the time of hearing before us also, the Revenue has not brought on record any evidence to prove that the provision made by the assessee for diminution in the value of investment is unreasonable or excessive.

Accordingly, we do not find any justification to interfere with the order of the CIT (A) in this regard. The same is sustained and the Revenue's appeal is rejected.

49. Now we come to Revenue's appeals in the case of Indian Container Leasing Co. Ltd. for asst. yrs. 1997-98 and 1998-99. The common ground raised in both these appeals reads as under: That, on the facts and circumstances of the case and in law, the learned CIT (A) has erred to delete the provision for liability in the computation of book profit under Section 115JA.49.1. The facts of the case are that for both the years the AO computed the total income of the assessee under Section 115JA of the IT Act in which he made the addition for provision for bad and doubtful debt. In asst. yr. 1997-98, he made the addition of Rs. 64,31,000 while in asst.

yr. 1998-99, the addition made was of Rs. 50,35,889. The additions were made under Expln. (c) of Section 115JA. On appeal, the CIT (A) deleted the addition in both the years. Hence these appeals by the Revenue.

49.2. We have considered the rival submissions and for the detailed discussions made hereinabove in this order, we hold that Clause (c) of Explanation to Section 115JA is not applicable in respect of provision for bad and doubtful debt. Now we come to the alternate contention of the Revenue that the addition made by the AO should be sustained under Expln. (b) to Section 115JA. We find that with regard to provision for bad and doubtful debt, the assessee has furnished the complete details before the AO. At pp. 28 to 30 of the assessee paper book there is a partywise detail whose debt is considered as doubtful In these details, the assessee has also given the position in the subsequent year and has pointed out that even subsequently the debt could not be recovered but ultimately it was written off. The AO has not pointed out chat the above particulars given by the assessee are incorrect In fact the AO, has nowhere stated that the provision made by the assessee is unreasonable or excessive. During the course of hearing before us also, the Revenue has not brought on record any evidence in support of its claim that the provision is either unreasonable or excessive. In view of the above, we are unable to accept the Revenue's contention that the addition is required to be sustained under Expln. (b) to Section 115JA of the IT Act. We, therefore, uphold the order of the CIT (A).

50. In the result, the appeals filed by the Revenue in the cases of respective assessees are dismissed and appeal filed by the assessee, Balmer Lawrie & Co. Ltd., is allowed.


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