prpri Mere Provision not eligible for Adjustment against Book Profit it must be Ascertained Liability Mere Provision not eligible for Adjustment against Book Profit it must be Ascertained Liability

Case Law Details

Case Name : M/s. Southern Power Distribution Company of Andhra Pradesh Ltd. Vs DCIT (ITAT Hyderabad)
Appeal Number : ITA No.1460/Hyd/2013
Date of Judgement/Order : 27/04/2018
Related Assessment Year : 2009-10

M/s. Southern Power Distribution Company of Andhra Pradesh Ltd. Vs DCIT (ITAT Hyderabad)

Per Smt. P. Madhavi Devi, J.M.

We find that the assessee has made a provision of Rs.22.81 crores for bad and doubtful debts during the relevant previous year. The AO added it back to the book profit holding that it is not an ascertained liability. The CIT (A) has confirmed the addition by observing that subsequent to the amendment to Explanation 1(i) to section 115JB, any provision leading to diminution in the value of any asset, has to be added to the book profit. The fact is that the assessee has debited the provision for bad and doubtful debts to the P&L A/c and therefore, it has to be added back to the book profit while making the computation of tax payable u/s 115JB of the Act. What the assessee is now seeking is to reduce the book profit by the actual bad debts written off as it has debited the said amount to the provision for bad and doubtful debts A/c and not the profit and loss account. Whether such an adjustment is permissible is to be seen. The Legislature has provided that for computing the income u/s 115JB of the Act, the ‘book profit’ means the net profit as shown in the P&L A/c for the relevant previous year prepared under sub-section (2) and as increased by the items in clauses (a) to (k) under Explanation (1) to section 115JB and thereafter reduced by the items under clauses (i) to (viii) there under. The bad debts written off is not an item under the Explanation (1) to section 115JB of the Act. The assessee’s contentions that the bad debts written off is more than the provision made during the relevant year and therefore, nothing should be added also cannot be accepted for the simple reason that the assessee has prepared its P&L A/c in accordance with the provisions of the Companies Act and the net profit as per such P&L A/c is to be adopted and thereafter the adjustments under the Explanation (1) are to be made. The Hon’ble Supreme Court in the case of Apollo Tyres (cited Supra) has clearly held that the AO has no jurisdiction to tinker with the net profit arrived at under the provisions of the Companies Act. There is also no doubt that the provision made for bad and doubtful debts has to be added back to the net profit. The bad debts written off ought to have been debited to the P&L A/c as per the provisions of the Companies A/c and thereafter the net profit is to be arrived at to which the adjustments under the Explanation (1) are to be made. Where the AO has no jurisdiction to tinker with the accounts of the assessee, likewise the AO has no authority to make an adjustment not provided under the explanation. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue as the assessee has clearly debited the provision of Rs.22.81 crores to the P&L A/c. The assessee’s ground of appeal No.4 is accordingly rejected.

PER S. RIFAUR RAHMAN, A.M.:

In my considered view, the assessee is following regularly the method of accounting as per which the provision is created every year and charged to P&L Account. The actual loss is not charged to P&L Account. But the book profit for the year has to be adjusted to arrive at the actual book profit with the impact on ascertained liability/loss and unascertained liability. The intention of the statute is to determine the actual book profit that is the reason, the Explanation 1 was inserted in the Act. As per the Explanation, the liabilities/loss which does not have an impact is added and assets/gains which also does not have impact on the book profit are eliminated. In particular, the clause (c) of Explanation 1, which is given below:

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.”

The above clause clearly states that the liabilities which are created, are unascertained liabilities which has to be added back to the profit, if it is ascertained liabilities, it need not to be added. The clause ‘c’ has to be read along with the conditional statement, which is other than ascertained liabilities. In the given case, the actual loss/liabilities are already ascertained by the assessee and the actual loss/liability has to be adjusted to arrive at the actual book profit. In the given case, the actual book profit has to be arrived as below:

Book profit as per P& L A/c xxxxx

Add: Unascertained book debts 22.89 xxxxx

Less: Actual loss having impact on book profit 25.43 xxxxx

By considering the above discussion, in my opinion, the ground raised by the assessee is allowed.

Per: D. Manmohan, Vice-President (As Third Member)

I have carefully considered the rival submissions and perused the record. I have also gone through the orders passed by my Learned colleague Members and also the case law referred therein. Clause ‘c’ to Explanation-1 of section 115JB of the Act, which is relevant in this context, is reproduced for immediate reference:

“(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;

A careful analysis of the said provision shows that the “book profit” means the profit as shown in the Profit & Loss Account in the relevant assessment year, prepared under the Companies Act, and the same has to be reduced by the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities. No doubt the Assessing Officer has no power to go behind the profit / loss declared for Company Law purposes, and the ‘book profit’ shown therein has to be taken as the base for making adjustments u/s 115JB of the Act. Both the Learned Members have expressed their views mainly based on the interpretation of sub-clause ‘c’ to Explanation-1 of section 115JB of the Act which merely speaks of making additions to the book profit, only in the event where the provision made for meeting liabilities is not an ascertained liability. In the instant case, the assessee has debited the expenditure to the tune of Rs. 131.93 Crs to arrive at the book profit and Schedule-14 shows that a sum of Rs. 22,89,02,937/- was provided for with the narration “Bad & Doubtful debts Provided for / Written off”. In other words, it is not specified as to whether it was only a provision or a write off. However, going by the facts stated elsewhere, it is clear that the assessee was maintaining separate provision account wherein it was shown that the bad debts written off is to the tune of Rs. 25.43 Crs which is an ascertained liability. In fact the assessee ought to have claimed deduction of the entire ascertained liability but chose to write off only to the tune of Rs. 22.89 Crs. Sub-clause ‘c’ to Explanation-1 empowers Assessing Officer to increase the book profit to the extent of amount set aside for meeting unascertained liabilities whereas in the instant case, as against the correct figure of Rs. 25,43,02,937/-the assessee has written off only to the tune of Rs.22,89,02,937/-which is an ascertained liability and thus the same cannot be taken into consideration. In fact Schedule-14, annexed to the Profit & Loss Account, prepared for Company Law purposes, indicate that the assessee clearly mentioned it as bad and doubtful debts written off. There is no dispute with regard to the fact that the Tax Authorities have not stated anywhere that the liability to the tune of Rs. 25,43,02,937/- is not an ascertained liability. If the assessee has claimed lesser than the ascertained liability, it cannot be assumed that it is a provision merely because of a different accounting method followed by the assessee. I am therefore of the opinion that the view taken by the Learned Judicial Member is not in accordance with law. At the same time, the view taken by the Learned Accountant Member also deserves to be modified in view of the fact that the grounds of appeal is restricted to disallowance of Rs. 22.89 Crs only. Therefore there is no claim with regard to the allowance of Rs. 25,43,02,937/-either in the grounds of appeal or Schedule-14. As rightly pointed out by the Learned Departmental Representative the actual claim made by the assessee in the Profit & Loss Account maintained for Company Law purposes cannot be tinkered with by the Assessing Officer but at the same time further benefit cannot be given; The Tribunal cannot ask the Assessing Officer to give some more relief, in addition to the relief claimed in the Grounds of Appeal. The Learned Accountant Member was of the of the view that the entire amount of Rs. 25,43,02,937/- should be taken into consideration for re-computation. In my considered opinion the issue which arises out of the order of the Ld. CIT(A) is confined to Rs. 22.89 Crs and the ground being limited to the said addition, the Tribunal, in my humble opinion, cannot go beyond the issue as raised by the assessee and therefore the Learned Accountant Member ought to have confined the issue to the correctness of the addition made therein.

