MAT- Prov for Bad Debts to be allowed for certain lia.

SUPREME COURT OF INDIA Commissioner of Income-tax, Delhi v. HCL Comnet Systems & Services Ltd. S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ. CIVIL APPEAL NO. 5800 OF 2008 SEPTEMBER 23, 2008 Section 115JA of the Income-tax Act, 1961 - Minimum alternate tax - Assessment year 1997-98 - Whether for purposes of computing book profit under section 115JA, provision made by assessee for bad and doubtful debt can be added back to net profit only if clause (c) of Explanation to section 115JA stands attracted - Held, yes - Whether clause (c) of said Explanation is attracted only if amount is set aside as provision; provision is made for meeting a liability; and provision is for an unascertained liability - Held, yes - Whether where debt was amount receivable by assessee, any provision made towards irrecoverability of said debt could be said to be a provision for liability so as to attract clause (c) of Explanation and could be added back to net profit for purpose of computing book profit under section 115JA - Held, no Facts During the relevant assessment year, the assessee-company had made provision for bad and doubtful debts and debited the amount of said provision to the profit and loss account. The Assessing Officer, for the purpose of computing its book profit under section 115JA, added the aforesaid amount to its book profit as per clause (c) of the Explanation to section 115JA. On appeal, the Commissioner (Appeals) allowed the assessee’s appeal. The Tribunal and the High Court affirmed the decision of the Commissioner (Appeals). On the revenue’s appeal to the Supreme Court : Held Section 115JA, which refers to ‘deemed income relating to certain companies’, has an overriding effect upon other provisions of the Act. It is applicable only to the case of a company. As per this section, the Assessing Officer has to first compute the total income of the assessee as per the provisions of the Act. Thereafter, he has to compute 30 per cent of its book profit and then to compare the total income as computed as per the provisions of the Act with 30 per cent of book profit computed under section 115JA. If 30 per cent of the book profit is more than the total income, then 30 per cent of the book profit shall be deemed to be the ‘total income’ of the assessee for such previous year. As per sub-section (2) of said section, the assessee has to prepare the ‘profit and loss account’ for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The Explanation to section 115JA defines the words ‘book profit’ which mean ‘net profit’ as shown in the profit and loss account for the relevant previous year. Such book profit has to be increased by clauses (a) to (f) of the Explanation to said section if they are debited to the profit and loss account and from such profit, clauses (i) to (ix) of the Explanation to section 115JA are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years. [Para 6] In view of the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562, while computing the book profit for the purpose of section 115J, the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, which are certified by the auditors and passed by the company in the general meeting. The Assessing Officer has only the power of examining whether the books of account are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act. The Assessing Officer does not have the jurisdiction to go beyond the net profit shown in the profit and loss account, except to the extent provided in the Explanation thereto. Thereafter, the Assessing Officer has to make adjustments permissible under the Explanation to section 115JA. However, the adjustments required to be made to the net profit disclosed in the profit and loss account for the purposes of section 349 of the Companies Act are quite different from the adjustment required to be made under the Explanation to section 115JA. For the purposes of section 115JA, the Assessing Officer can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the Explanation thereto. [Para 7] The Explanation to section 115JA has provided six clauses, i.e., clauses (a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In the instant case, one is concerned with clause (c) which refers to the provision for bad and doubtful debt which can be added back to the net profit only if clause (c) stands attracted. Clause (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee’s case would, therefore, fall within the ambit of clause (c), only if the amount has been set aside as provision; the provision has been made for meeting a liability; and the provision has been made for other than an ascertained liability, i.e., it has been made for an uncertained liability. In other words, all the ingredients should be satisfied to attract clause (c) of the Explanation to section 115JA. There are two types of ‘debt’; a debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where it has to pay the amount to others, whereas the debt receivable by the assessee is an amount which it has to receive from others. In the instant case, ‘debt’ under consideration was ‘debt receivable’ by the assessee. The provision for bad and doubtful debt, therefore, was made to cover up the probable diminution in the value of asset, i.e., debt which was an amount receivable by the assessee. Therefore, such a provision could not be said to be a provision for liability, because even if a debt was not recoverable, no liability could be fastened upon the assessee. In the instant case, since the debt was the amount receivable by the assessee and not any liability payable by it, any provision made towards irrecoverability of the debt could not be said to be a provision for liability. Therefore, clause (c) of the Explanation to section 115JAwas not attracted to the facts of the instant case. The Assessing Officer was not justified in adding back the provision for bad and doubtful debts under clause (c) of the Explanation to section 115JA for the purpose of computing book profit under section 115JA. [Para 8] Case review CIT v. HCL Comnet Systems & Services Ltd. 172 Taxman 217 (Delhi) affirmed. Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) followed. [Para 7] Case referred to Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) [Para 7]. Naresh Kaushik and B.V. Balaram Das for the Appellant. M.S. Syali, Peeyoosh Kalra, Aseem Mowar, Ms. Mallika Poswal, Ms. Mahua C. Kalra and Jagjit Singh Chhabra for the Respondent.