Bombay HC: Provision for Doubtful Debts Not a Reserve Under Section 115JA; Book Profits Cannot Be Increased

The assessee company, engaged in the export of medicines, sold goods worth Rs. 3.82 crore to a USA Client. Out of this, only Rs. 1.47 crore was realised, while Rs. 2.35 crore remained unpaid on account of alleged quality defects. The company treated and added Rs. 2.49 crore towards doubtful debts/advances in its 1996-97 audit. The Assessing Officer added this amount back to book profits under Section 115JA, treating it as a provision for liability.

CIT (A) and ITAT Held: The CIT(A) confirmed the addition done by AO, but under clause (b) as a reserve. The ITAT also upheld the adjustment. The assessee appealed before the High Court, arguing that the entry represented a diminution in the value of receivables (assets) and not any liability, relying on Supreme Court rulings in Apollo Tyres and HCL Comnet.

Issue Raised: Whether a provision for doubtful debts can be added back to book profits under clauses (b) or (c) of the Explanation to Section 115JA for AY 1997-98.

HC’s Decision: The High Court held that the amount set aside for doubtful debts/advances could not be added back to book profits under Section 115JA. The court ruled that such an amount was neither a “reserve” under clause (b) nor a “provision for liability” under clause (c), since it related to receivables, an asset, not a liability. Relying on the Supreme Court’s ruling in CIT v. HCL Comnet Systems and similar precedents, the Court clarified that provisions for diminution in asset value were not covered by these clauses in AY 1997-98. It was further clarified that clause (g), specifically introduced in 1998 to deal with such provisions, applied only prospectively and not retrospectively.

Therefore, the additions made by the AO, CIT(A), and ITAT were set aside, and the appeal was allowed in favour of the assessee.

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