2011 (8) TMI 1209 - HC - Income Tax

Addition while computing the book profit u/s.115JB on account of provision for doubtful debts - Held that - It is not in dispute that the assessee had made the provisions for doubtful debt. In fact the assessee itself had before the Tribunal contended that such provisions for the doubtful debt cannot be added for the computation of book profit for Section 115JA since there is no clause which speaks of adding back such provisions for diminution of value of assets. It is not in dispute that such provisions for doubtful debts would be which amount to diminution of value of assets. That being the position, in our opinion the case of the assessee is squarely covered under the clause (g) to explanation to Section 115JA. We are unable to see any demarcation between the provisions which would reduce the value of the assets against a situation where the value of the assets may come down to Nil . In either case there would be diminution in the value of assets. Even when the value of the assets is brought down to Nil from the previously existing value, it can still be stated that there has been a diminution in the value of the assets. In any case no such facts arise in this appeal.In the result, the question is answered in favour of revenue

Issues Involved:
1. Addition of provision for doubtful debts while computing book profit under Section 115JA of the Income Tax Act.
2. Applicability of statutory amendments with retrospective effect on the provision for doubtful debts.

Detailed Analysis:

Issue 1: Addition of Provision for Doubtful Debts While Computing Book Profit Under Section 115JA

The core issue revolves around whether the provision for doubtful debts should be added to the net profit for computing book profit under Section 115JA of the Income Tax Act. The Tribunal had upheld the assessee's contention that such an amount cannot be included in the book profit of the company under Section 115JA. The Tribunal reasoned that book debts are an asset, and writing them off is a business loss or a reduction in the value of a business asset, not a provision for any unascertained liability.

The Tribunal stated, "Book debts are an asset, and if any are to be written off, they are in the nature of a business loss/reduction in value of business asset. They are certainly not a provision for any unascertained liability. Hence, this addition is deleted."

The Tribunal's decision was influenced by the Apex Court's judgment in the case of HCL Comnet Systems and Services Ltd., which held that provisions for doubtful debt cannot be considered a provision for liability. The Apex Court opined, "The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability."

Issue 2: Applicability of Statutory Amendments with Retrospective Effect on the Provision for Doubtful Debts

The statutory landscape changed with the introduction of Explanation (g) to Section 115JA by the Finance Act of 2009, effective retrospectively from 01.04.1998. This amendment necessitated adding back provisions for diminution in the value of any asset while computing book profit.

The relevant statutory provision reads, "(g) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (g) is debited to the profit and loss account."

The Revenue argued that this amendment rendered the Apex Court's decision inapplicable, as the new clause (g) explicitly includes provisions for diminution in the value of any asset. The court noted, "On the basis of statutory provisions existing at relevant point of time, the Apex Court in the case of HCL Comnet Systems and Services Ltd. (supra) came to the conclusion... With respect to the premature provisions of bad and doubtful debt the Apex Court was of the opinion that the same would not be covered in any of the clauses to the explanation and in particular clause (c) thereof."

The court further elaborated that the amendment was intended to clarify that provisions for diminution in the value of any asset should be added back to the net profit for the purpose of computing book profit. The explanatory notes stated, "A new clause(i) in Explanation 1 after subsection (2) of the said section has been inserted so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit."

The court concluded that the assessee's case falls squarely under clause (g) to the explanation to Section 115JA. Therefore, the Tribunal's decision was reversed, and the question was answered in favor of the Revenue, stating, "In the result, the question is answered in favour of revenue. The decision of the Tribunal to the above extent is reversed."

Conclusion:

The court held that the provision for doubtful debts must be added back to the net profit while computing book profit under Section 115JA, in light of the statutory amendment introduced by the Finance Act of 2009 with retrospective effect. The Tribunal's decision was reversed, and the appeal was disposed of accordingly.

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