The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) reverses Principal Commissioner of Income Tax addition of Rs. 1,67,51,026 from doubtful debts to book profit under section 115JB of the Income Tax Act,1961. The ITAT acknowledged the amount as an actual write-off, not just a provision for doubtful debts.
Featherlite Office Systems Pvt. Ltd., ( assessee ) filed its original income tax return for the assessment year 2017-18 declaring Rs.4,66,38,270 as total income. The assessing officer completed the assessment under section 153A r.w.s. 143(3) of the Income Tax Act, 1961.
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A revision notice was issued by the Principal Commissioner of Income Tax ( PCIT ) under section 263 of the Income Tax Act. The PCIT found that the assessee had debited an amount of Rs.1,67,51,026 as a provision for doubtful debts and added the same in the computation of income under the normal provisions. However, it was not considered for computing book profit.
Since the assessing officer failed to examine and verify the book profits calculation under section 115JB of the Income Tax Act, the PCIT held that the assessment order was erroneous insofar as prejudicial to the interest of revenue. The assessee responded that the officer not agreeing with a view, cannot be treated as erroneous or prejudicial to the interest of revenue. The PCIT claimed that merely debiting a bad debt to the profit and loss account would not constitute an actual write-off.
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The PCIT concluded that the provision for doubtful debts should have been added to the book profit based on clause (i) of Explanation 1 to section 115JB. Aggrieved by the PCIT ‘s order, the assessee appealed before the Bangalore Bench of ITAT. The assessee’s counsel argued that the provision for doubtful debts was reduced from trade receivables on the balance sheet, amounting to an actual write-off.
The assessee’s counsel relied on the Supreme Court ruling in the case of HCL Comnet Systems and Services Ltd (2008) which held if a company reduces bad debts from its balance sheet, it’s considered an actual write-off and doesn’t fall under clause (i) of Section 115JB. Merely making a provision without this reduction would be added back to book profits. On the other hand, the revenue counsel supported the PCIT’s Order.
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The two-member bench comprising Beena Pillai ( Judicial Member ) and Waseem Ahmed ( Accountant Member ) referred to a similar case, Karnataka High Court in the case of CIT vs. Kirloskar Systems Ltd. (supra) which held that companies don’t need to add back provisions for bad and doubtful debts to their book profits for tax purposes if these amounts are already accounted for in their financial statements. This prevents double taxation on the same amount.
The Tribunal held that the reduction of Rs. 1,67,51,026 from trade receivables amounted to an actual write-off and not a mere provision for doubtful debts. Thus, the tribunal directed the assessing officer to complete the assessment in light of the observation of this order. The assessee’s appeal was allowed.
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