2014 (8) TMI 972 - HC - Income Tax

Deduction for provision for bad and doubtful debts - AO held that in terms of Explanation (c) to the second proviso to section 115JA, the provision for unascertained liabilities is to be added to the book profit and it cannot be claimed as deduction - ITAT deleted the disallowance - Held that - We find no error in the Revenue's plea that the amount claimed as deduction of provision for bad and doubtful debts representing unascertained liability should not be deducted from the book profit for the purpose of determining the income, in view of the retrospective amendment, vide Explanation (g) to section 115JA with effect from April 1, 1998, applicable to the assessment year 1998-99. The decision in the case of CIT v. HCL Comnet Systems and Services Ltd. reported in 2008 (9) TMI 18 - SUPREME COURT will not come to the aid of the assessee in view of the above amendment with retrospective effect as per the Explanatory Notes to the Finance (No. 2) Act, 2009, vide the Central Board of Direct Taxes Circulars mentioned above. - Decided against assessee.

Summary

Issues:
- Interpretation of provision for bad and doubtful debts as deduction in profit and loss account
- Applicability of Explanation (c) to second proviso to section 115JA
- Disallowance of provision for bad and doubtful debts in computing book profits under section 115JA
- Effect of retrospective amendment by Finance (No. 2) Act, 2009 on deduction of provision for bad and doubtful debts

Analysis:

The case involved an appeal against the order of the Income-tax Appellate Tribunal regarding the deduction claimed for provision for bad and doubtful debts in the profit and loss account for the assessment year 1998-99. The Assessing Officer added the provision to the net profit as per the profit and loss account, considering it as unascertained liability under Explanation (c) to the second proviso to section 115JA. The Commissioner of Income-tax (Appeals) ruled in favor of the assessee, stating that the provision for bad debts is not a liability but an adjustment to set off money lost due to bad debts, as per the guidance note of the Chartered Accountant Institute of India.

The Revenue appealed before the Income-tax Appellate Tribunal, which referred to a larger Bench decision of the Calcutta Tribunal, stating that clause (c) of the Explanation to section 115JB is not applicable to the provision for doubtful debts. The Tribunal dismissed the Revenue's appeal based on this interpretation, leading the Revenue to file the present appeal before the High Court.

The High Court modified the question of law to consider the applicability of the Finance (No. 2) Act, 2009 amendment, which inserted clause (i) under Explanation 1 to section 115JA/115JB. The Revenue argued that the retrospective amendment affected the case, citing relevant judgments and circulars. The Court agreed with the Revenue, stating that the provision for bad and doubtful debts should not be deducted from book profit due to the retrospective amendment, answering the question of law in favor of the Revenue.

The Court upheld the appeal, setting aside the Tribunal's order and ruling in favor of the Revenue, emphasizing the impact of the retrospective amendment on the deduction of provision for bad and doubtful debts in computing book profits under section 115JA for the assessment year 1998-99.