Judgment:
1. This appeal arises out of the order of the CIT, Tamil Nadu-I, dt.
24th December, 1990, passed under s. 263 of the IT Act, 1961, for the asst. yr. 1988-89. The assessee has challenged the order of the CIT by which the AO was directed to recompute the book profits under s. 115J for including the loss on revaluation of investments amounting to Rs. 40,19,920 and provision for doubtful debts amounting to Rs. 6,80,560 to the book profits.
2. The brief facts of the case were that the assessee had filed return showing an income of Rs. 9,59,340. Assessment was made on the same income. The CIT passed an order under s. 263 by which the assessment was set aside as he found that the assessment was prejudicial to the interest of Revenue and patently erroneous. The assessee had debited to its P&L a/c a sum of Rs. 40,19,920 on account of loss on revaluation of investments and Rs. 6,80,560 on account of provision for doubtful debts respectively. The AO while computing the taxable income as per the provisions of s. 115J failed to add back these amounts to the profit as shown in its audited P&L a/c.
3. The assessee's authorised representative filed the copy of the audited accounts and annual report and drew our attention to p. 15 of the P&L a/c, which contains details of expenses in Schedule 13. He also pointed out to p. 11 of the printed annual accounts where the details of investment appears. He argued that Expln. to s. 115J is not applicable to the present case, neither to the loss on revaluation of investment amounting to Rs. 40,19,920, not to the provision for doubtful debts amounting to Rs. 6,80,560, which has been directed by the CIT to be added to the book profits. The book profits could only be increased by the amounts referred to in sub-cls. (e) to (h) of the explanation and deducted by the amount referred to in sub-cls. (i) to (iv) of s. 115J. The loss on revaluation of investment amounting to Rs. 40,19,920 charged to P&L a/c and provision for doubtful debts amounting to Rs. 6,80,560 would not come under any of the items in the Expln. to s. 115J(1). Under cl. (c) of the Explanation the amounts set aside for provisions made for meeting liabilities other than ascertained liabilities are only to be added. Debt is not a liability and therefore provision for doubtful debt can never be a provision for meeting liabilities. Debt is an asset. Similarly (sic) on revaluation of investment can also not be regarded to be a provision for meeting liabilities. In respect of the provision for doubtful debts, addition cannot be made under s. 115J. He relied on the decision of the C-Bench of this Tribunal in for the asst. yr. 1989-90 in the case of Asstt. CIT vs. Jones Woodhead & Sons (India) Ltd. (ITA No. 685/Mad/1983). He vehemently relied on Parts II and III of Schedule VI, which defines the 'provision' to mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. As per the authorised representative the legislature has only picked up from the definition in Part III, the provision made for meeting liabilities under cl. (c) to the Explanation given under s. 115J. Therefore, the provision for the diminution in the value of assets is not covered under the Explanation to s. 115J and the direction given by the CIT is contrary to the provisions of IT Act and, therefore, the order of the CIT is liable to be vacated.
4. The learned Departmental Representative relied on the order of the CIT passed under s. 263. As per the Departmental Representative the assessment order was erroneous with respect to the non-addition of the following amount debited to the P&L a/c by the assessee :(a) Loss incurred on revaluation of investments 40,19,920(b) Provision for doubtful debts 6,80,560 and was, therefore, prejudicial to the interest of the Revenue administration. The procedure adopted by the AO has brought the less revenue and, therefore, the same was prejudicial to the interest of the Revenue. He argued that the book profits are to be taken as per P&L a/c prepared in accordance with the provisions of Part II and Part III of the Sixth Schedule to the Companies Act, not the one as may be shown in the audited P&L a/c. The provision for doubtful debts is a reserve in the commercial term and, therefore, the same should be added under cl. (b) to the Explanation to the book profits of the assessee. Reserve and provision have been clearly defined by the Supreme Court in various judgments. In this regard, he placed reliance on the following judgments of the Hon'ble Supreme Court : Loss on revaluation of investment is not an expenditure incurred by the assessee and neither a provision as the nomenclature appears on p. 15 to the annual report. Therefore, it should be added to the book profits. The learned Departmental Representative also relied on the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC).
5. We have heard the rival contentions in depth and perused the record.
Sec. 115J requires every assessee being a company to prepare its P&L a/c for the relevant previous year for the purpose of the s. 115J in accordance with the provisions of Parts II and III and Schedule VI to the Companies Act, 1956. The profit so arrived at shall be increased by the items as given under cls. (a) to (h) under Explanation appended to s. 115J. On a question from the Bench whether the P&L a/c was prepared in accordance with Parts II and III of the Sixth Schedule to the Companies Act, the authorised representative pointed out that the P&L a/c is duly audited and, therefore, no such type of question arises.
He, when questioned, answered the Bench that the company was following accrual system of accounting. The Bench again questioned how the loss on revaluation of investment amounting to Rs. 40,19,920 has accrued during the year. The authorised representative agreed that the loss is debited to the P&L a/c on account of fall in the market value of the investments made by the company in its subsidiary and other companies.
6. The authorised representative could not point out under which provision of Parts II and III of the Sixth Schedule to the Companies Act, r/w ss. 209 and 211 of the Companies Act the loss on revaluation of investment has been debited to the P&L a/c. The s. 115J in our considered opinion require every company to determine its net profit in accordance with Schedule VI r/w ss. 209 and 211 of the Companies Act.
