S.115JB Provision for doubtful debt to be added to Book Profit for MAT Calculation

ITAT DELHI BENCH ‘B’

Eastern India Power tech Ltd.

versus

Additional Commissioner of Income-tax

IT Appeal Nos. 4463 (Delhi) of 2009 & 192 & 4471 (Delhi) of 2010
[ASSESSMENT YEARS 2005-06 TO 2007-08]

NOVEMBER 9, 2012

ORDER

B.C. Meena, Accountant Member

These three appeals emanate from the three orders of CIT (A) dated 02.09.2009 for Assessment Year 2005-06, dated 03.11.2009 for Assessment Year 2006-07 and dated 10.08.2010 for Assessment Year 2007-08. Grounds of appeal are same except difference in figures of addition, hence, being decided by this common order.

2. The grounds of appeal in ITA No. 4463/Del/2009 for Assessment Year 2005-06 read as under :-

“1. That the CIT(A) has erred on facts and in law in confirming the order of the assessing officer, assessing the income of the appellant at Rs. 19,25,37,634 under section 115JB of the Income-tax Act, 1961 (the Act), against income of Rs. 7,33,22,716 declared by the appellant under that section.

2. That the CIT(A) has erred on facts and in law in confirming the order of the assessing officer making addition of provision for doubtful debts amounting to Rs. 11,92,14,918, while computing ‘book profits’ under section 115JB of the Act.

2.1 That the CIT(A) has erred on facts and in law in confirming the addition of Rs. 11,92,14,918 without appreciating that clause (i) of Explanation 1 to section 115JB of the Act was not applicable since the provision made by the appellant was not ‘provision for diminution in value of any asset.’

2.2 That the CIT(A) erred in observing that there is no dispute regarding calculation of ‘book profit’ under section 115JB of the Act.

3. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in charging interest under section 234B of the Act.

3.1 That the CIT(A) erred in not deleting interest levied under section 234B of the Act, instead directing that the appellant should file waiver petition before CIT instead of.

The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing.”

3. In all these appeals, common issue involved against sustaining addition made on account of provision for doubtful debts u/s 115JB and charging the interest u/s 234B of the Income-tax Act, 1961.

4. The assessee company is engaged in the business of generation of power and executing turnkey power plants as an Engineering, Procurement and Construction (EPC) Contractors. The company has entered into power purchase agreements with Coal India Ltd. and Assam State Electricity Board to build, own, operate and maintain power plants. The assessee has made provision for bad and doubtful debts which was not added to the profit as per the profit and loss account for computing book profit u/s 115JB of the Act. In Assessing Officer’s contention, this was a provision for an unascertained liability as litigation was going on between the assessee and CCL over the power tariff. It was also held that provision for doubtful debits is also covered by the amendment in the Act by the Finance Act, 2009 Clause (i) of Explanation 1 to section 115JB which has been made effective from 01.04.2001. In the Assessment Year 2005-06, the CIT(A) has decided the issue against the assessee by holding as under :-

“During the appellant proceedings, the appellant company, made the written submissions vide its letter dated 27-8-2009 as under:

“In fairness, it was further pointed out during the course of hearing on 18-8-2009 and also in the supplementary submissions filed on that date that in view of recent insertion of clause (i) in Explanation 1 to section 115JB of the Act by the Finance (No.2) Act, 2009 w.r.e.f. 1-4-2001 the aforesaid issue is prima facie, covered against the appellant.

It may, in this regard, be further pointed out that the management of the appellant is, however, still advised that despite the aforesaid amendment by way of insertion of clause (i) in Explanation 1 to section 115JB of the Act, provisions for bad and doubtful debts debited by the appellant to the profit and loss account cannot be adjusted since the same could not be regarded as ‘provisions for diminution in the value of an asset’. The management is also seeking further legal advise in the matter and is also contemplating challenging the validity of the aforesaid retrospective amendment in law.

After going through the assessment order and appellant’s written submissions and Finance Act, 2009 which become part of I.T. Act, 1961 it is quite clear that on account of retrospective amendments to section 115JB, there is no dispute regarding calculation of book profit u/s 115JB as far as provisions for doubtful debts are concerned. For the sake of clarity the amendment is reproduced as below

“(a) in sub-section (1), with effect from the 1st day of April, 2010-

(i) for the words, figures and letters “the 1st day of April, 2007”, the words, figures and letters “the 15 day of April 2010” shall be substituted;

(ii) for the words “ten per cent” at both the places where they occur, the words “fifteen per cent” shall be substituted;

(b) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters “if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by-“, the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2001, namely:-

(i) the amount or amounts set aside as provision for diminution in the value of any asset,

if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,-“.

Therefore, on account of above reasons this ground of appeal is dismissed and issue is decided in favour of revenue.”

5. While pleading on behalf of the assessee, Ld. AR submitted that assessee is a public limited company engaged in the business of generation of power and executing turnkey projects. The assessee had made provision for the financial year 2004-05 relevant to Assessment Year 2005-06 for bad and doubtful debts amounting to Rs. 11,92,14,918/-.

Project-wise details are as under :-

CIL/CCL Rajrappa Project	Rs. 4,60,20,866
CIL/CCL Gidi Project	Rs. 4,89,03,120
ASEB Project	Rs. 2,42,90,932
Total	Rs. 11,92,14,918

Ld. AR submitted that the provisions were made on account of excess income recognized by the assessee in its audited accounting statement and was made in respect of specified and ascertained debt not likely to be realized by the assessee. The ld. AR further submitted that provision was made in view of general accounting principles and Parts II and III of Schedule VI of the Companies Act. The provisions so made also accepted by the statutory auditors and no qualification/observation were made in respect of their audit report. The Assessing Officer has not appreciated the facts judiciously while holding that it was an unascertained liability. The reason for non-accepting the bills raised by the company on ASEB is on account of dispute regarding determination of tariff as per the Power Purchase Agreement (PPA) entered into between the assessee and ASEB. Clause 3 of PPA deals with the tariff of supply of power. As per clause 3.2, the tariff for sale of electricity has two components, viz. (a) fixed part; and (b) variable part. The relevant part of clause 3.2 read as under :-

“3.2 The two part tariff or sale of Electricity shall consist of following:

(a) FIXED PART:

This shall be the amount payable annually by the Board to the Company on the basis of 6y8.49% (consisting both Actual and Deemed Generation) for BANSKANDI and P LF (considering with both Actual and Deemed Generation) corresponding to the level of energy generation of 52393700 KWH per annum/or ADAMTILLA.

The payment of Fixed charges on monthly basis shall be made proportionate to the electricity generation by the Company(considering both Actual & Deemed generation). Necessary adjustment based on the cumulative generation shall be made at the end of the year (as per GOI guidelines).

VARIABLE PART:

The total Variable cost per month shall be calculated based on gross generation at generator terminals, landed cost of the fuel inclusive of all taxes/levies, declared plant heat rate and gross calorific value of the fuel. The cost of start-up & maintenance power paid for each month by the company shall be added to this cost.

The variable part of the tariff per month shall be calculated by division of the total variable cost per month by net units of energy metered.

The variable cost is not depended on P LF and is payable on all costs associated with actual generation irrespective of PLF.”

Clause 3.3 of the PPA provides for fixation of annual fixed charges based on various factors, including, inter alia, the following :-

“Clause 3.3 of the PP A provides for fixation of annual fixed charges based on various factors, including, inter alia, the following:

(a) Interest on debt;

(b) Return on equity of 16%, which is dependent upon cost of investments;

(c) Depreciation on assets;

(d) Operations and maintenance costs”

Clause 3.2 of the PPA thus defines fixed part of the tariff to be based upon actual capital cost and plant load factor (PLF) of the power plant of the company. Clause 3.11.1 provides for various incentives and disincentives. The relevant clause is reproduced as under :-

“3.11.1 Incentives :-

(i) For BANASKANDI:

For PLF of above 68.49% (considering both actual & deemed generation) an incentive in return on equity (ROE) at the rate of additional 0.7% for each 1 % increase in PLF above 68.49% shall be allowed.