16. In the peculiar facts of the case, I am of the view that the addition made by the Assessing Officer to the tune of Rs. 22.19 Crs is not in accordance with law since this is a part of the ascertained liability which was otherwise adjusted in the provision account separately maintained by the assessee though, while claiming write off, it was restricted to Rs.22.89 Crs. In other words, in principle, I agree with the view taken by the Learned Accountant Member. The assessee is not entitled to further reduction to the book profit but the disallowance of Rs. 22,89,02,937/- deserves to be set aside. The question placed before me is answered accordingly.

Final Verdict

In accordance with the view expressed by the third member, Hon’ble Vice-President, Hyderabad, the ground of appeal No.4 is partly allowed and the AO is directed to allow the deduction from the book profit of sum of Rs.22.89 crores while computing the taxable income u/s 115GB of the I.T. Act. The ground of appeal No.4 is therefore, treated as allowed.

FULL TEXT OF THE ITAT JUDGMENT

Both are cross appeals filed by the assessee as well as the Revenue for the A.Y 2009-10 against the order of the CIT (A), Guntur, dated 26.08.2013.

2. Brief facts of the case are that the assessee company, which is engaged in the business of purchase and distribution of electric power, filed its return of income for the A.Y 2009-10 through e-filing on 23.09.2009 disclosing total income at Rs.Nil. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the income under the normal provisions of the Act is ‘Nil” while the income computed u/s 115JB of the Act was Rs.70,39,55,794. As the tax payable under the provisions of section 115JB was more than the tax payable under the normal provisions of the Act, the AO raised the demand of tax payable u/s 115JB of the Act. While computing the income u/s 115JB of the Act, the AO added the following to the book profit:

i)

Provisions for taxation which is erroneously reduced from the book profit (Fringe Benefit Tax)

Rs.93,05,363
ii) Prior Period expenses as the same are not chargeable against the book profit of current year. Rs.7,69,38,745
iii) Provision for bad and doubtful debts, since it is not an ascertained liability Rs.22,89,02,937
iv) Provision for leave  encashment Rs.22,02,00,000
v)

Provision for non-moving and obsolete stock, since the same were not taken into account for arriving at the book profit

Rs.4,32,02,259

3. Aggrieved by the above additions to the book profit disclosed by the assessee, the assessee preferred an appeal before the CIT (A). The CIT (A) granted partial relief to the assessee by deleting the addition of the provision of taxation (Fringe Benefit Tax) and provision for leave encashment and also addition of Rs.60,90,62,390 being the sum of the income from capital contributions credited to P&L A/c and income from RGGVY subsidy credited to P&L A/c treating the same as a capital receipt. Aggrieved by the relief granted by the CIT (A), the Revenue is in appeal before us, while the assessee is in appeal against the confirmation of the additions by the CIT (A). Let us first deal with the assessee’s appeal. The assessee has raised the following grounds of appeal:

1) The order of the Learned Commissioner (Appeals) is contrary to the facts and the law on the subject with reference to certain additions made by the assessing officer.

2) The Learned Commissioner (Appeals) erred in confirming the disallowance of the amount debited to Profit and Loss Account amounting to Rs.7,69,38,745.

3) The Learned Commissioner (Appeals) erred in confirming the addition made to book profits relating to prior period expenses amounting to Rs.7,69,38,745.

4) The Learned Commissioner ( Appeals) erred in confirming the disallowance of Provision for Bad and Doubtful Debts amounting to Rs.22,89,02,937.

5) The Learned Commissioner (Appeals) erred in confirming the addition made to book profit in respect of Provision for Non-moving and Obsolete Stock amounting to Rs. 4,32,02,259”.

4. As regards the additions of the prior period credits/charges of Rs.7,69,38,745/-, the AO had added the same to the book profits on the ground that the prior period expenses amounted to Rs.8,56,99,500 and the income relating to earlier years amounted to Rs.87,60,755 and that the net figure of Rs.7,69,38,745 has been reduced from the income of the current year, AO observed that the assessee has not furnished any information or evidence or prove that the above expenses were not claimed in the earlier years and held that the expenses relating to earlier years cannot be charged against the current year’s income as each assessment is independent from the assessment of earlier and the subsequent years. He therefore, added it to the returned income. Aggrieved, the assessee filed an appeal before the CIT (A) stating that these expenses were not claimed in the earlier years and has referred to AS-5 for treatment of prior period items. Further, it was also submitted that though these items were classified as prior period expenses, the same were accrued and crystallized in the relevant A.Y. The CIT (A), however, confirmed the addition by holding that the expenses clearly pertain to earlier A.Y by relying upon the decision of the Coordinate Bench of this Tribunal in the case of Singareni Colleries Co. Ltd vs. ACIT wherein it was held that “prior period adjustment is not allowable either while computing the income u/s 115JB nor under the provisions of the Income Tax Act”. He was of the opinion that the accounting standard 5 provided for a different method of accounting of prior period items such as reflecting the same separately after arriving at the profit for the year and that the assessee’s claim regarding Accounting Standard-5 is only partially correct. Against the order of the CIT (A), the assessee is in appeal before us.

5. The learned Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities below, has drawn our attention to the Accounting Standard-5 which clearly lays down that the extra ordinary items such as prior period expenses are to be shown after arriving at the net profit of the year. He has also drawn our attention to the computation of the income u/s 115JB of the Act wherein the net profit as per the books of account as per the P&L A/c was Rs.10,97,69,983, to which, the provision for Income Tax of Rs.1,56,36,507 and depreciation of Rs.224,31,94,166 were added and thereafter the depreciation of Rs.224,31,94,166 debited to the P&L A/c was reduced and the book profit as per section 115JB was arrived at a sum of Rs.12,54,06,490. He also drew our attention to Page 1 of the Paper book filed by the assessee which is the computation of the total income for the previous year ending i.e. 31.03.2009 wherein the net profit as per the P&L A/c was taken at Rs.10,97,69,983 and the book profit as per section 115JB of the Act after all the adjustments was arrived at Rs. 12,54,06,490. It was submitted that the prior period expenses were taken to the P&L A/c after arriving at the net profit of the year after tax and therefore, it is not an item which needs to be added to the book profit u/s 115JB of the Act. He also submitted that there is no clause under the Explanation to section 115JB of the Act which requires the prior period expenses to be added to the book profit u/s 115JB of the Act. In support of his contention, he placed reliance upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. Khetan Chemicals & Fertilizers Ltd reported in 307 ITR 150 and also of the Hon’ble Madras High Court in the case of T.N. Cements Ltd vs. DCIT reported in 349 ITR 58.

6. The learned DR, on the other hand, supported the orders of the authorities below and has also drawn our attention to the comments of the Comptroller and Auditor General of India for the year ended 31.03.2009 and the assessee’s reply thereto and to the comments on the expenditure at page 32 of the paper book wherein the comment of the Comptroller & Auditor General was that the expenditure on purchase of power was understated by Rs.14.95 lakhs due to non accounted unscheduled Inter change charges payable to Southern Regional Power Committee, Bangalore, which has resulted in understatement of “Current liabilities for power purchase” and overstatement of “Net Profit Before Tax” by Rs.14.95 lakhs. The reply of the assessee to this comment was that “the audit observation is correct and the same is treated as prior period expenditure in the accounting year 2009-10. Thus, according to the learned DR, the details of the prior period expenditure are not available with the assessee and the expenditure which could not be explained by the assessee to the CAG has been treated as prior period expenses. Therefore, according to him, the same is not allowable and is to be added to the book profit u/s 115JB of the Act. In support of her contention that the AO can recast the books of a/c for the purpose of computing the book profit u/s 115JB of the Act if the assessee is not following the accounting standard and is not computing the income in accordance with the Company’s Act, the learned DR placed reliance upon the decision of the Coordinate Bench of the Tribunal at Ahmedabad in the case of Molex Mafatlal Micron Ltd vs. Income Tax Officer in ITA No.1083/Ahd/2007, dated 7.12.2006.

