[CIT vs. HCL Comnet Systems and Services Ltd.,
(2008) 305 ITR 409 (SC)].
The assessee-company was engaged in trading in data
communication equipment and satellite communication services. During the
course of assessment proceedings, the Assessing Officer found that the
assessee had debited an amount of Rs.92,15,187 on account of bad debts to the
profit and loss account. However, on the ground that it was a provision for
bad and doubtful debts, the Assessing Officer added the aforestated amount to
the book profits as per Explanation (c) to Section 115JA of the Act.
On appeal, the Commissioner of Income-tax (Appeals) allowed
the assessee’s appeal. That decision of the Commissioner of Income-tax
(Appeals) stood affirmed by the Tribunal and also by the High Court.
On further appeal by the Revenue, the Supreme Court held
that the Assessing Officer does not have the jurisdiction to go beyond the net
profit shown in the profit and loss account except to the extent provided in
the Explanation. The Assessing Officer has to make adjustment permissible
under the Explanation given in Section 115JA of the 1961 Act.
The said Explanation has provided six items, viz.,
item Nos. (a) to (f), which if debited to the profit and loss account can be
added back to the net profit for computing the book profit.
Item (c) deals with amount(s) set aside as provision made
for meeting liabilities, other than ascertained liabilities. The assessee’s
case would, therefore, fall within the ambit of item (c) only if the amount is
set aside as provision; the provision is made for meeting a liability; and the
provision should be for other than an ascertained liability, i.e., it
should be for an unascertained liability. The Supreme Court observed that
there are two types of ‘debt’. A debt payable by the assessee is different
from a debt receivable by the assessee. A debt is payable by the assessee
where the assessee has to pay the amount to others, whereas the debt
receivable by the assessee is an amount which the assessee has to receive from
others. In the present case, the ‘debt’ under consideration was a ‘debt
receivable’ by the assessee. The provision for bad and doubtful debt,
therefore, is made to cover up the probable diminution in the value of the
asset, i.e., debt which is an amount receivable by the assessee.
Therefore, such a provision cannot be said to be a provision for a liability,
because even if a debt is not recoverable, no liability could be fastened upon
the assessee. In the present case, the debt is the amount receivable by the
assessee and not any liability payable by the assessee and, therefore, any
provision made towards irrecoverability of the debt cannot be said to be a
provision for liability. The Supreme Court therefore was of the view that item
(c) of the Explanation was not attracted to the facts of the present case. In
the circumstances, the Assessing Officer was not justified in adding back the
provision for doubtful debts of Rs.92,15,187 under clause (c) of the
Explanation to Section 115JA of the 1961 Act.
