Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. 5800  OF 2008

(arising out of S.L.P. (C) No. 4575 of 2008)

Commissioner of Income Tax-IV, Delhi        … Appellant

                   versus

M/s HCL Comnet Systems & Services Ltd.    … Respondent

J U D G M E N T

S. H. KAPADIA, J.

Leave granted.

The short question which arises for determination in this

civil  appeal  filed  by  the  Department  is  :  whether  AO  was

justified  in adding  back  the  provision  for  doubtful  debts  of

Rs.92,15,187/-  to  the  net  profit  under  clause  (c)  of  the

Explanation to Section 115JA of the Income-tax Act, 1961.

In  this  civil  appeal  we  are  concerned  with  the

Assessment Year 1997-98.

Assessee-company  was  engaged  in  trading  in  data

communication  equipment  and  satellite  communication

services.  During the course of assessment proceedings, the

AO  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 AO added the aforestated amount

to the book profits as per Explanation (c) to Section 115JA of

the Income-tax Act, 1961 (“1961 Act”, for short).

On  appeal,  the  CIT(A)  allowed  the  assessee’s  appeal.

That decision of CIT(A) stood affirmed by the Tribunal and also

by the High Court vide its impugned judgment dated 18.5.07

in ITA No.56 of 2007.

At the outset, we quote hereinbelow Section 115JA read

with  clause  (c)  of  the  Explanation  which  defines  the

expression “book profit” as under:

“Chapter XII-B

Special provisions relating to certain companies  

Deemed income relating to certain companies

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115JA. (1)  Notwithstanding  anything  contained  in  any other  provisions  of  this  Act,  where  in  the  case  of  an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2)  Every  assessee,  being  a  company,  shall,  for  the purposes of this section prepare its profit and loss account for  the  relevant  previous  year  in  accordance  with  the provisions  of  Parts  II  and  III  of  Schedule  VI  to  the Companies Act, 1956 (1 of 1956) :

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates  which  have  been  adopted  for  calculating  the depreciation  for  the purpose of  preparing the profit  and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):

Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1  of  1956),  which  is  different  from  the  previous  year under  the  Act,  the  method  and  rates  for  calculation  of depreciation  shall  correspond  to  the  method  and  rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation.-For  the  purposes  of  this  section,  "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by-

(a) & (b) xxx xxx xxx

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(c) the amount  or  amounts  set  aside to provisions  made  for  meeting  liabilities, other than ascertained liabilities; or

(d), (e) & (f) xxx xxx xxx;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by, -

(i) to (viii) xxx xxx xxx

(3) and (4) xxx xxx xxx”

 From the above, it is evident that Section 115JA of the

1961 Act which refers to “deemed income relating to certain

companies” has an overriding effect upon other provisions of

the  Income-tax  Act.   It  is  applicable  only  in  the  case  of  a

company.  As per Section 115JA, the AO has to first compute

the total income of the assessee as per the provisions of the

Income-tax Act.   Thereafter,  he has to compute 30% of the

book  profit.   Then  he  has  to  compare  the  total  income  as

computed  as per  the  provisions  of  the Income-tax Act  with

30% of book profit computed as per Section 115JA.  If 30% of

the book profit is more than the total income, then 30% of the

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book profit  shall  be deemed to be the “total  income”  of the

assessee for such previous year.  As per sub-section (2), the

assessee has to prepare the ‘profit and loss account’ for the

relevant  previous  year  in  accordance  with the  provisions  of

Parts II  and III  of  Schedule  VI  to the Companies Act.   The

Explanation defines the words “book profit” which means “net

profit” as shown in the profit and loss account for the relevant

previous year.  Such book profit has to be increased by Item

Nos.(a) to (f) of the said Explanation if they are debited to the

profit and loss account and from such profit Item Nos.(i) to (ix)

of the Explanation are to be reduced.  The figure arrived at

after the above exercise is the book profit of the assessee for

the relevant previous years.

This  Court  has  examined  the  powers  of  the  AO  while

computing the book profits for the purposes of Section 115J in

the case of  Apollo Tyres Ltd. v. Commissioner of Income-

tax – [2002] 255 ITR 273 (SC) which reads as under:

“The  Assessing  Officer,  while  computing  the  book profits  of  a company under  Section  115-J of  the  Income-tax

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Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies  Act.   The  Assessing  Officer,  thereafter,  has  the limited power of making increases and reductions as provided for in the Explanation to section 115J.  The Assessing Officer does  not  have  the  jurisdiction  to  go  behind  the  net  profits shown  in  the  profit  and  loss  account  except  to  the  extent provided  in  the  Explanation.   The  use  of  the  words  “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer  to rely upon  the  authentic  statement  of  accounts  of  the  company. While  so  looking  into  the  accounts  of  the  company,  the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate  the  company  to  maintain  its  accounts  in  a  manner provided  by  that  Act  and  the  same  to  be  scrutinized  and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and  be  satisfied  that  the  accounts  of  the  company  are maintained  in  accordance  with  the  requirements  of  the Companies  Act.   Sub-section  (1A) of  Section  115J  does  not empower the Assessing Officer to embark upon a fresh enquiry in  regard to the entries  made in the books of account of the company.”

From the above, it is evident that the AO has to accept

the  authenticity  of  the  accounts  maintained  in  accordance

with the provisions of Part II and Part III of Schedule VI to the

Companies  Act,  which  are  certified  by  the  Auditors  and

pressed by the company in the general meeting.  The AO has

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only the power of examining whether the books of accounts

are duly certified by the authorities under the Companies Act

and whether  such books  have  been  properly  maintained  in

accordance with the Companies Act.  The AO 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.   Thereafter,  the  AO  has  to  make  adjustment

permissible under the Explanation given in Section 115JA of

the 1961 Act.  It may be noted, that the adjustments required

to be made to the net profit disclosed in the profit and loss

account for the purposes of Section 349 of the Companies Act

are quite different from the adjustment required to be made

under the Explanation to Section 115JA of the 1961 Act.  For

the purposes of Section 115JA, the AO can increase the net

profit determined as per the profit and loss account prepared

as per Parts II  and III  of Schedule VI to the Companies Act

only to the extent permissible under the Explanation thereto.

As stated above, the said Explanation has provided six

items, i.e., Item Nos.(a) to (f) which if debited to the profit and

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loss account can be added back to the net profit for computing

the book profit.  In this case, we are concerned with Item No.

(c)  which refers to the provision for bad and doubtful  debt.

The provision for bad and doubtful debt can be added back to

the net profit only if Item (c) stands attracted.  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

ascertained  liability,  i.e.,  it  should  be  for  an  unascertained

liability.  In other words, all the ingredients should be satisfied

to attract Item (c) of the Explanation to Section 115JA.  In our

view, Item (c) is not attracted.  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

“debt”  under  consideration  is  “debt  receivable”  by  the

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assessee.  The provision for bad and doubtful debt, therefore,

is made to cover up the probable diminution in the value of

asset,  i.e.,  debt  which  is  an  amount  receivable  by  the

assessee.  Therefore, such a provision cannot be said to be a

provision for 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.  Therefore,

in our view Item (c) of the Explanation is not attracted to the

facts of the present case.  In the circumstances, the AO 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.   

For the aforestated reasons, there is no merit in this civil

appeal and accordingly the same is dismissed with no order as

to costs.

……………………………J.                                    (S.H. Kapadia)

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……………………………J.                                               (B. Sudershan Reddy)

New Delhi; September 23, 2008.

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