7. Having regard to the rival contentions and the material on record, we find that while computing the income u/s 115JB of the Act, the book profit as per the P&L A/c is to be considered to which the adjustments under the Explanation are to be made. From the P&L A/c placed at page 38 of the Paper Book filed by the assessee, the net profit after tax for the year is Rs.18,67,08,728 and after reducing the prior period expenses of Rs.7,69,38,745, the net figure of Rs.10,97,69,983 has been arrived at. Though the assessee had contended that these expenses have crystallized during the relevant financial year, nothing has been brought on record to prove the same. From the computation of income u/s 115JB of the Act, we find that the assessee has reduced the prior period expenses before arriving at the net profit of Rs.10,97,69,983/-. In fact, it has made below the line adjustment of the prior period expenses as per AS-5. The Hon’ble Supreme Court, in the case of Apollo Tyres vs. CIT (cited Supra), has held that u/s 115JB, the jurisdiction of the AO is limited to examine whether the books of account are certified by the authority under the Companies Act as having been properly maintained in accordance with the Company’s Act and cannot embark on a fresh enquiry in determining the book profit so as to arrive at a re-computation. However, this may be a ground for disallowance u/s 37 of the Act. In the case before us, the AO has not brought out anything on record as to how the assessee has not maintained its books of account in accordance with the Companies’ Act. The reasons for disallowing the expenditure u/s 37 of the Act cannot be adopted for adding the same to the book profit u/s 115JB of the Act as the mode of computation of income under these two provisions entirely different. The Hon’ble Madras High Court in the case of T.N. Cements (Cited Supra) has considered similar circumstances and has held as under:

7. Before going into the various submissions of learned counsel for the assessee and learned Standing Counsel for the Revenue, the facts herein need to be seen as disclosed in the papers filed before this Court. A perusal of the profit and loss account which is filed before the authorities below and before this Court shows that profit for the year to a tune of Rs.1456.44 was reckoned after taking into account, the prior year expenses which are enumerated under Schedule ‘S’. It is seen from the order of the Assessing Authority that the Assessing Authority also did not dispute the above said fact that in computing the net profit of the company, the assessee had considered the deduction of the prior year expenses. The only ground on which the claim of the assessee was rejected was that the prior year adjustments could not be reduced for arriving at net profit for the year under consideration.

8. In contrast to the said fact, the Tribunal held that after arriving at the net profit after tax, the assessee has charged “prior period expenses” and in their opinion, it was charged to appropriation account. We do not think such statement of facts is supported by any material. Thus, the facts as seen from the documents show that the computation of the net profit for the year under consideration was made after adjusting prior year expenses and it was not by way of appropriation account.

9. The authority of an Assessing Officer to go beyond the book profit under Section 115JA for the Officer to go beyond the book profit, in the decision in Apollo Tyres Ltd. (supra) the Apex Court pointed out to the objects of the introduction of the said provision of Section 115J with a deeming provision which makes the company liable to pay tax on at least 30 percent of its book profits as shown in its own account. The Apex Court pointed out that Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh inquiry with regard to the entries made in the books of account of the company. The said sub-section mandates the company to maintain its account in accordance with the requirements of the Companies Act for the limited purpose to find out whether the computation is done in accordance with the provisions of the Companies Act. The Assessing Authority has a limited jurisdiction to satisfy himself that the accounts are maintained in accordance with the provisions of the Companies Act. Beyond that, the Assessing Authority has no jurisdiction to go further into accounts. The Apex Court further held as follows:- 

“…………. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115J of the Act, then it should be that incomewhich is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in Section 115J that “income of the company as accepted by the Assessing Officer “

10. The said decision came up for consideration, although in the different context as regards the working out of the depreciation in the decision in Malayala Manorama Co. (supra)., the Apex court upheld the contention of the assessee therein that the net profit prepared by the assessee after working out the depreciation as per the Income Tax Rules was correct in law.

11. In the decision Dynamic Orthopaedics (P.) Ltd (supra) the Apex Court however questioned the correctness of the working out of the depreciation as per the Income Tax Rules as against the rates given in the Companies Act in terms of Parts II and III of Schedule VI to the 1956 Act. Thus, the Supreme Court referred the decision in Malayala Manorama Co., Ltd. (supra) to a larger Bench.

12. Leaving this aspect aside, the Apex Court pointed out that by legislative incorporation, only Parts II and III of Schedule VI to the 1956 of the Companies Act have been incorporated legislatively into Section 115J of the Act. The question hence that came up before the Apex Court in the decision in Dynamic Orthopaedics (P.) Ltd. (supra) is as regards the computation of the depreciation for the purpose of net profit determination. Hence, as rightly contended by learned counsel for the assessee, the said decision does not seriously stand in the way of this Court considering the issue as regards the deduction of prior year expenses in the matter of computing the net profit of the company for the year under consideration. In fact, similar question came up for consideration before the Delhi High Court in the decision in Khaitan Chemicals & Fertilizers Ltd. (supra) The facts therein is that the assessee prepared its net profit as per the profit and loss account after reducing the prior period expenses/ extraordinary items and thus arrived at the resultant book profit. The Revenue contested the claim of the assessee for reducing the prior period expenses on the ground that such expenses did not find mention in any of the clauses (i) to (ix) of the Explanation to Section 115JA(2). Dealing with such contention, the Delhi High Court pointed out that to the Accounting Standard (AS-5) and stated that Accounting Standards clearly stipulates that prior period items are income or expenses which arise “in the current period” as a result of errors or omissions in the preparation of the financial statement of one or more prior periods. Referring to paragraph 7 of AS 5, the Delhi High Court pointed out that the net profit or loss comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. The Delhi High Court further held as follows:-

” From this, it is clear that both, “prior period items” as well as “extraordinary items” are to be included in the determination of net profit or loss. If a prior item is an expense, it is obvious that it will go towards reducing the net profit or increasing the loss, as the case may be. On the other hand, if the prior period item is an income, it would go towards increasing the net profit or reducing the loss, as the case may be. The same is the position with extraordinary items which may be income or expenses. The conclusion that one can arrive at from this discussion is that prior period items and extraordinary items form part of the net profit or loss. “

13.  period items are also enumerated in paragraphs 15 and 19 of Accounting Standard. Dealing with the above said Accounting Standard-5, the Delhi High Court pointed out that the income or expenses relating to prior period items, merit to be included in the determination of net profit or loss. It reasoned out that both the prior period items and extraordinary items are to be included in the determination of the net profit or loss and as per paragraphs 15 of the AS 5, that prior period items should be separately disclosed in the statement of profit and loss and held as follows:-

” Two approaches have been indicated in paragraph 19 of the said Accounting Standard (AS 5). The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. As indicated in the accounting standard, in either case, the objective is to indicate the effect of such items on the current profit or loss. “

14. Thus, the Delhi High Court held that whether the prior period expenses were shown separately or not, the assessee would nevertheless be entitled to have the adjustment of the prior period expenses in the matter of computing the net profit of the assessee. Thus on mere fact that the assessee had shown its prior period expenses in the extra ordinary items separately, did not mean the net profit was arrived at de hors these items. The Delhi High Court further pointed out that the assessee had not claimed any deduction with the net profit on the basis of any clauses given in the Explanation to Section 115JA(2). Consequently, the question was answered in favour of the assessee. We are in agreement with the view expressed by the Delhi High Court and we do not have any hesitation in applying the said decision to the case before us.

