In a major relief to M.J. Exports Pvt. Ltd., the Bombay High Court has allowed the company’s appeal and set aside orders passed by the Income Tax authorities that had added ₹2.49 crore to its book profits under Section 115JA of the Income Tax Act for the Assessment Year 1997–1998. The addition pertained to a provision made by the company for doubtful debts/advances.
The division bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne ruled that the amount in question representing debts receivable from a U.S.-based buyer that had partially defaulted was not a “reserve” under clause (b), nor a liability under clause (c), of the Explanation to Section 115JA. The Court held that the Assessing Officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal (ITAT) had all erred in categorising the provision as one warranting addition to the company’s book profits.
The company had made the provision after Regal International Inc. defaulted on payment of around ₹2.35 crore for exported goods. Despite partial recovery through litigation in the U.S., M.J. Exports had treated the unpaid portion as a doubtful asset and made a provision for it in its profit and loss account for FY 1996–97.
Rejecting the Revenue’s arguments, the Court relied on Apollo Tyres and HCL Comnet Systems,(2002) 255 ITR 273 (SC), which held that debts receivable by an assessee are assets not liabilities and therefore cannot be reclassified by tax authorities as reserves or liabilities unless explicitly covered by statutory provisions.
The Court particularly noted that clause (g) of the Explanation to Section 115JA which allows addition of provisions for diminution in value of assets was only introduced with effect from April 1, 1998, and did not apply to AY 1997–98.
Answering the substantial question of law in favour of the assessee, the Court held that the addition of ₹2.49 crore to book profits was legally unsustainable. Accordingly, it quashed the assessment and appellate orders to that extent and allowed the appeal.
Appearances in the case:
Appellant (Assessee): Mr. Vipul B. Joshi, with Ms. Drinkle Hariya and Mr. Prashant Ghumare
Respondent (Revenue): Mr. Prakash Chhotaray
