IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.9.2014 CORAM HON'BLE MR.JUSTICE R.SUDHAKAR AND HON'BLE MR.JUSTICE G.M.AKBAR ALI T.C.(A).No.412 of 2007 Commissioner of Income Tax Chennai. .. Appellant Vs. Indbank Merchant Banking Services Ltd. 26/27, Jehangir Street Second Line Beach Chennai 600 001 Respondent PRAYER: Appeal under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal 'A' Bench, Chennai, dated 27.10.2006 made in I.T.A.No.1838/Mds/2002 for assessment year 1997-1998. For Appellant : Mr.T.Ravikumar Senior Standing Counsel For Respondent : Mr.R.Vijayaraghavan Assisted by Mr.Venkat Narayanan for M/s.Subbaraya Aiyar JUDGMENT (Delivered by R.SUDHAKAR, J.) Revenue has filed this appeal challenging order of Income Tax Appellate Tribunal 'A' Bench, Chennai, dated 27.10.2006 made (2) in I.T.A.No.1838/Mds/2002 for assessment year 1997-1998, by raising following questions of law: (i) Whether in facts and circumstances of case, Tribunal was right in holding that rectification was on debatable issue, when rectification was done only in accordance with decision of jurisdictional High Court? (ii) Whether in facts and circumstances of case, issue can be said to be debatable one, when there is order of jurisdictional High Court settling issue? 2.1. facts in nutshell are as under: assessee company is engaged in merchant banking and allied activities. They filed return of income for assessment year 1997-1998. Assessing Officer made prima facie adjustment in intimation vide order dated 14.3.2000 and he disallowed provision for non-performing assets from book profits made under Section 115JA of Income Tax Act, 1961 (for brevity, Act ). 2.2. Aggrieved by said order, assessee preferred appeal to Commissioner of Income Tax (Appeals), who, by order dated 22.1.1999, placing reliance on decision of this Court in Commissioner of Income Tax v. Srivinayaga Pictures, [1986] 161 ITR 65 (Mad.) , deleted addition on account of provision for non-performing assets. (3) 2.3. Thereafter, in case of Deputy Commissioner of Income Tax v. Beardsell Ltd., [2000] 244 ITR 256 (Mad.) , decided on 14.3.2000, this Court decided issue for not allowing provision for non-performing assets in favour of Revenue. On basis of said decision, it appears Assessing Officer filed application for rectification of mistake pleading that provision for doubtful debts could not be excluded from book profits under Section 115JA of Act. 2.4. Commissioner of Income Tax (Appeals), by order dated 28.10.2002, allowed application filed by Assessing Officer seeking rectification and held that Assessing Officer was justified in not excluding provision for non performing assets for purpose of determination of book profits under Section 115JA of Act. earlier order dated 22.1.1999 passed by Commissioner of Income Tax (Appeals) was rectified accordingly. 2.5. Aggrieved by said decision, assessee appealed to Tribunal. Tribunal, taking note of two different views of this Court on issue, and also decision in India Pistons Ltd. v. DCIT, [2004] 188 CTR 282 (Mad.) , decided on 16.2.2004, came to hold that Commissioner of Income Tax (Appeals) had no jurisdiction to rectify his earlier decision (though wrongly stated as to restore decision already taken ) under Section 154 of Act, when issue involved is (4) debatable point of law. 2.6. Challenging said order, present appeal is filed on substantial questions of law, referred supra. 3. We have heard Mr.T.Ravikumar, learned Senior Standing Counsel appearing for appellant and Mr.R.Vijayaraghavan, learned counsel appearing for respondent. 4. At outset, it was pointed out by Mr.R.Vijayaraghavan, learned counsel appearing for assessee that issue as to whether provision for bad and doubtful debts should be added back to book profits under Section 115JA of Act has been answered in negative by Supreme Court in Commissioner of Income Tax v. HCL Comnet Systems and Services Ltd., [2008] 305 ITR 409 (SC ), wherein it was held as under: From above, it is evident that Assessing Officer has to accept authenticity of accounts maintained in accordance with provisions of Part II and Part III of Schedule VI to Companies Act, which are certified by auditors and passed by company in general meeting. Assessing Officer has only power of examining whether books of account are duly certified by authorities under Companies Act and whether such books have been properly maintained in accordance with Companies Act. Assessing Officer does not have jurisdiction to go beyond net profit shown in profit and loss account except to (5) extent provided in Explanation. Thereafter, Assessing Officer has to make adjustment permissible under Explanation given in section 115JA of 1961 Act. It may be noted that adjustments required to be made to net profit disclosed in profit and loss account for purposes of section 349 of Companies Act are quite different from adjustment required to be made under Explanation to section 115JA of 1961 Act. For purposes of section 115JA, Assessing Officer can increase net profit determined as per profit and loss account prepared as per Parts II and III of Schedule VI to Companies Act only to extent permissible under Explanation thereto. As stated above, said Explanation has provided six items, i.e., item Nos. (a) to (f) which