(ii) For ADAMTILLA:

A return on equity of 16% shall be allowed for P LF corresponding to generation of 52393770 KWH (66.46% PLF) per annum with gas supply of AJ 50,000 Sm3/day. In case the company is able to get more quantity of gas per day then the PLF at which 52393770 KWH can be reached would be determined.

Thus for incentive in PLF above the PLF required to generate 52393770 KWH/annum an increase in ROE at the rate of additional 0.7% for each 1% increase in P LF shall be allowed.

On the perusal of these clauses, it can be noticed that fixed tariff and incentives receivable under the PPA is based on various factors like capital investment/cost of project, PLF, eligible amounts like interest on debit, depreciation, etc. The assessee was also entitled to receive certain tariff as bonus if the assessee was able to active a certain level of production, which is determined as certain percentage of PLF, normally called as percentage of PLF. In the books of accounts, the assessee recognized tariff receivable for supply of power to ASEB based on the actual capital cost incurred and PLF achieved up to 100% (actual and deemed) for setting up the power plant and as per PPA. The company recognized incentive in tariff receivable for supply of power to ASEB based on the PLF achieved up to 100% (actual and deemed). However, there has been a consistent dispute between the assessee and the customers of powers, i.e. ASEB, regarding actual capital cost of the plant, PLF and consequently, on the tariff for supply of power. Ld. AR also relied on the various submissions made before the authorities below.

6. On the other hand, the ld. DR vehemently pleaded that the Assessing Officer has given elaborate reasons in the order. The ld. DR submitted that while making the dis allowances, the Assessing Officer has considered the factual matrix of the case ranging from agreement with customers of the assessee and observations of the regulatory commission on petition of assessee. The ld. DR has argued on all relevant issues in detail which have been dealt by the Assessing Officer and CIT(A) and on the reply to the arguments made by the ld. AR. Ld. DR also submitted detailed written submissions which read as under :-

“The common issues involved in these appeals are addition on account of provision for doubtful debts u/s 115JB and charging of interest u/s 234B of the I.T.Act,1961.

2. The AO has given elaborate reasons in the assessment order for the A.Y. 2005-06 for making the addition of Rs. 11,92,14,918/- for A.Y. 2005-06. He has dissected the factual matrix of the case ranging from note on provision for doubtful debts, agreement with customers of the assessee, the petition filed before the Central Electricity Regulatory Commission, Commission’s observations and then arrived conclusion that the amount of Rs. 11,92,14,918/- is taxable u/s or the sake of the convenience the relevant findings of the AO as given on pg. 10, 11 & 12 of the assessment order dated 26.12.2007 are reproduced below:

“A perusal of the grounds taken and statement of facts submitted before the Appellate Tribunal shows that as per clause 1.18.2 of the power purchase agreement, that lays down the formula for the purpose of fixation of tariff As per page 11 of the agreement DLF Power Co. Ltd. had to furnish documentary evidence in support of actual capital cost to be accepted by CIL after examining the reason ability of requirement of additional capital investment on the basis of mutual agreement. For the first year the tariff was to remain firm at Rs. 1.20 per unit. For determining the tariff for the subsequent year fixation of capital cost of plant on the date of its commission was the prime factor. DLF Power Co. Ltd. was requested on numerous occasion to submit plant wise and item wise details of capital cost incurred by them. However, in spite of repeated request DLF Power Ltd. did not furnish item wise details together along with documentary evidence and they only relied in support of the investments made on audited final accounts. The assessee due to adamant attitude of not furnishing the details before the CCL resulted into this litigation which cannot be resolved till the time these details of investment in capital goods is furnished [Para 4(x to xv)]. Now the CCL has moved the appellate tribunal to look into the entire matter afresh and decide all the issues arising in the dispute. Therefore, it is clear that the liability provided by the assessee is subjudice and therefore, no provision can be calculated by the assessee. No amount can be ascertained since the issues involved in the dispute are not only concerned with the quantification but are challenging the jurisdiction of JCERC on various grounds as mentioned above. Therefore, the rate fixed by the JCERC cannot become a guideline or lead to a ascertained liability for which a provision can be made. Moreso, when the assessee himself is in default of not furnishing the complete details before the prescribed authority which are primarily essential for fixing the tariff from second year. Assessee cannot take benefit of a situation created by its own conduct. Such a debt cannot be said to have become bad which is due to the assessee’s own manipulations and act of not furnishing the documentary evidence of capital investment without which the tariff cannot be determined especially when the other party to the contract is challenging the genuineness of the investment.

Assessee has relied on the judgment of special bench of the Tribunal in the case of JCIT v. Usha Martin Industries Ltd. 288 ITR 63 (AT) (Cal.) (SB) for the proposal that the provision for doubtful debt is not a provision for liability but represents provision for domination in value of assets and hence, clause c of explanation to section 115JA is not applicable. However, this view has been impliedly over ruled by the Jurisdictional High Court in the case of CIT v. Eicher Ltd.287 ITR 170 and CIT v. HCL Comnet Systems & Services Ltd.292 ITR 299 where they held that (we are of the view that there is not reason why a bad and doubtful debt claimed by the assessee cannot be treated as an ascertained liability (page 292 ITR 299, 300 para 6 of the judgment). Both these judgment have laid down the law that provision for bad and doubtful debt is in the nature of a liability and can be allowed only if it is ascertained and if not ascertained then they will fall under the purview of clause c of explanation to Section 115JA of I.T. Act. In our case as evident from the facts above even the whole issue is under dispute as the basis of estimating the tariff has been questioned and the jurisdiction of the authority fixing the revised tariff is also under judicial review therefore, at this stage the liability is at best a contingent liability which will get fixed when these proceedings will get finality and hence will be available for calculating the ascertain liability which then can be written off by the assessee in whichever year they choose. Another distinction to be kept in mind while deciding this issue is that we are not deciding the allow ability of a bad debt but we are deciding the issue of calculation of book profit as per provisions of Section 115JB of I.T. Act. This liability is certainly not ascertained as on date and therefore, the judgments issued by the jurisdictional high court favors the revenue.

Accordingly the sum of Rs. 11,92,14,918/- debited from P&L account of provision for doubtful debts is added to the book profit computed by the assessee treating the same as unascertained liabilities.’ (emphasis supplied).

2.1 The assessee company has preferred an appeal before the CIT(A). The Ld. CIT(A) vide order dated 22.9.2009 has dismissed the appeal of the assessee. For the sake of the convenience the relevant part of the CIT(A)’s order is reproduced below:

“During the appellant proceedings, the appellant company, made the written submissions vide its letter dated 27.8.2009 as under:

“In fairness, it was further pointed out during the course of hearing of 19.8.2009 and also in the supplementary submissions filed on that date that in view of recent insertion of clause (i) in Explanation 1 to section 115JB of the Act by the Finance (n.2) Act 2009 w.r.e.f. 1.4.2001 the aforesaid issue is, prima facie, covered against the appellant.

It may, in this regard be further pointed out that the management of the appellant is, however, still advised that despite the aforesaid amendment by way of insertion of clause (i) in Explanation 1 of section 115JB of the Act, provisions for bad and doubtful debts debited by the appellant to the profit and loss account cannot be adjusted since the same could not be regarded as provisions for diminution in the value of any asset. The management is also seeking further legal advise in the matter and is also contemplating challenging the validity of the aforesaid retrospective amendment in law.

After going through the assessment order and appellant’s written submissions and Finance Act, 2009 which become part of I.T. Act 1961 it is quite clear that on account of retrospective amendments of section 115JB, there is no dispute regarding calculation of book profit u/s 115JB as far as provisions for doubtful debts are concerned. For the sake of clarify the amendment is reproduced as below:

“(a) in sub-section (1), with effect from the 1st day of April, 2010 =

(i) for the words, figures and letters “the 1st day of April, 2007”, the words, figures and letters “the 1st day of April 2010” shall be substituted.

(ii) for the words “ten percent”, at both the places where they occur, the words “fifteen percent” shall be substituted

(a) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters “if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by – “the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April 2001, namely:

(i) the amount or amounts set aside as provision for diminution in the value of any asset.