15. It is relevant to note herein that the said decision rendered by the Delhi High Court was considered by this Court in the decision in CIT v. Swamiji Mills Ltd. [2012] 342 ITR 250(Mad.), wherein in preference to the decision of the Delhi High Court in Khaitan Chemicals & Fertilizers Ltd. (supra) , this Court applied the decision of the Kerala High Court in Sree Bhagawathy Textiles Ltd. v. Asstt. CIT [2012] 342 ITR 244 (Ker.), on the facts available that it was more about appropriation account. In considering the nature of the expenses charged on the appropriation account, this Court held that the assessee was not entitled to have the deduction of amounts debited in the profit and loss appropriation account in the computation of the net profit. As such, the decision of this Court Swamiji Mills Ltd. (supra) has no application to the facts of the case herein and it is totally distinguishable.

16. Thus, going by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and applying the facts thus found that in computing the net profit the assessee had adjusted prior period expenses, rightly, the assessee offered the book profit for assessment. No exception could be taken to the course adopted by the assessee in adjusting the prior period expenses in computing the net profit. In the light of the law declared by the Apex Court as to the jurisdiction of the officer in respect of the matter of MAT assessment, we have no hesitation in holding that once the officer accepts the book profit, he cannot travel beyond what had been disclosed in the book profit. In the matter of granting adjustment to the prior period expenses, we have no hesitation in applying the decision of the Delhi High Court in Khaitan Chemicals & Fertilizers Ltd. ( supra) thereby set aside the order of the Tribunal and allowed the Tax Case Appeal and answered the substantial question of law in favour of the assessee. No costs”.

Respectfully following the same, we are inclined to accept the contentions of the assessee that the prior period expenses cannot be added to the book profit computed under the Companies Act for computation of income u/s 115JB of the Act. The assessee’s grounds of appeal No.2 & 3 are accordingly allowed.

8. As regards Ground of appeal No.4, it is the case of the assessee that the opening balance of the provisions for bad and doubtful debts as on 1.4.2008 was Rs.72.65 crores and it is submitted that during the relevant A.Y. subsequent to the actual write off of bad debts of Rs.25.43 crores, the balance of the provision available was Rs.47.22 crores and to maintain the provision at Rs.70.11 crores, the additional provision of Rs.22.81 crores was made. It was explained before the CIT (A) that the actual loss suffered by the assessee on account of bad debts was Rs.25.43 crores which was written off against the provision for bad & doubtful debts and by debiting the provision by Rs.22.81 crores during the year, the net debit to the P&L A/c during the year was (Rs.25.43 crores – 22.81 crores) Rs.2,54,00,000 only and there is no excess provision made and that since the actual loss incurred is greater than the provision made, nothing should be added back to book profit u/s 115JB of the Act.

9. The learned DR however, supported the orders of the authorities below.

10. Having regard to the rival contentions and the material on record, we find that the assessee has made a provision of Rs.22.81 crores for bad and doubtful debts during the relevant previous year. The AO added it back to the book profit holding that it is not an ascertained liability. The CIT (A) has confirmed the addition by observing that subsequent to the amendment to Explanation 1(i) to section 115JB, any provision leading to diminution in the value of any asset, has to be added to the book profit. The fact is that the assessee has debited the provision for bad and doubtful debts to the P&L A/c and therefore, it has to be added back to the book profit while making the computation of tax payable u/s 115JB of the Act. What the assessee is now seeking is to reduce the book profit by the actual bad debts written off as it has debited the said amount to the provision for bad and doubtful debts A/c and not the profit and loss account. Whether such an adjustment is permissible is to be seen. The Legislature has provided that for computing the income u/s 115JB of the Act, the ‘book profit’ means the net profit as shown in the P&L A/c for the relevant previous year prepared under sub-section (2) and as increased by the items in clauses (a) to (k) under Explanation (1) to section 115JB and thereafter reduced by the items under clauses (i) to (viii) there under. The bad debts written off is not an item under the Explanation (1) to section 115JB of the Act. The assessee’s contentions that the bad debts written off is more than the provision made during the relevant year and therefore, nothing should be added also cannot be accepted for the simple reason that the assessee has prepared its P&L A/c in accordance with the provisions of the Companies Act and the net profit as per such P&L A/c is to be adopted and thereafter the adjustments under the Explanation (1) are to be made. The Hon’ble Supreme Court in the case of Apollo Tyres (cited Supra) has clearly held that the AO has no jurisdiction to tinker with the net profit arrived at under the provisions of the Companies Act. There is also no doubt that the provision made for bad and doubtful debts has to be added back to the net profit. The bad debts written off ought to have been debited to the P&L A/c as per the provisions of the Companies A/c and thereafter the net profit is to be arrived at to which the adjustments under the Explanation (1) are to be made. Where the AO has no jurisdiction to tinker with the accounts of the assessee, likewise the AO has no authority to make an adjustment not provided under the explanation. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue as the assessee has clearly debited the provision of Rs.22.81 crores to the P&L A/c. The assessee’s ground of appeal No.4 is accordingly rejected.

11. As regards Ground No.5, the AO had added a sum of Rs.4,32,02,259 as a provision for non moving and obsolete stock on the ground that it is a provision which has to be added to the book profit for MAT computations. The assessee had submitted before the CIT (A) that it is not a provision but it is the actual loss on account of non-moving and obsolete stock. The CIT (A) agreed that it is not a provision but is an ascertained liability, but since the assessee had given the nomenclature of the provision, he held that it has to be added back under Explanation 1(i) to section 115JB of the Act. Aggrieved by this finding of the CIT (A), the assessee is in appeal before us.

12. The learned Counsel for the assessee has drawn our attention to the inventory of the stock wherein the value of the stock has been reduced by the value of non-moving and obsolete stock which has been arrived at after due verification. Therefore, according to him, the loss on non-moving and obsolete stock is an ascertained liability and cannot be added back to the book profit for computation u/s 115JB of the Act.

13. The learned DR, however, supported the orders of the authorities below.

14. Having regard to the rival contentions and the material on record, we find that the inventory of the current assets is in schedule 7 and the non-moving and obsolete stock has been reduced from the stores and spares (as valued and certified by Management). The difference between the provision as on 31.3.2008 and 31.3.2009 is the sum of Rs.4.32 crores. However, we find that though it is mentioned as a provision, it has not been debited to the P&L A/c but is a Balance Sheet item. We find that the CIT (A) also has agreed with the contention of the assessee that it is an ascertained liability, but merely because of the nomenclature given as a provision, he had confirmed the addition. We are of the opinion that the nature of the item or of expenditure cannot be determined merely by the nomenclature but the AO and the CIT (A) ought to have gone into and examined the nature of the expenditure claimed by the assessee particularly whether it has been debited to the P&L A/c. As we are satisfied that it is not a provision and has not been debited to the P&L A/c, we direct the AO to recompute the taxable income u/s 115JB of the Act without adding the provision for non moving and obsolete stock to the book profit. The assessee’s ground of appeal is accordingly allowed.

