Holding

The AO cannot add back a provision for doubtful debts under clause (c) of the Explanation to section 115JA(2) because such a provision is not for a liability.

Summary

The assessee, M/s HCL Com Net Systems & Services Ltd, for Assessment Year 1997-98, debited Rs 92,15,187 as bad debts in its profit and loss account. The Assessing Officer (AO) added this amount back to the book profit under clause (c) of the Explanation to section 115JA(2) of the Income‑Tax Act, treating it as a provision for bad and doubtful debts. The CIT(A), the Income Tax Appellate Tribunal and the Delhi High Court all held that the addition was unwarranted. On appeal, the Supreme Court examined whether the AO could lawfully make such an addition. It held that section 115JA has overriding effect and the AO must accept the authenticity of accounts prepared under the Companies Act, and may adjust net profit only as permitted by the Explanation. Clause (c) applies only to provisions for unascertained liabilities, whereas a provision for doubtful debts relates to a receivable asset, not a liability. Consequently, the AO was not justified in adding back the doubtful‑debt provision, and the appeal was dismissed.

Issues considered

Whether the Assessing Officer 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(2) of the Income‑Tax Act, 1961.

Legislation cited

Companies Act, 1956s. Schedule VI Parts II and III
Income Tax Act, 1961s. 115J, s. 115JA(1), s. 115JA(2)

Subjects

book profitprovision for doubtful debtsection 115JAIncome Tax ActAssessing OfficerCompanies Actdeemed incometax assessment

Judgment

. _~
[2008] 13 S.C.R. 837

COMMISSIONER OF INCOME TAX-IV, DELHI A
II.
M/S HCL COM NET SYSTEMS & SERVICES LTD.
(Civil Appeal No. 5800 of 2008)
> )
SEPTEMBER 23, 2008
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ]

Income TAX ACT, 1961:
s. 115JA(2), Second proviso, Explanation, Clause {c) -
· "Book profit" - Amount set aside as provisions for bad and c
doubtful debt - Added by A. 0. back to "net profit" - HELD:
Provision for bad and.doubtful debt was made to cover up the
debt receivable by the assessee - Such a provision cannot
~ ~
be said to be a provision for liability- Therefore Clause (c) of
the Explanation is not attracted to facts of the case - A. 0. was D
not justified -in adding back the provision for doubtful debt un-
der Clause (q) of the Explanation.
Words and Phrases:
'Book profit', 'debt' - Connotation of in the context of E
s.115JA of Income Tax Act, 1961.
The respondent-assessee, with regard to the assess-
ment year 1997-98, debited an amount of Rs.95,15,187/-
~ on account of bad debts to the 'profit and loss account'.
The A.O. added the said amount back to book profits hold- F
ing that it was a provision for bad and doubtful debts as
per Clause (c) of the Explanation to the second proviso
to sub-section (2) of s.115JA of the Income Tax Act, 1961.
~ut, the Commissioner of Income Tax (Appeals), the In-
come Tax Appellate Tribunal as also the High Court held G
in favour of the assessee.
In the instant appeal filed by the Revenue, the ques-
tion for consideration before the Court was as to whether
837 H
838 SUPREME COURT REPORTS [2008] 13 S.C.R.

A the A.O. was justified in adding back the provision for
doubtful debts of Rs.95, 15, 187/- to the net profit under
Clau~;e (c) of the Explanation to the second proviso to
sub-section (2) of s.115JA of the Income Tax Act, 1961.
Dismissing the appeal, the Court
' .
8
HELD: 1.1 Section 115JA of the Income Tax Act, 1961
which refers to 'deemed income relating to certain com-
panies', has an overriding effect upon other provisions
of the Income Tax Act and is applicable only in the case of
c a company. [para 7] [842-B]
1.2 The AO has to accept the authenticity of the ac-
counts maintained in accordance with the provisions of
Part II and Part Ill of Schedule VI to the Companies Act,
which are certified by the Auditors and passed by the
D company in the general meeting. The AO has 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. He does not have
E the jurisdiction to go beyond the net profit shown in the
profit and loss account except to the extent provided in
the Explanation, and has to make adjustment permissible
under the Explanation given in Section 115JA of the 1961
Act. [para 9] [843 F-G]
F 1.3 The Explanation has provided six items, i.e. Item
Nos.(a) to (f) which if debited to the profit and loss ac-
count can be added back to the net profit for computing
the book profit. In the instant case, the AO resorted to Item
No.(c) which refers to the provision for bad and doubtful
G debt. The assessee's case would fall within the ambit of
Item (c) only if all its ingredients are satisfied, namely, if
the amount is set aside as provision; the provision is made
for meeting a liability; and the provision should be for an
unascertained liability. [para 10] [844 C-D]
H
COMMI. OF INCOME TAX-IV, DELHI v. M/S HCL 839
COMNET SYSTEMS & SERVICES LTD.

