2011 (8) TMI 766 - HC - Income Tax

Applicability of Explanation (c) to Section 115JB(1)(MAT) - Provisions made for Bad and Doubtful debts - Held That - Beside debiting Profit & Loss A/C and creating a provision assessee also reduces the amount from Loan & advances and at the end only net amount is shown in asset side - Therefore when bad or doubtful debts is reduced from the loan & Advances Explanation to Section 115JA or 115JB is not at all attracted. - In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. - Decided in favor of assessee.

Summary

Issues:
Challenge to addition of provision for doubtful debts in computing book profits under Section 115JB of the Act.

Analysis:
The case involved an appeal by the revenue challenging the Tribunal's decision upholding the Appellate Commissioner's view regarding the addition made by the Assessing Authority on account of provision for doubtful debts claimed by the assessee. The appeal pertained to the assessment year 2004-05, where the assessee contended that the debts provided as doubtful debts should not be added back to book profits under Section 115JB as they were not provisions for unascertained liabilities. The Appellate Authority agreed with the assessee, holding that bad and doubtful debts cannot be added to book profits under Section 115JB. The Tribunal also dismissed the revenue's appeal, leading to the current appeal.

The main substantial question of law considered was whether provisions for bad and doubtful debts could be added back under Explanation (c) to Section 115JB(1) of the Act. The assessee had shown a significant amount as doubtful debt in the balance sheet, which was claimed as bad debts written off. The Assessing Authority added this provision for doubtful debts to book profits, but the Appellate Commissioner and the Tribunal disagreed, stating that such provisions were not contemplated under Explanation (1) to the said provision. The Court analyzed Section 115JB, a special provision for tax payment by certain companies, and explained that doubtful debts written off were not mentioned in the Explanation as part of arriving at book profit. Therefore, the appellate authorities were justified in setting aside the addition made by the Assessing Officer.

The Court further delved into the nature of the debt in question, distinguishing between debts payable and receivable by the assessee. It was clarified that provisions for bad and doubtful debts made to cover diminution in the value of assets, specifically debt receivable by the assessee, did not constitute provisions for liability. The Court emphasized that for provisions to be added back under Item (c) of the Explanation, they must be made for unascertained liabilities, which was not the case here. The judgment referenced relevant case law to support the position that the provision for doubtful debts in this scenario did not fall within the ambit of Item (c) of the Explanation.

Ultimately, the Court rejected the revenue's arguments, stating that the retrospective amendment and the explanation provided in the case law highlighted the distinction between actual write-offs and provisions for bad and doubtful debts. The Court emphasized that if bad debts or doubtful debts were reduced from loans and advances or debtors on the assets side of the balance sheet, the Explanation to Section 115JA or JB would not apply. Consequently, the benefit granted to the assessee by the Tribunal and the Appellate Commissioner was upheld, and the appeal was dismissed in favor of the assessee.