15. In the result, assessee’s appeal is partly allowed.

16. In the Revenue’s appeal, the Revenue has raised the following grounds of appeal:

“1. The order of the CIT(A) is erroneous both on facts and in law;

2. The CIT(A) was erroneous in treating the capital contributions from the customers and RGGVY subsidy to an extent of Rs.60,90,62,319/- as capital receipts which was credited to P&L account.

3. The CIT(A) ought to have upheld the order of the Assessing Officer since the assessee could not prove the additions made in respect of the items pertaining to the Provision for FBT and Provision for Leave Encashment.

4. The decision of the Ld CIT(A) is unilateral as no opportunity was given to the Assessing Officer on the submissions made by the applicant in respect of the items mentioned in point 3 supra”.

17. As regards Ground No.2, the CIT (A) has considered the assessee’s contention at length and has held as under:

“5. During the appellate proceedings, the appellant was represented by Sri Y.Balakrishna Reddy, CA., and Sri B.Ravindra, CA., as authorized representatives. The. submissions as made by them are placed on record. I have perused the assessment order and all the submissions made, as well as the remand report dt.29.1.2013 received from the Assessing Officer. The appeal filed by the appellant is disposed off as under:

1) GROUNDS No.1 & 2:

The first ground of appeal pertains to treatment of Rs.58,53,98,096/- as taxable income. The facts relevant to this issue are that, the appellant company is engaged in distribution of power to six circles viz., Vijayawada, Guntur, Ongole, Nellore, Kadapa and Chitoor. It has nearly sixty five lakh consumers of power. For every new connection, the appellant company is collecting contributions/charges from consumers towards cost of service line charges and development charges. The appellant company has submitted that “on receipt of contributions from consumers, the company is debiting to cash/bank account and crediting to consumer contributions received as they are capital receipts towards the cost of fixed assets”. The appellant has submitted that its Accounting Policy, is that the assets so created/constructed, out of the contributions from consumers, will be depreciated as per rates specified under GO No.265 (FE) dt.27.3.1994. The depreciation is debited to P&L account every year and the same is recognized as income and credited to P&L Account, by reducing it from the amount of capital fund received, to reduce the depreciation charged to P&L account on the assets purchased out of consumer contribution. For easy explanation the appellant has given the details of entries passed in its books pertaining to the receipts from consumers.

The appellant has stated that the contributions received from consumers are capital contributions and should not be treated as income. From the accounting entries passed by it, the appellant has stated that, “it can be observed that the capital contributions which has part funded the fixed assets of the company, are adjusted to the cost of fixed assets and also the depreciation originally charged on the fixed assets are reversed, thereby the assets are shown at net values in the books of account and there is no impact on the P&L account, as the capital contributions are not on the revenue account and the depreciation originally charged attributable to the cost of assets partly funded by the capital contributions are reversed”.

The appellant has submitted that during the asst.year 2009-10, the company has received consumer contributions including subsidies and grants towards cost of capital assets amounting to Rs.147.77 cr. and an amount of Rs.58.53 cr. has been reduced from the capital contributions and transferred to P&L account which is equal to the amount of depreciation charged on the assets purchased out of capital contributions. The appellant has also submitted that it has followed Accounting Standard-12 regarding treatment of consumer contributions. Accounting Standard-12 is as under:

Accounting Standard-12 which deals with capital based grants suggests two methods for treating grants received for specific asset? As per para-14 of the Standard, grants related to specific assets can be reduced from the cost of the fixed assets or the grants can be treated as deferred revenue grants. Para-14 is reproduced below:

“Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed assets equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the Profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the period and in the proportion in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfilment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements”.

The appellant has further referred to the treatment prescribed in the Income tax Act for such capital contributions. As per Sec.43(1) “Actual Cost” means the actual cost of the asset to the assessee, reduced by that portion of the cost, if any, as has been met directly or indirectly by any other person or authority. Explanation 10 states that, where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly, by the Central Government or State Government, or any authority established under any law, or by any other person, in the form of a subsidy or grant or reimbursement, then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Provided, that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

The appellant has gone on to state that the Assessing Officer has misunderstood the accounting policy and accounting entries passed in the books and erroneously treated the capital contributions received from consumers as income. Therefore, the amount of Rs.58,53,98,095/-added to the total income under the normal provisions, is not correct. The appellant has ‘placed reliance on the decision in the case of Jodhpur Vidyut Vitran Nigam Vs CIT 321 ITR 18(2010).

2. Ground No.2 is regarding the treatment of subsidy received under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) credited to P&L Account amounting to Rs.2,36,64,224/-. This subsidy has been received from the Government towards construction/purchase of fixed assets. The appellant has stated that on receipt of subsidy from Government, the amount is spent for procurement· of capital stock/material and payment of service/labour charges for laying of service lines and fixing of transformers. The appellant has explained that the accounting treatment of such subsidy is similar to the accounting treatment followed in the case of capital contributions by the consumers. In respect of this subsidy, the appellant has again referred to Accounting Standard-12 as well as Sec.43(1) of the I.T.Act.

The Assessing Officer in his remand report dt.29.1.2013 has stated that the above two amounts viz., Capital contributions from Consumers and RGGVY subsidy have not been found in the details of ‘other income: furnished by the appellant. The Assessing Officer has further stated that statement of computation filed by the assessee reveals that the capital contributions to the extent of Rs.58,53,98,095/- and RGGVY subsidy of Rs.2,36,64,224/- were treated as Revenue receipts are not correct. The Assessing Officer stated that this statement of the appellant is contradictory, and the additions made should be sustained.

There appears to be an error in the interpretation given by the Assessing Officer. It is seen that the contributions from consumers were reflected in the balance-sheet as contributions and subsidies towards cost of capital assets, while cost of the material/capital cost incurred for giving connections to customers was capitalized and shown as additions to fixed assets. The appellant has submitted that while computing depreciation in the books, the appellant calculated depreciation on gross value of assets which included assets purchased contributions received from customers as well as subsidy received. Since, the deprecation debited to the P&L Account included depreciation on the value of assets created out of consumers contributions, as well as out of subsidy received under RGGVY, the depreciation relating to assets credited out such contribution/subsidy was credited to the P&L account under the head ‘other income’. As a result, in the books of account of the appellant, gross depreciation was debited and deprecation on assets created out of consumer contributions and RGGVY subsidy was credited to the P&L account under the head “other incomes”. In the next stage the appellant while computing its taxable income under the Income tax Act has deleted both the items from the net profit as per the books, by adding gross depreciation and reducing the depreciation attributable to consumers contribution/subsidy. The appellant has then claimed depreciation allowable under the Income tax Act on the net value of assets. The net value of assets is the gross value as reduced by consumers contributions/subsidy as is required under. explanation-l0 to sec.43(1). It is logical that adjustments are made to net profit for entries in the P&L account towards depreciation, before allowing deductions towards depreciation as per the I.T.Act. In the normal course such adjustment is required only for the depreciation debited to the P&L account. In the assessee’s case· there is also a credit of such amount in accordance with ESAAR (Electricity Supply Annual Account Rules) even though it is not in the nature of income. It logically follows that this amount is to be reduced from net profit for the purpose of computation of total income. To sum up the amount of Rs.58,53,98,095/- and Rs.2,36,64,224/-were the amounts of depreciation claimed on assets generated out of the capital contributions/subsidy and had been credited to the P&L account since the P&L account had been debited by gross depreciation and not depreciation as per actual cost. Subsequently, while computing the income, gross depreciation was added back and depreciation as per I.T.Act was reduced. This depreciation as per I.T.Act took into account the provisions of sec.43(1) and expalantion-10 and hence the depreciation was proportionately reduced amount taking into account capital contributions. In view of the same the depreciation on capital contributions credited to the P&L account was also reduced in the computation of income and, correctly so. The accounting method followed by the appellant is not only correct but also as per provisions of the I.T.Act and Accounting Standards and the addition made is deleted. Appeal on Grounds No.1 & 2 is hence allowed”.

