TaxTMI 
TaxTMI 
2025 (7) TMI 684
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....sessing Officer by treating the provision made by the Assessee towards doubtful debt/advances as 'reserves' under clause (b) instead of treating the same as 'provision' made for meeting liabilities under clause (c) by modifying the order of the Assessing Officer to this limited extent. 2. The Appeal has been admitted by order dated 2 November 2004 on following substantial question of law: "Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that the provision for doubtful debts/advances of Rs. 2,49,73,218/- was a "Reserve" and therefore, the book profit had to be increased by the said amount under clause (b) of the Explanation to section 115JA of the Act? 3. The Assessee was an Export House recognized by the Ministry of Commerce and engaged inter alia in the business of export of medicines, bulk drugs, pesticides and agricultural products to the countries belonging to erstwhile Russian Federation. The Assessee had exported medicines to Regal International Inc. of USA between November 1995 to May 1996 and out of sum due of Rs. 3,82,11,388/-, the said concern had paid only an amount of Rs. 1,46,83....
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....ents in the "book profit" which is arrived at on the basis of accounts prepared as per provisions of Companies Act, 1956 and certified as correct by the statutory authorities, except as specifically provided in Explanation to 115JA of the Act. He would rely upon judgment of the Apex Court in Apollo Tyres Ltd. vs. Commissioner of Income Tax (2002) 255 ITR 273 (SC). b) Clause (c) of Explanation to Section 115JA of the Act does not cover provision made for bad or doubtful debt. That the Assessing Officer had erred in treating the amount as provision made for meeting liabilities ignoring the position that the said amount was not the liability of the Assessee but actually its asset. He would rely upon judgment of the Apex Court in Commissioner of Income Tax, Delhi vs. HCL Comnet Systems & Services Ltd. (2008) 174 Taxman 118 (SC) in support of his contention that a debt which is amount receivable by the Assessee cannot be covered by clause (c) of Explanation to Section 115JA of the Act. That the provision made by the Assessee for doubtful debts/advances cannot be treated as amounts carried to any reserve under clause (b) to the Explanation to Section 115JA of the Act. c....
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....absolutely no warrant for interference in the same in exercise of the Appellate jurisdiction by this Court. v) Referring to clause (b) of Explanation to Section 115JA of the Act, he would submit that the provision uses the expression "by whatever name called". That therefore the CIT(A) and ITAT have rightly treated the amounts shown as provision as 'reserves' for the purpose of adding the said amount in the book value. vi) He would also rely upon provisions of clause 7(2) of Part III of Schedule VI of the Companies Act, 1956 in support of his contention that the provision of amount which results into diminution of value of assets has to be treated as 'reserve' and not as a 'provision'. That none of the case laws relied upon by the Assessee are applicable to the facts and circumstances of the present case. vii) That though the amount was clearly recoverable and receivable by the Assessee's from its supply abroad and though the same has actually been recovered by the Assessee, the same was erroneously sought to be excluded from the book value and has rightly been added back by the Assessing Officer, CIT(A) and ITAT. On above broad submissions, Mr. Chhota....
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....eral meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation. For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) the amount of income-tax paid or payable, and the provision therefor, or (b) the amounts carried to any reserves by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or ....
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....4 above, it is seen that the exemption provided in the clause (c) to explanation to sec. 115JA relates only to ascertained liabilities. In this case, provision for doubtful debt/advances has neither been proved to be bad nor has it been written off irrecoverable from the accounts. The said provision is also not towards ascertained liabilities as the assessee is still making efforts to recover the amount. Therefore, the said provision is to be added for determination of book profit u/s 115JA by virtue of clause (c) to Explanation to section 115JA" 13. In Appeal preferred by the Assessee, though the CIT(A) upheld the finding of Assessing Officer for adding back the amount of Rs. 2,49,73,218/-, he deferred with the Assessing Officer in respect of the clause under which the said amount was required to be increased in the book profit. The CIT(A) held that the said amount could not be treated as provision made for meeting liabilities, but is required to be treated as "reserve" under clause (b). The relevant finding recorded by CIT(A) are as under: "15. So far as deduction of Rs. 2,49,73,218 is concerned, I may also refer to Explanation to Sec. 115JA(2) of I.T. Act. It has nar....
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....n clause 7(2) of Part III of Schedule VI to the Companies Act itself. This clause 7 reads as under.- "7 (1) For the purpose of Parts I and II of this Schedule, unless the context otherwise requires,- (a) the expression "provision" shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or dimension in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. (b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability: (c) the expression "capital reserve" shall not include any amount regarded as free for distribution through the profit and loss account and the expression "revenue reserve" shall mean any reserve other than a capital reserve: and in this sub-clause the expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.....
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.... loss account prepared by the Company and certified by the statutory Auditor. The Apex Court has held as under: "The above speech shows that the income-tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income-tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent. of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to ....
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....ing Officer was justified in adding back the provision for doubtful debts of Rs.92,15,187 to the net profit under clause (c) of the Explanation to section115JA of the Income-Tax Act, 1961. 17. The issue is answered by the Apex Court in paragraph 8 as under: "8. As stated above, the said Explanation has provided six items, ie, Item Nos. (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No. (c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee's case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision, the provision is made for meeting a liability; and the provision should be for other than ascertained liability, ie. it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of the Explanation to sectio....
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.... to the Companies Act,1956. 21. The ITAT proceeded to extract the provisions of clause 7 and held that under clause 7(2), any excess amount of provision, even if resulting in diminution in value of assets, has to be treated as 'reserve' and not as a 'provision'. In our view, the ITAT has grossly erred in treating the amount of provision resulting in diminution in value of assets as 'reserve'. Provisions of clause (g) of Explanation to Section 115JA of the Act would indicate that the Legislature made provision for adding back the amount set aside as provision for diminution in the value of any asset by amending Section 115JA of the Act vide Finance Act, 2009 with effect from 1 April 1998. During the assessment year 1997-1998, clause (g) was absent in the Explanation to Section 115JA of the Act. If the amount set aside as provision for diminution in the value of any asset formed a part of 'reserves' under clause (b), there was no necessity for the Legislature to include such amount in a separate category under clause (g). Clause (g) appears to have been added by the Legislature after noticing that there was no provision in Section 115JA of the Act for adding back the amount set as....