Case Law Details
M/s. Southern Power Distribution Company of Andhra Pradesh Ltd. Vs DCIT (ITAT Hyderabad)
Per Smt. P. Madhavi Devi, J.M.
We find that the assessee has made a provision of Rs.22.81 crores for bad and doubtful debts during the relevant previous year. The AO added it back to the book profit holding that it is not an ascertained liability. The CIT (A) has confirmed the addition by observing that subsequent to the amendment to Explanation 1(i) to section 115JB, any provision leading to diminution in the value of any asset, has to be added to the book profit. The fact is that the assessee has debited the provision for bad and doubtful debts to the P&L A/c and therefore, it has to be added back to the book profit while making the computation of tax payable u/s 115JB of the Act. What the assessee is now seeking is to reduce the book profit by the actual bad debts written off as it has debited the said amount to the provision for bad and doubtful debts A/c and not the profit and loss account. Whether such an adjustment is permissible is to be seen. The Legislature has provided that for computing the income u/s 115JB of the Act, the ‘book profit’ means the net profit as shown in the P&L A/c for the relevant previous year prepared under sub-section (2) and as increased by the items in clauses (a) to (k) under Explanation (1) to section 115JB and thereafter reduced by the items under clauses (i) to (viii) there under. The bad debts written off is not an item under the Explanation (1) to section 115JB of the Act. The assessee’s contentions that the bad debts written off is more than the provision made during the relevant year and therefore, nothing should be added also cannot be accepted for the simple reason that the assessee has prepared its P&L A/c in accordance with the provisions of the Companies Act and the net profit as per such P&L A/c is to be adopted and thereafter the adjustments under the Explanation (1) are to be made. The Hon’ble Supreme Court in the case of Apollo Tyres (cited Supra) has clearly held that the AO has no jurisdiction to tinker with the net profit arrived at under the provisions of the Companies Act. There is also no doubt that the provision made for bad and doubtful debts has to be added back to the net profit. The bad debts written off ought to have been debited to the P&L A/c as per the provisions of the Companies A/c and thereafter the net profit is to be arrived at to which the adjustments under the Explanation (1) are to be made. Where the AO has no jurisdiction to tinker with the accounts of the assessee, likewise the AO has no authority to make an adjustment not provided under the explanation. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue as the assessee has clearly debited the provision of Rs.22.81 crores to the P&L A/c. The assessee’s ground of appeal No.4 is accordingly rejected.
PER S. RIFAUR RAHMAN, A.M.:
In my considered view, the assessee is following regularly the method of accounting as per which the provision is created every year and charged to P&L Account. The actual loss is not charged to P&L Account. But the book profit for the year has to be adjusted to arrive at the actual book profit with the impact on ascertained liability/loss and unascertained liability. The intention of the statute is to determine the actual book profit that is the reason, the Explanation 1 was inserted in the Act. As per the Explanation, the liabilities/loss which does not have an impact is added and assets/gains which also does not have impact on the book profit are eliminated. In particular, the clause (c) of Explanation 1, which is given below:
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