Assessment Year : 2004- 05
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal, assessee assails the assumption of jurisdiction by CIT, under Section 263 of the Income-tax Act, 1961 (hereinafter called “the Act”), considering the assessment order dated 19.12.2006 for the impugned assessment year as erroneous and prejudicial to the interest of the Revenue.
2. Grounds raised by the assessee can be grouped into two. First group assails the order of the CIT in relation to computation of book profits for the purpose of Section 11 5JB of the Act. Second group assails the order of the CIT in relation to certain items not considered by A.O., while computing the income of the assessee under normal provisions.
3. Of the above, grounds relating to aspects concerning book profit computation under Section 11 5JB of the Act can be summarised as under:-
(i) Provision for bad and doubtful debts an advance of Rs. 16,03,61,290/- to one M/s Sical Ships (India) Ltd.
(ii) Provision for bad and doubtful Rs. 86,48,265.68 relating to various other parties.
(iii) Deposit of Rs. 2,00,00,000/- against Electricity tax demand of Rs. 10.51 Crores for captive power consumption, considered as contingent liability.
(iv) Electricity tax demand of Rs. 98,67,181/- as per Tamil Nadu Tax on Consumption or Sale of Electricity Act, again considered as contingent liability.
4. Ld. CIT in his show cause notice under Section 263 of the Act conveyed to the assessee that none of the above items were considered by the Assessing Officer for the purpose of computation of book profits under Section 11 5JB of the Act. Reply of the assessee vis-à-vis item No.(i) was that the said amount represented an advance given to one M/s Si-cal Ships (India) Ltd., which was engaged by the assessee-company to transport imported raw material from other countries for use in its manufacture of chemical fertilisers and the said Si-cal Ships (India) Ltd. was under winding up. According to assessee, a petition was already filed before Honourable High Court Judicature at Madras in this regard and Honourable High Court vide its order dated 4.9.2003 had directed that the said company be wound up. Therefore, as per the assessee, the provision made was against an ascertained liability and would not come within the purview of Explanation 1 to Section 11 5JB(2) of the Act. Vis-à-vis the second item reply of the assessee was that it had considered the amounts due from various parties doubtful of recovery and hence, made a provision. According to assessee, this was also an ascertained liability. Assessee also pointed out that whole of the provision totalling to Rs. 16,90,09,556/- was added back in its Memo of Income while computing total income under normal provisions of the Act and the Assessing Officer had, therefore, considered each of the items and came to a conclusion that these could not be considered as un ascertained liability which would call for application of Explanation 1 to second proviso to Section 11 5JB(2) of the Act.
5. On the third item mentioned in the notice under Section 263, reply of the assessee was that the Tamil Nadu Electricity Board had imposed a demand of Rs. 10.51 Crores on captive consumption of power for the period January 1986 to March 1994 which was disputed by the assessee before the Honourable Madras High Court in a writ petition. According to assessee, an amount of Rs. 2,00,00,000/- was deposited as per the directions of the Honourable High Court given while admitting the writ petition. Therefore, it was argued that this was also a crystallised liability.
8. CIT after considering the above submission was of the opinion that none of the above merited any positive consideration. According to him, the provisions mentioned at (i) and (ii) above were against un ascertained liabilities. According to CIT, in so far as the dues from M/s Sical Ships (India) Ltd. was concerned, Honourable High Court had ordered winding up of the said company on 4.9.2003 and assessee despite having such order with it, which was passed during the currency of the relevant financial year, had decided only to make a provision. As per the CIT, assessee had effected an actual write off only in the next assessment and this by itself clearly showed that the sum of Rs. 16,03,61,290/- represented un ascertained liability. In so far as item No. (ii) was concerned, CIT noted that these were amounts due from various Government Departments and could not be considered as bad or doubtful. Vis-à-vis the third item, ld. CIT noted that it was only a deposit made pursuant to High Court direction and was only a contingent liability. Vis-à-vis item No.(iv), ld. CIT was again of the opinion that it represented only a contingent liability. He, therefore, directed the A.O. to disallow all these amounts for the purpose of computation of book profit under Section 11 5JB of the Act.
