The officer added back my provision for doubtful debts in computing book profit, calling it a provision for an unascertained liability. Is that right?
No, on the Explanation as it then stood. The Supreme Court dismissed the Revenue's appeal and held that clause (c) of the Explanation to section 115JA was not attracted to a provision for doubtful debts of Rs 92,15,187. Clause (c) covers amounts set aside as provision for meeting liabilities other than ascertained liabilities, and every ingredient must be satisfied. A debt receivable is an asset, not a liability: a provision against its irrecoverability covers a probable diminution in the value of an asset, and no liability is fastened on the assessee even if the debt is never recovered. The Assessing Officer was therefore not justified in adding it back.
Decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - B. Sudershan Reddy and S.H. Kapadia, JJ; judgment by S.H. Kapadia, J) on 2008-09-23, reported as AIRONLINE 2008 SC 395; Civil Appeal No. 5800 of 2008 (Supreme Court of India). It bears on section 115JA of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
The case is cited for two things. The first is the classification point - a provision for doubtful debts is a provision for diminution in the value of an asset and not a provision for a liability - which is the analytical starting point for every argument about what may be added back in computing book profit. The second is the discipline the Court imposes on the exercise: applying Apollo Tyres, the Assessing Officer may only check that the accounts are certified and properly maintained under the Companies Act, has no jurisdiction to go behind the net profit shown in the profit and loss account, and may make only the increases and reductions the Explanation itself allows. Anyone arguing about an addition to book profit should start by asking whether the item is squarely within a lettered clause, because nothing else will do.
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The assessee traded in data communication equipment and provided satellite communication services. For assessment year 1997-98 it debited Rs 92,15,187 to the profit and loss account on account of bad debts. The Assessing Officer, treating this as a provision for bad and doubtful debts, added the amount back to book profit under clause (c) of the Explanation to section 115JA. The Commissioner (Appeals) allowed the assessee's appeal, the Tribunal affirmed that, and the Delhi High Court dismissed the Revenue's appeal by judgment dated 18 May 2007 in ITA No. 56 of 2007. The Revenue appealed to the Supreme Court.
The appeal was dismissed with no order as to costs. Clause (c) of the Explanation to section 115JA was not attracted, and the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs 92,15,187 in computing book profit.
The Court set out the machinery of section 115JA: the officer computes total income under the Act, computes thirty per cent of book profit, and if the latter is higher it is deemed to be the total income. Book profit is the net profit shown in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act, increased by the items in clauses (a) to (f) where debited to that account and reduced by the items in clauses (i) to (ix). Applying Apollo Tyres, decided on section 115J, the officer's power is limited: he may examine whether the books are certified by the authorities under the Companies Act and properly maintained under it, and may then make only the increases and reductions the Explanation provides; he has no jurisdiction to go behind the net profit shown in the accounts or to embark on a fresh enquiry into the entries. The adjustments required for section 349 of the Companies Act are different and do not travel across. Turning to clause (c), it applies only where an amount is set aside as a provision, the provision is made for meeting a liability, and that liability is unascertained; all three ingredients must be satisfied. The Court then distinguished a debt payable by the assessee from a debt receivable by it. The debt here was receivable. A provision against its irrecoverability covers the probable diminution in the value of an asset, and since no liability can be fastened on the assessee even if the debt is never recovered, the provision is not one for meeting a liability at all.
The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee.
