2017 (9) TMI 51 - HC - Income Tax

Addition being provision for bad and doubtful debts to the book profit for computation of MAT liability - Held that - Applying the findings of the Larger Bench, the question is answered against the Revenue. The assessee had made provision for bad and doubtful debts and the same has been charged to the Profit and Loss Account for the year ended 31st March 2003. In the balance sheet as on 31st March 2003 of the assessee, it can be seen that the provision of bad and doubtful debts has been reduced from the gross debtors and net sundry debtors are shown as asset in the balance sheet. This amounts to actual write off and would not be hit by clause (i) of the explanation to section 115JB. Thus the provision for bad and doubtful debts cannot be termed as a provision for liability but is in the nature of diminution in the value of asset.- Decided in favour of Assessee.

Summary

Issues:
1. Whether the Appellate Tribunal was right in deleting the addition of provision for bad and doubtful debts to the book profit for computation of MAT liability.
2. Whether the judgment in the case of Deepak Nitrite Limited was correctly decided in light of the Supreme Court's decision in the case of Vijaya Bank.

Analysis:
1. The High Court considered the substantial question of law regarding the deletion of the addition of a provision for bad and doubtful debts to the book profit for MAT liability computation. The Division Bench referred a question to the Larger Bench regarding the correctness of the judgment in the case of Deepak Nitrite Limited. The Larger Bench analyzed the situation before and after the insertion of clause (i) to the explanation to Section 115JB. It was clarified that if the provision for bad debt was merely made by debiting the Profit and Loss Account without reducing the corresponding amount from the balance sheet, it would be added back for book profit computation. However, if the provision was simultaneously reduced from the balance sheet, it would amount to a write-off not hit by clause (i) of the explanation. The judgment in the case of Deepak Nitrite Limited fell in the former category, while the case of Indian Petrochemicals Corporation Ltd. fell in the latter category.

2. The tax appeal was placed before the High Court for final disposal based on the opinion of the Larger Bench. The Tribunal noted that the assessee had made a provision for bad and doubtful debts, which was charged to the Profit and Loss Account. The provision was reduced from the gross debtors in the balance sheet, indicating it was in the nature of diminution in the value of the asset. In light of these facts and the findings of the Larger Bench, the question was answered against the Revenue, leading to the dismissal of the Tax Appeal.