9. Now before us, learned A.R. strongly assailing the order of CIT, submitted that Honourable Apex Court in the case of CIT v. HCL Com-net Systems And Services Ltd. (2008) 305 ITR 409 (SC) vide its order dated 23rd September, 2008, had held that provision for bad and doubtful debts could not be considered for addition while computing book profit under Section 11 5JA of the Act. According to the learned A.R., such provision was made to cover up probable diminution in the value of assets and did not represent any provision for liability. As per the learned A.R., Honourable Apex Court clearly held that provision made towards ir recover ability of a debt could not be said to be a provision for liability. According to him, when the CIT passed the order under Section 263 of the Act on 17.10.2008, the order of the Honourable Apex Court was already available. It was argued that even, otherwise, there were two views subsisting regarding treatment of provisions for debts when the A.O. considered the issue. The A.O. had taken a lawful view in not making any addition of these amounts for the purpose of computation of book profit under Section 11 5JB of the Act. Reliance was placed on the decision of Honourable Apex Court in the case of Malabar Industrial Co. Ltd. (supra) in support of this contention. According to him, the CIT was trying to substitute his view with the lawful view taken by the A.O. Learned A.R. further argued that though Explanation 1 to second proviso to Section 115JB(2) was amended by Finance (No.2) Act, 2009 and clause (i) added to it with retrospective effect from 1.4.2001, as per the decision of Honourable Apex Court in the case of CIT v. Max India Ltd. (2007) 295 ITR 282 (SC), retrospective amendment could not be a ground for invoking powers under Section 263 of the Act. According to learned A.R., the CIT was obliged to consider only the law as it stood when he was passing the order and the retrospectively amended provisions could not cure the inappropriate jurisdiction exercised by the CIT. In so far as dues on electricity tax was concerned, learned A.R. took us through para 5 of the order of the Assessing Officer for arguing that the liability arising to assessee on account of such taxes was properly considered by the A.O. According to him, the Assessing Officer had made a dis-allowance of the claim of Rs. 2,98,67,181/- under the normal provisions of the Act despite assessee’s argument that these were crystallised liabilities. In other words, according to him, the Assessing Officer had duly considered the issue regarding allowance of such amounts and after having considered such issue, came to a conclusion that no addition was called for under Explanation 1 to second proviso to Section 11 5JB(2) of the Act. In any case, according to him, the provision for bad debts of Rs. 16.04 Crores relating to M/s Sical Ships was already deducted from its loans and advances appearing in the balance sheet. For this contention, he placed reliance on audited accounts statement of the assessee company for the relevant previous year and Schedule X thereto. Similarly, according to him, the other amount of Rs. 86.48 lakhs was also deducted from its sundry debtors balance and Schedule VII to the audited accounts would substantiate this. Therefore, as per the learned A.R., the whole of the provision for bad and doubtful debts though it was called a provision, stood actually deducted from the balances due to the debtors and therefore, it clearly implied that these were ascertained liabilities only. In any case, according to him, the CIT in each of the above item had given a direction to the Assessing Officer to disallow the amounts under Section 11 5JB of the Act and the CIT had no powers to give any directions under Section 263 of the Act to do an assessment in a particular manner.
“12. It is seen from the records that the Assessing Officer had only examined the issues for the purpose of computing the total income under the normal provisions of the Act other than Sec. 115JB of the Act. The Assessing Officer had omitted to examine the case in the light of Sec. 115JB and obviously had not taken any view in the matter. Therefore the ratio of the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT (2000) (109 Taxman 66) relied on by the assessee does not apply to the facts of the case.”
He deemed the order to be erroneous in so far as it was prejudicial to the interest of the Revenue for a reason that the A.O. had omitted to examine each of the items in the light of Section 11 5JB of the Act. In our opinion, decision of Honourable Apex Court in the case of Malabar Industrial Co. Ltd. (supra) would come to the aid of the Revenue here. The order of the A.O. was without application of mind on Section 11 5JB of the Act. Sub-section (1) of Section 11 5JB starts with a non obstante clause and it runs as under:-
“115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on 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, ], is less than [fifteen per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [fifteen percent].”
A duty is thus cast on an Assessing Officer to work out book profit as defined under subsequent sub-section, and apply 7.5% thereon, and make a comparison thereof with total income under normal provisions of the Act. The Assessing Officer had failed to discharge this duty cast on him. In so far it relates to the electricity tax, undoubtedly, the tax audit report of the assessee clearly mentioned the amount to be contingent in nature. It is for this reason that the A.O. held it as not allowable while computing the total income under the normal provisions of the Act. Even at that point, the Assessing Officer never made any effort to make a book profit computation as mandated under Section 11 5JB of the Act. The simple reason for not doing so was that such an aspect never came to his mind at all when he passed the assessment order. Non consideration of law and not making a computation prescribed under law would definitely render the order of the A.O. erroneous and prejudicial to the interest of the Revenue. In so far as the direction of the CIT to disallow all the above items under Section 115JB of the Act, no doubt, such a direction to do an assessment in a particular manner would be beyond the powers of a CIT under Section 263. But, this by itself could not be a reason to strike off the CIT’s order as a whole since the basic conclusion which he reached, that the assessment order was erroneous in so far as it was prejudicial to the interest of the Revenue is correct. The order of the CIT in this regard would stand but we would modify it, so as to give the A.O. a free hand in making the fresh assessment. The order of the CIT would thus stand modified to the effect that the Assessing Officer shall examine each of the above issue relating to each of the above four items and proceed in accordance with law.
12. Now coming to second group of grounds which assails the order of the CIT whereby he considered certain additions/ dis-allowances made by the A.O. to be erroneous in so far as it was prejudicial to the interest of the Revenue. We can summarise these items into following two items:-
(i) Claim of depreciation made by the assessee Rs. 2,78,000/- in respect of a let out property at Tuticorin.
