COMMISSIONER OF INCOME TAX-IV, DELHI v. M/S HCL COM NET SYSTEMS & SERVICES LTD.

The Judgment of the Court was delivered by S. H. KAPADIA, J. Leave granted.

2Copy pinpoint2. The short question which arises for determination in this civil appeal filed by the Department is : whether AO was justi- H

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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.

3Copy pinpoint3. In this civil appeal we are concerned with the Assess- ~ . ment Year 1997-98. B

4Copy pinpoint4. 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). ., . .

5Copy pinpoint5. 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.

6Copy pinpoint6. 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

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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 .,

8Copy pinpoint8. 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 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 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 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."

9Copy pinpoint9. 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

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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.

10Copy pinpoint10. 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 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 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.

11Copy pinpoint11. 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.