CIT vs. Vodafone Essar Gujarat Ltd (Gujarat High Court) (Full Bench)
Question of Law discussed/ decided: “Whether the Appellate Tribunal is right in law and on
facts in deleting the addition of Rs.6,28,14,653/ being provision for bad and doubtful debts to the book profit for computation of MAT liability even when such adjustment was provided for by inserting clause(i) to Explanation (1) to Section 115JB w.e.f. 01.04.2001?"
Some of the important areas/ discussions for easy reference:
1- Explanation 1 to subsection (2) to section 115JB contains various items by which such book profit would be increased or reduced, as the case may be. Clause (c) thereof provides as under:
“Explanation 1 For the purposes of this section, “book profit” means the profit as shown in the statement of profit and loss for the relevant previous year prepared under subsection (2), as increased by
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(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or”
2- It was deliberated by the learned court that " We are unable to see any demarcation between the
provisions which would reduce the value of the assets against a situation where the value of the assets may come down to 'Nil'. In either case there would be diminution in the value of assets. Even when the value of the assets is brought down to 'Nil' from the previously existing value, it
can still be stated that there has been a diminution in the value of the assets. In any case no such facts arise in this appeal"
3- It was very well explained the meaning of the clause and provision of liability meaning " 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 “debt” under consideration is “debt receivable” by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts of under clause (c) of the Explanation to Section 115JA of the 1961 Act
4- Hence it was very well concluded "This clause, however, would not cover a provision made for a debt which is receivable by the assessee. It was observed that the provision for bad and doubtful debts which is made to cover up probable diminution in the value of the asset,
cannot be said to be a provision for liability because even if the debt is not recoverable, no liability could be fastened on the assessee"
5- In case of Vijay Bank the court held that " Therefore, after the Explanation the assessee is now required not only to debit the P&L A/c but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of
the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s. 115JA or JB is not at all attracted"
For reading full text please refer http://itatonline.org/archives/cit-vs-vodafone-essar-gujarat-ltd-gujarat-high-court-full-bench/vodafone-essar-115ja-jb-bad-debts-write-off/
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