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Issues: Whether the Assessing Officer was justified in adding back a provision for doubtful debts of Rs. 92,15,187/- to the net profit under Clause (c) of the Explanation to Section 115JA of the Income-tax Act, 1961 for computing book profit.
Analysis: Section 115JA applies to companies and defines "book profit" as net profit shown in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, subject to specified increases and reductions in the Explanation. The Assessing Officer's power is confined to examining the authenticity and proper maintenance of accounts certified under the Companies Act and making only those adjustments expressly permitted by the Explanation. Clause (c) of the Explanation permits addition of amounts set aside as provisions made for meeting liabilities other than ascertained liabilities. A provision for doubtful debts relates to diminution in the value of an asset (amounts receivable) rather than to a liability payable by the company. All ingredients of Clause (c) must coexist: an amount set aside as a provision; the provision must be for meeting a liability; and the liability must be unascertained. A provision towards receivables does not constitute a provision for meeting a liability payable by the assessee and therefore does not satisfy Clause (c).
Conclusion: Clause (c) of the Explanation to Section 115JA is not attracted to a provision for doubtful debts relating to amounts receivable; the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs. 92,15,187/- to compute book profit.
Ratio Decidendi: For purposes of Section 115JA, the Assessing Officer may only make adjustments expressly permitted by the Explanation; a provision for doubtful debts representing diminution in assets (receivables) is not a provision for meeting liabilities and therefore cannot be added back under Clause (c) of the Explanation to Section 115JA.
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