Flex Foods Ltd., New Delhi vs Assessee

BEFORE SHRI S.V. MEHROTRA, AM AND SHRI A.T. VARKEY, JM

ITA No.4800/Del/2011 Assessment Year : 2007-08

Flex Foods Ltd., Vs. DCIT, 305, 3rd Floor, Central Circle-18, Bhanot Corner, New Delhi. Pomposh Enclave, Greater Kailash, New Delhi.

PAN : AAACF0108K

(Appellant) (Respondent)

Assessee By : Shri Suresh Anantharaman, CA Department By : Shri Ramesh Chander, CIT, DR

ORDER

PER S.V. MEHROTRA, AM:

This appeal by the assessee is directed against the order passed by the

CIT(A) 12.09.2011 in relation to the assessment year 2007-08.

2. Brief facts of the case are that the company, a 100% EOU, in the relevant

assessment year, was primarily engaged in growing and processing of mushrooms,

culinary herbs and other fruits and vegetables. A search and seizure operation u/s

132 was carried out on 10th May, 2007 in M/s Uflex Group of cases. The assessee's

case was also covered u/s 132(1). In response to notice u/s 153A, the assessee

filed return of income declaring total income of Rs. 40,20,864/-. Book profit u/s

115JB was declared at Rs. 49,22,980/-. The total turnover declared was Rs. 34.21 ITA No. 4800/Del/2011

crores. 'Business income' was declared at Rs. 3.75 crores and 'Income from other

sources' at Rs. 47.36 lac. The gross total income declared was Rs. 4.23 crores from

which deduction u/s 80IC had been claimed for Rs. 3.75 crores. The relevant

assessment year was the third year for claim of deduction u/s 80IC. The assessee,

accordingly, declared the total income at Rs. 47.36 lac. The assessment under

normal provisions was completed at Rs. 78,41,945/-, inter alia, making addition of

Rs. 27,00,483/- on account of denial of deduction u/s 80IC in respect of interest

income earned from bank of Rs. 26,08,881/- and Rs. 91,002/- in respect of

deduction u/s 80IC claimed in respect of duty drawback receipt. The total book

profit u/s 115JB was determined at Rs. 5,00,32,212/-, after making an addition in

respect of provision for doubtful debts of Rs. 40,47,232/-. The ld. CIT(A) partly

allowed the assessee's appeal. Being aggrieved by the order of the ld.CIT(A), the

assessee is in appeal before us and has taken the following grounds of appeal:-

"a. The lower authorities have erred in disallowing the claim of the assessee U/s 80-IC for Rs 26,08,881/- on account of interest income.

b. The Lower authorities have erred in holding that Delhi High court decision on Section 80-IB in the case of CIT v. Eltek SGS Pvt. Ltd. (2008) 300 ITR 6 (Delhi), is not good law holding the difference between the language used in section 80-HH (Pandian chemicals Ltd. 262 ITR 278 (SC) and Section 80-IB.

c. It is contended that the language used in section 80lC (akin to section 80-IB) is different from the language used in section 80HH & 80-I. Hon'ble Supreme court judgment in case of Liberty India Ltd is not applicable to the appellant.

d. The Lower authorities have erred in holding that only Rs 50,000/- is attributable to earning of Gross interest income of Rs 26,08,881/- out of Administrative expenses of Rs 6.33 crore and salary expenses of Rs 4.33 crore aggregating Rs.10.66 crore.

2 ITA No. 4800/Del/2011 e. The lower authorities have erred in adding back 40,47,2321- under section 115JB being the provision for doubtful debts. The provision is the actual written off of debtors. Write off of debtors through provision is not covered under the clauses of Explanation 1 to section 11JB. Ratio of Hon'ble Supreme court judgment in the case of Vijaya Bank vs. CIT 323 ITR 166 is directly applicable to the case.

f. The lower authorities erred in adding provision for doubtful debts of Rs.40,47,232/- under normal provisions of the act. Hon'ble Supreme court judgment in the case of Vijaya Bank vs. ClT 323 ITR 166 is directly applicable to the case.

g. The assessee craves the right to add, alter, amend, reduce delete or withdraw any grounds of appeal arising out of this order."

3. Brief facts apropos ground Nos. a, b, c and d are that while claiming

deduction u/s 80IC, the assessee had included the interest earned from bank for Rs.

