The classification of doubtful debts as reserves under Section 115JA was improper, as the amount was a recoverable asset, not a liability, necessitating adjustment under appropriate provisions.

JUDGMENT :

(Sandeep V. Marne, J.)

1. The Assessee has filed the present Appeal under provisions of Section 260A of the INCOME TAX ACT , 1961 (the Act) challenging the judgment and order dated 31 December 2002 passed by the Income Tax Appellate Tribunal, Mumbai Bench, rejecting the Appeal filed by it to the extent of addition of amount of Rs.2,49,73,218/- in the book profit under clause (b) of Explanation to Section 115JA of the Act. The Income Tax Appellate Tribunal (ITAT) has confirmed the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)], who in turn had confirmed the order of the Assessing Officer by treating the provision made by the Assessee towards doubtful debt/advances as ‘reserves’ under clause (b) instead of treating the same as ‘provision’ made for meeting liabilities under clause (c) by modifying the order of the Assessing Officer to this limited extent.

2. The Appeal has been admitted by order dated 2 November 2004 on following substantial question of law:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that the provision for doubtful debts/advances of Rs.2,49,73,218/- was a “Reserve” and therefore, the book profit had to be increased by the said amount under clause (b) of the Explanation to section 115JA of the Act?

3. The Assessee was an Export House recognized by the Ministry of Commerce and engaged inter alia in the business of export of medicines, bulk drugs, pesticides and agricultural products to the countries belonging to erstwhile Russian Federation. The Assessee had exported medicines to Regal International Inc. of USA between November 1995 to May 1996 and out of sum due of Rs.3,82,11,388/-, the said concern had paid only an amount of Rs. 1,46,83,760/- to the Assessee upto 31 March 1997. The balance due amount of Rs.2,35,27,628/- remained unpaid inter alia on the ground that the goods did not conform to the warranty contracted for the quality of the goods and the quality of goods were not acceptable to the Russian Test Labs. The Appellant filed Civil Suit against Regal International Inc. in the Superior Court of New Jersey for recovery of said amount of Rs.2,35,27,628/- corresponding to US $ 6,88,948.29. In the above background, the Assessee Board decided to treat the sum of Rs.2,49,73,218/-, including the sum due from Regal International Inc., and some other debts, as doubtful recovery and for making a provisions for diminution in the value of the debts, it created a provision for doubtful debts/advances in respect of the said amount. Accordingly, in the Profit and Loss Account prepared for the concerned year, the Assessee debited an amount of Rs.2,49,73,218/- as “provision for doubtful debts/advances”. The Assessee’s accounts were audited by the statutory auditors and were filed with the Registrar of Companies without raising of any objection by anyone. The settlement was arrived at between the Assessee and Regal International Inc., under which Assessee received various amounts in the assessment years 2000-2001, 2001- 2002 and 2002-2003, which was approximately 50% of the amount actually due.

4. The Assessing Officer however passed Assessment Order dated 28 February 2000 holding that provision f