Relief to Bank of Bahrain & Kuwait: ITAT Allows Deduction from Book Profit for Withdrawn Reserves Credited to P&L Account u/s 115JB [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has provided relief to the Bank of Bahrain & Kuwait by ruling that when reserves or provisions are created in a year where the assessee has increased the book profit under Section 115JB of the Income Tax Act, 1961, the assessee is entitled to reduce the amount withdrawn from such reserves if it is credited to the profit and loss account in that year.

The assessee Bank of Bahrain & Kuwait filed its return of income on September 26, 2009, declaring a total income of Rs. Nil and book profits of Rs. 1, 85, 63,851 under Section 115JB. The case was selected for scrutiny, and notices under Sections 143(2) and 142(1) were issued. The Assessing Officer (A.O.) passed a draft assessment order on March 19, 2013, and a final assessment order on April 23, 2013, maintaining the book profits at Rs. 1, 85, 63,851 under Section 115JB.

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The assessee appealed to the first appellate authority, which, in an order dated April 27, 2015, remanded the matter back to the A.O. However, both the assessee and the Revenue challenged this order, and the tribunal later ruled on August 8, 2019, that the Commissioner of Income Tax (Appeals) [CIT(A)] lacked the authority to remand the issue to the A.O., a power revoked by the Finance Act, 2001. Consequently, the CIT (A) dismissed the assessee's appeal on November 30, 2023.

During the proceedings, Mr. Ninad Patade, representing the assessee, argued that a deduction of Rs. 23.44 crores, representing provisions written back for NPAs, NP investments, and other assets, should have been reduced from the book profits under Section 115JB. He contended that these provisions were previously added to the book profits in earlier years, and their reversal should have been accounted for in the current year's book profits. However, the A.O. disallowed this deduction, citing a lack of evidence that the reversed provisions were previously added in the relevant years.

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Mr. Anil Sant, representing the revenue, countered that the CIT(A) had correctly noted the assessee's failure to provide necessary documentary evidence showing that the provisions were added to book profits in earlier years. He supported the findings of the lower authorities.

The tribunal reviewed the submissions and evidence, noting that the A.O. and CIT(A) did not properly verify the details provided by the assessee regarding the provisions written back. Specifically, the tribunal pointed out that "Appendix E," which detailed the year-wise breakup of the written-back provisions, was overlooked. The CIT(A) also failed to acknowledge this appendix, focusing instead on other documents that did not substantiate the assessee's claims.

Citing the legal principle that the benefit under clause (i) of Explanation 1 to Section 115JB(2) is available only if the provision for bad debts was added to book profits in the year it was created, the tribunal referenced similar rulings, including the Himachal Pradesh State Industrial Development Corporation case and the Escort Finance Ltd. case the Himachal Pradesh High Court held that when the assessee has increased the book profit under section 115JB of the Income Tax Act in the year the reserve or provisions were created, the assessee is entitled to reduce the amount withdrawn from such reserve if it is credited to the Profit & Loss account in that year, a decision relied upon by the bench in favor of the assessee.

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Further the two member bench of the tribunal comprising Renu Jauhri ( Accountant member) and Kavitha Rajagopal ( Judicial member)  ultimately decided to remand the matter back to the A.O. for a fresh examination of the details submitted by the assessee, specifically whether the provisions were properly accounted for in the book profits as required by the law. All issues raised by the assessee were allowed for statistical purposes, and the appeals were remanded for further consideration.

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