2010 (4) TMI 865 - AT - Income Tax

Tribunal confirms provision for doubtful debts to be added to book profit under section 115JB

DCM Shriram Consolidated Ltd. Versus Assistant Commissioner of Income-tax, Range-10, New Delhi

DCM Shriram Consolidated Ltd. Versus Assistant Commissioner of Income-tax, Range-10, New Delhi - [2010] 39 SOT 203 (DELHI) Issues Involved:1. Adjustment made by the Assessing Officer in computation of book profit under section 115JB of the Income Tax Act on account of provision for doubtful debts and advances.Detailed Analysis:Adjustment of Book Profit under Section 115JB:The core issue in this case revolves around the adjustment made by the Assessing Officer (AO) to the book profit under section 115JB of the Income Tax Act, specifically concerning the provision for doubtful debts and advances amounting to Rs. 1.02 crores. The AO added this provision to the book profit, treating it as an unascertained liability.Assessee's Argument:The assessee contested this adjustment, arguing that the provision for doubtful debts was made based on a definite analysis of the financial position, adhering to well-settled accounting policies and practices. The provision was made for debts from parties to whom sales were made in earlier years, but the amounts had not been received. The assessee highlighted that similar provisions had been made in previous years and were adjusted accordingly when debts were actually written off or recovered.The assessee further argued that clause (i) in the Explanation to section 115JB, introduced by the Finance Act, 2009, which mandates adding provisions for diminution in the value of any asset to the book profit, should not apply retrospectively to provisions for doubtful debts. They emphasized that this clause pertains to provisions for diminution in asset value, which is different from provisions for doubtful debts related to revenue recognition under Accounting Standard 9 (AS-9).Legal Precedents and Accounting Standards:The assessee referenced several legal precedents and accounting standards to support their argument:- Accounting Standard 13 (AS-13): Pertains to the valuation of investments, not directly applicable to doubtful debts.- Accounting Standard 9 (AS-9): Relates to revenue recognition, indicating that provisions for doubtful debts reflect uncertainty in revenue collection and should not be added to book profit.- Supreme Court Decisions: The assessee cited the Supreme Court's decisions in *Apollo Tyres Ltd. v. CIT* and *CIT v. HCL Comnet Systems & Services Ltd.*, where it was held that the AO cannot alter profits certified by statutory auditors and that provisions for doubtful debts are not unascertained liabilities.Revenue's Argument:The Revenue, represented by the CIT-DR, argued that the AO was justified in adding the provision for doubtful debts to the book profit under the amended provisions of section 115JB, as introduced by the Finance Act, 2009. They contended that the amendment was applicable retrospectively from 1-4-2001, thus covering the assessment year 2005-06.Tribunal's Decision:The Tribunal examined the rival contentions and the relevant materials on record. It concluded that the amended provision under section 115JB, which requires adding provisions for diminution in asset value to the book profit, was applicable retrospectively from the assessment year 2001-02. The Tribunal noted that the Supreme Court's decision in *HCL Comnet Systems & Services Ltd.* was no longer applicable due to this retrospective amendment.The Tribunal also referenced the Delhi High Court's decision in *CIT v. Ilpea Paramount (P.) Ltd.*, which upheld the retrospective application of the amendment, thereby requiring the addition of provisions for doubtful debts to the book profit under section 115JA, a provision similar to section 115JB.Conclusion:The Tribunal upheld the orders of the lower authorities, confirming that the provision for doubtful debts should be added to the book profit under section 115JB for the assessment year 2005-06, in line with the retrospective amendment introduced by the Finance Act, 2009.Result:The appeal of the assessee was dismissed.