if debited to profit and loss account can be added back to net profit for computing book profit. In this case, we are concerned with item No. (c) which refers to provision for bad and doubtful debts. provision for bad and doubtful debts can be added back to net profit only if item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. assessee s case would, therefore, fall within ambit of item (c) only if amount is set aside as provision; provision is made for meeting liability; and provision should be for other than ascertained liability, i.e., it should be for unascertained liability. In other words, all ingredients should be satisfied to attract item (c) of Explanation to section 115JA. In our view, item (c) is not attracted. (6) There are two types of debt . debt payable by assessee is different from debt receivable by assessee. debt is payable by assessee where assessee has to pay amount to others whereas debt receivable by assessee is amount which assessee has to receive from others. In present case, debt under consideration is debt receivable by assessee. provision for bad and doubtful debt, therefore, is made to cover up probable diminution in value of asset, i.e., debt which is amount receivable by assessee. Therefore, such provision cannot be said to be provision for liability, because even if debt is not recoverable no liability could be fastened upon assessee. In present case, debt is amount receivable by assessee and not any liability payable by assessee and, therefore, any provision made towards irrecoverability of debt cannot be said to be provision for liability. Therefore, in our view, item (c) of Explanation is not attracted to facts of present case. In circumstances, Assessing Officer was not justified in adding back provision for doubtful debts of Rs. 92,15,187 under clause (c) of Explanation to section 115JA of 1961 Act. (emphasis supplied ) 5. In view of law enunciated by Supreme Court in HCL Comnet Systems and Services Ltd. case, referred supra, primary issue decided by Assessing Officer that bad and doubtful debts should be (7) added to book profits under Section 115JA of Act has to fail. order of Commissioner of Income Tax (Appeals) passed on 22.1.1999 deleting addition on account of provision for non-performing assets is, therefore, in accordance with decision of Supreme Court in HCL Comnet Systems and Services Ltd. case, referred supra. In view of above, on merits, there is no issue for revenue to canvass either before this Court or Tribunal in respect of assessee's claim that bad and doubtful debts should not be added back to book profits under Section 115JA of Act. 6. further issue raised in appeal is purely academic. However, since appeal is admitted, we would like to answer said substantial questions of law, as it would set right any confusion that has arisen in this case. 7. We find that order of Commissioner of Income Tax (Appeals) dated 22.1.1999 was decided on basis of decision of this Court in Srivinayaga Pictures case , referred supra, and Commissioner of Income Tax (Appeals) is bound by said decision of jurisdictional High Court. 8. In case on hand, based on subsequent decision of jurisdictional High Court in Beardsell Ltd. case , referred supra, (8) Assessing Officer filed application for rectification under Section 154 of Act before Commissioner of Income Tax (Appeals), who considered subsequent decision and allowed rectification application. 9. core issue to be considered is whether there existed any mistake apparent from record requiring revenue to invoke Section 154 of Act. 10. Section 154 of Act deals with rectification of mistake apparent from record and it empowers authority to amend any order passed by it under provisions of Act. In case on hand, Commissioner of Income Tax (Appeals), by order dated 22.1.1999, relying on decision of this Court in Srivinayaga Pictures case, referred supra, deleted addition on account of provision for non-performing assets. Thereafter, Commissioner of Income Tax (Appeals), by order dated 28.10.2002, allowed application filed by Assessing Officer seeking rectification under Section 154 of Act relying on decision of this Court in Beardsell Ltd. case , referred supra, and held that Assessing Officer was justified in not excluding provision for non performing assets for purpose of determination of book profits under Section 115JA of Act. In our considered opinion, subsequent decision rendered by Commissioner of Income Tax (Appeals) can at best be stated to be based on change of opinion and not based on any (9) mistake apparent from record. 