If any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by, -“

Therefore, on account of above reasons this ground of appeal is dismissed and issue is decided in favour of revenue.” (emphasis supplied).

3. For the assessment year 2006-07, the AO has made addition with following observations:

“In support of its contention, during the course of assessment proceedings, the assessee company also furnished copy of judgment of Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. (305 ITR 409).

4.2 The above reply of the assessee company is not tenable for the following reasons.

(i) The decision of Hon’ble Supreme Court in the case of CIT v. HCL Comnet System and Services Ltd. (305 ITR 409), relied upon by the assessee has been considered. The facts of the case of CIT v. HCL Comnet System and Services Ltd. (305 ITR 409) are different from those of assessee’s case itself. In the assessee’s case, the provision made by it is for unascertained liability because the liability provided by the assessee is subjudice, as the assessee company and the CCL are in litigation over the power tariff. (Elaborated reasons have been mentioned by the AO in the order of the assessee for A. Y. 2005-06). Therefore, this year also, on the basis of principle of consistency the provision for doubtful debts amounting to Rs. 18,26,02,000/- is added to the book profit for the purpose of provisions of Sec. 115JB.” (emphasis supplied).

3.1 The assessee company preferred an appeal before the CIT(A). The CIT(A) has dismissed the appeal vide the order dated 3.11.2009. For the sake of convenience, the relevant portion of the CIT(A) order is reproduced below:

“After going through the assessment order and appellant’s written submissions and Finance Act, 2009 which become part of I.T. Act, 1961 it is quite clear that on account of retrospective amendments to section 115JB, there is no dispute regarding calculation of book profit u/s 115JB as far as provisions for doubtful debts are concerned. For the sake of clarity the amendment is reproduced as below:-

(a) in sub-section (1), with effect from the 1st day of April, 2010-

(i) for the words, figures and letters” the 1st day of April, 2007″, the words, figures and letters” the 1st day of April 2010″ shall be substituted;

(ii) for words “ten per cent”, at both the places where they occur, the words “fifteen per cent” shall be substituted;

(a) in sub-section (2), after the second proviso, in Explanation 1, after clause (h), for the words, brackets and letters “if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by-“, the following shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2001, namely:-

(i) the amount or amounts set aside as provision for diminution in the value of any asset,

if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by, –

This issue has already been decided in earlier year (A. Y. 2005-06) vide order dated 02-09-2009 in appellant own case. Therefore, on account of above reasons this ground of appeal is dismissed and issue is decided in favour of revenue.

The next ground is regarding levying of interest u/s 234B. In this written submission, the appellant has mentioned that the CBDT has issued following notification/orders for waiver of interest u/s 234B leviable due to retrospective amendment.

• Notification No. F.No. 212/495/92-IT(A-II) dated 2-5-1994

• Notification F.No. 400/234/95-IT(B) dated 23.5.1996

• Order F.No. 400/234/95-IT(B) dated 30-1-1997

In view of the above and in the fitness of the thing, the assessee should file waiver petition before the jurisdictional Commissioner of Income Tax and no interference is required at this stage.

In the result, the appeal is dismissed.” (emphasis supplied).

4. For the assessment Year 2007-08, the AO has made the addition of Rs. 13,75,00,000/- with the following observation:

“Assessee has made a provision for Bed & doubtful debts in its profit and loss account amounting to Rs. 13,75,00,000/- During the assessment proceedings, vide note sheet entry dated 11/09/2009, assessee was asked to give details of provision for doubtful debts amounting to Rs. 13,75,00,000/- debited to the Profit & Loss Account and justify its claim. Assessee was also asked to show cause why not the same be added to its book profit for the financial year under consideration, keeping in view the facts of the case in preceding two assessment years viz. 2005-06 & 2006-07 wherein similar addition was made in this case.

In response to the above assessee filed its reply vide letter dated 25/09/2009 as under:

“Since several year the claim of the company are not being accepted, but in its account books it has to charge the full amount as per its own calculation. If it does not do so, its case for recovery of its full claims gets prejudiced. Accordingly the company has been creding to its profit & loss account the full amount cleared by it. But later on it makes a provision in its account books for a part of the Bill sent to the chents. The calculation of provisions of Rs. 1375 lacks and copy of opinion of Sh. S.S. Bagai an eminent person in the field of taxation, are attached.”

The above reply and submission of the assessee company are unfavourable for following reasons:

1. The decision of Hon’ble Supreme court in the case of CIT v. HCL Comnet Systems and Services Limited (305 ITR 409) relied upon by the assessee has been considered. The facts of this case are different form the instant case as the provision made by the assessee M/s DLF Power Ltd is for unascertained liability because the liability of the assessee is subjudice, as the assessee company and the CCL are in litigation over the power tariff Elaborated reasons for the same have been mentioned by the AO in the assessment orders for the A. Y. 2005-06 & 2006-07.

2. Further assessee has submitted the opinion of Sh. S.S. Bagai, M.A., L.L.B. who in his opinion vide point no. 6 & 7 (reproduced as (a) & (b) hereunder) has submitted as under.

a. In a recent case (CIT v. HCL Comnet Systems and Services Limited, (305 ITR 409) the supreme court has held a provision for bad & doubtful debts is probably in the nature of “diminution in the value of the asset”.

b. In order to nullify this judgment of the supreme court and to enable the tax authorities to add back provision for bad & doubtful debts, the parliament has amended the Income tax Act, through the Finance Act 2009 and added clause (i) to the section proviso under sub-section (2) of section 115JB of IT Act which reads as ” (i) the amount or amounts set aside as provision for diminution in the value of any asset” and made his amendment effective from 01/04/2001.

In light of this retrospective amendment, the querist (assessee) has been advised that it may stop contesting its appeal.

Therefore, it is seen that even the legal opinion given by Sh. S. S. Begai and cited by the assessee company also does not support the contention of the assessee. Hence on the basis of reasons given herein above and the provision of section 115JB of the IT Act and the amendment made recently i.e. clause (i) of the explanation-1 to section 115JB of IT Act 1961! this amount is to be added to the book profit of the assessee company as this is not an ascertained liability and further it amounts to a provision set as Value of asset. Hence it is to be added to the book profit of the assessee under section 115JB. This has been constantly followed in the case of the assessee by the income tax department in earlier years also.” (emphasis supplied).

4.1 The assessee company preferred appeal before the CIT(A). The ldCIT(A) has dismissed the appeal with following observations:

“I have carefully considered the submission made above by the appellant and also persuade the assessment order.

It is noticed that the appellant itself has recognized the said provision as “provision for doubtful debts” in the profit and loss account. The said provision, in my view, clearly falls in newly inserted clause (1) of Explanation 1 to section 115JB of the 1. T. Act brought vide Finance Act 2009, and with retrospective effect from 01.04.2001. Further the observation of Honourable Supreme Courts in case of CIT v. HCL Comnet system and Service Ltd.305 ITR 409 are quite relevant on the issue. The extracts from the judgment are as follows:-

“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. 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 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. Therefore, in our view item (a) of the explanation is not attracted to the facts of the present case.”

Now S.115 JB is a “special provision for payment of tax by certain companies” and forms part of chapter XII – B of the IT Act. A special provision creates a legal fiction and therefore in taxing status, have to be strictly construed. Hence the words of the stature in S.115JB should be strictly construed. It further appears that the impugned restrospective amendment has been inserted with retrospective effect since 01.04.2001 so as to clarify the legislative intent and bring it in consonance with the observation of Hon’ble Supreme Court in the case of HCL Comnet case, cited above. This precisely appears to be the reason why similar “provision for doubtful debt” was held to be falling in clause (i) of Explanation 1 to section 115JB of the 1. T. Act by my predecessor in the assessment years 2005-06 and 2006-07 decided in Appeal Nos. 228/07-08 vide order dated 2nd September, 2009 and appeal no. 120/08-09 vide order dated 3.11.2009 respectively. Thus, in view of the above observation as also following the orders of my predecessor for the said assessment years, the action of the assessing officer in making addition of Rs. 13.75 crores is hereby confirmed.

