23.3     Shri Poddar has further contended that the expression reserve and capital reserve has also been specified by clause 7(b) and 7(c) of Part-III which mean as under :-

(b) the expression reserve shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability;

(c) the expression capital reserve shall not include any amount regarded as free for distribution through the profit and loss account; and the expression revenue reserve shall mean any reserve other than a capital reserve.

23.4     Shri Poddar has thereafter contended that the above provision as laid down in Schedule-VI of Companies Act has to be understood with the help of various legal interpretations as laid down in various dictionaries for Accountants and the authority.  He thereafter has first referred to the dictionary for accountants by Eric L Kohler, for the meaning of the word provision, wherein it reads as under :-

Provision 1 -   A charge for an estimated expense or loss or for a shrinkage in the cost of an asset offsetting an addition to a valuation account such as a reserve or accumulation of depreciation or the accrual of a liability such as an income tax.

2. (British usage) (a)  An amount entered on the books of account covering an estimated or accrued liability.  (b) The amount of a reserve for depreciation, bad debts or inventory decline; a valuation account.

23.5     He has thereafter referred to the black law dictionary for the meaning of provision, which reads as under :-

Foresight of the chance of an event happening, sufficient to indicate that any present undertaking upon which its assumed realization might exert a natural and proper influence was entered upon in full contemplation of it as a future possibility.

In commercial law. Funds remitted by the drawer of a bill of exchange to the drawee in order to meet the bill, or property remaining in the drawees hands or due from him to the drawer, and appropriated to that purpose.

In ecclesiastical law.  A nomination by the pope to an English benefice before it became void; the term was afterwards indiscriminately applied to any right of patronage exerted or usurped by the pope.

In French law. An allowance or alimony granted by a judge to one of the parties in a cause for his or her maintenance until a definite judgment is rendered.

In English History.  A name given to certain statutes or acts of parliament, particularly those intended to curb the arbitrary or usurped power of the sovereign, and also to certain other ordinances or declarations having the force of law.

A term used in the reign of Henry III. To designate enactments of the King in Council. Perhaps less solemn than statutes.  The term statutes was a later term with a changed conception of the solemnity of a statute, and is one that cannot easily be defined.  It came into use in Edward I.s reign, supplanting provisions which is characteristic of Henry IIIs reign, which had supplanted assize, characteristic of the reign of Henry II. Richard and John Maltland, 2 Sel. Essays in Anglo-Am. Leg. Hist.80

23.6.    He has also referred to para 13.14 of guidance notes and terms used for financial statements by the Institute of Chartered Accountants of India which specify the provisions as under :-

Provision

An amount written off or retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability the amount of which cannot be determined with substantial accuracy.

23.7     Shri Poddar has also stated that the word reserve has been defined by the I.C.A.I. vide its guidance notes at para 14.04 as under :-

Reserve :- The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.  The reserves are primarily of two types : capital reserves and revenue reserves.

24.       It has been pleaded by the ld. Senior Counsel Shri N.K. Poddar that for the better understanding of the nature of provision for bad and doubtful debts, it is useful to read both reserve and provision together and has pointed out that these two expressions have been elaborately discussed and interpreted in the books of accountancy by various famous authors and authorities in the field of accountancy and has annexed the extract of such books in the paper book, wherein the word reserve and surplus has been interpreted and is being reproduced hereunder for the better convenience :

Reserves and Provisions (Extract from Books of Accountancy

Written by William Pickles (Third Edition)(1)  Reserves amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of balance sheet.

(2) Provisions amounts set aside out of profits and other surpluses to provide for-

(a) depreciation, renewals, or diminution in value of assets, or

(b) any known liability of which the amount cannot be determined with substantial accuracy.

It follows therefore that

(1) Any amount set aside for the purposes described in (2)(a) and (b) (above) in excess of estimated requirements much be regarded as a reserve and

(2) Sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy do not fall within the definition of a provision and should therefore be described as accruals or accrued liabilities.

Reserves are in effect part of the undistributed profits of the business and therefore part of the proprietorship, whereas provisions and accruals are a diminution of proprietorship in the form of a liability or diminution of an asset.  The former are broadly appropriations of, the latter charges against profits.

