2001 (4) TMI 203 - AT - Income Tax

Summary

Issues Involved:
Computation of book profits u/s 115J(1A) for assessment year 1989-90.

Issue 1: Provision for Doubtful Debts

The Assessing Officer disallowed the provision for doubtful debts made by the assessee while computing book profits u/s 115J. The AO observed that the provision was not allowable as a deduction since efforts for recovery were ongoing and the debt was not considered bad or irrecoverable. Consequently, the AO determined the profits at a specific amount, holding a portion as income chargeable to tax.

Issue 1 Details:
- The CIT(A) held that the provision for doubtful debts represented a real loss, not a contingency, and was ascertainable at the time of completing the accounts. The CIT(A) referred to tribunal decisions supporting this view.
- The Revenue appealed to the Tribunal, arguing that the provision for doubtful debts should be added back to the book profits as it was for meeting liabilities other than ascertained ones, as per clause (c) of the Explanation to section 115J.
- The Revenue contended that the provision was not for ascertained liabilities but for contingent ones, emphasizing the ongoing efforts for recovery and the absence of a write-off of the party account.
- The assessee's counsel supported the CIT(A)'s decision, stating that the provision aimed to diminish asset value, not meet a liability. The counsel cited relevant case law and highlighted that a debt could be considered bad without necessarily writing off the party account.

Issue 1 Decision:
- The Tribunal analyzed section 115J and the nature of the provision, concluding that the provision for doubtful debts did not qualify as a provision for liability, especially not an ascertained one. The Tribunal emphasized that the provision did not create an obligation for the assessee to pay any sum, but rather affected asset value due to non-recovery.
- The Tribunal distinguished the case law cited by the Revenue, noting that those decisions proceeded on different assumptions and did not address the specific issue at hand.
- Ultimately, the Tribunal ruled in favor of the assessee, upholding the CIT(A)'s order and dismissing the Revenue's appeal.