M/S Karnataka State Industrial ... vs Dy. Commissioner Of Income Tax
2021 Latest Caselaw 159 Kant

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 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

       DATED THIS THE 5TH DAY OF JANUARY 2021

                        PRESENT

        THE HON'BLE MR. JUSTICE ALOK ARADHE

                          AND

       THE HON'BLE MR. JUSTICE V. SRISHANANDA

                   I.T.A. NO.409/2014
BETWEEN:

M/S. KARNATAKA STATE INDUSTRIAL AND
INFRASTRUCTURE DEVELOPMENT
CORPORATION LTD.,
REP. BY ITS CHAIRMAN & MANAGING
DIRECTOR SRI. V.P. BALIGAR
KHANIJA BHAVAN, NO.49
5TH FLOOR, EAST WING
RACE COURSE ROAD
BANGALORE-560001.
                                            ... APPELLANT
(BY MR. A. SHANKAR, SENIOR COUNSEL A/W
    MR. M. LAVA, ADV.,)

AND:

DY. COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-11(5)
R.P. BHAVAN, OPP. RBI
NRUPATHUNGA ROAD
BANGALORE-560001.
                                          ... RESPONDENT
(BY MR. T.N.C. SRIDHAR, ADV.)
                            ---

     THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,
1961 ARISING OUT OF ORDER DATED 02.05.2014 PASSED IN ITA
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NO.1547/BANG/2012 FOR THE ASSESSMENT YEAR 2009-10,
PRAYING TO:
     (I) FORMULATE THE SUBSTANTIAL QUESTION OF LAW
STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE
APPELLANT.
     (II) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO
THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY
THE INCOME TAX APPELLANT TRIBUNAL, BANGALORE BENCH IN
ITA NOS.1547/BANG/2012 DATED 02-05-2014 FOR THE
ASSESSMENT YEAR 2009-10.

     THIS ITA COMING ON FOR ADMISSION,         THIS    DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                      JUDGMENT

This appeal under Section 260A of the Income Tax

Act, 1961 (hereinafter referred to as the Act for short)

has been preferred by the assessee. The subject matter

of the appeal pertains to the Assessment year 2009-10.

The appeal was admitted by a bench of this Court vide

order dated 27.02.2015 on the following substantial

questions of law:

"(i) Whether the Tribunal is justified in law in holding that the appellant is not entitled to the reduction of the amount of Rs.14,77,53,747/- credited to the profit & loss account on account of reversal of provision for bad and doubtful debts under

section 115JB of the Act, on the facts and circumstances of the case?

(ii) Without prejudice, whether the Tribunal in law failed to take note of the fact of retrospective amendment by Finance (No.2) Act, 2009 with effect from 01.04.2001, by which the computation of book profit as per MAT provisions requires the provision for bad and doubtful debts to be added back and consequently book profits under MAT provisions are to computed for such earlier assessment years in accordance with amended scheme of the Act and further such amended computation ought to form the basis of computation of MAT for the subsequent years and accordingly the authorities below ought to have allowed the reduction of Rs.14,77,53,747/- under proviso to clause (i) of Explanation 1 to section 115JB(2), on the facts and circumstances of the case?

(iii) Without prejudice, whether the Tribunal in law failed to appreciate that the appellant had added back the provision for

bad and doubtful debts for certain years and hence ought to have granted the deduction in respect of reversal of provision for bad and doubtful debts at least to that extent, on the facts and circumstances of the case?

(iv) Whether the Tribunal is justified in law in holding that the indirect expenditure disallowed under section 14A read with rule 8D(iii) of Rs.49,75,359/- in computing the total income under normal provisions of the Act, is to be added to the net profit in computation of book profit for MAT purposes under section 115JB and thereby importing the provision of section 14A read with rule 8D into the MAT provisions on the facts and circumstances of the case?

2. The factual background, in which the

aforesaid substantial questions of law arise for our

consideration need mention. The assessee is a company

and is an undertaking of Government of Karnataka. The

assessee is engaged in financing industrial units in the

State of Karnataka. The assessee filed the return of

income for the Assessment Year 2009-10 on 30.09.2011

declaring 'NIL' income under normal provisions of the

Act. Thereafter, the assessee returned income of

Rs.13,60,88,457/- under the provisions of Section 115JB

of the Act. The return of the assessee was selected for

scrutiny and assessment was completed under Section

143(3) of the Act. The Assessing Officer vide order

dated 21.11.2011 determined the loss at

Rs.1,73,60,700/- under the normal provisions of the Act

and determined the book profits under Section 115JB of

the Act at Rs.30,01,07,991/-.

