2014 (9) TMI 54 - HC - Income Tax

Provision for debts and nonperforming assets Computation of book profits u/s 115JA Held that - While resorting to the provisions of Section 115JA on the basis that the total income of the company as computed under the Act is less than 30 per cent of its book profits, the AO has to accept the authenticity of the accounts maintained by the company in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956, which are certified by the auditors and passed by the company in its general meeting - The AO has only the power of examining whether the books of account are duly certified and whether such books have been properly maintained in accordance with the Companies Act - Item (c) of the Explanation to section 115JA is not attracted to the provision for bad and doubtful debts. The provision for bad and doubtful debts is made to cover up probable diminution in the value of the assets, i.e., a debt which is an amount receivable by the assessee - Such a provision cannot be said to be a provision for a liability, because even if the debt is not recoverable no liability can be fastened on the assessee - Any provision made towards irrecoverability of a debt cannot be said to be a provision for liability - the provision for bad and doubtful debt is made to cover up the probable diminution in the value of the asset - the assessee has made the provision for the bad debt but without written of the bad debt as per Section-36(1)(vii) of the Act - the deduction is not allowable as claimed by the assessee thus, the order of the Tribunal is set aside and the matter is remitted back to the AO Decided in favour of Revenue.

Issues:
Appeal against order of Income Tax Appellate Tribunal regarding addition to book profit for provision of debts and nonperforming assets under Section 115JA of the Income Tax Act, 1961 for assessment year 1998-99.

Analysis:

1. Interpretation of Section 115JA:
The primary issue in this case revolves around the interpretation of Section 115JA of the Income Tax Act, 1961. The Assessing Officer (A.O.) levied tax on book profit under Section 115JA at 30%, based on the provision for debts and Non Performing Assets (NPA) made by the assessee company. The contention was whether this provision falls under the permissible deductions outlined in the Explanation to Section 115JA. The A.O. argued that the provision for NPA was not covered by the relevant clause, leading to the addition in the assessment. On the other hand, the assessee contended that the provision should be allowed as a deduction while computing book profit under Section 115JA.

2. Application of Explanation to Section 115JA:
The crux of the matter lies in the application of the Explanation to Section 115JA, which outlines specific items that can be added back to the net profit for computing the book profit. The provision for bad and doubtful debts falls under item (c) of the Explanation, which deals with amounts set aside for meeting liabilities other than ascertained liabilities. The key consideration is whether the provision made by the assessee qualifies as a provision for an unascertained liability, as required by item (c) of the Explanation.

3. Distinction between Liability and Asset Value:
A critical aspect of the judgment is the distinction between a provision for liabilities and a provision for asset value. The provision for bad and doubtful debts is made to cover potential diminution in the value of assets, specifically debts receivable by the assessee. It was argued that such a provision does not constitute a provision for a liability since the assessee is not liable even if the debt becomes irrecoverable. This distinction plays a pivotal role in determining whether the provision for bad debts can be added back to the net profit under Section 115JA.

4. Adherence to Statutory Requirements:
The judgment emphasizes the importance of adhering to statutory requirements, particularly the provisions of the Companies Act, 1956, in preparing the profit and loss account for computing book profit under Section 115JA. The Assessing Officer is mandated to verify the authenticity of the accounts maintained by the company in accordance with the statutory provisions, certified by auditors and approved in general meetings. This underscores the significance of following prescribed accounting standards in tax assessments.

5. Decision and Outcome:
After extensive deliberation, the Court ruled in favor of the department, setting aside the Tribunal's order and restoring the A.O.'s decision to add back the provision for bad debts to the book profit. The judgment clarified that the provision made by the assessee did not qualify under item (c) of the Explanation to Section 115JA, as it did not pertain to an unascertained liability. Consequently, the deduction claimed by the assessee was deemed not allowable, leading to the allowance of the department's appeal.

In conclusion, the judgment provides a detailed analysis of the legal provisions governing the computation of book profit under Section 115JA and underscores the importance of adhering to statutory requirements while interpreting tax laws.

← Previous Next →