Reversal of excess provision for doubtful debts deductible in book profit calculation

Brief of the case:

• The Hon’ble Himachal Pradesh High Court in the case of CIT vs. M/s Himachal Pradesh State Industrial Development Corporation Ltd. held that the excess provision for bad and doubtful debts written back by way of credit to Profit and Loss A/c is deductible while arriving at the book profits.
• It is an effective credit to P&L A/c and not merely a book adjustment.

Facts of the case:

• For AY 2004-05, the assessee had claimed that a debit of Rs. 1,64,47,026/- in the P&L account on account of bad debts written off and writing back Provision made for Bad & Doubtful Debts of Rs. 2,38,41,187/- in financial years 1997-98 to 2002-03.
• Assessee claimed the deduction of amount of Provision for Doubtful Debts written back under Explanation 1(i) to Sec 115JB (2). AO did not allowed the such deduction from book profits.
• ITAT allowed the appeal of assessee by following its own decision in the assessee’s case for AY 2003-04.
• Against the order of ITAT , the revenue is in appeal before Himachal Pradesh High Court.

Contention of the Assessee:

• The deduction was claimed as per explanation 1(i) to Sec 115JB because the provisions were created only after April 1, 1997 so the exception provided by the explanation won’t apply in the assessee’s case.
• The written back of provision was an effective credit to P&L A/c and a book adjustment because the excess provision had been written back after utilizing the same from current year’s bad debts written off.

Contention of the Revenue:

• Amount withdrawn from reserve for doubtful debts created in the earlier years credited to the P&L account could not be deducted from the book profit for the purposes of section 115JB because such credit merely a book adjustment and not an effective credit.
• Such credit is not a credit in substance and deduction of the same from the book profit would not be in the spirit of the legislature.

Issue before the High Court:

Whether the Provision for Doubtful Debts revered by way of credit to Profit & Loss A/c is an allowable deduction while arriving at book profits?

Held by Hon’ble High Court:

• As per Explanation 1 (i) to Sec 115JB the net profit arrived as per Profit & Loss A/c prepared in accordance with the framework provided in Companies Act to be reduced by the amount withdrawn from any reserve or provision, if such amount withdrawn from the reserve or provision has been credited to the profit and loss account.
• However, this is with exception that if such reserve or provision is out of reserve created prior to or before 1.4.1997 and, such reserve has been created otherwise than by way of debit to the profit and loss account, then the same cannot be reduced from the net profit.
• In the present case, a sum of Rs. 2,38,41,187/- represents the provision for non-performing assets created earlier years (1997-98 to 2002-03) but not pertaining to any year prior to April 1,1997.
• Therefore, in the present case the exception cannot be taken recourse to and the court thus, uphold the order of ITAT and accordingly dismiss the appeal filed by the revenue.