25.       Ld. Senior  Counsel Shri Poddar has thereafter pointed out that the terminology provision for bad and doubtful debts has been interpreted by Spicer & Pegler, 17^th Edition in their book Book Keeping and Accounts and has annexed the extract of such book, wherein the provision for bad debts has been defined as under :-

When a debt is found to be irrecoverable, it should be written off as a loss by means of a journal entry debiting bad debts account and crediting the account of the defaulting debtor.  At the end of the accounting period the bad debts account is closed by transfer to the Profit and Loss Account.  Should a debt which has been written off as bad be subsequently recovered, in whole or in part, the debtors personal account should be debited and bad debts account credited, the cash received then being credited to the debtors account.  This is preferable to posting the amount recovered direct from the cash book to the credit of the bad debts account without making any entry in the debtors personal account, since it is desirable, for future reference, that this account should contain a full history of the occurrence.

After all debts which are known to be irrecoverable have been written off, there may still be some doubtful accounts for which it would be prudent to provide.  A provision for bad or doubtful debts may be calculated either by reference to the amounts of the specific debts which are regarded as doubtful, or by way of a percentage on the total debts outstanding.  In many businesses experience shows that the percentage of bad debts to outstanding debtors does not fluctuate widely from year to year and in such cases this method may, as a rule quite safely be employed.

25.1     Mr. Poddar has also elaborately pointed out the approach of various Court on the basis of the following judgment :-

(i)         Metal Box Company of India Ltd. vs.- Their Workmen [1969] 73 ITR 53      (SC);

(ii)        Vazir Sultan Tobacco Co. Ltd. vs.- CIT [1981] 132 ITR 559 (SC);

(iii)       CIT vs.- Eyre Smelting Pvt. Ltd. [1979] 118 ITR 857 (Cal.);

(iv)       CIT vs.- Jugantar P. Ltd. [1981] 128 ITR 619 (Cal.);

(v)        CIT vs.- Echjay Forgings Pvt. Ltd. [2001] 251 ITR 15 (Bom.);

(vi)       Apollo Tyres Ltd. vs.- CIT [2002] 255 ITR 273 (SC);

(vii)      M.J. Exports Ltd. vs.- JCIT [2004] 88 ITD 18 (Mum.).

26.       Concluding his argument, Shri Poddar has submitted that Explanation (c) to Section 115JA(2) is not applicable in case of assessee in view of clause (7)( of Part-III of Companies Schedule, wherein the word provision has clearly been defined a any amount written of or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.  Shri Poddar has submitted that from the above definition and interpretation as mentioned elaborately in different text books of accountancy pointed out by him, it is apparent that the provision in this case is intended to meet the anticipated diminution of the value of assets of the assessee, resulting from unrealized debts and since the contingencies were anticipated at the date of balance-sheet and the amounts set apart from this item duly existed at the date of the balance-sheet, which has to be deducted for computation of book profit under Section 115JA. Shri Poddar has thereafter referred to his paper book and submitted that the issues involved in the case of both the assessee i.e. Balmer Lawrie and Indian Containers are similar which have been referred to in this Special Bench by the Honble President, which should be decided in favour of assessee taking into consideration the various decisions of Tribunal and High Courts and after due interpretation terminology as defined in various books of accountancy in this regard.

27.       Replying to the above argument, Ld. Senior D.R. Shri S.K. Jain has submitted that the Honble Chennai High Court has already elaborately discussed the issue involved before this Special Bench in case of Beardsell Limited (supra), wherein it was clearly held by the Honble Madras High Court that the provision for bad debts falls under clause (c) to the Explanation (1) of sub-section (2) of section 115JA of the Act.  Shri Jain has pointed out the above decision of the Honble Madras High Court was made against the order passed under section 143(1)(a), which strengthen the plea of the revenue in treating such provision as unascertained liability as the Honble Chennai High Court ha found such adjustment prima facie correct even in case of intimation under section 143(1)(a).

28.       The Ld. D.R. Shri Jain has thereafter submitted that the provision for bad and doubtful debts has to be treated as unascertained liability and has submitted following reason in support of his argument :-

(a) The assessee has not written off such bad debts in the books of accounts;

(b) Such provisions for bad and doubtful debts were not deduced from the respective ledger account;

(c) The assessee offered the same for taxation purpose while filing computation of income;

(d) Honble Chennai High Court has dealt with the issue in an elaborate way and such decision of the Honble Madras High Court has not been overruled by the

(e) The decision of this Bench in ITA No. 2189/Cal./1995 dated 18.11.2002 in case of ICI India Ltd. is squarely applicable to the present case as the same has been passed even after considering and discussing the decision of Echjay Forgings Pvt. Ltd. by Honble Mumbai High Court which has been relied heavily by the ld. counsels for different assessees, whereas the judgment of Usha Martin High Court;

(f) The decision of Eichar Motors relied by ld. counsel for assessees, has been passed without considering the decision of Honble Madras High Court;

(g) The case laws relied by Shri Poddar are not applicable.