3. The assessee thereupon filed an appeal

before the Commissioner of Income Tax (Appeals) who

by an order dated 31.08.2012 partly allowed the claim

of the assessee with regard to gratuity and leave

encashment and partial relief was granted in respect of

disallowance under Section 14A read with Rule 8D of the

Income Tax Rules to the extent of Rs.1,03,08,426/-.

However, the Assessing Officer did not grant any relief

in respect of disallowance of provision for bad and

doubtful debts written back. Being aggrieved, the

assessee as well as the revenue filed appeals before the

Income Tax Appellate Tribunal (hereinafter referred to

as 'the tribunal' for short). The tribunal vide order dated

02.05.2014 held that write back of provision for bad and

doubtful debts to the extent of Rs.14,77,53,747/- is

liable to be added to the profits for determination of

book profits under Section 115JB of the Act and held

that disallowance of Rs.49,75,359/- under Section 14A

of the Act deserves to be added back while computing

book profits under Section 115JB of the Act. In the

aforesaid factual background, the assessee has filed this

appeal.

4. Learned Senior counsel for the assessee

submitted that provision for bad and doubtful debts

could not have been added to the net profit by the

assessee as the provision under which the same had to

be increased was inserted by Finance Act, 2009 with

retrospective effect i.e., from 01.04.2001 and the

revenue cannot expect the assessee to add back the

provisions for doubtful debts to the net profits for the

purpose of computation under Section 115JB of the Act

in the years prior to insertion of clause (i) to Explanation

to Section 115JB of the Act as those years have already

elapsed and the assessee cannot give effect to a

provision, which was inserted at a later point of time.

5. Alternatively, it is submitted that the

assessee could not have added back the provision for

doubtful debts to the net profit as even if the same is

added to the net profits, the resultant book profit is still

negative. It is also contended that though the assessee

was prevented from adding back the provision for bad

and doubtful debts to the net profit due to reasons

beyond its control, it has at the first subsequent

opportunity demonstrated to the authorities that book

profits are still negative on adding back the provision for

bad and doubtful debts and therefore, no adverse

inference can be drawn as the assessee cannot perform

the impossible i.e., adding back to the net profit of the

provision for bad and doubtful debts, based on a

provision, which was inserted later. It is also pointed out

that the assessee had added the provision for

Assessment Years 1998-99 to 2000-01. It is also argued

that any disallowance computed under Section 14A of

the Act pertains to computation of income under normal

provisions of the Act and cannot be read into provisions

of Section 115JB of the Act pertaining to computation of

book profits by levy of Minimum Alternate Tax (MAT).

In support of aforesaid submissions, reliance has been

placed on decisions in 'LIFE INSURANCE

CORPORATION OF INDIA VS. CIT (1996) 219 ITR

401 (SC), 'CITY UNION BANK LTD. VS. ACIT',

(2020) 425 ITR 475 (MADRAS), 'HUDA AND

ANOTHER VS. DR.BABESWAR KANHAR AND

ANOTHER', (2005) 1 SCC 191, 'CIT VS. GOKALDAS

IMAGES P. LTD.', (2020) 122 TAXMANN.COM 160

(KAR.), 'CIT VS. BENGAL FINANCE &

INVESTMENTS PVT LTD.', ITA NO.337 OF 2013

DATED 10.02.2015 and 'CIT VS. M/S ESSAR

TELEHOLDINGS LTD.', ITA NO.438 OF 2012 DATED

07.08.2014.

