HIGH COURT OF DELHI
Whirlpool of India Ltd.
versus
Union of India
W.P.(C) No. 3126 of 2010
FEBRUARY 28, 2013
ORDER
R.V. Easwar, J. – In this writ petition, the petitioner challenges the retrospectivity of the amendment made to Section 115 JB of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 by insertion of clause (i) to Explanation 1 with retrospective effect from 01.04.2001.
2. The petitioner is a public limited company incorporated under the Companies Act, 1956 and is engaged in the business of manufacture and trading/export of consumer items such as refrigerators, washing machines, etc. It was assessed to income tax on the “book profit” computed in accordance with the provisions of Section 115 JB of the Act. This section was inserted into the Act by the Finance Act, 2000 w.e.f. 01.04.2001. It made special provision for payment of tax by certain companies. The gist of the section, shorn of the details, is that certain companies were liable to pay tax on their “book profit” if the total income computed in accordance with the provisions of the Act was less than 18% of its book profit. In that case, book profit was deemed to be the total income of such companies. These companies were required to prepare their profit and loss account in accordance with the provisions of parts –II and III of Schedule VI to the Companies Act, 1956. Explanation 1 to the section permitted certain adjustments to be made to the figure of book profit as shown in the profit and loss account prepared as per the Companies Act. The first part of the Explanation provided for certain additions to be made to the book profit and the second part provided for certain reductions to be made from the book profit. In the present petition we are not concerned with the second part, but are concerned only with the first part of Explanation 1 which provided for certain upward adjustments to the book profit. For the purposes of the present petition therefore, it would only be necessary to reproduce the first part of the Explanation, which reads as under: –
“Explanation [1].- For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2), as increased by –
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves, by whatever name called [, other than a reserve specified under section 33AC ]; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed ; or
(f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or]
[(g) the amount of depreciation,]
[(h) the amount of deferred tax and the provision therefor,”
It may be noticed that under clause (c) “the amount or amounts set aside to provisions made for meeting liabilities, other than the ascertained liabilities” was/were to be added to the book profit as shown in the profit and loss account. A controversy arose as to whether the provision for bad and doubtful debts made in the profit and loss account can be added to the book profit under the aforesaid clause. The income tax authorities took the view that such a provision was made for meeting a liability other than an ascertained liability and therefore the book profit had to be increased by the amount of the provision. The case of the companies which were liable to tax under Section 115 JB was that a provision for bad and doubtful debts cannot be regarded as a provision made for meeting a liability, let alone an unascertained liability, because a debt is not a liability but is an asset of the company and what in effect the company does, when making the provision for bad and doubtful debts, is only to provide for a possible non-recovery of the debt; according to the companies, a provision made for the diminution in the value of the debt due to possible non-recovery or the debt going bad cannot be treated as a provision made for meeting an unascertained liability. The matter ultimately reached various benches of the Income Tax Appellate Tribunal and on account of the importance of the issue, a Special Bench of the Tribunal was constituted which ruled in JCIT v. Usha Martin Ltd. [2006] 105 TTJ (Kol.) 543 (SB) that such a provision cannot be considered as a provision for meeting an unascertained liability and that in truth and substance it was a provision for the diminution of the value of the debt and therefore, it fell outside clause (e) of the Explanation and the book profit cannot be increased by the amount of the provision. This view of the Special Bench of the Tribunal was upheld by the Delhi High Court in a case where a similar issue had arisen and this judgment is reported as CIT v. Eicher Ltd. [2006] 287 ITR 170. The controversy was eventually resolved by the Supreme Court in the judgment reported as CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409. This judgment was rendered on 23.09.2008. It was observed as under: –
“For the purposes of section 115JA, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the Explanation thereto. As stated above, the said Explanation has provided six items, i.e., item Nos. (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with item No. (c) which refers to the provision for bad and doubtful debts. The provision for bad and doubtful debts can be added back to the net profit only if item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee’s case would, therefore, fall within the ambit of item (c) only if the amount is set aside as provision ; the provision is made for meeting a liability ; and the provision should be for other than an ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract item (c) of the Explanation to section 115JA. In our view, item (c) is not attracted. There are two types of “debt”. A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case, the “debt” under consideration is a “debt receivable” by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of the asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for a liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability.”
3. After the judgment of the Supreme Court was rendered in favour of the company-assessees, the Finance (No.2) Bill, 2009 was introduced in the Lok Sabha on 06.07.2009 to give effect to the financial proposals of the Central Government for the financial year 2009-10. The Bill proposed an amendment to Section 115 JB as follows: –
“45. Amendment of section 115JB – In section 115JB of the Income-tax Act,-
