The Assessing Officer has added our provision for bad and doubtful debts to book profit under clause (i) of Explanation 1, relying on the retrospective 2009 amendment. We reduced the provision from sundry debtors on the asset side. Does that make a difference?
It does. After the retrospective insertion of clause (i) by the Finance (No.2) Act 2009 from 1 April 2001, a provision for diminution in the value of any asset — which is what a provision for doubtful debts is — must be added back, and the earlier line based on HCL Comnet under clause (c) no longer helps. But if the assessee simultaneously obliterates the provision by reducing the corresponding amount from loans and advances or debtors on the asset side, so that the balance sheet shows those figures net of the provision, that is an actual write-off and clause (i) is not attracted.
Decided by the High Court (Akil Kureshi J, J.B. Pardiwala J and A.J. Shastri J (Full Bench, High Court of Gujarat at Ahmedabad)) on 2017-08-04, reported as Tax Appeal No.749 of 2012 (O/TAXAP/749/2012), CAV Judgment dated 4 August 2017; reference made by Division Bench order dated 23 August 2016. It bears on section 115JB, section 115JA, section 36(1)(vii) of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters.
This is a Full Bench of three judges resolving a conflict inside the Gujarat High Court between Deepak Nitrite (Revenue) and Indian Petrochemicals (assessee), and it is the cleanest statement available of where the line runs after the retrospective amendment. The practical consequence is that the outcome depends on a presentation decision taken in the accounts, not on the label used in the profit and loss account: a debit to the profit and loss account with a corresponding credit to "current liabilities and provisions" on the liabilities side is a provision and is added back; a debit to the profit and loss account with a corresponding reduction of debtors or loans and advances on the asset side is a write-off and is not. The Court reaches that by carrying the Supreme Court's reasoning in Southern Technologies and Vijaya Bank on s.36(1)(vii) across into s.115JB, following the Karnataka High Court in Yokogawa India and Kirloskar Systems. Two cautions for a reader. The Court held that the two Gujarat decisions do not conflict but operate in different fields, so Deepak Nitrite remains good for a case that is a mere provision. And the reference was answered on a question of law: the tax appeal itself was directed to go back to a regular Division Bench, so this judgment decides the principle and not the assessee's appeal.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For AY 2003-04 the assessee company filed a nil return. The assessment was framed on 27 March 2006 and reopened by notice under s.148 issued on 6 February 2007. The point of divergence in the reassessment was a provision of Rs.6.28 crores (rounded) made for bad and doubtful debts, which the Assessing Officer added in computing book profit for MAT under s.115JB. The Commissioner (Appeals) allowed the assessee's appeal and the Tribunal dismissed the Revenue's appeal, recording that the provision had been charged to the profit and loss account for the year ended 31 March 2003 and that in the balance sheet as at that date the provision for bad and doubtful debts had been reduced from gross debtors so that net sundry debtors were shown as an asset; the provision was therefore not a provision for a liability but was in the nature of diminution in the value of an asset, and the case was identical to Yokogawa India Ltd. The Revenue's appeal was admitted on the question whether the Tribunal was right in deleting the addition even though the adjustment was provided for by inserting clause (i) to Explanation 1 to s.115JB with effect from 1 April 2001. At the hearing the Revenue relied on the Division Bench in CIT-I v Deepak Nitrite Ltd (Tax Appeal No.1918/2009, order dated 17 August 2011) and the assessee on CIT-I v Indian Petrochemicals Corporation Ltd (Tax Appeal No.1773/2008, order dated 19 July 2016), which followed Yokogawa India Ltd and Kirloskar Systems Ltd. Because Deepak Nitrite had not been cited in Indian Petrochemicals and Vijaya Bank had not been cited in Deepak Nitrite, the Division Bench referred to a larger Bench the question whether, in view of Vijaya Bank, Deepak Nitrite was wrongly decided and Indian Petrochemicals laid down the correct law.
The reference was answered by holding that there is no conflict between Deepak Nitrite and Indian Petrochemicals and that both operate in different fields. With the retrospective insertion of clause (i) to Explanation 1, any amount set aside as a provision for diminution in the value of an asset is added back in computing book profit under s.115JB. But where the assessee, besides debiting the profit and loss account and creating the provision, simultaneously obliterates it by reducing the corresponding amount from loans and advances on the asset side of the balance sheet so that the year-end figure is shown net of the provision, that amounts to a write-off and such actual write-off is not hit by clause (i). Deepak Nitrite fell in the former category and Indian Petrochemicals, on the brief discussion available in that judgment, in the latter (paragraphs 23 and 24). The Tax Appeal was directed to be placed before the regular Division Bench (paragraph 25).