26,08,881/-. The AO did not allow this claim observing that its income could not be

said to be derived from business of the undertaking or enterprise. He relied on the

decision of the Hon'ble Supreme Court in the case of Pandian Chemicals vs. CIT 262

ITR 278 (SC). Before the ld.CIT(A), the assessee had, inter alia, submitted that

there is material difference in the wordings of section 80IC and 80HH as noted by

the Hon'ble Delhi High Court in the case of Eltek SGS Pvt. Ltd., 2008-TIOL-156-HC-

DEL. It was submitted that the decision in the case of Pandyan Chemicals (supra)

was delivered with reference to section 80HH where the words used are 'derived

from industrial undertaking' as opposed to the 'income derived from business u/s

80IC.' However, the ld.CIT(A) relied on the decision of Hon'ble Supreme Court in

the case of Liberty India Ltd. Vs. CIT, wherein it has been held that DEPB/duty

drawback are incentives which flow from the schemes framed by the Central

Government or from section 75 of the Customs Act, 1962, hence, incentives profits

are not profits derived from the eligible business u/s 80IB. They belong to the

category of ancillary profits of such undertaking. The ld.CIT(A) pointed out that the 3 ITA No. 4800/Del/2011

observations of Hon'ble Supreme Court are squarely applicable with reference to

section 80IC which is identically worded as section 80IA and 80IB. However, the

ld.CIT(A) accepted the assessee's alternative contention that only the net interest

after excluding expenditure incurred in earning the gross interest should be

excluded. He, accordingly, directed the AO to exclude Rs. 50,000/- being attributable

to earning of the gross interest income on estimate basis.

4. We have considered the submissions of both the parties and have perused

the record of the case. As far as allowability of deduction u/s 80IC in respect of

interest earned from bank is concerned, we do not find any infirmity in the order of

the ld.CIT(A) in view of the decision of Hon'ble Supreme Court in the case of Liberty

India Ltd. (supra). The Hon'ble Supreme Court has, inter alia, held that the words

'derived from' are narrower in connotation as compared to the words 'attributable

to.' The interest income derived from bank cannot be held to come within first

degree source as per the test laid down by the Hon'ble Supreme Court in Liberty

India Ltd. Respectfully following the decision of the Hon'ble Supreme Court in

Liberty India Ltd., (supra), ground Nos.a, b and c raised by the assessee are

dismissed.

5. Apropos Ground No.d, the ld. Counsel submitted that as against the total

administrative expenses and salary expenses aggregating to `10.66 crores, ld.CIT(A)

has estimated a very meager amount towards expenses incurred for earning of

interest income which is approximately about 2% of the interest income. He

submitted that at least 5% of interest income may be estimated towards expenses

for earning of the interest income. We find considerable merit in the argument of

4 ITA No. 4800/Del/2011

the ld. Counsel for the assessee that considering the overall administrative and

salary expenses, the estimate made by the ld.CIT(A) was quite meagre. We,

therefore, hold that Rs.1 lac be treated as attributable to earning of the gross

interest income. We direct accordingly.

6. In the result, this ground is partly allowed.

7. Brief facts apropos ground No. e and f are that from the Profit & Loss

Account, the AO noticed that a sum of Rs.40,47,232/- had been debited as

'Provisions for doubtful debts.' He noted that this sum had been added back in the

computation of income under the normal provisions of the Act by the assessee itself,

but the same had not been added in the computation of book profit u/s 115JB. He

pointed out that in view of the amended provisions u/s 115JB by the Finance Act,

2009 with retrospective effect from 01.04.2001, the book profit is to be increased by

the amount or amounts set aside as 'Provisions for diminution in the value of any

assets.' He, therefore, concluded that since the provisions for doubtful debts is the

diminution in the value of asset, therefore, the same was required to be added back

to the book profit u/s 115JB. He, accordingly, made the addition of Rs. 40,47,232/-

for the purposes of computation of book profit u/s 115JB. Before the ld.CIT(A), the

assessee had, inter alia, relied on the decision of Hon'ble Supreme Court in the case

of Vijaya Bank vs. CIT 323 ITR 166, wherein it was held that after 1st April, 1989, a

mere provision for bad debt will not be entitled to deduction u/s 36(1)(vii).

