2004 (9) TMI 96 - HC - Income Tax

Computation of book profits under section 115J - whether the amount transferred from the revaluation reserve to the profit and loss appropriation account is to be added to the net profit for the purpose of computation of book profits under section 115J or not. - We are satisfied that the order of the Tribunal is clearly in accordance with the provisions of law and no cause for interference has been made out by this court. The provisions of clause (i) of the Explanation to section 115J(1A) are totally unambiguous and have no scope for any other interpretation - Tribunal was, therefore, right in holding that the amount transferred from the revaluation reserve could not be deducted out of the net profit while computing the book profits for the purpose of section 115J - Resultantly, the assessee s appeal being without any merit is dismissed in limine.

Summary

Issues:
1. Computation of book profits under section 115J of the Income-tax Act, 1961 based on the transfer from revaluation reserve.
2. Interpretation of the proviso to clause (i) of the Explanation to section 115J(1A) regarding the treatment of amounts withdrawn from reserves.

Issue 1: Computation of Book Profits:
The case involved an appeal under section 260A of the Income-tax Act, 1961, against an order pertaining to the assessment year 1990-91. The assessee's return of income declared book profits under section 115J at Rs. 66,98,857, with an income of Rs. 20,09,658. The controversy arose when the Assessing Officer sought to add Rs. 2,54,09,727 transferred from the revaluation reserve to the net profit for computing book profits. The assessee argued that the reserve was not real income but a notional one, and hence, should not be included in the book profits. The Commissioner of Income-tax (Appeals) accepted the assessee's claim, but the Tribunal upheld the Revenue's plea, emphasizing the proviso to clause (i) of the Explanation to section 115J(1A) that restricted the deduction of amounts withdrawn from reserves.

Issue 2: Interpretation of Proviso to Clause (i) of Explanation to Section 115J(1A):
The key contention was whether the amount transferred from the revaluation reserve should be added to the net profit for computing book profits under section 115J. The relevant proviso stated that amounts withdrawn from reserves created in previous years could not be reduced from book profits unless the book profits of the relevant year had been increased by those reserves. As the reserve in question was created in a previous year relevant to the assessment year 1990-91, and the book profits were not increased by it, the Tribunal rightly held that the transfer from the revaluation reserve could not be deducted from the net profit. The judgment clarified that the Assessing Officer's power was limited to adjustments as per the Explanation to section 115J(1A) and did not extend to questioning entries in the profit and loss account beyond the specified provisions.

In conclusion, the Tribunal's decision aligned with the unambiguous provisions of law, and the appeal was dismissed for lacking merit. The judgment emphasized the strict interpretation of clause (i) of the Explanation to section 115J(1A) and upheld the treatment of amounts withdrawn from reserves as per the statutory framework, rejecting the appellant's arguments based on the Supreme Court's judgment in a different context.