2008 (9) TMI 18 - SC - Income Tax

Provision for doubtful debts not addable under Clause (c) of Explanation to Section 115JA; add-back by AO unjustified

SC held that the assessing officer erred in adding back a provision for doubtful debts to book profit under Clause (c) of the Explanation to Section ... Computation of 'book profit' under Section 115JA - Doubtful debts - trading in data communication equipment and satellite communication services - Whether AO was justified in adding back the provision for doubtful debts to the net profit under Clause (c) of the Explanation to Section 115JA - HELD THAT:- It is evident that Section 115JA of the 1961 Act which refers to 'deemed income relating to certain companies' has an overriding effect upon other provisions of the Income-tax Act. It is applicable only in the case of a company. The Explanation defines the words 'book profit' which means 'net profit' as shown in the profit and loss account for the relevant previous year. Such book profit has to be increased by Item Nos. (a) to (f) of the said Explanation if they are debited to the profit and loss account and from such profit Item Nos. (i) to (ix) of the Explanation are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years. It may be noted, that the adjustments required to be made to the net profit disclosed in the profit and loss account for the purposes of Section 349 of the Companies Act are quite different from the adjustment required to be made under the Explanation to Section 115JA of the 1961 Act. For the purposes of Section 115JA, the AO can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the Explanation thereto. In the present case 'debt' under consideration is 'debt receivable' by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards recoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts under Clause (c) of the Explanation to Section 115JA of the 1961 Act. 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.