(ii) Claim of bad debts Rs. 84.09 lakhs which was already included in a sum of Rs. 1321.73 lakhs falling under the head ‘miscellaneous expenses’ debited in the profit and loss account.
13. The CIT in its notice under Section 263 of the Act, conveyed to the assessee that the property at Tuticorin was considered by the A.O. under the head “House Property” and therefore, depreciation of Rs. 2.78 lakhs which was allowed was erroneous and prejudicial to the interest of the Revenue. In so far as the claim of bad debts was concerned, CIT was of the opinion that the said amount was part of miscellaneous expenses and further deduction made as claimed by the assessee and allowed by the A.O. resulted in double deduction. Reply of the assessee in this regard was that depreciation of Rs. 6.40 lakhs on let out property, was already added back by the Assessing Officer in the assessment and the said dis-allowance was under challenge before the CIT(Appeals). Therefore, according to assessee, the CIT had no jurisdiction to revise the order of the A.O. on an issue in appeal before the CIT (Appeals). Vis-à-vis the double claim for bad debts, explanation of the assessee was that there was no such double claim. According to assessee, it was following an accounting practice whereby party-wise receivables were considered and provisions made to the extent it had become doubtful by charging the same to the profit and loss account. Nevertheless, as per the assessee, when the amounts really become irrecoverable, there was a reversal of the amounts earlier charged from the provision and equivalent write-off thereafter effected. Therefore, as per the assessee, there was no double deduction.
14. Ld. CIT was however not impressed. According to him, just because an issue was in appeal, did not preclude him from exercising his jurisdiction under Section 263 of the Act. According to him, the income from let out property having been computed under the head “Income from House Property”, the claim of depreciation could not be allowed. Vis-à-vis the double claim of bad debts, ld. CIT was of the opinion that the assessee was not able to explain how the charge to profit and loss account was reversed in the subsequent year, and assessee never furnished copies of ledger accounts and details of actual entries passed in support. According to CIT, the Assessing Officer while completing the assessment had not examined these aspects. He, therefore, directed the A.O. to disallow the claim of depreciation on the house property and to examine the contention of the assessee vis-à-vis its claim for bad debts.
17. We have perused the orders and heard the rival contentions. No doubt, vis-à-vis the issue of depreciation there was a dis-allowance of Rs. 6,40,000/- made by the A.O. at para 10.3 of the assessment order. Case of the assessee is that Rs. 2,78,000/- considered by the CIT was included in the above amount of Rs. 6,40,000/-. We find that the A.O. had not examined the claim of depreciation of the assessee vis-à-vis each of the let out property owned by it. There is nothing in the assessment order which gives a break-up of the dis-allowance of Rs. 6,40,000/- made by the A.O. Hence, there is a clear omission by the A.O. in making a scrutiny of each of the claim of depreciation of the assessee. We cannot find any error in the order of the CIT in considering such non-application of mind to be erroneous and prejudicial to the interest of the Revenue. Nevertheless, we cannot also accept the order of CIT that the A.O. shall disallow the claim of the assessee. Hence, vis-à-vis the depreciation claim, we modify the order of CIT and direct the A.O. to verify the claim of the assessee and deal with it in accordance with law.
18. Coming to the claim of deduction of bad debts Rs. 84.09 lakhs, though the assessee had argued that there was no double deduction, as mentioned by the learned CIT, nothing was produced by the assessee to prove that it consistently followed an accounting practice whereby provision made in one year was reversed it to the extent debts were considered bad, in a subsequent year and a write-off effected for such bad debts. In any case, nothing is there in the assessment order which would show that there was any application of mind by the Assessing Officer in this regard. Therefore, we cannot find any lacunae in the order of CIT in directing the Assessing Officer to examine the contention of the assessee and deal with it in accordance with law. Obviously, there was an error by sheer non-application of mind of the A.O. in this regard.
19. Before parting it, it would be inappropriate if we do not deal with one of the arguments taken by the learned A.R. that this Tribunal did not have any power under Section 254 of the Act to modify an order of CIT under Section 263 of the Act. We cannot accept this contention since sub-section (1) of Section 254 of the Act, empowers this Tribunal to pass such orders as it thinks fit. As already mentioned by us where the order of the A.O. was palpably erroneous and prejudicial to the interest of the Revenue, just because the CIT slightly overstepped his powers, would not be a sufficient reason to quash his order in toto, but it is the duty of the Tribunal to properly modify it so as to effectuate the purpose of Section 263. Therefore, we do not find any merit in this appeal of the assessee against the order of the CIT under Section 263 of the Act. Nevertheless, as observed by us, the order of CIT shall stand modified to the extent that the A.O. can consider each of the issue raised by the CIT in his order, in accordance with law after giving the assessee an opportunity to represent its case.
20. In the result, the appeal filed by the assessee stands dismissed.
The order was pronounced in the Court on 21st April, 2011.