2018 (4) TMI 1133

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..../MDS/2004 for the assessment year 2000-01. 3. This appeal has been admitted on the following substantial questions of law: "1. Whether the Appellate Tribunal is correct in law in concluding that the provisions created for sub standard, doubtful and for loss of assets claimed as a deduction, were not allowable in the computation of book profits in terms of Section 115 JA of the Act? 2. Whether the Tribunal is correct in law in sustaining the action of the respondent in making the disallowances under consideration in the computation of book profits under Section 115 JA of the Act even though such a claim was accepted by the respondent in the immediately preceding assessment year on scrutiny" 4. It is not in dispute tha....

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....ny, it would be "reasonable and legitimate to assume" that in the course of its business, "it is bound to have" bad and doubtful debts for which "it may" in anticipation, make a provision in the balance-sheet by having a separate fund or an account to meet such anticipated liability. We are afraid that the aforesaid assumption is totally unjustified and proceeds on mere surmises and conjectures. This is not a case, when at the time fund is earmarked, there is a known liability - one which has either arisen or anticipated legitimately, by the assessee - and the fund to meet such eventuality cannot be treated as "reserves". The observations of this Court that the liability should be one "which has actually arisen or is anticipated legitimatel....

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....n the aforementioned decision, the Hon'ble Supreme Court pointed out that, the question is, whether the liability was known or anticipated on the date when the balance sheet was prepared and the question is not whether the assessee can anticipate or reasonably anticipate on the date when the balance sheet was prepared about the bad and doubtful debts . Further, the Hon'ble Supreme Court pointed that the High Court was in error in surmising that the assessee being a banking company is bound to get 'bad and doubtful debts'. 6. In a subsequent decision in the case of Commissioner of Income Tax vs. HCL Comnet Systems & Services Ltd., reported in (2008) 305 ITR 0409, the Hon'be Supreme Court held as follows: "10. ....

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....ch 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 irrecoverability 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 of Rs. 92,15,187/- under clause (c) of the Explanation to Section 115JA of the 1961 Act." 7. It was p....