In view of the above reasons, the grounds of appeal Nos. 1 & 2 raised by the appellant are dismissed.

In respect to ground No.3, the appellant has challenged the imposition of interest amounting to Rs. 51,76,407/- u/s 234B of the I.T. Act. As regards the same, it was contended by the AR for the appellant that in case addition made by the assessing officer it upheld on account of insertion of clause (i) in Explanation 1 to section 115JB of the I.T. Act with retrospective effect from 1.4.2001, by the Finance (No.2) Act, 2009, the appellant should not be held to be in default in payment of advance tax and consequential imposition of interest u/s 234B of the I.T. Act

In this regard, the AR for the appellant has cited a number of decisions of the Tribunal wherein it has been held that interest u/s 234B/234C should not be levied where demand arises on account of retrospective amendment in law. This issue was the considered by my predecessor in the A. Y. 2005-06 AND 2006-07 decided in appeal Nos. 228/07-08 vide order dated 2nd Sep., 2009 and appeal No. 120/08-09 and order dated 3.11.2009 respectively, wherein this issue has been decided against the assessee observing as under:

“The next ground is regarding levying of interest u/s 234B. In his written submission the appellant has mentioned that the CBDT has issued following notification orders for waiver of interest u/s 234B leviable due to retrospective amendment.

• Notification No.F.No.212/495/92-IT(A-11) dated 2.5.94

• Notification F.No. 400/234/95-IT(B) dated 23.5.1996

• Order F.No.400/234/95-IT(B) dated 30.1.1997

In view of the above and in the fitness of the things, the assessee should file waiver petition before the jurisdictional Commissioner of income-tax and no interference is required at this stage.”

The appellant may file waiver petition before the jurisdictional commissioner of Income-tax for this year too. Thus this ground of appeal is also dismissed. (emphasis supplied).

5. The ld. Counsel for the assessee has submitted before your honours that it needs to be considered whether a debt comes in existence as a consequence of unilateral claim, not acknowledged by the customer.

It was submitted that the Provision for doubtful debts relates to provision for un-accrued income. Income shown in the books of accounts was inflated and provision was made to bring down profit by providing provision for un-accrued income, though nomenclature was given as provision for bad and doubtful debts.

It was submitted that though the assessee is following mercantile system of accounting, the debt has not accrued in favour of assessee. The customer is disputing tariff/rate and there is a live dispute in fixation of tariff. Therefore, it can not be said that any debt has accrued in favour of assessee.

It was submitted that the AO should have recast the accounts to arrive at the correct profit. He further submitted that if debt is not due to the assessee, it is not income of the assessee.

6. It is respectfully submitted that the submissions of the Ld.AR are factually and legally incorrect and therefore the same deserve to be rejected for the following reasons:

(i) It is an admitted fact that the appellant company is following mercantile system of accounting and preparing its account under the mercantile system. Therefore, the moment the bill is raised and it is credited in the books of accounts it becomes income of the assessee.

(ii) The bills are raised on the basis of a written power purchase agreement with its customer. Therefore, the assessee becomes legally entitled to recover them and precisely for this reason the assessee company has filed a civil suit to recover its claim and has also gone in arbitration. The copy of arbitration proceedings have not been produced so far in spite of direction given by the Hon’ble Bench. In none of the proceedings either before the Electricity Regulatory Commission or before the Appellate Tribunal for Electricity the assessee company has taken the plea that they have raised inflated bills. On the contrary, they have claimed that the bills have been raised on the basis of Power Purchase agreement. Therefore, the submissions of the Ld AR that bills were inflated needs to be rejected.

(iii) It is respectfully submitted that if the assessee is claiming that it was a unilateral claim then why they have filed a civil suit to recover the amount and why they have gone for arbitration to recover the amount on the basis of bills raised. It may be mentioned that the Electricity Regulatory Commission vide order dated 4.12.2004 as amended by the order dated 28.2.2005 determined the cost of the project in favour of the assessee company. The CCL further filed appeal against the order of the commission before the Appellate Tribunal for Electricity which was dismissed vide order dated 11.5.2006 (Pg.159 of Paper Book filed by the assessee for A.Y.2007-08). Page 65 to 82 of the Paper Book contains the copy of the petition filed before Appellate Tribunal for Electricity. In Para – 5, clause (a) to (gg) (Pg. 74 to 79 of Paper Book for A.Y.2007-08), the Central Coal Fields Ltd (CCL) has raised grounds of appeal. The Appellate Tribunal for Electricity has dismissed the appeal (Pg.83 to 107 of Paper Book for A.Y. 2007-08), by observing that the proceedings before Electricity Regulatory Commission were in the nature of arbitral proceedings and therefore, the same were binding on the parties. Therefore, the claim of the assessee company that the bills raised by it were only in the nature of unilateral claim and no debt has arisen in its favour is not correct.

(iv) It is respectfully submitted that the Parliament in its wisdom inserted clause (i) in explanation (1) to sec. 115JB by the finance (no.2) Act 2009 with retrospective effect from 1.4.2001. The explanation 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 sub-section (2), as increased by-

(a) The amount of income-tax paid or payable, and the provision therefore or

(b) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities or

(c) The amounts carried to any reserves, by whatever name called other than a reserve specified under section 33AC 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 of 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 therefore

(i) The amount of amounts set aside as provision for diminution in the value of any asset”

Thus the position in law for the A.Y. 2001-02 and afterwards is that any amount debited in the P&L Account for provision of bad and doubtful debts has to be compulsory added for calculating book profit u/s 115 JB.

(v) The case laws cited by the Id AR relates to the position before the insertion of clause (i) in explanation-1 to Section 115JB. Therefore, they are of no help to the assessee as the legislature has brought the amendment to overcome the judgment of Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. reported in 305 ITR 409 (SC). The provision of law as it stands today mandates the AO to add the amount on account of provision made for bad and doubtful debts in calculating book profit u/s 115JB. Since the provision is mandatory, the AO does not have any choice of not making the addition.

(vi) The perusal of Schedule-8 (Generation, construction and other expenses) to the P&L account (pg.21 of the P.B. submitted by the appellant in ITA No.4471) clearly shows that the appellant has made provision for doubtful debts amounting to Rs. 1375 lakhs in the A.Y. 2007-08 and Rs. 1826.02 lakhs in the A.Y. 2006-07. Similarly schedule 8 to the P & L Account for the A.Y. 2005-06 (pg.100 of P.B. submitted by ld.AR in ITA No.4463) shows that the appellant company has made of provision for doubtful debts amounting to Rs. 1192.51 lakhs for A.Y.2005-06. The perusal of the assessee’s accounts makes it clear that it was clearly a provision for doubtful debts and hence directly hit by clause (i) of Explanation 1 to section 115JB.

(vii) The appellant company has no where mentioned in the account that it was a provision for unaccrued income. Therefore, the submission of the Ld.AR that it was provision for unaccrued income is without any basis and not borne from the records. Therefore, the submissions of the Ld.AR needs to be rejected.

(viii) Without prejudice to the above submissions, it is further submitted that during the course of assessment proceedings, the assessee was asked by the AO as to why the amount on provision for bad and doubtful debts should not be added back for calculating the tax payable u/s 115 JB of I T Act. The assessee submitted along with letter dated 26.10.2007 that provision for bad and doubtful debts can not be added while computing the tax payable u/s 115 JB as this case is squarely covered in favour of the assessee by the decision of CIT v. HCL, Comnet Systems and Services Ltd.,292 ITR 299 (Del). It is submitted that with the insertion of clause(i) in explanation to S. 115JB, the above decision is of no help to the assessee.

Now, during the hearing of appeal before the Hon’ble Tribunal, the ld AR is contending that the since the bills raised by it have not been accepted by the clients, it becomes disputable claim and therefore it can not be said that the income has accrued in favour of the assessee even though assessee is following mercantile system of accounting.

