Beharilal, Accountant Member - (1.) THIS appeal of the assessee has been directed against the order of the CIT(A) II Mumbai dated 21/1/2002 for the A.Y. 1997-98. The only ground of appeal taken up by, the assessee reads as follow: "On the facts and circumstances of the case, the learned CIT(A) erred in confirming the write back of Rs. 4,18,63,920 made by the Assessing Officer Under Section 115JA of the Income-tax Act and treating the same as income of the appellant. The appellant states that the amount written back was not allowed as a deduction and hence every write back would not be treated as income."
(2.) The assessee is a limited company and is engaged in the manufacture of non-woven fabrics. The assessee filed its return for the assessment year 1997-98 on December 1, 1997 declaring taxable income of Rs. 82,44,896 under the provisions of Section 115JA of the Income-tax Act, 1961. Subsequently, on June 19, 1998 it filed a revised return declaring loss of Rs. 26,83,740 under the normal provisions of the Act and nil income under Section 115JA of the Act. The only issue for consideration in this case is the computation of the taxable income under the provisions of Section 115JA of the Act. The Assessing Officer observed that the assessee's annual report shows a net profit of Rs. 5,62,42,271 which includes write back of liabilities of earlier years of Rs. 4,18,63,960. Regarding the write back, the Assessing Officer has stated that during the relevant year the assessee arrived at one time settlement with the Financial Institutions. By letter dated 31/3/97, the Industrial Credit and Investment Corporation of India Ltd. informed the assessee company that as per the terms of one-time settlement a total amount of Rs. 7 crores has to be paid by the assessee to three Financial Institutions (IDBI, ICICI, and IFCI). This was payable in five three month instalments beginning from 31/1/1997 and ending on 15/3/1998. The original loan availed by the assessee from three Financial Institution was Rs. 4.9 crores. As a result of one settlement, the assessee wrote back in its books an amount of Rs. 418.63 lakhs. The Assessing Officer referred to Clause (i) to the explanation to Section 115JA, which deals with amounts withdrawn from any reserves or provision and has stated that the amount written back cannot be considered as withdrawn from a provision or a reserve. The amount written back is a cumulative total of principle and interest payable as per books of the one time settlement. The Assessing Officer has further observed that of the two words used in Section 115JA, the word 'reserve' does not apply to the facts of the case. According to him this also cannot be considered as a provision, as stated above, the amount written back constitutes of both principle and interest. The Assessing Officer referred to the provisions of proviso to Explanation to Section 115JA and has stated that even if the amount written back can be termed as a reserve, then it is a reserve created during the A.Y. 1997-98. Thus, according to him, the said reserve has not increased the book-profit of any earlier year and therefore cannot be reduced in term of the Clause (i) to the Explanation to Section 115JA of the Act. Thus, the Assessing Officer concluded that the book-profit of the assessee for the year will remain at Rs. 562.42 lakhs. The learned CIT(A) in his order has observed that the amount of Rs. 4,18,63,920 represents the provision for interest created in the earlier years and written back and credited to the profit and loss account in this year. This amount was not allowed in the relevant years by virtue of Section 43B on account of not having been paid. The learned CIT(A) referred to the order of the Assessing Officer under Section 154 wherein the Assessing Officer has observed that according to the proviso to Explanation (i) below Section 115JA(2) a provision created in a previous year relevant to the assessment year commencing on or after 1/4/1997 shall be reduced from the book profit unless the book profit of such year has been increased by the provision out of this amount was withdrawn. The Assessing Officer further observed that the relevant provision for interest was created prior to the assessment year 1997-98 and therefore, the amount withdrawn out of this provision and credited to the profit and loss account in this year and cannot be reduced from the book profit under this explanation. It was submitted before the learned CIT(A) that the Assessing Officer has misled the aforesaid proviso which refers to such provision which is made in the previous year relevant to the assessment year commencing on or after 1/4/97 and not in any earlier assessment year. The relevant provisions of interest having been made during the period form 1/4/1988 to 31/3/1996, therefore, the said proviso does not apply so as to create a bar against the reduction of book-profit by the amount credited to the profit and loss account in this year out of the said provision. The learned CIT(A) referred to the Explanation (i) which provides for reduction of book profit by the amount withdrawn and credited to the profit and loss account from any reserve and provision, however, the proviso to Explanation (i) excludes from reduction such amount credited to the profit and loss account which is out of the reserve treated or provisions made in the previous year relevant to the assessment year commencing on or after 1/4/97. The learned CIT(A) has, thus, concluded that in the present case, it is undisputed fact that the relevant provision for interest out of which the amount was withdrawn and credited to the profit and loss account in this year was made in the earlier years. Thus, according to the CIT(A), the proviso to Explanation (i) does not come in the way of reduction of book profit by the amount of provision withdrawn and credited to the profit and loss account in this year.
(3.) THE learned CIT(A) however, took up a new issue and observed that when Explanation (i) refers to reserves or provision, it clearly refers to such reserves or provision as are mentioned in Explanation (b) and (c). In the opinion of CIT(A) Clause (b), (c) and (i) are the clauses of the same Explanation below Section 115JA(2). THE meaning of the provision in this Explanation is derived from Section 115JA(2) which refers to profit and loss account prepared in accordance with the provisions of Part-III of Schedule-VI of the Companies Act. Clause (b) of the Explanation refers to the amounts carried to any reserve by whatever name called. Thus, the learned CIT(A) has stated that when the interest was provided in the books of account in the earlier years, such provision could not be said to be a "reserve". A reserve denotes transfer of profit below the line or an account created out of capital receipts. It does not form part of the profits i.e. that the net result of revenue and expenses. As regards Clause (c) referring to amount or amounts set-aside to provisions made for meeting liabilities, other than ascertained liabilities. Thus, the learned CIT(A) has stated that a provision for interest could not be said to be a provision for meeting an unascertained liability within the meaning of this clause. THE CIT(A) has also stated that the fact that it was not allowed as deduction under the Income-tax Act by virtue of Section 43B does not render it a provision towards unascertained liability within the meaning of the Companies Act. Thus, according to the CIT(A) the amount written off in this year out of the provisions of interest on the basis of one-time settlement with the lenders did not represent an amount withdrawn from the provision for an unascertained liability within the meaning of the Explanation below Section 115JA(2). Thus, the learned CIT(A) held that this amount could not be reduced from the book profit. THE learned CIT(A), therefore, has justified in not reducing this amount from the book profit by the Assessing Officer.;