1.4 A debt payable by the assessee is different from A
the debt receivable by the assessee. In the instant case
"debt" under consideration is "debt receivable" by the
assessee, and not any liability payable by the assessee .
. The provision for bad and doubtful debt, therefore, is made
to cover up the probable diminution in the value of asset, B
i.e. which is an amount receivable by the assessee. 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. Therefore, Clause (c) of
the Explanation is not attracted to the facts of the case. In c
the circumstances, the A.O. was not justified in adding
back the provision for doubtful debts of Rs.92,15,187/-
under Clause (c) of the Explanation to the second pro-
viso to sub-section (2) of s.115JA of the 1961 Act. [para
1OJ [844 F-G 845-A-B]
D
Apollo Tyres Ltd. v. Commissioner of Income-tax [2002)
255 ITR 273 (SC) • referred to.
Case LdW Reference
[2002) 255 ITR 273 (SC) referred to para 8 E

CIVILAPPELLATE JLJR!SDICTION: Civil Appeal No. 5800
of 2008
·-.- From the final Judgment and Order dated 18/5/2007 of
the High Court of Delhi at New Delhi in l.T.A. No. 56 of 2007 F
Naresh Kaushik and B.V. Balaram Das for the Appellant.
M.S. Syali, Peeyoosh Ka)ra, Aseem Mowar, Mallika
Paswal, Mahua C. Kalra and ~agjit Singh Chhabra for the Re-
spondent. G
The Judgment of the Court was delivered by
S. H. KAPADIA, J. Leave granted.
2. The short question which arises for determination in this
civil appeal filed by the Department is : whether AO was justi- H
840 SUPREME COURT REPORTS [2008] 13 S.C.R.

A fied in adding back the provision for doubtful debts of .
Rs.92, 15, 187/- to the net profit under clause (c) of the Explana-
tion to Section 115JA of the Income-tax Act, 1961.
3. In this civil appeal we are concerned with the Assess- ~ .
ment Year 1997-98.
B
4. Assessee-company was engaged in trading in data
communication equipment and satellite communication ser-
vices. During the course of assessment proceedings, the AO
found that the assessee had debited an amount of Rs.92, 15, 187/
c - on account of bad debts to the 'profit and loss account'. How-
ever, 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,

D
1961 ("1961 Act", for short). ., . .
5. 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.
6. At the outset. we quote hereinbelow Section 115JA read
E with clause (c) of the Explanation which defines the expression
"book profit" as under:
"Chapter Xll-8
y

Special provisions relating to certain companies
F
Deemed income relating to certain companies
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
G 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
H
COMMI. OF INCOME TAX-IV, DELHI v. MIS HCL 841
; _. COMNET SYSTEMS & SERVICES LTD. (S. H. KAPADIA, J.]

to tax for the relevant previous year shall be deemed to be A
an amount equal to thirty per c.;ent 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
.• I
provisions of Parts II .and Ill of Schedule V! to the B
Companies Ac_t, 1956 (1 of 1956) : ·
Provided that while preparing prof:t and loss account, the
depreciation shall be calculated on the same method and
. rates which have been adopted for calculating the c
.1· 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 D
~
adopts the financial year under the Companies Act, 1956
(1 of 1956), which is different from the previous year under
the Act, the method arid rates for calculation of depreciation
shall correspond to the method and rates which have been
adopted for calculating the depreciation for such financial 6
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
''"f ·<for the relevant previous year prepared under sub·sectiori F
(2), as increased by-
(a) & (b) xxx xxx xxx
(c) the amount or amounts set aside to provisions
made for meeting liabilities, other than ascertained G
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, - H
842 SUPREME COURT REPORTS [2008] 13 S.C.R.

