INCOME TAX ACT, 1961

MAT- Book profit under section 115JB-Adjustment for provision for bad and doubtful debts

Assessee was engaged in manufacturing, trading and distribution of process control instruments and undertaking related services. AO added amount in respect of provision for doubtful debts in computing book profits under section 115JB by treating same as the provision for meeting liabilities other than ascertained liabilities. CIT(A) was of view that the addition for bad and doubtful debts could not be made to the book profit under item (c ) of the Explanation to section 115JB.Tribunal agreed with the finding of CIT(A). Held: The debt was an amount receivable by assessee and not any liability payable assessee, therefore, any provision made towards irrecoverability of the debt could not be said to be a provision for liability. Therefore, item (c) of the Explanation was not attracted to facts of the case. Item (c) in section 115JA and 115JB(1) were identical. In order to attract the Explanation the debt which was doubtful or bad should satisfy requirement contemplated in item (c) of the Explanation. It was amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In this case also the bad and doubtful debt for which a provision was made which was in nature of diminution in value of any asset would not fall within item (c) of Explanation (1). It was in that context CIT(A) as well as Tribunal had granted relief to assessee. Realising fatality of the said argument, it was contended now that item (i) could not amount to satisfaction as provision for diminishing in value of assets was substituted, if case of the assessee falls under item (c). Assessee brought on record judgment of the Apex Court in the case of Vijaya Bank v. CIT (2010) 323 ITR 166 (SC) : 2010 TaxPub(DT) 1825 (SC) where the Apex Court had an occasion to consider this Explanation . It accepted argument on behalf of revenue to the effect that the Explanation made it very clear that there was a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. Mere debit to profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the reason why the Explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under section 36(1)(vii) by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that a mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. This legal position was accepted by the Apex Court. It was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, assessee simultaneously obliterated said provision from its accounts by reducing corresponding amount from loans and advances/debtors on the assets side of balance sheet and consequently, 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 could not be added in order to compute book profit. Therefore, after the Explanation assessee was now required not only to debit the profit and loss account but simultaneously also reduced the loans and advances or debtors from assets side of balance sheet to extent of the corresponding amount so that, the amount of loans and advances/debtors was shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt was reduced from loans and advances or the debtors from the assets side of the balance sheet the Explanation to section 115JA or 115JB was not at all attracted. In that context even if amendment which was made retrospective the benefit given by Tribunal and CIT(A) to assessee was in no way affected. Hence, appeal was dismissed. (Para 8)