However, if the assessee debits provisions for doubtful debts to the Profits & Loss

Account and makes the corresponding credit to assets account like sundry debtors

account instead of current liability and provisions on the liability side of the balance

5 ITA No. 4800/Del/2011

sheet, then, that would constitute a write off of an actual debt. The contention of

the assessee was that the entries passed in books of account by the assessee were

in line with the decision of the Hon'ble Supreme Court in Vijaya Bank (supra) and,

therefore, it was not a provision for doubtful debts. The ld.CIT(A) observed that the

decision of Hon'ble Supreme Court in the case of Vijaya Bank Ltd. (supra) was

delivered in respect of section 36(1)(vii). He relied on the decision of ITAT Mumbai

Bench in the case of ITO, Ward 3 (3), Mumbai vs. TCFC Finance Ltd., 2011-TIOL-

184-ITAT-Mum and held that since the assessee had suo motu added back the

provision for doubtful debts while computing income under the normal provisions of

the Act, the logical and natural consequence was that such provision for doubtful

debt leads to diminution in value of asset and, therefore, rejected the assessee's

ground of appeal.

8. Ld. Counsel reiterated the submissions made before Ld. CIT(A) and submitted

that since the entries made in the books of account regarding provision of bad debt

were by way of reducing the sundry debtors, therefore, the said entries were in

conformity with the decision of Hon'ble Supreme Court in the case of Vijaya Bank

(supra) and, accordingly, resulted in the write off of bad debts. He referred to page

6 of paper book wherein the decision of Hon'ble Karnataka High Court in the case of

CIT vs. Yokogawa India Ltd. (2012) 17 taxmann Com. 15 (Kar.) is contained in

which it has been ,inter-alia, held that if the bad or doubtful debt is reduced from

the loans and advances or the debtors from the asset side of the balance sheet, the

explanation to section 115JA and 115JB is not at all attracted. Ld. Counsel

submitted that Ld. CIT(A) has relied on the decision of Tribunal in the case of ITO

vs. M/s. TCFC Finance Limited dated 9th March, 2011 whereas the decision in the

6 ITA No. 4800/Del/2011

case of CIT vs. Yokogawa India Ltd. (supra) is dated August 29, 2011. He, therefore,

submitted that the decision in the case of CIT vs. Yokogawa India Ltd. is to be

followed. Ld. Counsel for the assessee referred to the decision of ITAT Ahmedabad

Bench in the case of ACIT vs. Vodafone Essar Gujarat Ltd. 2012-TIOL-318-ITAT-

AMH wherein vide order dated 11th May, 2012 Tribunal has followed the decision of

Karnataka High court in the case Yokogawa India Ltd.. Ld. Ld. Counsel also relied on

the decision of M/s. Murugappa Morgan Thermal Ceramics Ltd. vs. ACIT 2013-TIOL-

477-ITAT-MAD wherein also the similar view has been taken.

9. Ld. CIT(DR) submitted that ground (f) raised by the assessee is in the form

of additional ground as no such issue was raised before the AO. He pointed out that

in the computation of income, under the normal provisions of Act, the assessee itself

had added this amount but did not add the same in the computation of book profit

u/s 115JB. He referred to page 8 of paper book wherein the question raised before

the Hon'ble Karnataka High Court is contained which reads as under :-

"The appeal was admitted to consider the following substantial question of law :

"Whether the Appellate Authorities were correct in holding that the provisions made for bad and doubtful debts cannot be added back in accordance with the Explanation (c) to Section 115JB(1) of the Act as the same is not an ascertained liability when computing the book profits under section 115JB of the Act?"

10. With reference to above question he submitted that the same was in context

of clause (c) and not Clause (i) to Explanation to section 115JB and, therefore, the

said decision cannot be applied particularly because section 115JB is a deeming

provision.

7 ITA No. 4800/Del/2011

11. We have considered both the parties and have perused the record. As far as

Ld. CIT(DR)'s plea that ground (f) raised by the assessee is an additional ground, we

do not find any substance in the same because the AO has specifically noted in para

5 of his order that though in the computation of income under the normal provisions

of Act the assessee itself had added the impugned amount in the computation of

income but the same had not been added in the computation of book profit u/s

115JB . The assessee's claim was denied by AO by making the addition of Rs.

