Provision for doubtful debts in company accounts when computing book profit u/s115J; rectification u/s154 rejected

A company claimed that a provision for doubtful/irrecoverable debts should be excluded while computing "book profit" under s.115J, and that its inclusion could be rectified under s.154 pursuant to an intimation under s.143(1)(a). Applying SC rulings, the HC held that a provision for doubtful debts represents an unascertained liability/reserve and therefore cannot be excluded from book profit under the Explanation to s.115J(1A); the assessing authority and first appellate authority were correct in adding it back. The HC further held that the Tribunal erred in directing rectification and in rejecting adjustment under s.143(1)(a) on this point. The Revenue's appeal was allowed and the addition was restored.

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Issues involved: Appeal against disallowance of provision for doubtful debts under section 115J of the Income-tax Act, 1961 for the assessment year 1989-90.

Summary:
The respondent company filed its return of income showing a provision for doubtful debts of Rs. 46,64,750, claimed as exempt from taxable profit. The Deputy Commissioner disallowed the provision, stating it was not for ascertained liabilities as per section 115J(1)(c) of the Act. The respondent filed a petition under section 154 for rectification, which was refused. The Commissioner of Income-tax (Appeals) upheld the disallowance, leading to an appeal before the Income-tax Appellate Tribunal.

The Tribunal found the issue debatable and directed the assessing authority to rectify the mistake under section 154. The main contention was whether the provision for doubtful debts was an ascertained liability under section 115J. The respondent argued the provision should be sustained, while the appellant contended it was not an ascertained liability and should be included in the book profit. The Tribunal allowed the appeal, leading to the current appeal before the High Court.

The High Court analyzed relevant legal principles and previous court decisions. It held that a provision for unascertained liability cannot be excluded from book profit under section 115J. Citing Supreme Court decisions, the Court emphasized the distinction between reserves and provisions for known liabilities. The Court disagreed with the Tribunal's decision and allowed the appeal, stating the assessing authority was correct in including the provision in the book profit.

In conclusion, the High Court allowed the appeal, with no order as to costs.

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