Digjam Limited Vs PCIT (ITAT Rajkot)
Actual Write-Off May Escape MAT Add-Back, but Unverified Land Impairment Justifies Section 263 Revision
Background of the Case
The assessee company filed its return for AY 2021–22 on 17 February 2022, declaring nil total income under the normal provisions and reporting book profit under section 115JB.
The assessment was completed under section 143(3) read with section 144B on 26 December 2022, accepting the returned income.
Subsequently, the PCIT noticed an impairment loss relating to land of ₹4,611.27 lakh—approximately ₹46.11 crore. He issued a notice under section 263 proposing revision on the grounds that the amount had not been disallowed in computing business income and had not been added back while computing book profit under section 115JB.
By an order dated 28 March 2025, the PCIT set aside the assessment to the limited extent of these issues and directed the Assessing Officer to reframe it.
Assessee’s Defence
The assessee explained that the entire impairment amount had already been suo motu disallowed in the computation under the normal provisions. Consequently, the allegation that the capital expenditure had escaped disallowance was incorrect.
Regarding MAT, the company contended that the amount represented an actual write-off rather than a provision for diminution in asset value.
It stated that the impairment loss had been debited to the profit and loss account and correspondingly reduced from the carrying value of land in the balance sheet. Audited financial statements and the accounting treatment were placed before the PCIT.
The assessee relied on CIT v. Vodafone Essar Gujarat Ltd. [2017] 85 taxmann.com 32 (Gujarat) and PCIT v. Torrent (P.) Ltd. [2019] 108 taxmann.com 375 (Gujarat). It also cited Apollo Tyres Ltd. v. CIT, 255 ITR 273 (Supreme Court).
Actual Write-Off Versus Provision
The Tribunal recognised that the distinction was material under clause (i) of Explanation 1 to section 115JB(2).
That clause contemplates an addition for an amount set aside as a provision for diminution in the value of an asset. An actual write-off, involving a corresponding reduction in the asset’s carrying amount, requires different consideration in light of the Gujarat High Court decisions.
To explain the accounting distinction, the Tribunal illustrated land carried at ₹10 crore whose recoverable amount falls to ₹6 crore. If ₹4 crore is charged to the profit and loss account and directly reduced from the land account, the asset’s carrying value becomes ₹6 crore.
The Tribunal therefore accepted that the assessee’s legal proposition concerning an actual write-off was supported by the cited precedents.
Why Revision Was Nevertheless Upheld
The Tribunal held that the description “impairment loss” or an assertion that the asset value had been reduced could not, by itself, conclude the enquiry.
It considered verification necessary concerning the actual entries passed, the reduction in the carrying amount, the computation of the impairment and the supporting valuation material.
The carrying amount, recoverable amount, valuation methodology, assumptions and other computation parameters required scrutiny. The Tribunal emphasised that a debit to the profit and loss account alone was insufficient. What mattered was whether the asset had actually been reduced in the books and whether the reduction represented a genuine impairment determined under the applicable accounting principles.
The Tribunal acknowledged that the amount had already been disallowed under the normal provisions. However, the MAT treatment and the underlying impairment computation remained matters requiring examination.
In the absence of that examination, it held that the assessment could be regarded as erroneous and prejudicial to the interests of the Revenue.
Final Decision
The Tribunal upheld the PCIT’s assumption of jurisdiction under section 263 and affirmed the revisional order.
The assessee’s appeal was dismissed. However, the Tribunal did not finally direct that the entire impairment loss be added to book profit. The accounting treatment and supporting facts remained subject to examination in the fresh proceedings.
Author’s Comments
Acceptance of a legal principle does not establish that its factual requirements have been satisfied. The Tribunal recognised the distinction between an actual write-off and a provision, yet required the company to demonstrate that its ₹46.11 crore charge genuinely fell within the former category.
The decision also highlights the need to separate the normal computation from the MAT computation. An amount already added back under the normal provisions cannot be treated as an omitted disallowance on that basis. Its treatment under section 115JB nevertheless remains a separate enquiry.
For companies recording impairment, the supporting file should connect the valuation exercise with the accounting entries and financial statements. Merely producing a profit and loss debit or using the expression “actual write-off” leaves the essential factual question unanswered.