11. This view of Court is fortified by decision of Supreme Court in Mepco Industries Ltd. v. Commissioner of Income Tax, [2009] 319 ITR 208 (SC) , wherein it is held as under: short point involved in these appeals is, whether there existed 'rectifiable mistake' enabling Department to invoke section 154 of Act? If one examines scheme of Income-tax Act, as it stood at material time, one finds clear dichotomy between section 154 and section 147 of Act. Section 154 deals with rectification of mistake. Section 154(1), inter alia, states that, with view to rectify any mistake apparent from record, income-tax authority may amend any order passed by it under provisions of Act , whereas section 147, inter alia, states that if Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to provisions of sections 148 to 153, assess or reassess such income which has escaped assessment and which comes to notice of Assessing Officer subsequently in course of proceedings under said section. In present case, Department did not invoke section 147 of Act even when matter was within time limit prescribed. Be that as it may, in these appeals, we are concerned with meaning of words 'rectifiable mistake'. On facts of present case, we are of view that (10) present case involves change of opinion. In this connection, it must be noted that Government grants different types of subsidies to entrepreneurs. subsidy in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) was incentive subsidy linked to production. In fact, in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) (at page 257), this court categorically stated that scheme in hand was incentive scheme and it was not scheme for setting up industries. In said case, salient features of scheme were examined and it was noticed that scheme formulated by Government of Andhra Pradesh was admissible only after com-mencement of production. In income-tax matters, one has to examine nature of item in question, which would depend on facts of each case. In present case, we are concerned with power subsidy whereas in case of CIT v. Ponni Sugars and Chemicals Ltd. reported in [2008] 306 ITR 392, subsidy given by Government was for repaying loans. Therefore, in each case, one has to examine nature of subsidy. This exercise cannot be undertaken under section 154 of Act. There is one more reason why section 154 in present case was not invokable by Department. Originally, Commissioner of Income-tax, while passing orders under section 264 of Act on April 30, 1997, had taken view that subsidy in question was capital receipt not taxable under Act. After judgment of this court in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253, Commissioner of Income-tax has taken view that subsidy in question was revenue receipt. Therefore, (11) in our view, present case is classic illustration of change of opinion. ... Before concluding, we may state that in Deva Metal Powders (P.) Ltd. v. Commissioner, Trade Tax, Uttar Pradesh, reported in [2008] (2) SCC 439 , Division Bench of this court held that 'rectifiable mistake' must exist and same must be apparent from record. It must be patent mistake, which is obvious and whose discovery is not dependent on elaborate arguments. To same effect is judgment of this court in case of Commissioner of Central Excise, Calcutta v. A. S. C. U. Ltd. [2003] 151 ELT 481 , wherein it has been held that 'rectifiable mistake' is mistake which is obvious and not something which has to be established by long drawn process of reasoning or where two opinions are possible. Decision on debatable point of law cannot be treated as 'mistake apparent from record' . (emphasis supplied ) 12. That apart, Supreme Court in CIT v. Palani Andavar Cotton and Synthetic Spinners Ltd., [2010] 317 ITR (St) 3, dismissed Department s Special Leave Petition against judgment dated 27.8.2007 of this Court in Tax Case (Appeal) Nos.96 to 98 of 2004, whereby High Court confirmed order of Tribunal holding that since on date of exercise of jurisdiction under Section 154 of Act issue was debatable, Revenue had no jurisdiction to make rectification and that (12) decision of this Court in 258 ITR 56 not having been available at time of exercise of power under section 154 of Act, it could not be applied with retrospective effect. 13. In instant case, when Commissioner of Income Tax (Appeals) passed order on 22.1.1999, decision of this Court in Srivinayaga Pictures case , referred supra, was binding on him. At that point, if Commissioner of Income Tax (Appeals) had taken contrary view, it would have been mistake apparent. However, that is not case here. Commissioner of Income Tax (Appeals), by order dated 28.10.2002, allowed application filed by Assessing Officer seeking rectification relying on decision rendered by this Court in Beardsell Ltd. case, referred supra, decided on 14.3.2000, in favour of Revenue subsequently (i.e.) after Commissioner of Income Tax (Appeals) passed order. subsequent order passed by Commissioner of Income Tax (Appeals), by way of rectification, by no stretch of imagination, could be stated case of rectification. There is no mistake apparent on record on date of passing original order in Appeal. It is case of rectification based on change of opinion. In our considered opinion, rectification order passed by Commissioner of Income Tax (Appeals) is erroneous and not sustainable in law. For foregoing reasons, substantial questions of law are (13) answered against Revenue and appeal is dismissed. No costs. (R.S.J.) (G.M.A.J.) 17.9.2014 Index : Yes Internet : Yes sasi (14) To: 1. Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench "A", Chennai. 2. Secretary, Central Board of Direct Taxes, New Delhi. 3. Commissioner of Income Tax (Appeals) - XI Chennai. 4. Joint Commissioner of Income Tax Special Range IV, Chennai 34. (15) R.SUDHAKAR,J. and G.M.AKBAR ALI,J. (sasi) T.C.(A).No.412 of 2007 17.9.2014 Commissioner of Income-tax, Chennai v. Indbank Merchant Banking Services Ltd