The loss on revaluation of investment has not accrued during the year to the assessee and, therefore, it cannot be debited to the P&L a/c by the company as per s. 209 r/w Parts II and III of the Sixth Schedule to the Companies Act. Such debit was merely a contingent loss and, therefore, we are of the view that the net profit shown by the assessee in its P&L a/c was not in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956, and the loss on revaluation of investment should have been added to the net profit as shown in the P&L a/c so as to make net profit in the P&L a/c in accordance with Parts II and III of the Sixth Schedule of the Companies Act, 1956. The AO need not apply Explanation to the section, but he is fully justified and can add such type of expenditure which are not debited in the P&L a/c of the assessee in accordance with Parts II and III of the Sixth Schedule to the Companies Act to determine the net profit in accordance therewith.
7. On the issue of provision for bad and doubtful debts as debited to the P&L a/c amounting to Rs. 6,80,560, on the basis of the material available the true nature of the transaction cannot be ascertained as to whether it is a provision or a reserve. We have gone through the decision of the Madras C-Bench of the Tribunal in ITA No.685(Mds)/1983, cited supra, on which the authorised representative has vehemently relied on, there is finding that the provision for doubtful debts cannot be taken as liabilities. The decision is based on the applicability of cl. (c) of the Expln. to s. 115J. We are of the considered opinion that the decision is applicable only if provision for bad and doubtful debts debited by the assessee in its P&L a/c is actually a provision and not reserve. If it is a reserve cl. (b) to the Expln. to s. 115J will be applicable. We direct the AO to decide the true nature of the provision for doubtful debts amounting to Rs. 6,80,560 while framing the assessment and add back the same for the purpose of book profit under cl. (b) to the Explanation if it is a reserve. The authorised representative could not produce any detail how this provision has been made. In this regard we would like to quote the following observation of the Hon'ble Supreme Court in the case of State Bank of Patiala vs. CIT, cited supra, at pp. 719 and 720 of 219 ITR : "The High Court has taken the view that the 'fund created or a sum of money set apart to meet any liability which the assessee 'can reasonably and ligitimately anticipate' on the date of preparation of the balance sheet, is the same, as in a case 'where the liability has actually arisen' (a present known liability) and the fund to meet such liability cannot be treated as 'reserve'. In the view of the High Court, since the assessee is a banking company, it would be 'reasonable and legitimate to assume' that in the course of its business, 'it is bound to have bad and doubtful debts for which 'it may', in anticipation, make a provision in the balance sheet by having a separate fund or an account to meet such anticipated liability. We are afraid that the aforesaid assumption is totally unjustified and proceeds on mere surmises and conjectures. This is not a case, when at the time fund is earmarked, there is a known liability - one which has either arisen or anticipated legitimately, by the assessee - and the fund to meet such eventuality cannot be treated as 'reserve'. The observations of this Court that the liability should be one 'which has actually arisen or is anticipated legitimately by the assessee', cannot be extended to hold that in the case of an assessee carrying on banking business, it is 'bound' or 'can reasonably anticipate' on the date of the preparation of the balance sheet 'bad and doubtful debts', for which 'it ought' in anticipation, make a provision and such provision for anticipated liability should be equated with known and existing liability and should be construed as a provision. The question in such cases, is whether the liability was 'known' or 'anticipated' on the date when the balance sheet was prepared. The question is not whether the assessee 'can anticipate' or 'reasonably anticipate' on the date when the balance sheet was prepared about 'the bad and doubtful debts'. The High Court was in error in surmising that the assessee being a banking company is bound to have bad and doubtful debts. It need not necessarily be so. It is not bound to anticipate on the date of the preparation of the balance sheet that all or any or its debts 'are bound to be bad and doubtful'. It all depends upon the facts and circumstances. We are of the view that the High Court misunderstood the scope of the observations in CIT vs. Saran Engineering Co. (1986) 161 ITR 741 (SC) 161 ITR 741 (SC) and surmised that the observations quoted at p. 748 will even cover cases, where the liability was not factually anticipated on the date of the preparation of the balance sheet, but also will apply to cases, where the company 'ought and can' anticipate on the date of the preparation of the balance sheet." 8. The power of revision under s. 263 can be exercised by the CIT when the following factors co-exist : (a) there should be a proceeding under the Act, (b) in such proceeding the ITO must have passed an order; and (c) the CIT should consider that the said order is erroneous and prejudicial to the interests of the Revenue. The assessee's authorised representative has not challenged the lacking of any of the above factors in the order passed under s. 263 except that on merit that the loss on revaluation of investments and reserve for doubtful debts could not be added in the profits for the purpose of s. 115J of the IT Act.
From the order we found that the CIT has given the specific finding after hearing the assessee-company that the assessment order is erroneous and is prejudicial to the interests of Revenue.
9. Thus, the order of the CIT under s. 263 is upheld. In our opinion debiting of such type of expenses under s. 115J is not only a colourable device to avoid the payment of revenue but also on substance it is an effect to dodge the Revenue. While upholding so, we cannot resist ourselves to recollect the following observations of the Supreme Court in the case of McDowell & Co. Ltd. vs. CIT (supra).
"It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." Thus, we notice that even without taking assistance from McDowell's case cited (supra), here is a case before us where clearly the claims made by the tax-payer company are not allowable under the provisions of law. Therefore, the order passed by the CIT stands approved by us. We hold that the contentions raised to the contrary by the learned counsel for the company are untenable.