18. We find that the CIT (A) has brought out the actual accounting treatment given by the assessee and its impact on the computation of income u/s 115JB of the Act. The learned DR has not been able to rebut the findings of the CIT (A) and demonstrate as to how the findings of the CIT (A) are not sustainable. In view of the same, we see no reason to interfere with the order of the CIT (A) on this issue and the Revenue’s ground of appeal No.2 is accordingly rejected.

19. As regards Ground No.3, we find that the CIT (A) has relied upon the actuarial valuation submitted by the assessee to come to the conclusion that the provision for leave encashment is an ascertained liability and therefore, cannot be added to the book profit. Further, as regards the provision for Fringe Benefit Tax, the CIT (A) has clearly brought out that it is not similar to the provision for Income Tax. The learned DR has not been able to rebut the findings of the CIT (A). Further, the CBDT Circular No.8/2008 dated 29.8.2005 has clarified that the FBT is a liability of the employer and is in the nature of the expenditure laid out and expended wholly and exclusively for the purpose of business or profession of the employer and therefore, is an allowable deduction for the computation of book profit u/s 115JB of the Act. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue also.

20. In the result, Revenue’s appeal is dismissed.

21. To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed.

Order pronounced in the Open Court on 30th June, 2017.

ORDER

PER S. RIFAUR RAHMAN, A.M.:

I have carefully perused the order proposed by Ld. Judicial Member. Though I am in agreement with the findings and conclusion of Ld. Judicial Member relating to ground Nos. 1, 2, 3 & 5, I have certain reservations, with great respect, in respect of Ground No. 4 and the conclusion reached therein. I, therefore, propose to pass separate order which reflects the reasons to arrive at a different conclusion.

2. On careful perusal of the records submitted before us, it is observed that the AO has disallowed the provision made by the assessee on provision for doubtful debts as unascertained liability as per clause “c” of the Explanation 1 of section 115JB. I have no objection to the above action of the AO as the provision was made as per the accounting method adopted by the assessee as per its own method regularly adopted in this line of business. The assessee is following its accounting method on provisions and actual loss by maintain a separate provision for doubtful debts account. In that separate account, every year, it is crediting unascertained liability as per its market study and charging the same to P&L A/c. This account is carefully analysed every year and the actual loss of that year is not charged to P&L A/c but charged to the provision a/c so that it could carry forward the doubtful debts account next year. This is being followed by the assessee regularly and the details of provision and write off of actual loss are given below:

APSPDCL
Particulars 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Opening Balance 57.03 72.65 70.11 62.93 101.35
Provision for the year 57.03 14.64 22.89 10.36 42.19
Bad debts written off during the year (25.43) (17.54) (3.77)
Closing
balance
57.03 72.65 70.11 62.93 101.35 101.35

LEDGER FOR THE YEAR 2008-09
Provision for bad debts account (GL A/c No. 23,900)
Balance Sheet GL
To Bad debts written off (GL A/c No.
79.400)
25,43,02,937 By Opening Balance B/d 72,65,00,000
During the year 2008-09 By provision for bad debts 22,89,02,937
To Balance c/d 70,11,00,000 During the year
Total 95,54,02,937 Total 95,54,02,937

Write off doubtful debts account (GL A/c No. 79.410
(Profit & Loss A/c GL)
Balance Sheet GL
By provision for Bad debts (transferred  to provision for bad
To Sundry

(23.000)

debtors 25,43,02,937 debts GL 23.900)
Total 25,43,02,937
To Sundry(23.000) debtors 25,43,02,937 debts GL 23.900)

3. The intention of the statute u/s 11 5JB is to determine the actual book profit of the company for that particular AY. In this regard, the Act carries an explanation to determine the actual book profit by crediting the provisions and reducing the actual loss. As per the clause “C” of explanation 1 of section 115 JB, the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. It is clear that from the book profit the unascertained liabilities should be excluded but at the same time, if there is ascertained loss, which was not charged through the profit/loss account but it has impact on the profits/liability of the company, then, it has to be adjusted in the book profit.

4. The above method can be understood by referring to the computation sheet of the assessee on normal provisions of the IT Act. For the sake of convenience, it is reproduced below:

SOUTHERN POWER DISTRIBUTION COMPANY OF ANDHRA PRADESH LIMITED TIRUPATI

HCPAN AAHCS4056Q
STATUS Government Company
PREVIOUS YEAR 2008-09
ASSESSMENT YEAR 2009-10
WARD JC-II
DC:: ASST Tirupati

COMPUTATION OF TOTAL INCOME FOR THE PREVIOUS YEAR ENDING 31-03-2009

COMPUTATION OF TOTAL INCOME FOR THE PREVIOUS YEAR ENDING 31-03-2009

From the above, it is clear that the assessee itself has made the addition of provision for bad & doubtful debts of Rs. 22.89 crores and claimed Rs. 25.43 crores as deduction. Hence, the actual loss to the assessee under bad debts is Rs. 25.43 crores, in case, it is charged to P&L A/c by following the actual loss method, the book profit would have come down to the extent of Rs. 25.43 crores instead of Rs. 22.89 crores.

5. In my considered view, the assessee is following regularly the method of accounting as per which the provision is created every year and charged to P&L Account. The actual loss is not charged to P&L Account. But the book profit for the year has to be adjusted to arrive at the actual book profit with the impact on ascertained liability/loss and unascertained liability. The intention of the statute is to determine the actual book profit that is the reason, the Explanation 1 was inserted in the Act. As per the Explanation, the liabilities/loss which does not have an impact is added and assets/gains which also does not have impact on the book profit are eliminated. In particular, the clause (c) of Explanation 1, which is given below:

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.”

The above clause clearly states that the liabilities which are created, are unascertained liabilities which has to be added back to the profit, if it is ascertained liabilities, it need not to be added. The clause ‘c’ has to be read along with the conditional statement, which is other than ascertained liabilities. In the given case, the actual loss/liabilities are already ascertained by the assessee and the actual loss/liability has to be adjusted to arrive at the actual book profit. In the given case, the actual book profit has to be arrived as below:

Book profit as per P& L A/c xxxxx

Add: Unascertained book debts 22.89 xxxxx

Less: Actual loss having impact on book profit 25.43 xxxxx

By considering the above discussion, in my opinion, the ground raised by the assessee is allowed.

6. With regard to the revenue appeal, I am in agreement with the findings of the Ld. Judicial Member.

Dt.: 04/07/2017 Sd/-

Per: D. Manmohan, Vice-President (As Third Member)

ORDER UNDER SECTION 255(4) OF THE I. T. ACT, 1961

1. On account of conflict of opinion expressed by the Learned Judicial Member and the Learned Accountant Member, the following question was referred to the Hon’ble President to resolve the issue by referring the matter to a Third Member and accordingly the Hon’ble President was pleased to nominate me as the Third Member.

Whether, on the facts and circumstances of the case, the A.O. was justified in adding back the provision for bad and doubtful debts to the book profit u/s 115JB of the Act and not reducing the actual bad debts written off from the book profit to arrive at the actual book profit.”

