PCIT's revision order adding doubtful debt provision to book profit under section 115JB quashed as bad in law

The ITAT Bangalore held that PCIT's revision order u/s 263 directing AO to add provision for doubtful debts to book profit under section 115JB was bad in law. The tribunal found that when provision for bad debts is debited to P&L account and simultaneously reduced from loans and advances in balance sheet, it constitutes actual write-off rather than mere provision. Relying on SC decisions in HCL Comnet Systems and Vijaya Bank Ltd., and Karnataka HC in Kirloskar Systems Ltd., the tribunal concluded such write-offs are not covered by clause (i) of explanation to section 115JB. The assessee's appeal was allowed.

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Issues:
1. Whether the addition of Provision for doubtful debts of Rs. 1.67.51.026 to book profit under section 115JB was justified.
2. Whether the assessment order passed under section 263 of the Act was erroneous and prejudicial to the interest of revenue.

Analysis:
Issue 1: The Appellant contested the addition of Provision for doubtful debts of Rs. 1.67.51.026 to book profit under section 115JB. The Ld.AR argued that the provision was not connected with meeting any liabilities other than ascertained liabilities and was not a mere provision for bad and doubtful debts. The financial records showed a reduction from trade receivables, indicating an actual write-off. The Ld.AR cited relevant case law to support the argument that the provision did not fall under clause (i) of Explanation to section 115JB.

Issue 2: The Ld.PCIT held the assessment order under section 263 as erroneous as the provision for bad debts was not considered while computing book profits under section 115JB. However, the Tribunal disagreed with this assessment. Referring to the financials and legal precedents, the Tribunal concluded that the provision was effectively written off and did not fall under the clause (i) of Explanation to section 115JB. Citing the decisions of the Hon'ble Supreme Court and High Courts, the Tribunal found that the reduction from loans and advances in the balance sheet constituted an actual write-off, not a mere provision. Therefore, the Tribunal allowed the appeal, stating that the directions by the Ld.PCIT to reassess were unfounded in law.

In conclusion, the Tribunal ruled in favor of the Appellant, holding that the addition of the Provision for doubtful debts to book profit under section 115JB was not justified, and the assessment order under section 263 was deemed erroneous and prejudicial to the interest of revenue. The Tribunal found that the provision was effectively written off and did not require inclusion in the book profit calculation under section 115JB. The Tribunal's decision was based on the interpretation of relevant legal provisions and precedents cited during the proceedings.

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