Book profit adjustments and mercantile accrual: doubtful debt provision excluded, and expatriate cost deductible when liability arose.

Provision for bad or doubtful debts is not to be added back while computing book profits under section 115JA where binding precedent treats such provision as outside the adjustment base, and the Tribunal's deletion of the addition was upheld. Expenditure provision for expatriate cost was deductible in the year of accrual because the liability arose under a valid contract and the assessee followed the mercantile system; Reserve Bank of India approval for remittance, obtained later, affected only payment abroad and did not postpone accrual. The distinction from cases involving an absolute statutory bar was inapplicable, and no substantial question of law arose.

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Issues: (i) Whether the provision made for bad or doubtful debts could be added back while computing book profits under section 115JA of the Income-tax Act, 1961. (ii) Whether the expenditure provision towards expatriate cost was deductible in the year of accrual when Reserve Bank of India approval for remittance was received in a subsequent year.

Issue (i): Whether the provision made for bad or doubtful debts could be added back while computing book profits under section 115JA of the Income-tax Act, 1961.

Analysis: The issue stood covered by binding decisions holding that such a provision does not warrant the addition made by the Assessing Officer for computation of book profits. The Tribunal had deleted the addition in conformity with that settled position.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Issue (ii): Whether the expenditure provision towards expatriate cost was deductible in the year of accrual when Reserve Bank of India approval for remittance was received in a subsequent year.

Analysis: The liability arose from a valid contract and the assessee followed the mercantile system of accounting. Reserve Bank of India permission was required only for remittance abroad and was not a pre-condition for the agreement or for the accrual of liability. The case distinguishing an absolute statutory bar under section 326 of the Companies Act, 1956 was inapplicable.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Final Conclusion: No substantial question of law arose. The Tribunal's order deleting the additions was upheld and the appeal failed.

Ratio Decidendi: Under the mercantile system, a liability accrues when it becomes legally due under the contract, and a later regulatory permission for remittance does not postpone accrual unless the permission is a pre-condition to the very creation of the liability.

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