A (i) to (viii) )()()( )()()( )()()(

(3) and (4) )()()( xxx XX)('

·7. From the above, it is evident that Section 115JA of the
1961 Act which refers to "deemed income relating to certain
B companies" ~1as an overriding effect upon other provisions of I '

the Income-tax Act. It is applicable only in the case of a com-
pany. As pe; Section 115JA, the AO has to first coMpute the
total income of the assessee as per the provisions of the ln-
come··tax Act. Thereafter, he has to compute 30% of the book
c 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 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 pre-
0
pare the 'profit and loss account' for the relevant previous year
in accordance with the provisions of Parts II and Ill of Schedule
VI to the Companies Act. The Explanation defines the words
"book profit" which means "net profit" as shown in the profit and
E loss account for the relevant previous year. Such book profit
has to be increased by Item Nos.(a) to (f) cf the said Explana-
tion 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 re-
duced. The figure arrived at after the above exercise is the book
profit of the assessee for the relevant previous years.
F .,
8. 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:
G "The Assessing Officer, while computing the book profits
of a company under Section 115-J of the Income-tax 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
H accordance with the Companies Act. The Assessing
COMMI. OF INCOME TAX-IV, DELHI v. M/S HCL 843
t-~
COMNET SYSTEMS & SERVICES LTD. [S. H. KAPADIA, J.]

Officer, thereafter, has the limited power of making A
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 B
provisions of Parts II and Ill of Schedule VI to the
Companies Act" in section 11 SJ was made for the limlted
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 c
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
D
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 E
Officer to embark upon a fresh enquiry in regard to the
entries made in the books of account of the company."
9. From the above, it is evident that the AO has to accept
the authenticity of the accounts maintained in acco.rdance with F
'"' the provisions of Part II and Part Ill of Schedule VI to the Com-
panies Act, which are certified by the Auditors and pressed by .
the company in the general meeting. The AO has only the power
of examining whether the books of accounts are duly certified
by the authorities under the Companies Act and whether such
G
books have been properly maintained in accordance with the
Companies Act. The AO does not have the jurisdiction to go
't beyond the net profit shown in the profit and loss account ex-
cept to the extent provided in the Explanation. Thereafter, the
AO has to make adjustment permissible under the Explanation
H
844 SUPREME COURT REPORTS [2008] 13 S.C.R.

A 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 re-
quired to be made under the Explanation to Section 115JA of
B the 1961 Act. For the purposes of Section 115JA, the AO can
incmase the net profit determined as per the profit and loss
account prepared as per Parts II and Ill of Schedule VI to the
Companies Act only to the extent permissible under the Expla-
nation thereto.
C 10. As stated above, the said Explanation has provided
six items, i.e., Item Nos.(a) to (f) which if debited to the profit
and loss account can be added back to the net profit for com-
puting the book profit. In this case, we are concerned with Item

D
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
E 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 Ex-
planation to Section 115JA. In our view, Item (c} is not attr2cted.
F There are two types of "debt". A debt payable by the asaessee
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
G the present case "debt" under consideration is "debt receivable"
by the assessee. The provision for bad and doubtful debt, there-
fore, is made to cover up the probable diminution in the vakie of
asset, i.e., debt which is an amount receivable by the asses-
see. Therefore, such a provision cannot be said to be a provi-
H sion for liability, because even if a debt is not recoverable no
COMMI. OF INCOME TAX-IV, DELHI v. MIS HCL 845
COMNET SYSTEMS & SERVICES LTD. [S. H. KAPADIA, J.]

liability could be fastened upon the assessee. In the present A
case, the debt is the amount receivabie 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 Expianation is not attracted to the facts of th8 present B
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.

11. For the aforestated reasons, there is no merit in this
civil appeal and accordingly the same is dismissed with no or- C
der as to costs.
R.P. Appeal dismissed.