Court’s Decision
The Bombay High Court allowed the appeal, holding that the provision for doubtful debts towards receivables is not a “reserve” and therefore cannot be added back to book profits under clause (b) of Explanation to Section 115JA of the Income Tax Act. The orders of the Assessing Officer, CIT(A), and ITAT adding ₹2,49,73,218/- to the book profits of the assessee were set aside.
Facts
The appellant, an export house, had exported goods to a US buyer, recovering only part of the payment and treating the unpaid amount of ₹2.35 crore (with others aggregating to ₹2.49 crore) as doubtful debts, creating a provision in its P&L for AY 1997-98. The accounts were audited and filed with the Registrar of Companies without objections. However, the Assessing Officer added back the provision to the book profits under clause (c) of Explanation to Section 115JA, treating it as a provision for unascertained liability. On appeal, CIT(A) held it to be a “reserve” under clause (b), which was affirmed by ITAT. The assessee approached the High Court challenging this addition under Section 260A.
Issues
- Whether the provision for doubtful debts towards receivables is a “reserve” under clause (b) of Explanation to Section 115JA.
- Whether such provision can be added back to book profits for computing MAT liability for AY 1997-98.
- Whether the orders of AO, CIT(A), and ITAT were legally sustainable.
Petitioner’s Arguments
The petitioner argued that the provision made for doubtful debts towards receivables is not a reserve and cannot be added back under clause (b). It relied on Apollo Tyres Ltd. and CIT v. HCL Comnet Systems to argue that MAT computation cannot interfere with audited accounts except as provided under specific clauses and that provisions towards receivables are not unascertained liabilities nor reserves. The petitioner emphasized that clause (g), introduced from 1 April 1998 to add back provisions for diminution in value of assets, was absent for AY 1997-98, reflecting the legislative intent that such amounts were not to be added back under clause (b).
Respondent’s Arguments
The Revenue argued that three authorities had concurrently held against the assessee, and the provision was rightly treated as a reserve under clause (b) since it was an excess provision, which under Clause 7(2) of Schedule VI of the Companies Act could be treated as a reserve. The Revenue further submitted that the AO, CIT(A), and ITAT correctly applied the statutory scheme to add back the amount to the book profits.
Analysis of the Law
The Court analyzed Section 115JA, which requires book profits to be computed as per audited accounts following the Companies Act, with specific permitted adjustments under clauses (a) to (g). It noted that clause (g), regarding provisions for diminution in value of assets, was inserted only from 1 April 1998, indicating that prior to this, such provisions could not be added back under any other clause.
Precedent Analysis
- Apollo Tyres Ltd. v. CIT: Limits the AO’s power to interfere with audited accounts while computing MAT.
- CIT v. HCL Comnet Systems: Clarified that provisions for doubtful debts against receivables are not unascertained liabilities under clause (c).
- CIT v. Peerless General Finance & Investment Company Limited and M/s. EID Parry (India) Ltd. v. ACIT: Affirmed that clause (g) cannot be applied retrospectively for AY 1997-98.
The Court applied these precedents to conclude that neither clause (c) nor clause (b) was applicable for adding back provisions for doubtful debts towards receivables.
Court’s Reasoning
The Court held that the AO erred in invoking clause (c) since the provision was made against receivables and did not represent a liability of the assessee. The CIT(A) and ITAT erred in invoking clause (b) to treat the provision as a reserve, ignoring that the Legislature introduced clause (g) from 1 April 1998 specifically to cover such provisions, which was absent for AY 1997-98, indicating legislative intent to exclude such provisions from MAT adjustments for that period.
Conclusion
The High Court held that the provision for doubtful debts towards receivables was neither a liability nor a reserve under clauses (b) or (c) of Explanation to Section 115JA and could not be added back to book profits for AY 1997-98. The orders of the AO, CIT(A), and ITAT were set aside, and the question of law was answered in favour of the assessee.
Implications
This judgment reinforces that:
- Provisions made towards doubtful receivables are not reserves for MAT computation under Section 115JA.
- The legislative intent behind clause (g) inserted from 1 April 1998 is critical in interpreting MAT adjustments for prior years.
- Revenue cannot add back such provisions for AY 1997-98 under clauses (b) or (c), safeguarding the integrity of audited accounts in MAT computation.
Brief on Cases Referred
- Apollo Tyres Ltd. v. CIT (2002): AO cannot disturb audited accounts except as specified under MAT.
- CIT v. HCL Comnet Systems (2008): Provisions for doubtful debts on receivables are not unascertained liabilities under clause (c).
- CIT v. Peerless General Finance (2016) and EID Parry v. ACIT (2020): Clause (g) is prospective and cannot apply to AY 1997-98.
These cases collectively supported the High Court’s decision, emphasizing correct interpretation of MAT adjustments.
FAQs
1. Can provisions for doubtful debts towards receivables be added back while computing book profits under MAT for AY 1997-98?
No. The Bombay High Court held such provisions cannot be added back under clause (b) or (c) of Explanation to Section 115JA for AY 1997-98.
2. Why was clause (g) of Explanation to Section 115JA relevant in this case?
Clause (g), introduced from 1 April 1998, specifically allowed adding back provisions for diminution in the value of assets, indicating the legislative intent that such adjustments were not permitted for prior years.
3. What is the significance of Apollo Tyres and HCL Comnet Systems judgments in MAT cases?
They restrict the Assessing Officer’s power in MAT computation to specific clauses and clarify that provisions against receivables are not liabilities, preventing improper additions to book profits.