2011 (8) TMI 766 - HC - Income Tax

Explanation (c) to Section 115JB(1) requires actual write-off; mere P&L provision without asset reduction does not trigger disallowance

HC held that Explanation (c) to Section 115JB(1) requires an actual write-off: a mere debit to P&L creating a provision does not trigger disallowance. If ... Applicability of Explanation (c) to Section 115JB(1)(MAT) - Provisions made for Bad and Doubtful debts - Held That:- A mere debit to the profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under Section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. The Apex Court in Vijaya Bank [2010 (4) TMI 46 - SUPREME COURT], accepted the said legal position. However it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and, consequentially, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the Impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to Section 115JA or JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. Decided in favor of assessee. Issues:Challenge to addition of provision for doubtful debts in computing book profits under Section 115JB of the Act.Analysis:The case involved an appeal by the revenue challenging the Tribunal's decision upholding the Appellate Commissioner's view regarding the addition made by the Assessing Authority on account of provision for doubtful debts claimed by the assessee. The appeal pertained to the assessment year 2004-05, where the assessee contended that the debts provided as doubtful debts should not be added back to book profits under Section 115JB as they were not provisions for unascertained liabilities. The Appellate Authority agreed with the assessee, holding that bad and doubtful debts cannot be added to book profits under Section 115JB. The Tribunal also dismissed the revenue's appeal, leading to the current appeal.The main substantial question of law considered was whether provisions for bad and doubtful debts could be added back under Explanation (c) to Section 115JB(1) of the Act. The assessee had shown a significant amount as doubtful debt in the balance sheet, which was claimed as bad debts written off. The Assessing Authority added this provision for doubtful debts to book profits, but the Appellate Commissioner and the Tribunal disagreed, stating that such provisions were not contemplated under Explanation (1) to the said provision. The Court analyzed Section 115JB, a special provision for tax payment by certain companies, and explained that doubtful debts written off were not mentioned in the Explanation as part of arriving at book profit. Therefore, the appellate authorities were justified in setting aside the addition made by the Assessing Officer.The Court further delved into the nature of the debt in question, distinguishing between debts payable and receivable by the assessee. It was clarified that provisions for bad and doubtful debts made to cover diminution in the value of assets, specifically debt receivable by the assessee, did not constitute provisions for liability. The Court emphasized that for provisions to be added back under Item (c) of the Explanation, they must be made for unascertained liabilities, which was not the case here. The judgment referenced relevant case law to support the position that the provision for doubtful debts in this scenario did not fall within the ambit of Item (c) of the Explanation.Ultimately, the Court rejected the revenue's arguments, stating that the retrospective amendment and the explanation provided in the case law highlighted the distinction between actual write-offs and provisions for bad and doubtful debts. The Court emphasized that if bad debts or doubtful debts were reduced from loans and advances or debtors on the assets side of the balance sheet, the Explanation to Section 115JA or JB would not apply. Consequently, the benefit granted to the assessee by the Tribunal and the Appellate Commissioner was upheld, and the appeal was dismissed in favor of the assessee.