It is respectfully submitted that for the sake of argument, even if it is accepted for a moment that since the assessee’s clients has not accepted the claim of the assessee, it is an unascertained liability because the entire amount under question is disputed and subject to outcome of decision of the Appellate Tribunal for Electricity, and of Arbitration proceedings. Therefore, even if we accept the assessee’s claim that the said amount is provision for amount not accepted as payable by its clients, then also, it remains unascertained liability and deserves to be added back u/s 115 JB. Therefore, it is a contingent liability. Hence, the amount of provision is hit by S.115JB.

7. Furthermore, without prejudice to the above submissions, the case laws cited by the Ld.AR are distinguishable on facts as discussed below:

i. CIT v. HCL Comnets Systems and Services Ltd.305 ITR 409 (SC) – In view of the amendment brought by way of insertion of clause (i) in explanation -1 to section 115JB, the decision is not applicable.

ii. CIT v. Noadiad Electric Supply Ltd. 80 ITR 660 (Bom.) – In this case there was an agreement between the assessee company and Nadiad Municipality under which the assessee company was to supply electricity to the Nadiad Municipality for street lightning etc. purposes fixed in agreement at @ 19 paisa per unit. The assessee company raised the bills @ 30 paisa per unit as against the agreed rate of 19 paisa per unit. Therefore, in view of the claim of 30 paisa provided in the agreement, the Court held that any amount for the electricity supply to the municipality calculated at any rate other than rate of 19 paisa per unit amounted to making a claim not legally enforceable by the assessee company, nor a corresponding legal enforceable obligation of the municipality.

The case of the appellant company is totally different from the case of Nadiad Electricity Company. The appellant company is raising the bill strictly as per the power purchase agreement and not in excess of agreed rate as was the case in Nadidi Electricity Supply Company. Not only the appellant company has raised the bills as per agreed rate provided in the power purchase agreement, it has also filed a civil suit in the Court, has gone in the arbitration to recover the claim made by it. Therefore, it can not be said that the assessee company raised inflated bills unilaterally. The live claim of the appellant company in the form of civil suit and appointment of arbitrator for arbitration and provision made in the books of account as doubtful debts is evidence beyond any reasonable doubt that the debt has accrued in the favour of the assessee company.

iii. CIT v. Western India Co. Ltd81 ITR 712 (Gujrat) – In that case the assessee was doing the business of building, construction generally on the basis of accepted tenders where the assessee had to add non-tender work i.e. additional work not included in the tenders, for which the rate had not been settled. The assessee would submit bills for such extra work and the rate mentioned in such bills would be pitched a little high in view of past experience to allow of deduction at the time of submissions of the appeals. The assessee would credit the amount of the bills for non-tender work in his works account but would make provision in his P&L Account only such amount as he expected to receive and retain the works amount as kasar.

But, in the case under consideration the assessee company is not raising the bills for extra work or for any work not included in the power purchase agreement or at the rate higher than agreed in the power purchase agreement. The appellant company is raising the bills at the rate agreed in the power purchase agreement. Therefore, the decision in the case CIT v. Western India Company (supra) is not applicable to the facts of the case.

iv. Apollo Tyres Ltd. v. CIT 255 ITR 273 (SC) – In this case the Apex Court has held as under:

“The above speech shows that the income-tax authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income Tax Act with a deeming provisions which makes the company liable to pay tax on at least 30 percent of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company’s books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words «in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-Tax Act has to accept the authority of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its accounts in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditors and will have to be approved by the Company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to scrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on sub-section (1A) of section 115J of the Income-tax Act in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its accounts in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income Tax Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authorities under the Companies Act. 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 income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the 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”. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct an the High Court has erred in reversing the said view of the Tribunal.

v. Therefore we are of the opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of accounts are certified authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115. (emphasis supplied).

A perusal of the above judgment in the Apollo Tyres case (supra) makes it clear that the AO has limited power of making increases and reduction as provided in the explanation-1 of section 115JB brought with retrospective effect from 1.4.2001. It was held that the AO does not have the jurisdiction to go behind the net profit shown in the P&L account except to the extent provided in the explanation to section 115J. Therefore, it is not correct on the part of the ld.AR to contend that the AO should have gone behind the net profit shown in the P&L account and recast the accounts. The AO has followed the law laid down in the case of the Apollo Tyres and made addition on account of provision for doubtful debts as mandated by clause-(i) of explanation -1 to section 115JB. Therefore, the decision in the case of Apollo Tyres supports the stand of Revenue and not of the assessee.

v. CIT v. Sain Processing & Weaving Mills (P) Ltd. [2009] 221 CTR Reports 493 (Del)

In that case issue involved was whether the current year’s depreciation even if not charged to the P&L account but disclosed in the notes appended to the accounts has to be deducted from the net profit to arrive at book profit for the purposes of section 115J. It was held that the assessee was entitled to seek deduction of current year depreciation from net profit to arrive at the book profit even though it is not charged to the P&L account.

It is respectfully submitted that the above decision is distinguishable on facts of the case and also the provisions of law. Section 32 of the LT. Act mandates to allow depreciation even if not claimed by the assessee. However, in the case under consideration, the assessee has made provision for doubtful debts which is directly hit by clause (i) of explanation-1 to section 115JB. Moreover, the above case was decided before the amendment was made in explanation-1 to section 115JB. Therefore, the above case is of no help to the assessee.

vi. CIT v. Khaitan Chemicals and Fertilizers Ltd. – 221 CTR (Del) 501 – In that case the issue was whether adjustment of prior period items and extra ordinary items for the purposes of section 115JA are to be deducted for computing the net profit. It was held that the net profit is to be computed after deducting the prior period items and extraordinary items.

It is respectfully submitted that the above case is also distinguishable on the fact and also on law as the issue was totally different in that case. Moreover, that case was decided prior to the amendment brought in clause (i) of explanation-1 to section 115JB. The section mandates that the provision for doubtful debts has to be added for computing the book profit. Therefore, the above case is of no help to the assessee.

vii.Rain Commodities Ltd v. DCIT [2010] 40 SOT 265

In that case the issue was whether the Assessing Officer, while computing book profit of a company under section 115JB, has only power of examining whether books of account are certified by authorities under Companies Act, 1956, as having been properly maintained in accordance with Companies Act, and Assessing Officer thereafter has limited power of making increases and reductions as provided for in Explanation to section 115J – Held, yes. The Hon’ble Bench has observed as under: ” It is not the intention of the Legislature to substitute the other provisions of the Act in place of what is specifically made available in section 115JB in so far as the computation of book profit under section 115JB is concerned. The entire mechanism for the computation of book profit is clearly set out in sub-section (1) of section 115JB read with the Explanation thereto. The starting point being the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act but also the items, which are to be increased as stipulated in clauses (a) to (h), and the items, which are to be reduced as specified in clauses (i) to (vii), find separate mention in the scheme of the section itself So, the computation of book profit is to be done strictly as per the Explanation to section 115JB and, hence, no assistance from any other section of the Act can be taken for that purpose. In the light of the discussions made above, it is clear that the Assessing Officer, while computing the book profit of a company under section 115JB, 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 the Companies Act, and the Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The capital gain in question is exempt under section 47(iv) of the Act but the same is not covered by any of the clauses (i) to (vii) of the Explanation (1) to section 115JB. [Para 27]” (emphasis supplied).

