PCIT Vs Vaibhav Global Limited (Rajasthan High Court)
Summary: The Rajasthan High Court, Jaipur Bench, considered the Revenue’s appeal against the Income Tax Appellate Tribunal’s decision involving Vaibhav Global Limited, formerly Vaibhav Gems Ltd. The appeal raised six questions concerning transfer pricing of interest-free loans to associated enterprises at LIBOR plus 2%, a corporate guarantee adjustment of Rs.4,28,47,925 under Section 92B, write-off of Rs.41,02,27,250 invested in equity shares of a Mexican subsidiary, treatment of that write-off while computing book profits under Section 115JB, and remand of disallowances relating to doubtful subsidiary loans and bad-debt provisions. The appeal had earlier been dismissed on 20.11.2017, but the Supreme Court remanded the proceedings on 08.01.2020 for fresh consideration.
The High Court observed that the first two questions concerning interest-free loans and corporate guarantees were covered by its earlier judgment dated 13.10.2017 in Appeal No. 14/2015 involving the same assessee. The third question relating to the investment write-off was covered by its order dated 15.12.2021 in Appeal No. 53/2021. In that decision, the Court had accepted the Tribunal’s conclusion that investments in overseas subsidiaries were made to expand the assessee’s worldwide business and earn higher profits. Such investment was driven by commercial expediency, and the Tribunal had not erred in allowing the business loss under Section 37 of the Income Tax Act, 1961. Accordingly, the Court declined to entertain the third question.
Regarding computation of book profits under Section 115JB, the assessee maintained that the investment amount had actually been written off rather than merely provided for diminution in value. The Tribunal had found that the provision created in an earlier assessment year was subsequently written back and the investment written off; adding the amount again would result in double disallowance. The High Court adopted the Gujarat High Court Full Bench ruling in CIT Vs. Vodafone Essar Gujarat Ltd., [2017] 397 ITR 55, distinguishing an actual write-off from a mere provision. It therefore declined to entertain the fourth question. The remaining two questions arose from the Tribunal’s remand of issues to the Assessing Officer for verification, and no question of law arose. Consequently, the Revenue’s appeal was dismissed.
Cases Discussed
- CIT Vs. Vodafone Essar Gujarat Ltd. — [2017] 397 ITR 55 (Gujarat High Court, Full Bench). Followed for distinguishing actual write-offs from provisions in computing book profits.
- Southern Technologies Ltd. — Supreme Court. Discussed in the quoted Full Bench reasoning concerning provisions for doubtful debts.
- Vijaya Bank — Supreme Court. Relied upon for the distinction between actual write-off and mere provision.
- Yokogawa India Ltd. — Karnataka High Court. Considered regarding the treatment of bad-debt write-offs.
- Kirloskar Systems Ltd. — Karnataka High Court. Considered in the Full Bench discussion.
- HCL Comnet Systems and Services Ltd. — Supreme Court. Considered in interpreting the relevant Explanation to Section 115JB.
- Deepak Nitrite Limited — Gujarat High Court. Distinguished in the quoted Full Bench ruling.
- Indian Petrochemicals Corporation Ltd. — Gujarat High Court. Distinguished from Deepak Nitrite Limited.
FULL TEXT OF THE ORDER OF RAJASTHAN HIGH COURT
Revenue has filed this appeal challenging the judgment of Income Tax Appellate Tribunal. Following questions are presented for our consideration:-
“1. Whether in the facts and in circumstances of case, the ITAT was justified in law and has not acted perversely in restricting the adjustment on account of interest free loans advanced to Aes to prevailing LIBOR +2% with addressing the evidences and facts brought on record by the TPO.
2. Whether in the facts and in circumstances of case, the ITAT was justified in law and has not acted perversely in deleting the adjustment of Rs. 42847925/- made by the Assessing officer on account of adjustment of Corporate Guarantee without appreciating the fact that as per amendment by Finance Act 2012, insertion of explanation (i) (c) to section 92B, clarifies that corporate guarantee comes within the scope and ambit of international transaction.
3. Whether in the facts and in circumstances of case, the ITAT was justified in law and has not acted perversely in allowing the write off of loss of Rs. 410227250/- on account of investment made in equity shares of one of its subsidiary Indo Medico Co. S.De. R.L. De. V.V.s, Mexico without appreciating the fact that the amount is not an expense, loan or advance of any kind that is required to be debited form the profit and loss statement of the assessee and the amount even when it was an investment was never debited from the P&L statement of the company as required by accounting principles. Whether investment is not in the nature of a capital loss.
4. Whether in the facts and in circumstances of case, the ITAT was justified in law in allowing the write off of investment of Rs. 410227250/- for the purpose of computing “book profit” u/s. 115JB, the book profit of the assessee is to be increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. Whether in such circumstances, the write back of investment of Rs. 410227250/- for the purpose of computing book profits u/s. 115JB is correct in law.
5. Whether in the facts and in circumstances of case, the ITAT was justified in law to remit back the issue of disallowance out of provision for doubtful loans to subsidiary to the file of the Assessing Officer for verification without assigning any reasons and inspite of the facts that loan and advance are not revenue expenses and the details/ information provided by the assessee has already been considered during the assessment proceedings.
6.Whether in the facts and in circumstances of case, the ITAT was justified in law in remitting back the issue of disallowance out of bad debts provision claimed in MAT to the file of the Assessing Officer for verification without assigning any reasons and inspite of the fact that the details/ information provided by the assessee has already been considered during the assessment proceedings.”