2. Facts are already set out in the order passed by the Learned Judicial Member. However, a brief reference is given to appreciate the matter in the correct perspective. The assessee-company is engaged in the business of purchase and distribution of electric power. While working out the income u/s 115JB of the Act, the A.O. had taken into consideration the book profit as declared under the Companies Act and thereafter made certain disallowances /additions to arrive at the income taxable u/s 115 JB of the Act. One of such issues is with regard to the provision of bad and doubtful debts to the tune of Rs. 22,89,02,937/- which was added to the book profits on the ground that it is not an ascertained liability.

3. The case of the assessee was that in the computation of Profit & Loss Account, under the normal provisions, the assessee has not claimed deduction of provision for bad debts but there was a claim of deduction of bad debts actually written off, to the tune of Rs. 25.43 Crs. It may be noted that bad debts, even under the Companies Act, is entitled to be written off, being an ascertained liability. In the instant case the actual bad debts written off is more than what is reflected as provision in the books of account.

4. It was submitted that the assessee has been making a provision for bad and doubtful debts from year-to-year and carried it to a separate account and in the event of ascertained liability the provision is reduced accordingly. The actual loss suffered on account of bad debts being 25.43 Crs, the net amount debited to the Profit & Loss Account during the year was Rs. 2,54,00,000/- (Rs. 25.43 Crs – 22.81 Crs). Under these circumstances, nothing should be added back to the book profit while computing the income u/s 115JB of the Act.

5. A. O. as well as the Ld. CIT(A) rejected the contention of the assessee. On an appeal filed before the Appellate Tribunal, Learned Judicial Member was of the opinion that the view taken by the Tax Authorities is proper inasmuch as the Tax Authorities are not entitled to question book profit as reflected in the Profit & Loss Account maintained under Companies Act. The provision refers to the book profit as arrived at in the books maintained for Company Law purpose and it only speaks of addition to the said book profit referable to provision for bad debts, which is unascertained liability.

6. Learned Judicial Member observed that the assessee is seeking reduction from the book profit by the actual bad debts written off but, such adjustment is not permissible since the Legislature has earmarked the ‘book profit’ and the amounts which are to be added back or reduced from such ‘book profit’. The bad debts written of is not an item falling under Explanation-1 to section 115JB of the Act and hence the question of reducing the same does not arise merely on the ground that the bad debts written off is more than the provision made during the relevant year. It was also noticed that the assessee has prepared its Profit & Loss Account in accordance with the provisions of Companies Act and hence net profit as per such Profit & Loss Account has to be arrived at and there is no jurisdiction to tinker with the net percentage so arrived at, in the light of the decision of the Apex Court in the case of Apollo Tyres (255 ITR 273). In the aforecited decision, the Court observed that while assessing a company under Income Tax Act the correctness of Profit & Loss Account prepared by the assessee-company (certified by the statutory auditors of the company) prepared in accordance with the requirement of Part II & III of Schedule-VI of Companies Act, cannot be questioned. The Court further observed that the Assessing Officer, while computing the income 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 Companies Act, and thereafter he has limited power of making increases / deductions as provided in Explanation to section 115JB of the Act. In other words, the A.O. has no jurisdiction to go behind the net profit shown in the Profit & Loss Account. Learned Judicial Member was therefore of the opinion that the provision of Rs. 22.81 Crs debited to the Profit & Loss Account should automatically be added to the book profit and there is no provision u/s 115JB of the Act with regard to reduction of actual bad debts written off which is not even claimed in the Profit & Loss Account maintained under the Companies Act.

7. The Learned Accountant Member has proposed a separate order on this aspect since he was of the view that the impugned addition, made by the A.O, is not in accordance with law. In this regard, he observed that as per clause ‘c’ of Expalanation-1 to section 115JB of the Act, provision made for doubtful debts, being unascertained liability, deserves to be added to the book profit but in the peculiar matrix of the case, the overall picture ought to have been taken into consideration.

8. The assessee admittedly followed its accounting method in a way that provision for doubtful debts are taken to a separate account every year by creating unascertained liability as per its market study and charging the same to Profit & Loss Account and, as and when there is actual write off, such loss is not separately charged to Profit & Loss Account but it was charged to the provision account so that only the net doubtful debts can be carried forward to next year. The Learned Accountant Member tabulated the figures pertaining to the provision account from A.Ys 2006-07 to 2011-12 to emphasise that in the year under consideration there was ascertained liability to the extent of Rs. 25.43 Crs and the same ought to have been taken into consideration to arrive at book profit. No doubt, as per clause ‘c’ of Explanation-1 to section 115JB of the Act, the unascertained liabilities have to be added back to the book profit but it makes an exception to the ascertained loss, even though it is not charged to the Profit & Loss Account; so long as it has impact on the profits / liability of the company then it has to be adjusted against the book profit.

9. He also observed that the assessee has not charged to the Profit & Loss Account the actual loss suffered because the assessee was regularly following the method of accounting as per which provision is created every year and charged to Profit & Loss Account. As per the computation of total income for the previous year ending on 31.03.2009, the provision for doubtful debts was added to the net profit but thereafter actual bad debts written off was deducted from the net profit which clearly depicts that the assessee has actually written off certain debts and from that perspective there cannot be any addition to the book profit since the addition to be made is less than the actual deduction that ought to have been considered by the Tax Authorities i.e., the write off of bad debts was to the tune of Rs. 25.43 Crs whereas the provision for bad and doubtful debts was to the tune of Rs. 22.89 Crs and the assessee in fact deserves reduction from the book profit the actual sum written off.

10. Before me, Learned Counsel for the Assessee submitted that the assessee maintained a separate account towards provision for bad debts which was never carried forward to Profit & Loss Account though for the Company Law purposes it was debited to the Profit & Loss Account. As and when there was an actual liability i.e., if there is an ascertained liability on account of bad debts written off, the same is reduced from the provision account and the balance is carried forward but the fact remains that the actual liability in the year under consideration is more than the provision and hence there was no need to add back the amount referable to provision towards unascertained liabilities. He adverted my attention to Page 269 of the paper book to highlight that in view of the consistent method followed, the assessee did not charge to its Profit & Loss Account the actual loss incurred towards unascertained liability but, the fact remains that the ascertained liability ought to have been reduced from book profit. Learned Counsel for the Assessee admitted that the assessee followed the method available under the Companies Act. In short, the claim of the assessee is that though the amount of Rs. 22.89 Crs has been debited to the Profit & Loss Account, as provision for bad and doubtful debts, it should not be treated as bad debts since it is indirectly an actual write off; Instead of adjusting to provision account it should have been adjusted through Profit & Loss Account. Learned Counsel for the Assessee adverted my attention to the question framed to submit that the question was not only focused on the issue of adding back the provision for bad and doubtful debts to the book profit but on the issue of reduction of actual bad debts written off from the ‘book profit’ so as to arrive at actual book profit. In a nutshell the case of the Learned Counsel for the Assessee is that though for the Company Law purposes the book profit was already determined but while taking into consideration the net income tax, the book profit has to be modified suitably by taking into consideration the actual loss suffered. In fact A.O. could have suo moto done this. He relied upon the decision of the Hon’ble Supreme Court in the case of TRF Limited (323 ITR 397) to submit that it is not necessary for the assessee to establish that the debt in fact has become irrecoverable and thus the A.O should not have gone by nomenclature given to the actual bad debts written off and the mistake has occurred only because of the different accounting treatment given to the provision for doubtful debts as well as the actual bad debts. He thus strongly supported the order passed by the Learned Accountant Member.