(h) Ld.Senior D.R. Shri Jain has alternatively submitted that if clause is held to be inapplicable, then clause (b) should be invoked which says for disallowance of reserve made by the assessee.  The provision made by the assessee for bad & doubtful debt is in the nature of reserve, though it is termed as provision.  Therefore, the same is liable for addition to book profit as per clause (b) of Sec. 115AJ of the I.T. Act.

 29.       Shri Poddar in his reply has submitted that the Honble Chennai High Court has not dealt with the entire issue and has pointed out that the High Court in case of Beardsell Ltd. has not dealt with the distinction between assets and liabilities because it was not argued before the Court.  He has pointed out that even otherwise ITAT Pune Bench in case of ICI Ltd. has dealt with the issue elaborately after taking into consideration the various case laws and by interpreting various terminology used in the books of accountancy, Income Tax law and the Company Law.  It has, therefore, been pleaded by Shri Poddar that the issue has to be decided in favour of assessee.

 30.       We have carefully considered the rival submissions and perused the material placed before us.  We will first take up the Revenues appeal in the case of M/s. Usha Martin Industries Ltd.  In this appeal by the Revenue, the following ground has been raised  :-

 The Ld. CIT(A) erred in holding that the sum of Rs.1,56,00,000/- being provision for Doubtful debts, Advances & Investment and Rs.1,25,000/- being provision for wealth-tax could not be added back to the net profit for the purpose of computing the book profit within the meaning of Section 115JA of the I.T. Act since the same do not fall under any of the Clauses (a) to (f) of the Explanation-2 of Sec.115JA(2) of the Act.

 31.       The facts of the case are that the assessee has filed a return disclosing total loss of Rs.38,76,70,250/-.  The A.O. determined the net loss at Rs.18,64,93,786/-.  The A.O. further found that the net profit disclosed by the assessee as per P/L Account was Rs.14,51,90,597.  He, therefore, determined the book profit as per Sec.115JA and charged the tax on the book profit as per Sec.115JA.  The computation of the book profit made by the A.O. reads as under :-

 Computation of profit u/s. 115JA

of the I.T. Act, 1961 :

 Profit as per profit & loss a/c.                                           Rs.14,51,90,597/-

Add: a) Provision for doubtful debts, 
            Advances and investments-

            as discussed.                            Rs.15600000

            b) Provision for wealth-tax as

            per accounts.                            Rs.   125000                Rs.   1,57,25,000/-

                                                Book Profit                          Rs.16,09,15,597/-

30% thereof                                                                     Rs.4,82,74,680/-

Tax payable u/s.115JA @ 43%                                            Rs. 2,07,58,112/-

32.       Before the C.I.T.(A), the assessee challenged the addition of Rs..56 crores and Rs.1,25,000/- made by the A.O. Both the above additions were deleted by the C.I.T.(A).  Hence this appeal by the Revenue.

 33.       We will first take up the addition with regard to provision for doubtful debts amounting to Rs.1.56 crores.  Sec. 115JA as it stood at the relevant time reads as under : -

 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 this Act in respect of any previous year relevant to the assessment year commencing on or after the 1^st 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 to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent 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 provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) :

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the 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 adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial 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 for the relevant previous year prepared under sub-section (2), as increased by

(a) the amount of income-tax paid or payable, and the provision therefore; or

(b) the amounts carried to any reserves by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by, -

(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account.

      Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1^st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or

(ii) the amount of income to which any of the provisions of Chapter  III applies, if any such amount is credited to the profit and loss account; or

(iii)the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

      Explanation.- For the purposes of this clause, the loss shall not include depreciation; or

(iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or

(v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-clause (b) or sub-clause (c) of clause (iv) of sub-section (2) of section 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (5) of section 80-IA; or

(vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined under sub-section (12) of section 80-IA, and subject to fulfilling the conditions laid down in sub-section (4A) of section 80-IA; or

(vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulate losses.