In the case under consideration, the audited profit and loss account filed by the assessee clearly shows in schedule-8 that the assessee has debited the provision for bad and doubtful debts. Hence, the AO has made addition as per law. Therefore, the above case does not help the case of assessee.

viii.CIT v. Veekaylallnvestment Co P. Ltd [2001] 249 ITR 597

In that case the issue was whether the income from capital gains was to be included in book profit for purposes of applying section 115J. The court held as under:

“The assessee was a company carrying on the business of investment. For the assessment year 1989-90 the assessee filed its return of income declaring a net loss. During the previous year relevant to the assessment year, the assessee sold land and gains from which the assessee treated as long-term capital gains. The AO treated the profits arising from the transfer as capital gains and rejected the assessee’s contention that book profits u/s 115J of the I.T. Act, 1961, would not include capital gains. On appeals, the Commissioner of Income-tax (A) upheld the view of the AD. On further appeal, the Tribunal held that what was deemed to be income u/s 45 was not income for book profits and held in favour of the assessee. On appeal by the Department: Held : allowing the appeal, that according to section 115J of the Act, in the case of an assessee being a company. If the total income is less than 30% of its book profits then the total income of such company shall be deemed to be an amount equal to 30% of such book profit and such income shall be chargeable to tax. The important thing to be noted is that while calculating the total income under the Income-tax Act, the assessee is required to take into account income by way of capital gains u/s 45 of the I T. Act. In the circumstances, while computing the book profits under the Companies Act, the assessee has to include capital gains for computing the book profits u/s 115J. Even under clause 3(xii)(b) of Part II of Schedule VI to the Companies Act, 1956, profits or losses in respect of transactions or transactions of an exceptional or non-recurring nature are to be disclosed. This shows clearly that capital gains should be included for the purposes of computing book profits.” (emphasis supplied).

Therefore the above case is of no help to the assessee.

ix.E.D. Sassoon & Company Ltd. And Others v. CIT – 26 ITR 51(SC)

In that case the issue was whether commission to managing agents accrued on annual net profits and whether commission paid was liable for apportionment between assignor and assignee and whether assignee was liable to be taxed on whole commission. That case pertains to section 4, 26(2) of the LT. Act. 1922.

It was held that the right to receive the commission would arise and the income, profits or gains would accrue to the managing agents only at the end of the calendar year which was the terminus a quo for the making up of the accounts and ascertaining the net profits earned by the company.

The Ld. AR of the assessee relied on the observations mentioned on pg.51 of the above decision which are reproduced as under:

“It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him through it may be received later on its being ascertain. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in future.”

It is respectfully submitted that the above decision does not help the case of the assessee as facts are totally different. In E.D. Sasoon case (supra) the issue was commission payable to the managing agent and apportionment between assignor and assignee. However, in the case under consideration, the bills have been raised by the assessee on the basis of power purchase agreement. Moreover, the assessee is justifying its claim that the amount is due to the assessee by way of contesting its claim before arbitrator and also before the Appellate Tribunal for Electricity, New Delhi.

The other case laws cited by the Ld.AR are also of no help to the assessee company as all of them relate to different facts and before the amendment was brought in clause-(i) of explanation-1 to section 115JB.

Ld. DR also submitted decisions in favour of the Department which are as under :-

8. It is respectfully submitted that Hon’ble B -Bench of Delhi

ITAT in the case of DCM Sriram Consolidated Ltd. v. ACIT -ITA No.4299 Delhi 2009 – A.Y. 2005-06 vide order dated 23.4.2010 has considered the identical issue. For the sake of the convenience the relevant portion of the order of the Hon’ble Bench is reproduced as under:

“Para – 4 (Pg.2 )

6. “Learned AR also placed on record copy of extract of memorandum explaining provisions in the Finance Bill 1987, copy of extract of budget speech of the Finance Minister introducing Finance Bill, 1978, copy of extract of memorandum explaining provisions in the Finance Bill, 1996, memorandum explaining provisions in Finance Bill, 2000 and Finance Bill (No.2) Act, 2009. ShriDinodia also placed on record copy of Accounting Standard regarding revenue recognition as provided under AS-9 and also copy of Accounting Standard regarding accounting of investment as provided under AS-13.

9. {page 8} We have considered the rival contentions in the light of material placed on record vis-a-vis amendment brought in provisions of Section 115JB by the Finance Act 2009 by insertion of new clause (i). According to the amended provision, amount set aside as provision for diminution in value of any asset is required to be added in the book profit. Clause (i) has been inserted retrospectively with effect from 1.4.2001 meaning thereby from AY 2001-02, such provision for bad debts is to be added in the book profit while computing book profit u/s 115JB. The ratio laid down by the Hon’ble Supreme Court in the case of HCL Comnet System & Services Ltd. – 305 ITR 409 is no more applicable in view of the amended provisions brought in the statute with retrospective effect. The relevant assessment year under consideration is AY 2005-06 to which amended provisions are applicable. Recently Hon’ble Delhi High Court in the case of CIT v. Ilpea Paramount (P) Ltd. – 2010-TIOL-155-HC-Del-IT, vide order dated 18.22.2010 after considering the decision of the Hon’ble Supreme Court in the case of HCL Comnet System & Services Ltd. (supra) held that amendment brought in Section 115JA was brought with retrospective effect, accordingly provision for doubtful debts are nothing but provision for diminution in the value of the asset covered under clause (g) of the said Explanation. It was accordingly held that such provision is required to be added while computing book profit u/s 115JA. Similarly, amendment in Section 115JB was also brought by the same Finance Act w.e.f. AY 2001-02, therefore respectfully following the order of the Hon’ble Jurisdictional High Court, we do not find any infirmity in the orders of the lower authorities.

10. In the result, the appeal of the assessee is dismissed.” (emphasis supplied).

9. The Hon’ble Jurisdictional High Court of Delhi has considered similar issue in ITA No. 1178J2008 in the case of CIT v. Ilpea Paramount (P) Ltd.– 2010-TIOL-155-HC-DEL-IT the relevant portion of the order is reproduced as under:

“The questions with regard to the provision for doubtful debts and provision for doubtful advances have to be answered in favour of the revenue and against the assessee because of the retrospective amendment introduced in section 115JA of the said Act. By virtue of Finance (No.2) Act, 2009 clause (g) has been inserted in the Explanation contained in Section 115JA(2). By virtue of the said amendment, the amount or amounts set aside as provision for diminution in the value of any asset, is specifically mentioned. The Supreme Court in the case of CIT v. HCL Comnet Systems & Services : 305 ITR 409 = (2008-TIOL-182-SC-IT) held that provision for doubtful debts and doubtful advances did not fall within clause (c) of the said Explanation inasmuch as they amounted to provision in respect of diminution in the value of asset.

Now, with the introduction of the said amendment with retrospective effect from 1.4.98, the provision for doubtful debts and the provision for doubtful advances, which are nothing but provision for diminution in the value of asset, are specifically covered under clause (g) of the said Explanation. Consequently, the question insofar as it relates to provision for doubtful debts and provision for doubtful advances, required to be answered in favour of the revenue and against the assessee. It is so answered”

10. Hon’ble ITAT Mumbai E-Bench has considered the similar issue in the case of ITO v. TCFC Finance Ltd. reported in (2011) 11 ITR (TRIB) 153 (MUM) after discussing the factual and legal position it was held as under:

“Section 115JB has to be considered as code in itself. This section is a special provision for payment of tax by certain companies and opens with non-obstante clause thereby excluding any other provisions of this Act in the matter of determination of payment of tax by certain companies. Book profit is computed by adding back certain amounts to the net profit as shown in the profit and loss account which have been debited to the profit and loss account and thereafter reductions start, which have been specified in the later part of the Explanation. In clauses (i) to (viii).If such amounts have been credited to the profit and loss account. From here it follows that if the amount set aside as provision for diminution in the value of any asset, appears on the debit side of the profit and loss account, which implies that the amount of net profit as per profit and loss account is after the amount of such provisions, then such amount will be added back to the net profit for computing ‘book profit’ as per Explanation 1 to section 115JB(2). There is no other requirement in the language of the section for the addition or non-addition of the amount of provision for diminution in the value of any asset to the amount of net profit as shown in the profit and loss account, depending on the way in which such provision has been shown in the balance sheet. The reflection of the amount of provision for diminution in the value of investment separately on the liability side of the balance sheet or by way of reduction from the figure of investment on the asset side of balance sheet is totally alien for computing book profit. What is relevant for this purpose is to find out if any provision for diminution in the value of any asset has been debited to the profit and loss account. If it is so debited, the same will automatically stand added to the amount of net profit for working out the amount of book profit. [Para 11]

Explanation 1 to section 115JB(2) in no uncertain terms states that any amount set aside as provision for diminution in the value of asset debited to the profit and loss account is to be added to the amount of net profit for the purpose of computing book profit. As the relevant condition have been fully satisfied in the instant case in terms of the assessee debiting provision for diminution in the value of investment to its profit and loss account, the same was required to be added for determining book profit. [Para 12]