At one stage this appeal was dismissed by an order dated 20.11.2017. However on an appeal filed by the revenue, the Supreme Court by an order dated 08.01.2020 has remanded the proceedings for fresh consideration. Accordingly, we have heard learned advocates for the parties at some length. So far as questions No. 1 and 2 are concerned, it is pointed out to us that the issue is squarely covered by a detailed judgment of this Court dated 13.10.2017 in appeal No. 14/2015 concerning this very assessee. Under the circumstances these questions are not considered.
So far as question No. 3 is concerned, the same is covered by a recent order dated 15.12.2021 passed by this Court in appeal No. 53/2021 which also concerned this very assessee. The discussion in the order may be noted:-
“The second question pertains to the objection of the revenue to the claim of the assessee of a business loss of Rs.50.72 crores (rounded off) on account of permanent diminution in the value of the investment made in the equity shares in one of the subsidiaries of the assessee in USA. According to the assessing officer this loss was not allowable under Section 37 of the Income Tax Act, 1961 since the expenditure could not have been considered as a revenue expenditure. He also held that this was not a case of bad debt which could be allowed under Section 36 of the Act. The assessee carried the matter in appeal. The Income Tax Appellate Tribunal by the impugned judgment reversed the decision of the assessing officer on this point relying upon the earlier decision of the Tribunal in case of the assessee for the assessment year 2012-13. In such order the tribunal relying on the decisions of the Supreme Court and High Courts noted that under similar circumstances the expenditure incurred by the company were allowed. This was on the basis that the assessee company in order to expand its business world wide had setup subsidiaries in other countries. The investment made in such companies was seen as revenue expenditure since the purpose behind making the investment was only for expansion of the business. Applying this logic to the assessee in the present case, the Tribunal was of the opinion that such investment being in the nature of revenue expenditure was to be allowed under Section 37 of the Act.
Having perused the order passed by the assessing officer and by the tribunal and having heard learned counsel for the revenue, we find no error in the view expressed by the tribunal. As noted, the assessee had made investment in its subsidiary company in order to expand its business with a view to earn higher profit. The investment was thus driven by business expediency. The tribunal therefore committed no error. No question of law arises.”
Under the circumstances this question is also not entertained.
So far as the question No.4 is concerned, the issue pertains to the addition made by the assessing officer of the write off investment in the subsidiary company for the purpose of calculation of book profits under Section 115JB of Income Tax Act, 1961. According to the assessee, this was an actual write off and not a mere provision for diminution in value of the investments. The tribunal having accepted the stand of the assessee, the revenue is in appeal. The discussion of the tribunal in the impugned order reads as under:-
“5.5 We have heard the rival contentions and perused the materials available on record. It is noted prima facie from the available records that the assessee had made provisions in the financial year 2008-09 relevant to assessment year 2009-10 and the same has been considered while calculation of 115JB for that particular assessment year. Details are at assessee’s PB pages 440 to 442 and 460 to 462 which are copy of revised computation of total income. The AO’s order for A.Y. 2009-10 is placed at assessee’s PB pages 482 to 494. During this year, the assessee has written back the provisions and then written off the same. Therefore, for the year under consideration, this amount should not have been added back for working out the income under the provisions of Section 115JB of the Act. This will be the double disallowance of the same amount. Such action is not as per law. Therefore, we direct not to include this amount while working out income for MAT purpose. Therefore, the ground no. 3 and 4 of the assessee are allowed.”
Learned counsel for the respondent assessee brought to our notice a decision of the Full Bench of the Gujarat High Court in the case of CIT Vs. Vodafone Essar Gujarat Ltd.-[2017] 397 ITR 55 in which similar issues on a reference was examined. It was said and observed as under:-
“20. Above decisions of Supreme Court in cases of Southern Technologies Ltd. and Vijaya Bank thus bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of writeoff and not a mere provision.
21. Karnataka High Court in case of Yokogawa India Ltd. applying such principle found that case on hand was one of a debt which was an amount receivable by the assessee and not any liability payable by the assessee and observed that clause(c) of the explanation to section 115JA/115JB, would not apply. In context of applicability of clause(i) to the explanation, relying on the decision of Supreme Court in case of Vijaya Bank, the Court observed that there is a dichotomy between actual write off and provision for bad and doubtful debt. A mere debit to the Profit and Loss account would constitute a bad and doubtful debt but it would not constitute actual write off. However, if simultaneously such amount is obliterated from the accounts by reducing corresponding loans and advances on the asset side, the same would amount to a write off. It was concluded as under: “…Therefore, after the Explanation the assessee is now required not only to debit the P&L A/c but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s. 115JA or JB is not at all attracted.”
22. In case of Kirloskar Systems Ltd., the Karnataka High Court adopted the same principle.
23. By way of culmination of above judicial pronouncements and statutory provisions, the situation that arises is that prior to the introduction of clause(i) to the explanation to section 115JB, as held by the Supreme Court in case of HCL Comnet Systems and Services Ltd., the then existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With insertion of clause (i) to the explanation with retrospective effect, any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JB of the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB. The judgment in case of Deepak Nitrite Limited fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Powered by TCPDF (www.tcpdf.org) (7 of 7) [ITA-291/2017] Petrochemicals Corporation Ltd., fell in the later category.
24. Viewed from this angle and subject to the observations and clarifications made above, in our view, there is no conflict between the two judgments and both operate in different fields. Reference is answered accordingly.”
Respectfully adopting the view which has been adopted by a larger Bench of Gujarat High Court, we are not inclined to entertain this question also.
The questions No. 5 and 6 arise out of the order of the Income Tax Appellate Tribunal remanding certain issues to the assessing officer for fresh consideration. Being a pure remand and we are informed that decisions have also been rendered in such remand, no question of law arises. In the result, the appeal is dismissed.
