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Provision for bad debts and book profit u/s 115jb

Vivek Agrawal (GST Practitioner) (181 Points)

04 November 2016

While calculating book profit u/s 115JB, should provision for bad and doubtful debts be added back to profit as per explaination 1(g) to section 115JB (2) i.e. "the amount/amounts set aside as provision for diminution in the value of any asset."

In case of yes - please quote relevant case law

in case of no - please quote relevant case law

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1 Replies

Vishal Goel (Chartered Accountant) (1688 Points)
Replied 05 November 2016

Answer is Yes, For this issue amendment has come in 2009 Budget.

The Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Limited [2008] 305 ITR 409 had held that bad & doubtful debts should be viewed as a diminution in the value of an asset, rather than as provision towards an ‘Unascertained liability’. Such a provision is not a provision for liability because even if the debt is not recovered, no liability can be fastened on the assessee.

The Supreme Court has also pointed out that where the books of account are duly certified as having been maintained in accordance with the Companies Act, the Assessing Officer has jurisdiction only to make such adjustments as provided in the Explanation to section 115JA.

This interpretation was leading to several litigations causing a leakage of the revenue under MAT. To reverse the aforesaid interpretation, the amendment has been introduced w.r.e.f. from A.Y. 2001-02 for section 115JB and from A.Y. 1998-99 for section 115JA.