TILL a few months back, it used to be a rare event in which the Delhi High Court used to impose costs on the Income Tax Department. And this is what perhaps encouraged the Revenue to keep filing appeals indiscriminately and virtually in all cases. But such a cosy run has evidently run out of luck now. So much exasperated is the High Court over the Department’s thick-skinned approach to curb frivolous appeals that it can now be seen imposing costs in most of the cases. And it happened even in this case where the issue revolves around allowance of bad debts and stock damages. While computing book profits u/s 115JA, the AO added back the provisions of doubtful debts and stock damages as he felt that such provisions cannot be categorised as ascertained liabilities in advance.
Brief facts of the case
The Assessee company is engaged mainly in the manufacture/ formulation of various types of agricultural chemicals namely insecticides and pesticides. The Assessee filed return of income declaring loss of a little more than Rs five crore although the income was about Rs 2.62 Cr u/s 115JA of the Act. During the assessment proceedings, it was noticed by the Assessing Officer that while computing book profits, the Assessee had not added back provisions relating to bad and doubtful debts and provision for damaged stock to the profit which were clearly to be added back as per Explanation (c) of Section 115JA (2), which contemplates that ”the amount or amounts set aside to provisions made for meeting liabilities, other than the ascertained liabilities’ ‘. Accordingly, the Assessing Officer added these provisions to the net profit and computed book profits.
The assessee went in appeal and the CIT held that in view of the Apex Court decision in the case of Apollo Tyres Ltd. vs. CIT the AO is not empowered to make any adjustment, if the accounts are prepared in accordance with Part-II and III of the Schedule-VI of the Companies Act unless the same are provided in the Explanation. The CIT(A) further held that the provisions for these amounts were ascertained liabilities.
The Revenue filed appeal against the order of CIT(A) before the ITAT and the Tribunal vide its order deleted additions being provisions for doubtful debts and damaged stock holding that both the provisions were related to the assets and not any liability and, therefore, there was no question of these amounts representing any unascertained liability.
Before the HC, the counsel for the Revenue argued that the Assessee could not determine the amount of expired stock before it being expired and the Assessee had not explained as to on what basis provision for bad and doubtful debt was created. The provision for bad and doubtful debt could not be allowed to the Assessee unless the amount is actually written off and the Assessee had not shown as to which specific debt had actually become bad and irrecoverable and, therefore, had written off in the book accounts.
Having heard the arguments the Bench went to the CIT(A) findings :
++ The assessee manufactures insecticides and pesticides. The formulation and sale of the products are governed by the Insecticides Act and the Central Insecticides Board Act as Regulatory Authority. The said Act and Board have prescribed detailed guidelines on the purchase, storage, formulation and distribution of insecticides and pesticides to which the Assessee company is bound to adhere.
++ The stock written off during the year consists of stocks of these agricultural chemicals which have become obsolete/useless.
++ There are three reasons for writing off such stocks namely shortage of receipt of goods as reported by the distributors when compared to actual qunatities sold to them, leakage of stock during transportation and storage being a common occurrence in the industry given the nature of the products and thirdly the stock which has exceeded their expiry date as prescribed by the Central Insecticides Board and remain unsold as such.
++ These stocks cannot be sold to the distributors after expiry date and have to be incinerated. The details of stock expired, leaked and received as a shortage which has to be written off have been filed and gone through. These amounts have been written off in the books of accounts which have been prepared as per Part-II and III of Schedule-VI of the Computation of book profit under Section 115JA of the Act and, therefore, the same are to be reduced from the computation under Section 115JA of the Act.
The Bench also found that the Tribunal has held that the AO has simply added back these amounts as they were described as provision and in the opinion of the Assessing Officer, the same were required to be added back as per Clause (c) of the Explanation to Section 115 JA(2) and thus, the Assessing Officer has proceeded on an entirely incorrect basis because, both the provisions related to the assets and not any liabilities incurred by the Assessee. Therefore, there is no question of these amounts representing any unascertained liability. It was further held by the ITAT that the Assessing Officer otherwise did not enquire into the matter and there is no material to hold that these amounts have been arbitrarily provided for by the Assessee.
Thus the Bench noted that the Assessee was engaged in the business of insecticides and these products have a limited shelf life. The provision comprised of useless/obsolete stock and besides there were certain shortages on account of leakage of stock during the transportation and storage. Under these circumstances, these amounts related to ascertained liability and moreover the accounts of the Assessee have been prepared in accordance with Part-II and III of Schedule-VI of the Companies Act, as envisaged under Section 115JA of the Act.
Finally the HC ruled that there is no infirmity in the order passed by the Tribunal. No substantial question of law is involved and the Revenue petition was dismissed with costs of Rs 5000