At the same time, the revisional proceedings must preserve the recognised distinction. Verification of impairment does not mean that every impairment charge is necessarily a provision requiring MAT add-back. The Assessing Officer must determine the facts and apply the statutory adjustment in light of the binding precedents.
The proper description of this ruling is therefore that section 263 revision was upheld for examination of an unverified impairment claim. It is not a final decision taxing the impairment amount under MAT.
Cases Discussed
- CIT-IV v. Vodafone Essar Gujarat Ltd., [2017] 85 taxmann.com 32 (Gujarat High Court) — Relied upon for distinguishing an actual write-off involving reduction of an asset’s carrying amount from a mere provision for diminution in value while computing MAT book profit.
- PCIT v. Torrent (P.) Ltd., [2019] 108 taxmann.com 375 (Gujarat High Court) — Relied upon concerning the treatment of an actual write-off, as distinguished from a provision for diminution in the value of an asset, under Section 115JB.
- Apollo Tyres Ltd. v. CIT, [2002] 255 ITR 273 (Supreme Court) — Cited concerning the statutory limits on adjustments to book profit determined from accounts prepared under the Companies Act.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
The captioned appeal has been filed by the assessee against the order passed by the Ld. Principal Commissioner of Income Tax, (hereinafter referred to as “the Ld. PCIT”), Jamnagar vide order dated 28.03.2025 relevant to Assessment Year 2021-22.
2. The assessee has raised the following grounds of appeal:
1. The order u/s. 263 is bad in law.
2. The learned Principal CIT has erred in law as well as on facts in not considering the submission of the appellant that the order passed by the A.O. u/s. 143(3) r.w.s. 144B was neither erroneous nor prejudicial to the interest of revenue and provisions of Section 263 of the Act were not applicable to the case of the appellant.
3. The learned Principal CIT has erred in law as well as on facts in setting aside the assessment order passed by the A.O. u/s. 143(3) r.w.s. 144B to the extent of examining the applicability of provisions of section 37(1) in respect of disallowance of capital expenditure amounting to Rs. 4,611.27 Lakhs without appreciating the fact that such amount has already been suo motto disallowed in the computation of income by appellant and the said fact has been examined in detailed by the A.O. during the course of assessment proceedings.
3. Briefly stated, the assessee filed its return of income for A.Y. 2021-22 on 17.02.2022, declaring total income at Nil under the normal provisions of the Act and book profit under section 115JB of the Act. The assessment under section 143(3) read with section 144B was completed by the NFAC, Delhi, vide order dated 26.12.2022, accepting the returned income. Subsequently, notice under section 263 was issued by the Ld. PCIT on 13.03.2025, proposing revision of the assessment order on the ground that capital expenditure of Rs. 4,611.27 lakhs relating to impairment of land had not been disallowed while computing business income and that the corresponding amount had not been added while computing book profit under section 115JB of the Act. The Ld. PCIT thereafter passed the impugned order under section 263, setting aside the assessment order to the limited extent of the aforesaid issues and directing the Assessing Officer to reframe the assessment.
4. Aggrieved by the aforesaid order passed under section 263, the assessee is in appeal before the Tribunal.
5. The Ld. Counsel for the assessee submitted that the amount of Rs. 4,611.27 lakhs had already been suo motu disallowed by the assessee while computing income under the normal provisions of the Act. It was further submitted that the diminution in the value of land represented an actual write-off and not a mere provision, since the amount was debited to the Profit and Loss Account and the corresponding amount was reduced from the value of land appearing in the balance sheet.
6. The Ld. Counsel further relied upon the decisions of the Hon’ble Jurisdictional Gujarat High Court in CIT-IV vs. Vodafone Essar Gujarat Ltd. [2017] 85 taxmann.com 32 (Gujarat) and PCIT vs. Torrent (P.) Ltd. [2019] 108 taxmann.com 375 (Gujarat), in support of the proposition that an actual write-off, as distinguished from a mere provision for diminution in the value of an asset, is not required to be added back while computing book profit under section 115JB(2)(i) of the Act. Reliance was also placed on the decision of the Hon’ble Supreme Court in Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC).
