Mercantile accounting and MAT adjustments: duty credit exemption taxed in year of issue, but doubtful debt provision disallowed

Customs duty exemption arising on issue of a duty credit certificate was treated as taxable in the year of issue under the mercantile system, because the assessee had credited the exempted amount in that year and the accounting treatment was found proper; the point was decided in favour of the assessee. Provision for doubtful advances and debts was not allowable as a deduction under section 115JB, as the retrospective amendment to Explanation 1(i) with effect from 1 April 2001 governed the computation; this point was decided in favour of the revenue. The overall result was mixed, with no interference on the income-tax treatment of the customs duty exemption.

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Issues: (i) Whether customs duty exemption arising on issue of the duty credit certificate was taxable as income of the year of issue under the mercantile system of accounting. (ii) Whether provision for doubtful advances and debts was allowable as a deduction under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether customs duty exemption arising on issue of the duty credit certificate was taxable as income of the year of issue under the mercantile system of accounting.

Analysis: The exemption related to imported goods covered by a duty credit certificate issued under the relevant export incentive scheme. The assessee followed the mercantile system and credited the exempted amount in the year of issue of the certificate. The assessing authorities had disallowed that treatment, but the Tribunal accepted it. The Court found no error in the accounting treatment or in the Tribunal's view that the amount was accounted for in the proper year.

Conclusion: The question was answered in favour of the assessee and against the revenue.

Issue (ii): Whether provision for doubtful advances and debts was allowable as a deduction under section 115JB of the Income-tax Act, 1961.

Analysis: The question stood covered by the retrospective amendment to Explanation 1(i) to section 115JB with effect from 1 April 2001. In view of that amendment, the provision for doubtful advances and debts could not be allowed as a deduction for the purpose in issue.

Conclusion: The question was answered in favour of the revenue and against the assessee.

Final Conclusion: The appeal succeeded only on the second question and failed on the first, resulting in a mixed outcome with no interference with the Tribunal's decision on the income-tax treatment of the customs duty exemption.

Ratio Decidendi: Where a statutory amendment operates retrospectively, the amended rule governs the determination; and under the mercantile system, the tax treatment of a receipt turns on the year in which the relevant right to receive is recognized and accounted for in accordance with the accepted method of accounting.

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