[Income Tax Act] Amount Indicated In P&L Account As Provision For Doubtful Debts/Advances Cannot Be Treated As "Reserve" U/S 115JA: Bombay HC
The Bombay High Court has ruled that a provision for doubtful debts cannot be treated as either a "reserve" or a "provision for liability" under clauses (b) or (c) of the Explanation to Section 115JA of the Income Tax Act, 1961, and thus cannot be added back to the book profits for the purpose of minimum alternate tax (MAT). The Court accordingly overturned the addition of ₹2.49 crore made...
The Bombay High Court has ruled that a provision for doubtful debts cannot be treated as either a "reserve" or a "provision for liability" under clauses (b) or (c) of the Explanation to Section 115JA of the Income Tax Act, 1961, and thus cannot be added back to the book profits for the purpose of minimum alternate tax (MAT). The Court accordingly overturned the addition of ₹2.49 crore made by the Assessing Officer and upheld by the Tribunal.
A Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne was hearing an appeal filed by M.J. Exports Pvt. Ltd., which had made a provision for doubtful debts in its profit and loss account for the Assessment Year 1997–98.
After a buyer failed to pay the outstanding ₹2.35 crore, the company created a provision for doubtful debts amounting to ₹2.49 crore. While the provision was certified in its books and accepted by statutory auditors, the Assessing Officer added the same back to the book profits under clause (c) of the Explanation to Section 115JA, on the ground that provision for doubtful debts/advances was neither proved to be bad nor was written off as irrecoverable. The CIT(A) concurred with the addition but shifted the basis to clause (b), treating the provision as a "reserve." The ITAT upheld this view.
Setting aside all three orders, the High Court held:
“The said amount was not a 'Reserve' and therefore, the book profit could not be increased by the said amount under clause (b) of the Explanation to section 115JA of the Act.”
The Court observed that the Assessing Officer grossly erred in adding the amount by having recourse to provisions of clause (c) by treating the said amount as a 'provision made for meeting liabilities'. The Court emphasized that the Assessing Officer ignored the fact that the said amount was not a debt payable by the Assessee, but the same was a debt receivable by it. Therefore, the amount did not represent liability of the Assessee but in fact was its asset.
It also rejected the ITAT's reasoning that the amount must be treated as a "reserve" under clause (b) because it was “excessive.” The Court held that if such amounts were already covered under clause (b), the Legislature would not have added a new clause (g). It said:
“If the amount set aside… formed a part of 'reserves' under clause (b), there was no necessity for the Legislature to include such amount in a separate category under clause (g). Clause (g) appears to have been added by the Legislature after noticing that there was no provision in Section 115JA of the Act for adding back the amount set aside by the Assessee for diminution in the value of any assets.”
Since clause (g) did not apply to AY 199-98, the Court concluded that the addition could not be sustained under any part of the Explanation to Section 115JA as it stood during the relevant assessment year.
The Court answered the substantial question of law in favour of the assessee and allowed the appeal.
Case Title: M.J. Exports Pvt. Ltd. v. Joint Commissioner of Income Tax & Anr. [Income Tax Appeal No. 407 of 2003]