7. We have heard the rival submissions and perused the material available on record, including the impugned order passed under section 263 of the Act. Accounting treatment should be as under :
For Eg : The cost of land carried in the books at ₹10 crore, but its recoverable amount is determined to be ₹6 crore. If an impairment loss of ₹4 crore is recognised, the accounting entry may broadly be:
Impairment Loss A/c Dr. ₹4 crore
To Land A/c ₹4 crore
The ₹4 crore is charged to the P&L, while the carrying amount of land in the Balance Sheet is reduced from ₹10 crore to ₹6 crore.
Net result would be
*P&L: ₹4 crore impairment loss
*Balance Sheet: Land reduced by ₹4 crore
*Net effect: Asset to be actually reduced.
8. In the present case, the assessee has contended that the impairment of land amounting to ₹4,611.27 lakhs constituted an actual write-off and not a mere provision for diminution in the value of the asset. It has further been contended that the said amount was debited to the Profit and Loss Account and the corresponding amount was reduced from the carrying value of land in the Balance Sheet. The assessee had also placed before the Ld. PCIT its audited financial statements and the accounting treatment adopted in respect of such impairment.
9. We find that the distinction between an actual write-off and a mere provision assumes significance in the context of clause (i) of Explanation 1 to section 115JB(2) of the Act. The said clause contemplates an addition in respect of an amount set aside as a provision for diminution in the value of any asset. Where, however, the corresponding amount has actually been reduced from the carrying amount of the asset itself, the issue would require consideration in the light of the ratio laid down by the Hon’ble Jurisdictional High Court in CIT-IV v. Vodafone Essar Gujarat Ltd. [2017] 85 taxmann.com 32 (Gujarat) and PCIT v. Torrent (P.) Ltd. [2019] 108 taxmann.com 375 (Gujarat). The said decisions recognise the distinction between a mere provision for diminution in the value of an asset and an actual write-off whereby the corresponding amount is reduced from the asset appearing on the Balance Sheet.
10. At the same time, merely because an amount is described in the accounts as an “impairment loss” or is stated to have been reduced from the value of the asset, the matter cannot be decided solely on the nomenclature. It is necessary to examine the actual entries passed in the books, the manner in which the carrying amount of the land was reduced, the basis on which the impairment loss of ₹4,611.27 lakhs was computed, and the supporting material and valuation adopted for determining the recoverable amount of the land. The nature of the impairment, the methodology adopted for arriving at the said figure and the consequential accounting treatment therefore require factual verification.
11. Accordingly, while the proposition advanced by the assessee that an actual write-off, as distinguished from a mere provision for diminution in the value of an asset, would not attract clause (i) of Explanation 1 to section 115JB(2) is supported by the aforesaid judicial precedents, the applicability of that proposition to the assessee’s case can be determined only after examining the underlying facts and accounting treatment. With regard to the impairment computation parameters such as carrying amount, recoverable amount, valuation methodology, assumptions and supporting valuation have to be scrupulously examined before conclusively characterizing it as an actual write-off. The mere debit to the Profit and Loss Account, by itself, is not sufficient, what is material is whether there has been an actual reduction in the carrying amount of the asset in the books and whether the amount so reduced represents a genuine impairment determined in accordance with the applicable accounting principles.
12. It is settled that for invoking jurisdiction under section 263 of the Act, the assessment order must be erroneous as well as prejudicial to the interests of the Revenue. In the present case, the amount in question had already been disallowed under the normal provisions and, insofar as section 115JB is concerned, the assessee’s claim of actual write-off needs to be examined. It is also a matter requiring examination as to how the assessee has arrived at the impairment loss of Rs. 4,611.27 lakhs. The basis and methodology adopted by the assessee for determining such impairment, including the manner in which the value of the land is stated to have diminished, the valuation methodology applied, and the formula or computation adopted for quantifying the diminution in value, require proper verification and examination. In the absence of such examination, the allowability and correctness of the impairment loss claimed by the assessee cannot be conclusively determined.
13. In view of the above discussion, we are of the considered opinion that the assessment order dated 26.12.2022 can be held to be erroneous and prejudicial to the interests of the Revenue on the issues identified by the Ld. PCIT. Accordingly, the assumption of jurisdiction under section 263 of the Act is sustainable. We, therefore, affirm the impugned order passed by the Ld. PCIT under section 263 of the Act.
14. In the result, the appeal of the assessee is dismissed
The order is pronounced in the open Court on 12.10.2026.
