The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the amount of provision for bad and doubtful debts reduced from Sundry Debtors Balance won’t be hit by Clause (i) of explanation to Section 115JB of the Income Tax Act, 1961.
M/s. Lupin Limited, the assessee is engaged in the business of manufacture and sale of pharmaceuticals products. The assessee filed its return of income for the year under consideration u/s 139(1) of the Act on 30-09-2009 declaring a total income of Rs.77.29 crores under normal provisions of the Act and declaring book profit of Rs.459.47 crores u/s 115JB of the Act.
The assessee had created a “Provision for bad and doubtful debts” of Rs.23.50 million in the Profit and loss account. While filing the return of income, the assessee computed “book profit” as required u/s 115JB of the Act and the said provision mandates that any “Provision created for diminution in the value of assets” should be added to the Net Profit if it is debited to the Profit and Loss account. The assessee added the above-said amount of Rs.23.50 million to the Net profit as per the above-said provision.
Before the AO, the assessee took a different stand and contended that the “Provision for bad and doubtful debts” should not be added to the Net profit. Since a new claim was made without filing a revised return of income, the AO rejected the same.
The assessee contended that the “Provision for bad and doubtful debts” debited to the Profit and loss account has been reduced from the “Sundry debtors” balance and the net amount of ‘Sundry debtors balance’ was only shown in the “assets side” of Balance Sheet.
It was observed that for computing “book profit” u/s 115JB of the Act, the annual accounts are required to be prepared as per the Companies Act, which requires the preparation of annual accounts as per established accounting policies, and accounting standards.
As per the accounting principles, the expression “Provision for bad and doubtful debts” and “write off of bad debts” connote two different meanings. Under the accounting concept of “Prudence”, it is required to make provision for all known expenses and losses, even if has not been paid.
Further observed that while preparing financial statements, two methods of presentation are followed while preparing Balance Sheet. The first method is to show “Provision for bad and doubtful debts” in the liability side of the Balance Sheet as part of “Provisions and liabilities” and the other method is to reduce the “provision for bad and doubtful debts” from Sundry debtors balance in the Assets side of Balance Sheet.
Clause (i) of Explanation 1 to sec. 115JB states that “the amount or amounts set aside as provision for diminution in the value of any asset” should be added to the Net profit while computing book profit.
A Coram comprising of Shri B.R. Baskaran (AM) & Smt. Kavitha Rajagopal (JM) held that the amount of “Provision for bad and doubtful debts” if reduced from the amount of “Sundry debtors balance” in the assets side of the Balance Sheet, the same would not be hit by clause (i) of Explanation 1 to sec.115JB of the Act.
The Tribunal set aside the order passed by CIT(A) and directed the AO not to add the amount of Provision for bad and doubtful debts to net profit while computing book profit under section 115JB of the Act.
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