Complete diminution investment Value to be added to book profits while computing MAT

Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of  ITO Vs. TCFC Finance Limited (ITA No. 1299/Mum/2009) (Judgement date- 9 March 2011 Assessment Year 2004-05)  held that the provisions of Minimum Alternate Tax (MAT) deals with amount of provision for diminution in the value of any asset and not with the value of asset which remains after diminution. Once provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of the fact whether or not any balance value of the asset remains after diminution.

Further, the Tribunal held that the reflection of the amount of provision for diminution in the value of investment separately on the liability side of the balance sheet or by way of reduction from investment on the asset side of balance sheet is totally irrelevant for computing book profit.

Facts

• The taxpayer had made investment in unquoted shares of RFB Latex Limited. RFB Latex Limited discontinued its operation therefore the taxpayer estimating the amount was irrecoverable wrote off the INR 12.5 million as ‘provision for diminution in value of investment’.
• The Assessing Officer (AO) held that provision made was diminution in the value of shares and therefore was required to be added to book profit under Section 11 5JB of the Income-tax Act, 1961 (the Act).

Taxpayer’s contentions

• Although the provision has been termed in Profit and loss account as ‘Provision for diminution in the value of investments’ there was difference in the actual transaction vis-à-vis the nomenclature given in the profit and loss account.
• Taxpayer had reduced the amount of ‘provision for diminution in the value of investment’ from the gross value of investment and resultantly only the net sum was shown in the balance sheet. Accordingly, no figure of provision was appearing in the liability side.
• Relying on the Supreme Court decision in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 (SC) on provision of doubtful debts, the taxpayer contended that there was difference in two situations, firstly, in which the taxpayer debits the amount of doubtful debts to its Profit and loss account and credits the asset account like sundry debtors which would constitute a write off of an actual debt and, secondly, in which the taxpayer debits provision for doubtful debts to the Profit and loss account and makes a corresponding credit on the liability side of the balance sheet, in which case it would constitute provision for doubtful debts.
• Drawing analogy from the Supreme Court’s judgment in the case of Vijaya Bank, the taxpayer contended that the it had created provision of INR12.5 million and such provision including the opening balance, was shown by way of reduction from the value of Investment in its balance sheet. Therefore, the amount of diminution in the value of investment was not a provision but was effectively writing off of bad debt, which could not be added to the book profit.
• Referring to the meaning of word ‘diminution’ in the Webster’s Dictionary the taxpayer contended that it represents ‘the condition of being diminished’. Accordingly, the meaning of word ‘diminution’ suggests having some lower value of the asset other than zero as a pre- condition for invoking clause (i) of Explanation 1 to section 11 5JB(2) of the Act.
• Since provision was created in respect of shares of RFB Latex Limited for INR12.5 million, being the full value of investment itself, the amount of investment qua these shares became Nil. It was thus argued that it was not a case of diminution in the value of any asset and hence clause (i) of Explanation 1 to Section 115JB(2) of the Act was not applicable.

Tax department’s contention

• The word ‘zero’ has been defined in Concise Oxford Dictionary to mean ‘lowest possible value’. Accordingly, the reduction in the value of shares of RFB Latex Limited to zero also amounted to diminution in the value of investment and the same was rightly considered by the AO.

Tribunal’s ruling

• The amount debited as ‘provision for diminution in the value of any asset’ to the profit and loss account, implies that the amount of net profit as per profit and loss account is after considering the amount of such provision. Accordingly, such amount has to be added back to the net profit for computing `book profit’ as per Explanation 1 to section 11 5JB(2) of the Act.
• The reflection of the amount of ‘provision for diminution in the value of investment’ separately on the liability side of the balance sheet or by way of reduction from the figure of investment on the asset side of balance sheet is totally irrelevant for computing book profit.
• The Supreme Court decision relied upon by the taxpayer in the case of Vijaya Bank was not relevant since section 11 5JB of the Act is a code in itself and therefore there is no scope for examining the judgments rendered by the Courts in the context of other provisions.
• The meaning of the word ‘diminution’ in the value of any asset has to be construed as reduction from its original value. There is no requirement in the language of clause (i) of Explanation 1 to section 1 15JB(2) of the Act that some value of the asset must remain after diminution, as a pre- condition for adding it to the net profit.
• The provisions of MAT deal with amount of provision for diminution in the value of any asset and not with the value of asset which remains after diminution. Once provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of the fact whether or not any balance value of the asset remains after diminution.

Our Comments

This is an important decision by the Mumbai Tribunal wherein it is held that even 100 percent diminution in value of investment has to be added while computing book profits under Section 11 5JB of the Act.