The Court began with the statutory scheme of s.115JB and clause (c) of Explanation 1, which adds back amounts set aside to provisions made for meeting liabilities other than ascertained liabilities (paragraph 6). It revisited HCL Comnet, in which the Supreme Court held that clause (c) requires an amount set aside as a provision, made for meeting a liability, and for an unascertained liability, and that a provision for bad and doubtful debts is made to cover the probable diminution in the value of an asset — a debt receivable — so that no liability is fastened on the assessee and clause (c) is not attracted (paragraphs 7, 12 and 13). That decision led Parliament to insert clause (g) to Explanation 1 to s.115JA and clause (i) to Explanation 1 to s.115JB with retrospective effect from 1 April 1998 and 1 April 2001, the explanatory note stating that a provision for diminution in the value of any asset debited to the profit and loss account shall be added back (paragraph 14). In that light Deepak Nitrite, and the Delhi High Court in ILPEA Paramount, laid down the correct proposition that HCL Comnet no longer avails against such an addition (paragraph 15). The Court then took up Vijaya Bank, which had considered whether a bank must close each debtor's account or whether a mere reduction of loans and advances or debtors on the asset side to the extent of the provision suffices as a write-off, and Southern Technologies, which explained that a debit of doubtful debt to the profit and loss account with a credit to the sundry debtors account is a write-off of an actual debt, whereas a debit of "provision for doubtful debt" with a corresponding credit to current liabilities and provisions on the liabilities side is a provision (paragraphs 16 to 20). The Karnataka High Court in Yokogawa India applied that dichotomy to s.115JA and s.115JB and concluded that if the bad or doubtful debt is reduced from loans and advances or debtors on the assets side, the Explanation to s.115JA or JB is not attracted at all, and Kirloskar Systems adopted the same principle (paragraphs 21 and 22). Culminating those authorities, the Court held that clause (i) covers a mere provision but that a simultaneous obliteration of the provision on the asset side amounts to a write-off outside clause (i), so the two earlier Gujarat decisions address different fact situations and do not conflict (paragraphs 23 and 24).
it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB.
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Handle my notice → Ask a CA on WhatsAppIt does. After the retrospective insertion of clause (i) by the Finance (No.2) Act 2009 from 1 April 2001, a provision for diminution in the value of any asset — which is what a provision for doubtful debts is — must be added back, and the earlier line based on HCL Comnet under clause (c) no longer helps. But if the assessee simultaneously obliterates the provision by reducing the corresponding amount from loans and advances or debtors on the asset side, so that the balance sheet shows those figures net of the provision, that is an actual write-off and clause (i) is not attracted. This was decided by the High Court (Akil Kureshi J, J.B. Pardiwala J and A.J. Shastri J (Full Bench, High Court of Gujarat at Ahmedabad)) and bears on section 115JB, section 115JA, section 36(1)(vii) of the Income Tax Act 1961. It is reported as Tax Appeal No.749 of 2012 (O/TAXAP/749/2012), CAV Judgment dated 4 August 2017; reference made by Division Bench order dated 23 August 2016. This is a Full Bench of three judges resolving a conflict inside the Gujarat High Court between Deepak Nitrite (Revenue) and Indian Petrochemicals (assessee), and it is the cleanest statement available of where the line runs after the retrospective amendment. The practical consequence is that the outcome depends on a presentation decision taken in the accounts, not on the label used in the profit and loss account: a debit to the profit and loss account with a corresponding credit to "current liabilities and provisions" on the liabilities side is a provision and is added back; a debit to the profit and loss account with a corresponding reduction of debtors or loans and advances on the asset side is a write-off and is not. The Court reaches that by carrying the Supreme Court's reasoning in Southern Technologies and Vijaya Bank on s.36(1)(vii) across into s.115JB, following the Karnataka High Court in Yokogawa India and Kirloskar Systems. Two cautions for a reader. The Court held that the two Gujarat decisions do not conflict but operate in different fields, so Deepak Nitrite remains good for a case that is a mere provision. And the reference was answered on a question of law: the tax appeal itself was directed to go back to a regular Division Bench, so this judgment decides the principle and not the assessee's appeal. If it applies to you, the first step is this: Look at the balance sheet, not the profit and loss account: establish whether debtors or loans and advances are shown net of the provision on the asset side, or whether the provision sits on the liabilities side under current liabilities and provisions.
