2024 (8) TMI 1120 - AT - Income Tax

Revision u/s 263 - Addition of Provision for doubtful debts to book profit under section 115JB - HELD THAT - PCIT held the assessment order passed u/s.153A bad in law as the AO did not consider the provision for bad debts while computing the book profits u/s. 115JB. In observing so, PCIT relied on the clause (i) of explanation (1) of section 115JB(2) of the act. On perusal of the financials of the assessee, having regard to the profit and loss account and the balance sheet, we note that there is a corresponding reduction from the loans and advances on the asset side of the balance sheet and consequently showing the net of provision for bad debt. Hon ble Supreme Court in case of HCL Comnet Systems and Services Ltd. 2008 (9) TMI 18 - SUPREME COURT has observed that such actual write off would not be hit by clause (i) of explanation to section 115JB. Thus it cannot be only considered as a mere provision of account of bad and doubtful debts debited in the P L account. As noted that in case of CIT vs. Vijaya Bank Ltd. 2008 (9) TMI 18 - SUPREME COURT has also observed that, by debiting to P L Account for provision of bad and doubtful advances and by reducing the same amount from the loans and advances as appearing in the balance sheet there has obliterated the said provision from its accounts and therefore would be an instance of write off and not a mere provision. Hon ble Karnataka High Court in similar situation in case of CIT vs. Kirloskar Systems Ltd. 2013 (12) TMI 9 - KARNATAKA HIGH COURT took the view that, the addition of provision of bad and doubtful debts as per P L account to determine the book profits u/s. 115JB of the act is not warranted. We are of the view that the directions by the PCIT to AO to complete the assessment proceedings afresh in the light of the observations in the impugned order is bad in law. Grounds raised by the assessee stands allowed.

Summary

Issues:
1. Whether the addition of Provision for doubtful debts of Rs. 1.67.51.026 to book profit under section 115JB was justified.
2. Whether the assessment order passed under section 263 of the Act was erroneous and prejudicial to the interest of revenue.

Analysis:
Issue 1: The Appellant contested the addition of Provision for doubtful debts of Rs. 1.67.51.026 to book profit under section 115JB. The Ld.AR argued that the provision was not connected with meeting any liabilities other than ascertained liabilities and was not a mere provision for bad and doubtful debts. The financial records showed a reduction from trade receivables, indicating an actual write-off. The Ld.AR cited relevant case law to support the argument that the provision did not fall under clause (i) of Explanation to section 115JB.

Issue 2: The Ld.PCIT held the assessment order under section 263 as erroneous as the provision for bad debts was not considered while computing book profits under section 115JB. However, the Tribunal disagreed with this assessment. Referring to the financials and legal precedents, the Tribunal concluded that the provision was effectively written off and did not fall under the clause (i) of Explanation to section 115JB. Citing the decisions of the Hon'ble Supreme Court and High Courts, the Tribunal found that the reduction from loans and advances in the balance sheet constituted an actual write-off, not a mere provision. Therefore, the Tribunal allowed the appeal, stating that the directions by the Ld.PCIT to reassess were unfounded in law.

In conclusion, the Tribunal ruled in favor of the Appellant, holding that the addition of the Provision for doubtful debts to book profit under section 115JB was not justified, and the assessment order under section 263 was deemed erroneous and prejudicial to the interest of revenue. The Tribunal found that the provision was effectively written off and did not require inclusion in the book profit calculation under section 115JB. The Tribunal's decision was based on the interpretation of relevant legal provisions and precedents cited during the proceedings.