11. On the other hand, Learned Departmental Representative submitted that section 115JB of the Act was mainly meant to rope in Zero Tax companies. In other words, section 115JB applies to loss making companies and Income Tax Act provides for accounting method to be followed while computing the book profits u/s 115JB of the Act. Assessee has in fact furnished 115JB report for calculation and has also furnished Schedule 14 of the Profit & Loss Account which was maintained for Company Law purpose. He adverted my attention to pages 38 and 47 of the paper book to highlight that the assessee has actually claimed provision for bad and doubtful debts to the tune of Rs. 22,89,02,937/- and it is duly certified by the statutory auditors. The present claim of actual bad debts to the tune of above Rs.25 Crs was not claimed anywhere in the Profit & Loss Account. It was only an accounting entry of assessee whereas the audited books do not indicate that there was a loss suffered by the assessee.

12. Provisions of section 115JB of the Act has to be understood on the basis of the language employed therein. The computation of income begins with taking into consideration the “book profit” as defined in the said section. Explanation-1 to section 115JB defined “book profits” which means the profit as shown in the statement of Profit & Loss Account for the relevant previous year prepared under sub-section 2 and in turn sub-section 2 refers to the profit and loss arrived at in accordance with the provisions of Schedule-III to the Companies Act. Thereafter, certain amounts have to be reduced from the book profit and sub-clause (i) refers to ‘addition’ referable to reserves or provision if such amount is reflected in the Profit & Loss Account. It is not in dispute that the provision is reflected in the Profit & Loss Account and thus as per clause ‘c’ of Explanation-1 to section 115JB of the Act, the book profit has to be increased by the amount shown as doubtful debts.

13. Learned Departmental Representative further submitted that Explanation-1 refers to book profit, as the profit shown in the statement of Profit & Loss Account prepared under the Companies Act, as increased by the amounts / amount set aside to provisions made for meeting the liabilities, other than ascertained liabilities, whereas the question of reduction comes into play only when such amount is credited to the Profit & Loss Account. However, in the instant case both the Members referred to Explanation-1(c) but the fact remains that the present claim is referable to diminution in the value of recoverables which cannot fall under consideration for the purpose of reduction from the book profit. Under these circumstances, it cannot be said that the Learned Judicial Member has gone beyond the Profit & Loss Account prescribed in section 115JB of the Act. Learned Departmental Representative has also relied upon the decision of the Hon’ble Supreme Court in the case of Apollo Tyres (supra) to contend that the Assessing Officer / Tax Authorities cannot question the ‘book profit’, arrived at on the basis of books maintained for Company Law purposes, duly audited, and it has limited power of either increasing the book profit or reduction of book profit so arrived at, by applying the provisions of section 115JB of the Act. Certainly, in the instant case, diminution in the value of recoverables do not fall for consideration under any of the provisions referred in section 115JB of the Act. He thus strongly supported the order passed by the Judicial Member.

14. Joining the issue, Learned Counsel for the Assessee submitted that the assessee-company has not followed actual loss method on account of which there was a difference in claim but the fact remains that there was actual bad debt which was an ascertained liability which ought to have been reduced from the book profit or at least the net figure ought to have been taken while making addition to the book profit.

15. I have carefully considered the rival submissions and perused the record. I have also gone through the orders passed by my Learned colleague Members and also the case law referred therein. Clause ‘c’ to Explanation-1 of section 115JB of the Act, which is relevant in this context, is reproduced for immediate reference:

“(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;

A careful analysis of the said provision shows that the “book profit” means the profit as shown in the Profit & Loss Account in the relevant assessment year, prepared under the Companies Act, and the same has to be reduced by the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities. No doubt the Assessing Officer has no power to go behind the profit / loss declared for Company Law purposes, and the ‘book profit’ shown therein has to be taken as the base for making adjustments u/s 115JB of the Act. Both the Learned Members have expressed their views mainly based on the interpretation of sub-clause ‘c’ to Explanation-1 of section 115JB of the Act which merely speaks of making additions to the book profit, only in the event where the provision made for meeting liabilities is not an ascertained liability. In the instant case, the assessee has debited the expenditure to the tune of Rs. 131.93 Crs to arrive at the book profit and Schedule-14 shows that a sum of Rs. 22,89,02,937/- was provided for with the narration “Bad & Doubtful debts Provided for / Written off”. In other words, it is not specified as to whether it was only a provision or a write off. However, going by the facts stated elsewhere, it is clear that the assessee was maintaining separate provision account wherein it was shown that the bad debts written off is to the tune of Rs. 25.43 Crs which is an ascertained liability. In fact the assessee ought to have claimed deduction of the entire ascertained liability but chose to write off only to the tune of Rs. 22.89 Crs. Sub-clause ‘c’ to Explanation-1 empowers Assessing Officer to increase the book profit to the extent of amount set aside for meeting unascertained liabilities whereas in the instant case, as against the correct figure of Rs. 25,43,02,937/-the assessee has written off only to the tune of Rs.22,89,02,937/-which is an ascertained liability and thus the same cannot be taken into consideration. In fact Schedule-14, annexed to the Profit & Loss Account, prepared for Company Law purposes, indicate that the assessee clearly mentioned it as bad and doubtful debts written off. There is no dispute with regard to the fact that the Tax Authorities have not stated anywhere that the liability to the tune of Rs. 25,43,02,937/- is not an ascertained liability. If the assessee has claimed lesser than the ascertained liability, it cannot be assumed that it is a provision merely because of a different accounting method followed by the assessee. I am therefore of the opinion that the view taken by the Learned Judicial Member is not in accordance with law. At the same time, the view taken by the Learned Accountant Member also deserves to be modified in view of the fact that the grounds of appeal is restricted to disallowance of Rs. 22.89 Crs only. Therefore there is no claim with regard to the allowance of Rs. 25,43,02,937/-either in the grounds of appeal or Schedule-14. As rightly pointed out by the Learned Departmental Representative the actual claim made by the assessee in the Profit & Loss Account maintained for Company Law purposes cannot be tinkered with by the Assessing Officer but at the same time further benefit cannot be given; The Tribunal cannot ask the Assessing Officer to give some more relief, in addition to the relief claimed in the Grounds of Appeal. The Learned Accountant Member was of the of the view that the entire amount of Rs. 25,43,02,937/- should be taken into consideration for re-computation. In my considered opinion the issue which arises out of the order of the Ld. CIT(A) is confined to Rs. 22.89 Crs and the ground being limited to the said addition, the Tribunal, in my humble opinion, cannot go beyond the issue as raised by the assessee and therefore the Learned Accountant Member ought to have confined the issue to the correctness of the addition made therein.

16. In the peculiar facts of the case, I am of the view that the addition made by the Assessing Officer to the tune of Rs. 22.19 Crs is not in accordance with law since this is a part of the ascertained liability which was otherwise adjusted in the provision account separately maintained by the assessee though, while claiming write off, it was restricted to Rs.22.89 Crs. In other words, in principle, I agree with the view taken by the Learned Accountant Member. The assessee is not entitled to further reduction to the book profit but the disallowance of Rs. 22,89,02,937/- deserves to be set aside. The question placed before me is answered accordingly.

17. The matter will now be placed before the Bench, which originally heard the appeals, for a decision in accordance with the majority view.

Hyderabad, Dated: 27th March, 2018.

In accordance with the view expressed by the third member, Hon’ble Vice-President, Hyderabad, the ground of appeal No.4 is partly allowed and the AO is directed to allow the deduction from the book profit of sum of Rs.22.89 crores while computing the taxable income u/s 115GB of the I.T. Act. The ground of appeal No.4 is therefore, treated as allowed.

2. In the result, appeal filed by the assessee is allowed & Revenue’s appeal is dismissed.

Pronounced in the Open Court on 27th April, 2018

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