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2018 (12) TMI 44 - HC - Income TaxMAT - adding back the provision for bad debts in the computation book profits in terms of Section 115JA for the purpose of taxation - Held that - Identical question was answered by this Court in L.R.N.Finance Ltd. vs. Assistant Commissioner of Income-tax, Company Circle, Salem 2018 (4) TMI 1133 - MADRAS HIGH COURT Hon ble Supreme Court in the case of Apollo Tyres Ltd., vs. Commissioner of Income Tax 2002 (5) TMI 5 - SUPREME COURT both Clause (c) and Clause (g) would be inapplicable to the assessee s case. However, we cannot make any observation in this regard, since the effect of the Clause (g) in Section 115JA(2) was never considered by the Tribunal, though on the date when the Tribunal took the decision, the said provision has already been inserted with retrospective effect. Therefore, to take a decision on the said fact, the matter has to be necessarily remanded to the assessing officer for fresh consideration. Further, the contention advanced by the learned counsel for the assessee is that even assuming that the proviso is applicable, then the proviso is not unconditional, as it lays down various parameters, which are required to be fulfilled. Decided in favour of the assessee and against the Revenue.
Issues:
Interpretation of provision for bad debts in book profits for taxation under Section 115JA of the Income Tax Act for the assessment year 1998-99. Analysis: The appeal raised the substantial question of law regarding the correctness of adding back the provision for bad debts in the computation of 'book profits' under Section 115JA of the Income Tax Act. The High Court referred to previous judgments, including one involving State Bank of Patiala, which clarified that if the sums set apart in the balance sheet are 'reserves,' the assessee would be entitled to relief. The Court emphasized that the liability should be 'known' or 'anticipated' when the balance sheet was prepared, not merely 'reasonably anticipated.' It was highlighted that the assumption that a banking company is bound to have bad debts is unjustified. The High Court's error in this regard was pointed out, emphasizing the need for a factual anticipation of liabilities. In a subsequent decision involving HCL Comnet Systems & Services Ltd., the Supreme Court clarified that the provision for bad and doubtful debt can only be added back to net profit under Item (c) of the Explanation to Section 115JA if specific conditions are met. These conditions include the provision being made for an unascertained liability, not a liability payable by the assessee. The Court differentiated between debts payable and receivable, stating that a provision for bad debts covers probable diminution in the value of assets, not a liability. Therefore, the provision for doubtful debts cannot be considered a provision for liability if the debt is receivable by the assessee. The Court concluded that the decisions in State Bank of Patiala and HCL Comnet Systems & Services Ltd. provided clear answers to the substantial questions of law raised in the appeal. The appeal was allowed in favor of the assessee, and the matter was remanded to the Assessing Officer to determine the applicability of an amendment to Section 115JA with retrospective effect. The Court highlighted the need for further consideration regarding the effect of the proviso in Clause (g) of Section 115JA(2) and the parameters laid down in the proviso for its applicability. In summary, the judgment clarified the interpretation of provisions for bad debts in book profits for taxation under Section 115JA, emphasizing the distinction between reserves and provisions, the conditions for adding back such provisions, and the need for factual anticipation of liabilities. The decisions of the Supreme Court provided guidance on these matters, leading to the allowance of the appeal and remand for further assessment.
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