       Explanation.- For the purposes of this clause, net worth shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); [or]

       [(viii) the amount of profits eligible for deduction under section 80HHC, computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in sub-sections (4) and (4A) of that section;

 (ix) the amount of profits eligible for deduction under section 80HHE, computed under sub-section (3) of that section.]

 (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section or sub-section (3) of section 74A.

 (4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.

 34.       From the above it is evident that the provision of Sec. 115JA has an over-riding effect upon the other provisions of the Income-tax Act.  It is applicable only in the case of a company.  As per this section, the A.O. has to first compute the total income of the assessee as per the provisions of the income-tax Act.  Thereafter, he has to compute 30% of the book profit..  Then he has to compare total income as computed as per the provisions of I.T. Act with 30% of book profit computed as per Sec. 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-sec.(2) the assessee has to prepare the P/L Account for the relevant previous year in accordance with the provisions of Parts-II & III of Schedule-VI to the Companies Act.  The Explanation defines the words book profit which Means net profit as shown in the P/L Account for the relevant previous year.  Such book profit has to be increased by the items No. (a) to (f) of the Explanation if they are debited to the P/L Account and from such profit items No. (i) to (ix) of the Explanation are to be reduced.  The figure arrived at after the above exercise would be the book profit of the assessee for the relevant previous year.

35.       Honble Apex Court has examined the powers of the A.O. while computing the book profit for the purpose of Sec.115J in the case of Apollo Tyres Ltd. (supra), wherein Their Lordships observed as under :- 

The Assessing officer, while computing the book profits of a company under section 115J of the Income-tax, 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 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 III of Schedule VI to the Companies Act in section 151J was made for the limited 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 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 the 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 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 Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. 

36.       From the above it is evident that the A.O. has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts-II & III of Schedule-VI to the Companies Act, which are certified by the Auditors and approved by the company in the general meeting.  He has only the power of examining whether the books of accounts are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act.  The A.O. does not have the jurisdiction to go behind the net profit shown in the P/L Account except to the extent provided in the Explanation given in Sec. 115J.  The above observation of the

given with reference to Sec.115J would be squarely applicable with regard to the provision of Sec.115JA also because both the provisions are parimateria.

 36.1     It was contended by the Ld. D.R. that the assessee itself added the provision for bad and doubtful debt while computing its total income.  Therefore, the same should also be included in the book profit for the purpose of Sec.115JA.  We are unable to accept this contention of the Ld. D.R. because the computation of total income for the purpose of I.T. Act is not relevant while computing the book profit.  As we have already observed that the A.O. has to prepare two parallel computation one for determining the book profit as per Sec.115JA.  While computing the total income, he has to make the additions and allow deductions as per provisions of the Income-tax Act.  However, those additions or deductions as permissible under the various provisions of the Income-tax Act would not be relevant while determining the book profit.  While determining the book profit.  While determining the book profit, additions/deductions are to be made as given in the Explanation.  The assessee might have added the provision for bad and doubtful debt while determining its total income, because the deduction for the provision for bad and doubtful debt is not permissible while computing the total income for the purpose of Income-tax Act.  However, merely because the deduction of provision for bad and doubtful debt is not allowable in computing the total income of the assessee would be no ground for including the same in the book profit.

 37.       It was further contended by the Ld. D.R. that for the purpose of computing the net profit for Directors remuneration u/s.349 of the Companies Act, the assessee itself has included the provision for bad and doubtful debt in the net profit.  In this regard, he referred to page-17 of the Revenues paper book.  He contended that when for the purpose of Companies Act the assessee itself has included the provision for bad and doubtful debt in the net profit, the same has also be included for the purpose of computing the book profit, because for the purpose of Sec.115JA the assessee has to prepare the P/L Account and balance sheet as per the provisions of the Companies Act.  We find that the assessee has computed the net profit for computing the Directors remuneration as under :-

                                                                                            For the year

Ender 31^st

March, 1977

                                                                                  (Rupees in Thousands)

16  SCHEDULE OF COMPUTATION OF NET PROFIT IN

ACCORDANCE WITH SECTION 349 OF COMPANIES

ACT, 1956 FOR THE PURPOSE OF DIRECTORS

REMUNERATION FOR THE YEAR ENDED 31^ST

MARCH 1977.

