2016 (6) TMI 651 - HC - Income Tax

MAT computation - Provisions made for Bad and Doubtful debts - Held that - As besides debiting the P&L a/c and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and, consequentially, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the P&L as/c but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s. 115JA or JB is not at all attracted. See Yokogawa India Ltd. 2011 (8) TMI 766 - KARNATAKA HIGH COURT

Summary

Issues Involved:
1. Maintainability of the appeal based on tax effect.
2. Interpretation of provisions and accounting standards regarding bad debts write-off and provision for diminution in the value of assets.

Issue 1: Maintainability of the appeal based on tax effect:
The High Court considered the objection raised by the office regarding the maintainability of the appeal due to the tax effect being less than the prescribed limit. The appellant argued that a previous decision of the Court allowed for maintainability even if the tax effect was below the limit, citing a common order of the Tribunal where the tax effect exceeded the limit. The Court, after considering this argument, decided to proceed with the main matter despite the objection.

Issue 2: Interpretation of provisions and accounting standards regarding bad debts write-off and provision for diminution in the value of assets:
The appellant-Revenue raised substantial questions of law regarding the treatment of provisions for bad debts and their impact on the balance sheet and profit and loss account. The Tribunal's decision was analyzed, where it was observed that the provision for bad debts, when deducted from gross debtors, was considered equivalent to a bad debt write-off. The Court referred to previous judgments and accounting standards to support its decision, emphasizing the distinction between actual write-offs and provisions for bad debts. The Court concluded that the issue was already covered by a previous decision and did not find any substantial question of law for consideration, dismissing the appeal subject to any different view by the Apex Court in the future.

In summary, the High Court addressed the maintainability of the appeal based on the tax effect and interpreted provisions and accounting standards regarding bad debts write-off and provision for diminution in the value of assets, ultimately dismissing the appeal based on the previous decision and lack of substantial legal questions for consideration.