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Handle my notice → Ask a CA on WhatsAppNo, on the Explanation as it then stood. The Supreme Court dismissed the Revenue's appeal and held that clause (c) of the Explanation to section 115JA was not attracted to a provision for doubtful debts of Rs 92,15,187. Clause (c) covers amounts set aside as provision for meeting liabilities other than ascertained liabilities, and every ingredient must be satisfied. A debt receivable is an asset, not a liability: a provision against its irrecoverability covers a probable diminution in the value of an asset, and no liability is fastened on the assessee even if the debt is never recovered. The Assessing Officer was therefore not justified in adding it back. This was decided by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - B. Sudershan Reddy and S.H. Kapadia, JJ; judgment by S.H. Kapadia, J) and bears on section 115JA of the Income Tax Act 1961. It is reported as AIRONLINE 2008 SC 395; Civil Appeal No. 5800 of 2008 (Supreme Court of India). The case is cited for two things. The first is the classification point - a provision for doubtful debts is a provision for diminution in the value of an asset and not a provision for a liability - which is the analytical starting point for every argument about what may be added back in computing book profit. The second is the discipline the Court imposes on the exercise: applying Apollo Tyres, the Assessing Officer may only check that the accounts are certified and properly maintained under the Companies Act, has no jurisdiction to go behind the net profit shown in the profit and loss account, and may make only the increases and reductions the Explanation itself allows. Anyone arguing about an addition to book profit should start by asking whether the item is squarely within a lettered clause, because nothing else will do. If it applies to you, the first step is this: Test every proposed addition to book profit against the exact words of the clause relied on, and insist that all its ingredients are met before anything is added back.
The assessee traded in data communication equipment and provided satellite communication services. For assessment year 1997-98 it debited Rs 92,15,187 to the profit and loss account on account of bad debts. The Assessing Officer, treating this as a provision for bad and doubtful debts, added the amount back to book profit under clause (c) of the Explanation to section 115JA. The Commissioner (Appeals) allowed the assessee's appeal, the Tribunal affirmed that, and the Delhi High Court dismissed the Revenue's appeal by judgment dated 18 May 2007 in ITA No. 56 of 2007. The Revenue appealed to the Supreme Court. The matter was decided on 2008-09-23 by the Supreme Court (Supreme Court of India, Civil Appellate Jurisdiction - B. Sudershan Reddy and S.H. Kapadia, JJ; judgment by S.H. Kapadia, J). On those facts the Supreme Court held as follows. The appeal was dismissed with no order as to costs. Clause (c) of the Explanation to section 115JA was not attracted, and the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs 92,15,187 in computing book profit.
The Court set out the machinery of section 115JA: the officer computes total income under the Act, computes thirty per cent of book profit, and if the latter is higher it is deemed to be the total income. Book profit is the net profit shown in the profit and loss account prepared under Parts II and III of Schedule VI to the Companies Act, increased by the items in clauses (a) to (f) where debited to that account and reduced by the items in clauses (i) to (ix). Applying Apollo Tyres, decided on section 115J, the officer's power is limited: he may examine whether the books are certified by the authorities under the Companies Act and properly maintained under it, and may then make only the increases and reductions the Explanation provides; he has no jurisdiction to go behind the net profit shown in the accounts or to embark on a fresh enquiry into the entries. The adjustments required for section 349 of the Companies Act are different and do not travel across. Turning to clause (c), it applies only where an amount is set aside as a provision, the provision is made for meeting a liability, and that liability is unascertained; all three ingredients must be satisfied. The Court then distinguished a debt payable by the assessee from a debt receivable by it. The debt here was receivable. A provision against its irrecoverability covers the probable diminution in the value of an asset, and since no liability can be fastened on the assessee even if the debt is never recovered, the provision is not one for meeting a liability at all. In the words reproduced by the source cited on this page: "The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee."
It was decided by the Supreme Court on 2008-09-23 and is reported as AIRONLINE 2008 SC 395; Civil Appeal No. 5800 of 2008 (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 115JA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with no order as to costs. Clause (c) of the Explanation to section 115JA was not attracted, and the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs 92,15,187 in computing book profit. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 115JA of the Income Tax Act 1961, and was decided by Supreme Court of India, Civil Appellate Jurisdiction - B. Sudershan Reddy and S.H. Kapadia, JJ; judgment by S.H. Kapadia, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Classify the item first: a provision against an amount receivable is a provision for diminution in the value of an asset, not for a liability. Rely on Apollo Tyres to resist any attempt to go behind the certified accounts; the officer's power is confined to the adjustments the Explanation permits. Check the Explanation as it stood for your assessment year before relying on this case, since the clauses have been added to since.
