Only Ascertained Liability and not Mere Provision, is eligible for Adjustment against Book Profit: ITAT [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) in M/s. Southern Power vs. Dy. Commissioner of Income held that Only ascertained liability and not mere provision, is eligible for adjustment against book profit.

The Assessee had made a provision for Rs.22.81 Crores for bad and doubtful debts. However, the Assessing Officer (A.O.) added it back to the book profit holding that it is not an ascertained liability. On appeal, it was explained before the Commissioner of Income Tax (Appeals)(CIT(A)) that the actual loss suffered by the assessee on account of bad debts was Rs.25.43 crores which was written off against the provision for bad & doubtful debts and by debiting the provision by Rs.22.81 crores during the year, the net debit to the P&L A/c during the year was (Rs.25.43 crores – 22.81 crores) Rs.2,54,00,000 only and that there was no excess provision made and that since the actual loss incurred was greater than the provision made, nothing should be added back to book profit under Section 115JB of the Income Tax Act, 1961.

However, the CIT (A) confirmed the addition by observing that subsequent to the amendment to Explanation 1(i) to section 115JB, any provision leading to the diminution in the value of any asset, has to be added to the book profit.

The Bench comprising of Judicial Member P. Madhavi Devi and Accountant Member S. Rifaur Rahman had difference of opinion and thereby the matter was place before the Vice President D. Manmohan who observed “I am therefore of the opinion that the view taken by the Learned Judicial Member is not in accordance with law. At the same time, the view taken by the Learned Accountant Member also deserves to be modified in view of the fact that the grounds of appeal are restricted to disallowance of Rs. 22.89 Crores only. Therefore, there is no claim with regard to the allowance of Rs. 25,43,02,937/- either in the grounds of appeal or Schedule-14. As rightly pointed out by the Learned Departmental Representative the actual claim made by the assessee in the Profit & Loss Account maintained for Company Law purposes cannot be tinkered with by the Assessing Officer but at the same time further benefit cannot be given; In the peculiar facts of the case, I am of the view that the addition made by the Assessing Officer to the tune of Rs. 22.19 Crores is not in accordance with law since this is a part of the ascertained liability which was otherwise adjusted in the provision account separately maintained by the assessee though, while claiming write off, it was restricted to Rs.22.89 Crores. In other words, in principle, I agree with the view taken by the Learned Accountant Member. The assessee is not entitled to further reduction to the book profit but the disallowance of Rs. 22,89,02,937/- deserves to be set aside”