Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

The assessee claimed deduction u/s 80HHC of the Income-tax Act, 1961 and after setting off unabsorbed loss and depreciation of the preceding years, the assessee filed a nil return for the A.Y. 2004-05 and declared the book profits under the provisions of section 115JB. The Assessing Officer made various disallowances in his order u/s 143(3).

The Commissioner (Appeals) deleted the addition made on account of bad and doubtful debts holding that the provision for bad and doubtful debt was not a provision for a liability but for diminution in value of assets and therefore, clause (c) of the Explanation to section 115JB would not be applicable. The assessee and the Department filed appeals before the Tribunal. The Tribunal held that since the assessee had simultaneously obliterated the provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year shown the loans and advances on the assets side of the balance sheet as net of the provision for bad debts, it would amount to a write-off and such actual write-off would not be hit by clause (i) of the Explanation to section 115JB.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“The Tribunal was right in deleting the addition on account of the provision for bad and doubtful debts in the computation of the book profits for computation of minimum alternate tax liability in the light of clause (i) of the Explanation to section 115JB. No question of law arose.”