The Legislature has employed the expression ‘provision for diminution in the value of any asset’ in clause (i) to Explanation 1 to section 115JB(2). The expression ‘diminution in the value of any asset’ has not been defined in this section. In common parlance the word ‘diminution’ indicates the state of reduction. The meaning of the word ‘diminution’ in the value of any asset has to be construed as reduction from its original value which may still be a positive value or nil. If the reduced value happens to be cipher, the diminution will be the original value of the asset itself. There is not even a remotest hint in the language of clause (i) of Explanation 1 to section 11SJB that some value of the asset must remain after diminution, as a precondition for adding it to the net profit. Explanation 1 contemplates the adding back of the provision for diminution in the value of any asset to the amount of net profit. Once provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. In view of the foregoing discussion it is manifest that as Explanation 1 to section 115JB(2) deals with the computation of book profit and specifically provides that the net profit as shown in the profit and loss account for the relevant previous year has to be increased inter alia by the amount of provision for diminution in the value of any asset, the amount of provision for diminution in the value of any asset debited to the profit and loss account before the determination of net profit has necessarily to be added. [Para 14]

In view of the foregoing reasons the Commissioner (Appeals) was not Justified In ordering for the reduction of the said amount from the book profit. [Para 17]”

The above decisions clearly support the stand of revenue.

Regarding the charge ability of u/s 234B it is submitted that charging of interest u/s 234B is mandatory.

The Hon’ble Karnataka High Court in the case of Sankala Polymers P. Ltd [2011] 338 ITR 617 has held that the income computed u/s 115JB is liable for advance tax and interest was liable u/s 234B. Similarly, the Hon’ble Punjab & Haryana High Court in the case of CIT v. Steel Steips Leasing Ltd. [2011] 338 ITR 0455, has held that interest u/s 234B and 234C would be payable on failure to pay advance tax in respect of tax payable u/s 115JAf 115JB. Hon’ble Punjab & Haryana High Court in the case of Amtek Auto Ltd. v. CIT [2011] 338 ITR 0550 has also held that interest u/s 234B is payable on income computed u/s 115JB.

In view of the above factual and legal submissions, it is respectfully prayed that the order of the CIT(A) should be upheld and the appeals of the assessee should be dismissed.”

7. We have heard both the sides on the issue and also considered relevant material filed in the paper book. We have also considered the case laws cited by both the sides. We have also considered the written submissions. The assessee company is engaged in the business of generation of power and executing turnkey power plants as an Engineering, Procurement and Construction Contractors. The assessee company entered into power purchase agreements with Coal India Ltd. and Assam State Electricity Board. The tariff was to remain firm at Rss.1.20 per unit for the first year. The tariff is fixed as per clause 3 of P.P.A.. As per clause 3.2, the tariff had two components, viz., (i) fixed; and (ii) variable. The tariff is based on interest on debt, return on equity, depreciation on assets and operation & maintenance cost. Fixed tariff based on actual capital cost and plant load factor (PLF) of the power plant. The company had recognized tariff receivable for supply of power as per P.P.A. (Power Purchase Agreement). The assessee is following mercantile system of accounting. Thus, recognization of income was as per accounting principles. Assessee had recognized revenue tariff as per bills raised in accordance with P.P.A. There is dispute with respect of recovery of part of amount raised in bills. Assessee had made provision for doubtful debt in P&L account. Now, assessee pleads that assessee had recognized excess income. Assessee claims that income shown in P&L account is inflated. Now assessee pleads that Assessing Officer should recast the accounts to arrive at the correct profit. In our considered view, this proposition of assessee is not as per law laid down by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273. In this case, it is held that the Assessing Officer has no power to adjust the net profit except to the extent provided in the Explanation 1 to section 115JB of the Act. The Hon’ble Supreme Court has held as under :-

“The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, 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 the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.

Held accordingly, that, while determining the “book profits” under section 115J, the Assessing Officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation.

Decision of the Kerala High Court in CIT v. AppolloTyres Ltd. [1999] 237 ITR 706 reversed on this point.

The Hon’ble Supreme Court has also made it clear that the use of the words “in accordance with the provisions of Part II and III of Schedule VI of the Companies Act” in the section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of the accounts of the company and while so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by the statutory auditor and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies which has statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Hon’ble Supreme Court has clearly debarred the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. Further, we also held that the assessee is following the mercantile system of accounting and also preparing the accounts under the mercantile system. In this system, the income has recognized when it was credited in the books of account. The bills were raised on the basis of written power purchase agreement with the customer. The assessee is legally entitled to recover the same and assessee has filed a civil suit to claim the amount and which has gone into arbitration. Since the bills have been raised on the basis of power purchase agreement and the assessee has filed a suit and finally has gone into arbitration, therefore, it cannot be said that it was a unilateral act on the part of the assessee. In the books of account, assessee had made provision for doubtful debts for this amount. The matter is sub-judice before court or arbitration. This shows that the amount was not ascertained. It remained contingent at the relevant time. Moreover, it had been gone against assessee due to amendment in Act. The amendment made by inserting clause (i) in Explanation 1 to section 115JB by the Finance Act, 2009 with retrospective effect 1.4.2001, the amount set aside and provision for diminution in the value of an asset is to be added to arrive at the book profit under section 115JB of the Act. This empowers the Assessing Officer to add to income any amount debited in profit & loss account for provision of bad and doubtful debts. The case laws relied upon by ld. AR pertain to the period prior to the insertion of clause (i) to Explanation 1 to section 115JB. In view of these amended provisions, the Assessing Officer has no choice except to make additions to arrive at the book profit. Further, we would also like to state that in the accounts, the assessee has made provision for doubtful debts. Nowhere the assessee has stated that it was a provision for unaccrued income. Hence, such pleadings on behalf of the AR have no basis. The amendment brought into by inserting clause (i) to Explanation 1 to section 115JB has been made to overcome the decision of Hon’ble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409. The ratio of the case of HCL Comnet Systems & Services Ltd. (supra) is not applicable to assessee’s case on account of the amendment brought by insertion of clause (i) to Explanation 1 of section 115JB. The facts of the case of CIT v. Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom.)are at variance to the facts of the assessee’s case. In the case of Nadiad Electric Supply Co. Ltd. (supra), the agreement was between assessee and Nadiad Municipality to supply electricity to the Nadiad Municipality for street lighting, etc. at fixed rate of 19 paisa per unit. However, assessee company raised the bill @ 30 paisa per unit. In view of these facts, the Hon’ble Court has held that any rate other than the rate of 19 paisa per unit not legally enforceable by the assessee. However, in assessee’s case, the bill was raised as per the power purchase agreement with the customer. In the Nadiad Electric Supply Ltd., it was not as per agreed rate. The reliance of the ld. AR on the case of CIT v. Western India Engg.Co. [1971] 81 ITR 712 (Guj.)is also of no help as in that case the assessee was doing the business of building and construction on the basis of accepted tenders. The additional work was snot included in the tenders for which the rates were not settled. The assessee was crediting the amount of bills for non-tender work in his works account but was making provision in the profit and loss account only such amount as he is expected to receive and retain the works amount as kasar. Thus, the facts of the case were completely at variance. In the case of Apollo Tyres, cited supra, the Hon’ble Supreme Court has clearly disagree with the arguments of the revenue that Assessing Officer has power to scrutinize their accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. The Assessing Officer was having limited power only to make adjustments either increase or reduction as provided in Explanation 1 of section 115JB. In the case of CIT v. Sain Processing &Wvg. Mills (P) Ltd. [2009] 176 Taxman 448 (Delhi) the issue involved was whether the current year’s deprecation even if not charged to the P&L account but disclosed in the note appended to the accounts has to be deducted from the net profit for the purposes of section 115J. In that situation, the Hon’ble Court held that assessee was entitled to seek deduction of current year depreciation from net profit to arrive at the book profit even though it is not charged to P&L account. This case is also distinguishable on the account that section 32 of the I.T. Act mandates to allow depreciation even if not claimed by the assessee. Moreover, this case pertains to the period prior to the amendment in Explanation 1 to section 115JB. Thus, ratio of this case is also not applicable to facts of assessee’s case. In our considered view, the issue is covered against the assessee by various decisions of ITAT and decision of Hon’ble jurisdictional High Court. In the case of CIT v. Khaitan Chemical & Fertilizers Ltd., [2008] 175 taxman 195 (Delhi) issue was of prior period items and extra ordinary items for purposes of section 115JA. Moreover, this case was also pertained to period prior to amendment in Act. In the case of Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) (SB), the facts are at variance and it has no help to assessee. Other case laws relied by ld. AR are also of no help to assessee on account of variation on facts. In the case of DCM Sriram Consolidated Ltd. v. Asstt. CIT [2010] 39 SOT 203 (Delhi), the ITAT, Delhi Bench ‘B’ vide order dated 23.04.2010 has held as under:-

