Commr. of Income
Tax-Iv, Delhi Vs. M/S Hcl Comnet Systems & Services Ld. [2008] INSC 1618
(23 September 2008)
Judgment
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
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.
2 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 herein below 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 3 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 4 (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 5 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 6 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 7 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 8 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 9 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)
.................................J.
(B. Sudershan Reddy)
New
Delhi;
September
23, 2008.
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