Profit before Taxation as per Profit and Loss Account                                   14,62,80

Add: Depreciation as per Account                                                    8,07,65

        Loss on sale of Fixed Assets as per Account                                  3,06

        Provision for Doubtful debts, Advances and                              1,56,00

                                                            Investments

Provision for Wealth tax as per Account                                         1,25

Profit on sale of Fixed Assets considering                                       1,28            9,69,24

            Depreciation under Section 350                                                          24,32,04

Less: Depreciation under Section 350                                                                     12,12,86

Add : Directors Remuneration                                                                                 56,39

                                                                                                                                12,7557

38.       We find that Sec.198 of the Companies Act provides overall maximum limit for managerial remuneration payable to the Directors which is at 11% of the net profit of the company computed in the manner laid down in Secs.349 to 351 of the Companies Act.  Section 349 of the Companies Act reads as under :-

Determination of net profits.

349.(1) In computing for the purpose of section 348, the net profits of a company in any financial year-

(a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for those specified in sub-section (3); and

(b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.

(2) In making the computation aforesaid, credit shall be given for the following sums :-bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs.

 (3) In making the computation aforesaid, credit shall not be given for the following sums:-

(a) profits, by way of premium, on shares or debentures of the company, which are issued or sold by the company;

(b) profits on sales by the company of forfeited shares;

(c) profits of a capital nature including profits from the sale of the undertaking or any of the undertakings of the company or of any part thereof;

(d) profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets;

[Provided that where the amount for which any fixed asset is sold exceeds the written down value thereof referred to in section 350, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value.]

(4) In making the computation aforesaid, the following sums shall be deducted:-

(a) all the usual working charges;

(b) directors remuneration;

(c) bonus or commission paid or payable to any member of the companys staff, or to any engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis;

(d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits;

(e) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in its behalf;

(f) interest on debentures issued by the company;

(g) interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets;

(h) interest on unsecured loans and advances;

(i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;

(j) outgoings [inclusive of contributions made under clause (e) of sub-section (1) of section 293];

(k) depreciation to the extent specified in section 350;

(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

(m) any compensation of damages to be paid in virtue of any legal liability, including a liability arising from a breach of contract;

(n) any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m);

(o) debts considered bad and written off or adjusted during the year of account.

(5) In making the computation aforesaid, the following sums shall not be deducted:-

(a) the remuneration payable to the managing agent;

(b) income tax and super tax payable by the company under the Indian Income-tax Act, 1922 (11 of 1922), or any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

(c) any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability such as is referred to in clause (m) of sub-section (4);

(d) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess referred to in the proviso to section 350 of the written down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value.

39.       From the above it is evident that as per Sec.349 of the Companies Act, various items are to be included into and excluded from the net profit as disclosed in the P/L Account.  However, for the purpose of computation of book profit u/s.115JA, the assessee has to first prepare the P/L Account as per Parts-II & III of Schedule-VI to the Companies Act and thereafter makes adjustment as provided in Explanation to Sec. 115JA.  That the adjustments required to be made to the net profit disclosed in the P/L Account for the purpose of Sec.349 of the Companies Act are quite different than the adjustment required to be made under Explanation to Sec.115JA of the I.T. Act.  Therefore, merely because some item debited to P/L Account is required to be added to the net profit for the purpose of computing the Directors remuneration, it is not necessary that the same is to be included in the book profit for the purpose of Sec.115JA.  For the purpose of Sec.115JA, the A.O. can increase the net profit determined as per P/L Account prepared as per Parts-II & III of Schedule-VI to the Companies Act only to the extent permissible under Explanation thereto.  The Explanation has provided six items, i.e. items No. (a) to (f) which if debited to the P/L Account can be added back to the net profit for computing the book profit.  The provision for bad and doubtful debt has been debited to the P/L Account.  Therefore, it can be added back to the net profit if it falls within any of the items provided under the Explanation.  As per Revenue, it falls within the category of item (c) and alternatively within item No.(b).  We will first deal with item No. (c) which reads as under :-

The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities

Thus, the assessees case would fall within the ambit of item (c) if (i) the amount is set aside to any provision; (ii) the provision is made for meeting liability; and (iii) the provision should be for other than ascertained liability, i.e. it should be for unascertained liability.  All the above three ingredients should be satisfied so as to bring the provision within the ambit of item (c) of the Explanation to Sec. 115JA.