40,47,232/- to the book profit, as computed by assessee. Therefore, it cannot be

said that asessee now is raising some new issues. The claim was rejected by the AO

and the asstt. order was also confirmed by the Ld. CIT(A).

12. On merits Ld. Counsel has relied on the decision of Hon'ble Karnataka High

Court in the case of CIT vs. Yokogawa India Ltd. (supra). It is true that the ground

raised before Hon'ble High Court was with reference to Explanation (c) to section

115JB(2) but when the revenue's plea with reference to clause (c) was not found

acceptable to court then revenue also referred to clause (i) to the Explanation which

had come into effect from 1.4.2001. The submissions advanced by Ld. Counsel for

the Revenue are reproduced hereunder :

"7. The learned counsel for the Revenue submitted that Clause (i) stands added to the said Explanation which has come into effect from 1.4.2001 and therefore as the said amounts are set aside as provision for diminishing in the value of assets by virtue of retrospective operation, the said amounts have to be added only to arrive at the book profit and therefore the order passed by the Tribunal is illegal and requires to be set aside. In that context, he also relied on the judgment of the Apex Court in the case of Vijaya Bank vs CIT (2010) 323 ITR 166 / 190 Taxman 257 and CIT vs. HCL. Comnet Systems & Services Ltd. (2008) 305 ITR 409 / 174 Taxman 118. After referring to items

(a) to (f) as provided in the Explanation it was held that even doubtful debts can be added back to the net profit if Item (c) stands attracted. Item (c) deals with amounts set aside as provisions made for meeting the liabilities,

8 ITA No. 4800/Del/2011

other than ascertained liabilities. The assessee's case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision, the provision is made for meeting a liability and the provision should be for other than ascertained liability, that is, it should be for unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of Explanation to Section 115JA. It was further held that there are two types of debt. A debt is payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assesse 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 the debt under consideration is debt receivable by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up probably the diminution in the value of assets that is 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."

" After considering the aforementioned arguments Hon'ble High Court in para 8 observed as under :-

"8. In the present case, the debt is an 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, it was held that Item (c) of the Explanation is not attracted to the facts of the case. Item (c) in Section 115JA and 115JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in Item (c) of the Explanation. It is the amount or amounts set aside, as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision is made which is in the nature of diminution in the value of any asset would not fall within item (c) of Explanation (i). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (i) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, in case of the assessee falls under Item (c). In meeting the aforesaid case, the learned counsel for the assessee brought to our notice the judgment of the Apex Court in the case of Vijaya Bank vs. CIT (supra) where the Apex Court had an occasion to consider his explanation. It accepted the argument on behalf of the Revenue to the effect that the explanation makes it very clear that there is a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. A mere debit to the profit and loss account would constitute a bad and doubtful debt, but it could not constitute actual write off and that was the very reason why the explanation stood inserted. Prior to the Finance

9 ITA No. 4800/Del/2011

Act, 2001 many assesses used to take the benefit of deduction under section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly /simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequentially, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account 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 Section 115JA or JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. In that view of the matter, we do not see any merit in this appeal."

13. Therefore, it cannot be said that the judgment rendered by Hon'ble Karnataka

High Court was only after consideration of Item (c) of Explanation to section 115JA

and not after considering item (i) of Explanation to section 115JB. Hon'ble High

Court has held that the Explanation per se to sections 115JA or 115JB(1) is not

attracted where the amount has been written off in the books of account as per the

decision of Hon'ble Apex Court in the case of Vijaya Bank vs. CIT (supra). It is not

disputed that in the present case provision for bad debt has been reduced from

10 ITA No. 4800/Del/2011

sundry debtors from the asset side of the balance sheet and, consequently, the

debtors from the asset side on the balance sheet was shown at net of provision for

the impugned bad debts. This is in conformity with the decision of Hon'ble Apex

Court in the case of Vijaya Bank v. CIT (supra). Therefore, respectfully following the

decision of Hon'ble Karnataka High Court ground No. (e) and (f) raised by the

assessee are allowed.

In the result the assessee's appeal is partly allowed.

Order pronounced in the open court on 16th January, 2015.

sd/- sd/- (A.T. VARKEY) ( S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Date 16th January, 2015

'veena'

Copy of order forwarded to:

1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By Order

Deputy Registrar, ITAT

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