Provision for Doubtful Debts Must Be Added Back to Book Profits under Section 115JA, but Infrastructure Deduction Audit Reports Can Be Submitted at the Appellate Stage

By | June 11, 2026
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Provision for Doubtful Debts Must Be Added Back to Book Profits under Section 115JA, but Infrastructure Deduction Audit Reports Can Be Submitted at the Appellate Stage

Issue

  1. Whether a provision for bad and doubtful debts must be added back to the book profits under Section 115JA of the Income-tax Act, 1961 as a provision for the diminution in the value of assets.

  2. Whether the requirement to file an audit report under Section 80IA(7) is directory or mandatory, and whether such a report can be validly furnished for the first time at the appellate stage to claim infrastructure deductions.

Facts

  • Issue 1 (MAT Computation): During the assessment proceedings, the question arose regarding the treatment of a provision made for bad and doubtful debts while calculating the “book profits” for Minimum Alternate Tax (MAT) under Section 115JA.

  • Issue 2 (Deduction Disallowance): The assessee claimed a tax deduction for infrastructure undertakings under Section 80IA but failed to file the mandatory prescribed audit report before the Assessing Officer (AO) completed the assessment.

  • AO’s Action: Relying on the missing documentation, the AO strictly disallowed the Section 80IA deduction.

  • Appellate Compliance: The assessee subsequently obtained and furnished the required audit certificate during the appellate proceedings.

  • Tribunal Decision: The Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, holding that filing the audit report before the appellate authority constituted sufficient compliance.

Decision

  • Provision Added Back (In Favor of Revenue): The Court held that a provision for bad and doubtful debts is fundamentally a provision for the diminution in the value of an asset. Therefore, it must be added back to the net profit while computing “book profits” under Section 115JA.

  • Audit Report is Directory (In Favor of Assessee): The Court held that the filing requirement for the audit report under Section 80IA(7) is directory rather than mandatory.

  • Appellate Submission Permissible: Consequently, the right of the assessee to file the audit report at the appellate stage is legally valid and permissible, even if it was completely absent before the AO prior to the completion of the assessment.

Key Takeaways

  • Strict Asset Diminution Rules for MAT: For the purpose of MAT computations, any provision that directly reduces the value of assets (such as provisions for doubtful debts or receivables) cannot be used to reduce book profits and must be added back to the net profit matrix.

  • Procedural vs. Substantive Compliance: Statutory provisions requiring the filing of audit reports for claiming deductions (like Section 80IA) are regulatory and procedural. The non-filing before an AO does not automatically result in a permanent forfeiture of the substantive tax benefit.

  • Curing Defects at Appeal: Appellate authorities have the power to accept mandatory audit forms to cure procedural defects, provided the assessee meets all the substantive criteria entitling them to the underlying deduction.

HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
Mohan Breweries & Distilleries Ltd.*
DR. G. JAYACHANDRAN and Shamim Ahmed, JJ.
Tax Case Appeal No. 789 of 2008†
APRIL  1, 2026
D.Prabhu Mukunth Arunkumar for the Petitioner. R.Vijayaraghavan and Subbaraya Aiyar Padmanabhan Ramamani for the Respondent.
JUDGMENT
Dr. G. Jayachandran, J. – This Tax Case Appeal has been filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) holding that amounts that have become a bad and irrecoverable debts are allowable as a deduction under Section 115JA of the Income Tax Act and that the filing of an audit certificate before the Appellate Authority is sufficient to substantiate the claim for deduction under Section 80HHC.
2. On considering the grounds of appeal, this Court has framed the following substantial questions of law:-
“1.Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in deleting the addition of Rs.7,49,870/- for bad and doubtful debts in respect of book profits under Section 115JA of the Income Tax Act, 1961?
2.Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the deduction in respect of Section 80IA/80HHC of the Act, even though the audit report has not been filed before the completion of the assessment is valid in law?”
3. The learned counsel appearing for the appellant / Department, with regard to the first question of law, submitted that the provision for bad and doubtful debts must be added back while computing book profits under Section 115JA of the Income Tax Act, 1961. This is in view of Explanation (g) to Section 115JA(2), which was inserted by the Finance (No.2) Act, 2009, with retrospective effect from 01.04.1998.
4. A reading of Section 115JA, shows that it deals with the computation of book profits. The Explanation to the Section clarifies that ‘book profit’ includes any amount set aside as a provision for diminution in the value of any assets. The amendment, which has been given retrospective effect, disallows deductions in respect of provisional diminution in the value of any asset, including bad and doubtful debts.
5. In this context, the contention of the Department that the Tribunal ought not to have deleted the addition of Rs.7,49,870/- towards bad and doubtful debts while computing book profits deserves to be upheld, since the Tribunal failed to consider the impact of the retrospective amendment. Hence, the first question of law is answered in favour of the Revenue and against the assessee.
6. As far as the second question of law is concerned, the issue of submitting an audit report at the appellate stage to substantiate a claim for deduction under Section 80IA(7) is no longer res integra. This issue is covered by the judgment of the Coordinate Bench in TCA.No.966 of 2013, dated 4-4-2022 in the matter of CIT v. Ramco Cements Ltd. , Wherein, the Division Bench held as below:-
“8. Thus, it is crystal clear from the aforesaid provisions that the assessee should furnish the audit report along with his return of income, only pursuant to the amendment by the Finance Act, 2020 with effect from 01.04.2020. Prior to that, the requirement of filing the audit report along with the return of income is not mandatory, but directory and the audit report can be filed at any time before framing of assessment, so as to meet out the requirement of Section 80IA(7). It is also settled law that the taxing statute should be read prospectively and not retrospectively. Applying the said legal proposition to the facts of the present case, wherein it is an admitted fact that the respondent / assessee furnished the audit report during the course of assessment relating to the assessment year 2009-10 and they very well complied with the requirement of Section 80IA(7) for claiming deduction under Section 80IA. Therefore, the CIT(A) allowed the claim of the respondent / assessee, which was also rightly affirmed by the ITAT and the same do not call for any interference at the hands of this Court.”
7. In view of the above judgment, we hold that the requirement of an audit report for the purpose of 80IA(7) is directory and not mandatory. Therefore, the right to file an audit report at the appellate stage is permissible, even if it was not filed before the Assessing Officer prior to the completion of the assessment. Hence, the second question of law is answered accordingly in favour of the assessee and against the Revenue.
8. As a result, this Tax Case Appeal is partly allowed. No costs.