40.       In the case of the assessee it is not in dispute that a sum of Rs.1.56 crores has been set aside as provision for bad and doubtful debts.  Therefore, now the question remains whether this provision is for meeting the liability?  If answer is yes, whether such liability was unascertained liability.

41.       It is vehemently contended by the Ld. D.R. that the provision of bad and doubtful debt is a provision for unascertained liability, in support of which heavy reliance has been placed upon the decision of Honble Madras High Court in the case of DCIT vs. Beardshell Ltd. (supra) and the decision of I.T.A.T., Kolkata Bench in the case of ICI India Ltd. vs. DCIT (supra).

41.1.    In the case of Beardshell Ltd. (supra), the assessee is a public sector company which filed the return showing total income of Rs.33,49,950 computed as per the provisions of Sec.115J of the I.T. Act.  The A.O. in the order passed u/s. 143(1)(a) added the provision created by the assessee for bad and doubtful debt amounting to Rs.46,64,750/- on the ground that the provision made is not for the ascertained liabilities.  The assessee-company filed the petition u/s.154 for rectification of the order passed by the A.O. u/s.143(1)(a) of the I.T. Act.  The same was rejected by the AO.  The C.I.T.(A) also upheld the order passed by the A.O.  On appeal, the I.T.A.T. deleted the addition.  On further appeal by the Revenue, Their Lordships of Madras High Court allowed the Revenues appeal and held at page 259 of 244 I.T.R. as under :-

The only contention raised by the appellant herein is that the sum of Rs.46,64,750 is not an ascertained liability to be excluded in the profit and loss account for the relevant previous year under section 115J of the Act and that, therefore, the Tribunal was not right in directing the assessing authority to rectify the alleged mistake of inclusion of the above said amount in the book profit under section 154 of the Act.  Learned counsel appearing for the respondent company contends contra stating that the provision made for bad and irrecoverable debt in the return has to be sustained by the assessing authority and he has not right to make adjustment to include the same in the book profit, under section 143(1)(a) of the Act and, therefore, the Tribunal was right in setting aside the order of the Commissioner of income-tax (Appeals) who sustained the order of the assessing authority to include the sum of Rs.46,64,750 in the book profit as an unascertained liability under section 115J (1A)(c) of the Act.  Clause (c) of the Explanation to section 115J of the Act would reveal that book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section(1A) as increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.  It is evident from the above said section that unless a provision is made for ascertained liabilities, the provision made has to be included in book profit, for the purpose of taxation under section 115J of the Act.  The respondent claimed exclusion for the sum of Rs.46,64,750 from the profit and loss account on the ground that the same has been made as provision for irrecoverable debts due to the respondent company.  If a debt has become irrecoverable as claimed by the respondent company the said company ought to have written off the debt and should have deducted it from the profit of the business to the extent written off.  A debt, the recovery of which is doubtful, will not amount to writing off the same by the assessee concerned.  It cannot also be termed to be an ascertained liability as mentioned in section 115J of the Act.

42.       The I.T.A.T., Kolkata Bench in the case of ICI India Ltd. (supra) followed the above decision and held as under :-

6.        We have considered the rival contentions of both the parties and have gone through the orders of the authorities below.  We observe that the A.O. has made a prima facie adjustment of provision made for bad and doubtful debts and advances treating the same as uncertained liability by passing of order u/s.154 of the Act with a view to rectifying the intimation processed u/s.143(1)(a).  We further observe that the CIT(A) has made a categorical finding that the provision for bad and doubtful debts and advances was a provision for unascertained liability thereby attracting the provisions as contained in clause (c) of Explanation to sec. 115J(1A) of the Act.  We further observe that it is not the case of the assessee that the provision made for bad and doubtful debts and advances was for an ascertained bad and doubtful debts.  It is, therefore, clear that the provision for doubtful debts made by the assessee is a liability of an unascertained nature.  A similar issue had come for consideration before the Honble Madras High Court in the case of DCIT vs. Beardsell Ltd. (supra) wherein similar adjustment on account of doubtful debts was made to the net profit in course of processing the return of income u/s.143(1)(a) by treating the same as a provision made for unascertained liability.