Superseded by amendment. Superseded by retrospective amendment on the clause (c) question; not overruled, and much of it survives. Parliament answered this line of authority by giving provisions for diminution in the value of an asset a clause of their own: clause (g) in the Explanation to s.115JA and clause (i) in Explanation 1 to s.115JB, both inserted by the Finance (No. 2) Act, 2009, with retrospective effect from 1 April 1998 and 1 April 2001 respectively. Clause (i) is in force and reads "the amount or amounts set aside as provision for diminution in the value of any asset,". The dating comes from the Full Bench of the Gujarat High Court in CIT v Vodafone Essar Gujarat Ltd (Tax Appeal No. 749 of 2012, 4 August 2017), which records that the two clauses were introduced with retrospective effect from those dates and that, with clause (i) in place, this decision no longer avails against such an addition. So do not run this case on its own against an addition made under clause (i) of Explanation 1 to s.115JB or under clause (g) of the Explanation to s.115JA. The item now sits inside a lettered clause, and the answer given here — that clause (c) is not attracted because no liability is fastened on the assessee — no longer disposes of the addition. Four things survive. First, the classification itself: a provision against a debt receivable covers a probable diminution in the value of an asset and not a liability. That analysis was not disturbed; it was accepted and legislated around, and it remains the foundation of the later law, including the Gujarat Full Bench's write-off against provision distinction, under which a provision simultaneously obliterated by reducing debtors or loans and advances on the asset side is an actual write-off outside clause (i). Second, the Apollo Tyres discipline restated here: the Assessing Officer may satisfy himself only that the accounts are certified and properly maintained under the Companies Act, has no jurisdiction to go behind the net profit shown in the profit and loss account, and may make only the increases and reductions the Explanation allows. Third, the method — every ingredient of the clause relied on must be made out before anything is added back. Fourth, on this appeal's own year: s.115JA applied from AY 1997-98 while clause (g) took effect only from 1 April 1998, so AY 1997-98 appears to lie outside the retrospective reach. That is untested and should be checked. Whatever the year, read the Explanation as it applies to it before citing this case. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists section 115JB and clause (i) of the Explanation as well. The judgment concerns section 115JA alone and clause (c) of its Explanation; section 115JB is not mentioned in the text and is left out. The judgment does not say why the Commissioner (Appeals), the Tribunal or the High Court decided as they did, only that they held against the Revenue, and it does not record whether the amount was in fact a write-off or a provision beyond noting the Assessing Officer's view. The reasoning is confined to clause (c) and the Court did not consider any other clause of the Explanation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with no order as to costs. Clause (c) of the Explanation to section 115JA was not attracted, and the Assessing Officer was not justified in adding back the provision for doubtful debts of Rs 92,15,187 in computing book profit.
TaxSphere, “CIT v HCL Comnet Systems & Services Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-hcl-comnet-systems-services-ltd/ (validity last checked 2026-08-29)
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The Assessing Officer computed interest under s.234B and s.234C first and only then gave me credit for MAT under s.115JAA. My refund has turned into a demand. Is that the right order?
My company paid no advance tax because we only knew we would fall under MAT once the accounts were audited — is interest under sections 234B and 234C still chargeable on the tax on book profit?
The Assessing Officer has added our provision for bad and doubtful debts to book profit under clause (i) of Explanation 1, relying on the retrospective 2009 amendment. We reduced the provision from sundry debtors on the asset side. Does that make a difference?
The Assessing Officer has raised a MAT demand on my client bank for an assessment year before 2013-14. Can section 115JB apply at all to a company whose accounts are prepared under the Banking Regulation Act?