For AY 2003-04 the assessee company filed a nil return. The assessment was framed on 27 March 2006 and reopened by notice under s.148 issued on 6 February 2007. The point of divergence in the reassessment was a provision of Rs.6.28 crores (rounded) made for bad and doubtful debts, which the Assessing Officer added in computing book profit for MAT under s.115JB. The Commissioner (Appeals) allowed the assessee's appeal and the Tribunal dismissed the Revenue's appeal, recording that the provision had been charged to the profit and loss account for the year ended 31 March 2003 and that in the balance sheet as at that date the provision for bad and doubtful debts had been reduced from gross debtors so that net sundry debtors were shown as an asset; the provision was therefore not a provision for a liability but was in the nature of diminution in the value of an asset, and the case was identical to Yokogawa India Ltd. The Revenue's appeal was admitted on the question whether the Tribunal was right in deleting the addition even though the adjustment was provided for by inserting clause (i) to Explanation 1 to s.115JB with effect from 1 April 2001. At the hearing the Revenue relied on the Division Bench in CIT-I v Deepak Nitrite Ltd (Tax Appeal No.1918/2009, order dated 17 August 2011) and the assessee on CIT-I v Indian Petrochemicals Corporation Ltd (Tax Appeal No.1773/2008, order dated 19 July 2016), which followed Yokogawa India Ltd and Kirloskar Systems Ltd. Because Deepak Nitrite had not been cited in Indian Petrochemicals and Vijaya Bank had not been cited in Deepak Nitrite, the Division Bench referred to a larger Bench the question whether, in view of Vijaya Bank, Deepak Nitrite was wrongly decided and Indian Petrochemicals laid down the correct law. The matter was decided on 2017-08-04 by the High Court (Akil Kureshi J, J.B. Pardiwala J and A.J. Shastri J (Full Bench, High Court of Gujarat at Ahmedabad)). On those facts the High Court held as follows. The reference was answered by holding that there is no conflict between Deepak Nitrite and Indian Petrochemicals and that both operate in different fields. With the retrospective insertion of clause (i) to Explanation 1, any amount set aside as a provision for diminution in the value of an asset is added back in computing book profit under s.115JB. But where the assessee, besides debiting the profit and loss account and creating the provision, simultaneously obliterates it by reducing the corresponding amount from loans and advances on the asset side of the balance sheet so that the year-end figure is shown net of the provision, that amounts to a write-off and such actual write-off is not hit by clause (i). Deepak Nitrite fell in the former category and Indian Petrochemicals, on the brief discussion available in that judgment, in the latter (paragraphs 23 and 24). The Tax Appeal was directed to be placed before the regular Division Bench (paragraph 25).
The Court began with the statutory scheme of s.115JB and clause (c) of Explanation 1, which adds back amounts set aside to provisions made for meeting liabilities other than ascertained liabilities (paragraph 6). It revisited HCL Comnet, in which the Supreme Court held that clause (c) requires an amount set aside as a provision, made for meeting a liability, and for an unascertained liability, and that a provision for bad and doubtful debts is made to cover the probable diminution in the value of an asset — a debt receivable — so that no liability is fastened on the assessee and clause (c) is not attracted (paragraphs 7, 12 and 13). That decision led Parliament to insert clause (g) to Explanation 1 to s.115JA and clause (i) to Explanation 1 to s.115JB with retrospective effect from 1 April 1998 and 1 April 2001, the explanatory note stating that a provision for diminution in the value of any asset debited to the profit and loss account shall be added back (paragraph 14). In that light Deepak Nitrite, and the Delhi High Court in ILPEA Paramount, laid down the correct proposition that HCL Comnet no longer avails against such an addition (paragraph 15). The Court then took up Vijaya Bank, which had considered whether a bank must close each debtor's account or whether a mere reduction of loans and advances or debtors on the asset side to the extent of the provision suffices as a write-off, and Southern Technologies, which explained that a debit of doubtful debt to the profit and loss account with a credit to the sundry debtors account is a write-off of an actual debt, whereas a debit of "provision for doubtful debt" with a corresponding credit to current liabilities and provisions on the liabilities side is a provision (paragraphs 16 to 20). The Karnataka High Court in Yokogawa India applied that dichotomy to s.115JA and s.115JB and concluded that if the bad or doubtful debt is reduced from loans and advances or debtors on the assets side, the Explanation to s.115JA or JB is not attracted at all, and Kirloskar Systems adopted the same principle (paragraphs 21 and 22). Culminating those authorities, the Court held that clause (i) covers a mere provision but that a simultaneous obliteration of the provision on the asset side amounts to a write-off outside clause (i), so the two earlier Gujarat decisions address different fact situations and do not conflict (paragraphs 23 and 24). In the words reproduced by the source cited on this page: "it would amount to a write off and such actual write off would not be hit by clause (i) of the explanation to section 115JB." The decision followed or applied CIT v HCL Comnet Systems and Services Ltd (2008) 305 ITR 409 (SC) — explained, and held displaced on clause (c) by the retrospective amendment; Vijaya Bank v CIT (2010) 323 ITR 166 (SC) — applied; Southern Technologies Ltd v CIT (2010) 2 SCC 548 — applied; CIT v Yokogawa India Ltd [2012] 17 taxmann.com 15 (Kar.) — approved and applied; CIT v Kirloskar Systems Ltd [2013] 40 taxmann.com 124 (Kar.) — approved; CIT-I v Deepak Nitrite Ltd (Tax Appeal No.1918/2009, Gujarat, 17 August 2011) — held to lay down the correct proposition on its own facts; CIT v ILPEA Paramount (P) Ltd (2011) 336 ITR 54 (Delhi) — noted as reaching a similar conclusion.