43.       However, at the time of hearing before us, it was vehemently contended by the assessees learned counsels, Sri Mitra and Sri Poddar that the provision for bad and doubtful debt is not a provision for meeting the liability.  They also contended that this argument was neither raised before the Honble Madras High Court nor before the I.T.A.T., Kolkata Bench.  Once a provision is not for meeting the liability, the question whether the liability is ascertained or unascertained does not arise.  It was also contended that a provision can be for a diminution in the value of asset and also for meeting the liability.  In support of this contention, reliance has been placed upon the meaning of the word provision given in Companies Act, various dictionaries, Books of Accountancy as well as by the Institute of Chartered Accountants of India.  As per Sec.115JA, the P/L Account is to be prepared as per Parts-II & III of Schedule-VI to the Companies Act.  We find that Part-III of Schedule-VI to the Companies Act defines the expression provision which means any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.  The identical definition of the word provision is given by the Institute of Chartered Accountants of India in the guidance notes issued for its members.  Similar definition is given in the books of accountancy by William Pickles.  Thus, the provision can be for (i) depreciation; (ii) renewals; (iii) diminution in the value of assets; and (iv) for any known liability of which the amount cannot be determined with substantial accuracy.

43.1.    Now the question is whether the provision for bad and doubtful debt is the provision for diminution in the value of asset or for known liability of which the amount cannot be determined with substantial accuracy.  The provision for bad and doubtful debt is made when the assessee is of the opinion that its entire debt may not be realized and part of the debt may become irrecoverable.  However, when the amount of such irrecoverable debt cannot be ascertained with substantial accuracy, the provision is made for bad and doubtful debt.  Debts are of two types.  One debt payable by the assessee i.e. where the assessee has to pay amount to others.  This would be liability in the hands of the assessee.  Second debt receivable by the assessee, i.e. where the assessee has to receive the amount from others. This would be asset in the hands of the assessee. Admittedly, the debt under consideration is debt receivable by the assessee. The provision for bad and doubtful debt would always be made with reference debt to receivable, where there is doubt about full realization of debt. The provision is made to cover up the probable diminution in the value of asset, i.e. debt which is amount receivable by the assessee. The following example would make the position more clear. In the accounts of an assessee there are outstanding debts in the names of several parties totaling to Rs.1 crore. The assessee is of the opinion that the entire debt of Rs.1 crore may not be realized. It opines that only 90% 0f the debt would be realized and, therefore, it made a provision for Rs.10 lacs for bad and doubtful debts. By making this provision, the assessee is valuing its asset, viz., debt, at Rs.90 lacs as against the book figure of Rs.1 crore. Thus, the provision for bad and doubtful debt is the provision for diminution in the value of asset, i.e. debt. The provision for bad and doubtful debt cannot be said to be a provision for liability, because even if the a debt is not recovered, no liability would be fastened upon the assessee. In the above example if as against the outstanding debt of Rs.1 crore only Rs.90 lacs has been realized, then due to non-realization of the debt of  Rs.10 lacs there is no question of any liability upon the assessee. The debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision towards irrecoverability of the debt cannot be said to be provision for liability. Once it is held that the provision for bad and doubtful debt is not a provision for any liability, the question whether the liability is ascertained liability or unascertained liability does not arise.

43.2.    Reverting back to the decision of Honble Madras High Court in the case of Breadshell Ltd. (supra), we find that in the above case the Honble Madras High Court considered whether the provision for bad and doubtful debt is an ascertained liability or is not an ascertained liability. It was never contended before Their Lordships that the provision for bad and doubtful debt is not a liability at all but the provision is only for diminution in the value of asset. Therefore, Their Lordships had no occasion to deal with this vital aspect, i.e. whether the provision for bad and doubtful debt is a provision of the diminution of the value of the asset or a provision of known liability. Similarly, I.T.A.T., Kolkata Bench in the case of ICI India Ltd. (supra) also proceeded with the presumption that the provision made for bad and doubtful debt was a provision for liability and, therefore, relying upon the decision of Honble Madras High Court in the case of Breadshell Ltd. (supra) confirmed the addition in this regard. The learned counsel for the assessee has relied upon the decision of Honble Bombay High Court in the case of CIT vs. Echjay Forgings Pvt. Ltd. (supra). However, we find that in the above case also the question whether the provision for bad and doubtful debt is diminution in the value of the asset or a provision for liability was neither argued nor considered. The Honble High Court deleted the addition because they agreed with the assessees contention that the provision was for ascertained liability. Therefore, the above case would also not be applicable while considering whether the provision for bad and doubtful debt is at all a provision for liability.