Provision made for bad and doubtful debts to be included in the ‘Book Profit’ for the purpose of MAT

Court: Mumbai Income-tax Appellate Tribunal

Citation: ADIT (Int. Tax) Vs. Bank International Indonesia [2010-TII-85- ITAT-MUM-INTL],

Brief- In a recent ruling, the Mumbai Income-tax Appellate Tribunal (“Tribunal”), in the case of ADIT (Int. Tax) Vs. Bank International Indonesia [2010-TII-85- ITAT-MUM-INTL], has held that provision made for doubtful debts will be required to be added back to the net profit as per the profit and loss account while computing the Book Profit for the purpose of determination of Minimum Alternate Tax (“MAT”), subsequent to the amendment to Explanation 1 to section 115JB of the Income-tax Act, 1961 (“the Act”), with retrospective effect from 1 April, 2001 (See Note 1 Below).

Facts of the case

The relevant facts of the case are as follows:

• The assessee, a foreign bank, was engaged in the business of corporate banking and retail banking in India.

• The Assessing Officer (“AO”) held that the provision for doubtful debts, for assessment years 2002-03 and 2003-04, had to be added back to the Book Profit for the purpose of calculating MAT.

• The AO held that the Explanation 1(c) to section 115JB of the Act clearly provided that the net profit should be increased by the provision made for any unascertained liability.

• On appeal, the Commissioner of Income-Tax (Appeal) (“CIT(A)”) decided in favor of the assessee and directed the AO to delete the addition, relying on the decision of the Mumbai Tribunal in the case of Maharashtra State Electricity Board Vs. JCIT [2002] 77 TTJ 33 (Mumbai).

• Aggrieved by the order of CIT(A), the Revenue filed an appeal before the Tribunal.

Issue:-The issue before the Tribunal was whether the provision made for bad and doubtful debts should be added back to the net profit as per the profit and loss account for the purpose of computing Book Profit liable to MAT under section 115JB of the Act:

Revenue’s contentions

The Revenue contended that:

• Section 115JB of the Act provides that the net profit as shown in the profit and loss account should be increased by the amount(s) set aside towards provision made for meeting liabilities, other than ascertained liabilities, for computation of Book Profit.

• The intention of the legislature in introducing MAT was to tax the Book Profit at a minimum rate of tax and therefore, all the provisions made were required to be added for arriving at Book Profit.

• The assessee was making all efforts to recover the dues and therefore, had not written off the debts and made provision for doubtful debts, which evidenced that the liability was not an ascertained liability but only a contingent liability.

• Reliance was placed on the decision in the case of DCIT Vs. Beard sell Ltd.[2000] 244 ITR 256 (MAD) where the High Court held that the AO was justified in adding back the provision made for doubtful debts to arrive at the Book Profit for the purpose of MAT.

Tribunal Ruling

The Tribunal observed and held as follows:

• Section 115JB of the Act was amended by Finance (No.2) Act, 2009, by way of insertion of clause (i) with retrospective effect from 1 April, 2001, to specifically include any amount set aside as provision for diminution in the value of any asset.

• Prior to the amendment, the issue was squarely covered by the decision in the case of HCL Com net Systems & Services Ltd., where the Supreme Court held that the AO was not justified in adding back the provision for doubtful debts as clause (c) of the Explanation to section 115JA of the Act is not attracted to the provision for bad and doubtful debts.

• The decision in the case of HCL Com net Systems & Services Ltd.(above) is no longer a good law after the amendment of Section 115JB of the Act by the Finance (No. 2) Act, 2009.

• Therefore, the provision for doubtful debts is to be added back to the net profit as per profit and loss account while computing Book Profit under section 115 JB of the Act.

Conclusion

The decision clarifies the position regarding the addition of provision for doubtful debts for the purpose of computing the Book Profit for the purpose of MAT, in light of the amendment to section 115JB of the Act made with retrospective effect from 1 April 2001.

The Act does not provide on the applicability of MAT provisions to foreign banks. Recently, the Authority for Advance Rulings, in the cases of The Timken Company6 and Praxair Pacific Ltd.’, has held that the MAT provisions are not applicable to a foreign company that does not have a physical presence in India. Considering the fact that foreign bank branches, registered under the Companies Act, 1956 are required to prepare and submit their accounts in India, it appears that benefit of these decisions would not be available to the foreign banks having a branch in India.

Note-

1. The Finance (No.2) Act, 2009 inserted clause(i) to Explanation 1 to section 115JB of the Act to provide for increase in net profit as per profit and loss account by the amount set aside as provision for diminution in the value of any asset for the purpose of computing Book Profit.

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