6. On the other hand, learned counsel for the

revenue submitted that the assessee has earned income

which is exempt under Section 10(2A) and Section

10(35) of the Act and the expenditure incurred on the

exempt income has been calculated under Rule 8D of

the Rules. It is also urged that he provisions of Section

115JB of the Act are attracted in the fact situation of the

case. It is also argued that Section 10(2A) of the Act

exempts income of a person being partner of a firm

being separately assessed and its share in the total

income of the firm, whereas, Section 10(35) exempts

income exempts income by way of units of mutual

funds. It is also contended that income referred to in

Section 10A of the Act is exempt and income not

includable in total income referred to in Section 14A is

with respect to exempt income under Section 10 of the

Act. Therefore, any expenditure incurred for earning the

exempt income under Section10 of the Act has to be

disallowed under Section 14A of the Act. It is also

argued that any expenditure relatable to earning of

income exempt under Section 10(2A) and Section

10(35) of the Act has to be disallowed under Section

14A of the Act and has to be added back to book profit

under Section 115JB of the Act. It is further submitted

that the view taken by this court in COMMISSIONER

OF INCOME TAX, BANGALORE VS. GOKALDAS

IMAGES(P) LTD. (2020) 122 TAXMANN.COM 160(

KARNATAKA) requires reconsideration as the

disallowance of expenditure in relation to the income

referred to in Section 10 of the Act is provided only in

Section 14A the Act is not referred to in Clause (f) to

Explanation 1 to Section 115JB of the Act, would render

the provisions of Section 14A of the Act otiose.

7. It is also argued that in the absence of any

provision excluding the applicability of Section 14A of

the Act to compute book profit under Section 115JB of

the Act, it is implied and unambiguous that the Section

14A of the Act is applicable to computation of book profit

under Section 115JB of the Act. In support of aforesaid

submission reliance has been placed on 'JOINT

COMMISSIONER OF INCOME TAX VS. ROLTA INDIA

LTD.' (2011) 330 ITR 470 (SC) and 'MAXOPP

INVESTMENT LTD. VS. COMMISSIONER OF INCOME

TAX, NEW DELHI' (2018) 402 ITR 640(SC). It is

further submitted that the Assessing Officer has rightly

applied the law, which was prevailing on the date on

which an order of assessment was passed. It is also

contended that clause (i) in Explanation to Section

115JB(2) has been inserted by Finance Act, 2009 with

retrospective effect i.e., from 01.04.2001 and therefore,

no fault can be found with the view taken by the

authorities. It is also urged that the decisions relied

upon by the learned Senior counsel for the assessee

were rendered prior to 2009.

8. We have considered the submissions made

by learned counsel for the parties and have perused the

record. The Supreme Court in 'CIT VS. HCL Comnet

Systems and Services Ltd.', (2008) 305 ITR 409

(SC) held that provisions for bad and doubtful debts

cannot be added under Explanation to Section 115JB of

the Act. In order to ensure that provision for bad and

doubtful debts debited to profit and loss account, is

increased to the net profit for the purposes of

computation of book profit under Section 115JB of the

Act. Clause (i) in Explanation to Section 115JB(2) has

been inserted by Finance Act, 2009 with retrospective

effect i.e., from 01.04.2001. From perusal of para 40.2

of Circular dated 03.06.2010, it is evident that clause (i)

in Explanation after Section 115JB(2) has been inserted

so as to provide that if any provision for diminution in

the value of any asset has been debited to the profit and

loss account, it shall be added to the net profit as shown

in the profit and loss account for the purpose of

computation of book profit. It is well settled in law that

law does not contemplate or require the performance of

an impossible act. [See: Life Insurance Corporation of

India supra]. The assessee could not have added back

the provision for doubtful debts to the net profit for the

purpose of computation under Section 115JB of the Act

in the years prior to insertion of clause (i) as those years

had already elapsed and the assessee could not have

given effect to the provision, which was inserted at a

later point of time. The assessee therefore, could not

have added back the provision for bad and doubtful

debts to the net profit. It is also pertinent to note that

even if the provision for doubtful debt is added back to

the net profits, the resultant book profit is still negative

and even though the assessee was prevented from

adding back the provision for bad and doubtful debts to

the net profit due to reasons beyond its control, it has at

the first opportunity demonstrated to the authorities

that book profits are still negative on adding back the

provision for bad and doubtful debts and therefore, no

adverse inference could have been drawn against the

assessee. It is also pertinent to note that the assessee

had added the provision for bad and doubtful debts for

Assessment Years 1998-99 to 2000-01.

In view of preceding analysis, the substantial

questions of law 1, 2 and 3 are answered in favour of

the assessee and against the revenue. For the reasons

assigned by us in the judgment in I.T.A.No.203/2015

dated 04.01.2021, the substantial question of law No.4

is also answered in favour of the assessee and against

the revenue. In the result, the judgment dated

02.05.2014 passed by the tribunal to the extent it is

against the assessee is hereby quashed.

In the result, the appeal is allowed.

Sd/-

JUDGE

Sd/-

JUDGE ss