“9. We have considered the rival contentions in the light of material placed on record vis-a.-vis amendment brought in provisions of Section 115JB by the Finance Act 2009 by insertion of new clause (i). According to the amended provision, amount set aside as provision for diminution in value of any asset is required to be added in the book profit. Clause (i) has been inserted retrospectively with effect from 1.4.2001 meaning thereby from AY 2001-02, such provision for bad debts is to be added in the book profit while computing book profit u/s 115JB. The ratio laid down by the Hon’ble Supreme Court in the case of HCL Comnet System & Services Ltd. – 305 ITR 409 is no more applicable in view of the amended provisions brought in the statute with retrospective effect. The relevant assessment year under consideration is AY 2005-06 to which amended provisions are applicable. Recently Hon’ble Delhi High Court in the case of CIT v. Ilpea Paramount (P) Ltd. – 2010-TIOL-155-HC-Del-IT, vide order dated 18.22.2010 after considering the decision of the Hon’ble Supreme Court in the case of HCL Comnet System & Services Ltd. (supra) held that amendment brought in Section 115JA was brought with retrospective effect, accordingly provision for doubtful debts are nothing but provision for diminution in the value of the asset covered under clause (g) of the said Explanation. It was accordingly held that such provision is required to be added while computing book profit u/s 115JA. Similarly, amendment in Section 115JB was also brought by the same Finance Act w.e.f, AY 2001-02, therefore respectfully following the order of the Hon’ble Jurisdictional High Court, we do not find any infirmity in the orders of the lower authorities.

Hon’ble Delhi High Court in the case of CIT v. Ilpea Paramount (P) Ltd., [I.T. Appeal No. 1178 of 2008, dated 18-2-2010] cited supra, has held as under :-

“The questions with regard to the provision for doubtful debts and provision for doubtful advances have to be answered in favour of the revenue and against the assessee because of the retrospective amendment introduced in section 115JA of the said Act. By virtue of Finance (No.2) Act, 2009 clause (g) has been inserted in the Explanation contained in Section 115JA(2). By virtue of the said amendment, the amount or amounts set aside as provision for diminution in the value of any asset, is specifically mentioned. The Supreme Court in the case of CIT v. HCL Comnet Systems & Services : 305 ITR 409 = (2008-TIOL-182-SC-IT) held that provision for doubtful debts and doubtful advances did not fall within clause (c) of the said Explanation inasmuch as they amounted to provision in respect of diminution in the value of asset.

Now, with the introduction of the said amendment with retrospective effect from 1.4.98, the provision for doubtful debts and the provision for doubtful advances, which are nothing but provision for diminution in the value of asset, are specifically covered under clause (g) of the said Explanation. Consequently, the question insofar as it relates to provision for doubtful debts and provision for doubtful advances, required to be answered in favour of the revenue and against the assessee. It is so answered.”

Hon’ble ITAT, Mumbai ‘E’ Bench in the case of ITO v. TCFC Finance Ltd., [2011] 131 ITD 103 has held as under :-

“Section 115JB has to be considered as code in itself. This section is a special provision for payment of tax by certain companies and opens with non-obstante clause thereby excluding any other provisions of this Act in the matter of determination of payment of tax by certain companies. Book profit is computed by adding back certain amounts to the net profit as shown in the profit and loss account which have been debited to the profit and loss account and thereafter reductions start, which have been specified in the later part of the Explanation. In clauses (i) to (viii). If such amounts have been credited to the profit and loss account. From here it follows that if the amount set aside as provision for diminution in the value of any asset, appears on the debit side of the profit and loss account, which implies that the amount of net profit as per profit and loss account is after the amount of such provisions, then such amount will be added back to the net profit for computing ‘book profit’ as per Explanation 1 to section 115JB(2). There is no other requirement in the language of the section for the addition or non-addition of the amount of provision for diminution in the value of any asset to the amount of net profit as shown in the profit and loss account, depending on the way in which such provision has been shown in the balance sheet. The reflection of the amount of provision for diminution in the value of investment separately on the liability side of the balance sheet or by way of reduction from the figure of investment on the asset side of balance sheet is totally alien for computing book profit. What is relevant for this purpose is to find out if any provision for diminution in the value of any asset has been debited to the profit and loss account. If it is so debited, the same will automatically stand added to the amount of net profit for working out the amount of book profit. [Para 11]

Explanation 1 to section 115JB(2) in no uncertain terms states that any amount set aside as provision for diminution in the value of asset debited to the profit and loss account is to be added to the amount of net profit for the purpose of computing book profit. As the relevant condition have been fully satisfied in the instant case in terms of the assessee debiting provision for diminution in the value of investment to its profit and loss account, the same was required to be added for determining book profit. [Para 12]

The Legislature has employed the expression ‘provision for diminution in the value of any asset’ in clause (i) to Explanation 1 to section 115JB(2). The expression ‘diminution in the value of any asset’ has not been defined in this section. In common parlance the word ‘diminution’ indicates the state of reduction. The meaning of the word ‘diminution’ in the value of any asset has to be construed as reduction from its original value which may still be a positive value or nil. If the reduced value happens to be cipher, the diminution will be the original value of the asset itself. There is not even a remotest hint in the language of clause (i) of Explanation 1 to section 115JB that some value of the asset must remain after diminution, as a precondition for adding it to the net profit. Explanation 1 contemplates the adding back of the provision for diminution in the value of any asset to the amount of net profit. Once provision is made for diminution in the value of any asset, the same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. In view of the foregoing discussion it is manifest that as Explanation 1 to section 115JB(2) deals with the computation of book profit and specifically provides that the net profit as shown in the profit and loss account for the relevant previous year has to be increased inter alia by the amount of provision for diminution in the value of any asset, the amount of provision for diminution in the value of any asset debited to the profit and loss account before the determination of net profit has necessarily to be added. [Para 14]

In view of the foregoing reasons the Commissioner (Appeals) was not Justified In ordering for the reduction of the said amount from the book profit. [Para 17]”

Considering this factual and legal position, we sustain the orders of the authorities below and dismiss the assessee’s appeal on this ground.

8. As regards, charge ability of interest u/s 234B is concerned, after hearing both the sides, we hold that charging interest is mandatory u/s 234B of the Income-tax Act, 1961. Similar view has also been taken by various High Courts. In the case of CIT v. Sankala Polymers (P.) Ltd. [2011] 338 ITR 617, the Hon’ble Karnataka High Court has held that the income computed u/s 115JB is liable for advance tax and interest was liable u/s 234B of the Act. Similar view has also been held by Hon’ble Punjab & Haryana High Court in the case of CIT v. Steel Steips Leasing Ltd. [2011] 338 ITR 455 and held that the interest u/s 234B and 234C was to be payable on the failure to pay the advance tax in respect of the tax payable u/s 115JA and 115JB. Similar view has also been held by Hon’ble Punjab & Haryana High Court in the case of Amtek Auto Ltd. v. CIT [2011] 338 ITR 550 In view of this factual and legal position, we dismiss this ground of assessee’s appeal also.

9. In the result, all the grounds raised by the assessee stand dismissed in all the years. Accordingly, all the appeals of the assessee are dismissed.