It was decided by the High Court on 2017-08-04 and is reported as Tax Appeal No.749 of 2012 (O/TAXAP/749/2012), CAV Judgment dated 4 August 2017; reference made by Division Bench order dated 23 August 2016. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 115JB, section 115JA, section 36(1)(vii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The reference was answered by holding that there is no conflict between Deepak Nitrite and Indian Petrochemicals and that both operate in different fields. With the retrospective insertion of clause (i) to Explanation 1, any amount set aside as a provision for diminution in the value of an asset is added back in computing book profit under s.115JB. But where the assessee, besides debiting the profit and loss account and creating the provision, simultaneously obliterates it by reducing the corresponding amount from loans and advances on the asset side of the balance sheet so that the year-end figure is shown net of the provision, that amounts to a write-off and such actual write-off is not hit by clause (i). Deepak Nitrite fell in the former category and Indian Petrochemicals, on the brief discussion available in that judgment, in the latter (paragraphs 23 and 24). The Tax Appeal was directed to be placed before the regular Division Bench (paragraph 25). It arises in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 115JB, section 115JA, section 36(1)(vii) of the Income Tax Act 1961, and was decided by Akil Kureshi J, J.B. Pardiwala J and A.J. Shastri J (Full Bench, High Court of Gujarat at Ahmedabad). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the accounts show the netting, produce the schedule that demonstrates it and argue that there is an actual write-off outside clause (i) on the authority of this Full Bench and of Yokogawa India. Do not run any pre-2009 authority under clause (c) on its own — the Court records that clause (i) was inserted retrospectively from 1 April 2001 precisely to displace HCL Comnet, and clause (c) reasoning will not answer a clause (i) addition. Where the presentation is a bare provision on the liabilities side, accept that Deepak Nitrite governs and argue quantum or the ascertained-liability route instead of clause (i). Remember the reach of the words: clause (i) speaks of a provision for diminution in the value of any asset, so it is not limited to debtors — investments and other assets carry the same exposure.
Validity check could not be completed. Validity check could not be completed. No later decision of the Supreme Court or of the Gujarat High Court doubting or approving this Full Bench answer was located on this pass, and the outcome of the Tax Appeal on its return to the Division Bench was not traced. Note also that this judgment postdates and is consistent with the retrospective insertion of clause (i) by the Finance (No.2) Act 2009 from AY 2001-02, so any authority under clause (c) decided before that amendment must be treated as superseded on the clause (i) question. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a reference to a larger Bench, not a decision of the tax appeal. The order concludes that there is no conflict between Deepak Nitrite and Indian Petrochemicals, that both operate in different fields, that the reference is answered accordingly and that the Tax Appeal is to be placed before the regular Division Bench taking up the subject matter — so nothing here disposes of the Revenue's appeal on the Rs.6,28,14,653 addition. One inconsistency in the report: at paragraph 8 the Court records that clause (g) to Explanation 1 to s.115JA and clause (i) to Explanation 1 to s.115JB were introduced "by the Finance Act, 2009" with retrospective effect from 1 April 1998 and 1 April 2001 respectively; the enactment is the Finance (No.2) Act 2009 and the entry dates are as the Court states. The judgment reproduces long passages from HCL Comnet, Southern Technologies, Vijaya Bank and Yokogawa India within quotation; the key quote taken here is the Court's own sentence at paragraph 23. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The reference was answered by holding that there is no conflict between Deepak Nitrite and Indian Petrochemicals and that both operate in different fields. With the retrospective insertion of clause (i) to Explanation 1, any amount set aside as a provision for diminution in the value of an asset is added back in computing book profit under s.115JB. But where the assessee, besides debiting the profit and loss account and creating the provision, simultaneously obliterates it by reducing the corresponding amount from loans and advances on the asset side of the balance sheet so that the year-end figure is shown net of the provision, that amounts to a write-off and such actual write-off is not hit by clause (i). Deepak Nitrite fell in the former category and Indian Petrochemicals, on the brief discussion available in that judgment, in the latter (paragraphs 23 and 24). The Tax Appeal was directed to be placed before the regular Division Bench (paragraph 25).
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