2011 (3) TMI 1087 - AT - Income Tax

Computation of book profit under section 115JB - MAT - addition on account of revaluation reserve while computing the book profit under section 115JB - Held that - As from the provisions of Explanation 1 to section 115JB(2) that amount carried to any reserve by whatever name called has to be added to the net profit if the amount had been debited to the profit and loss account. In this case the revaluation reserve had been directly taken to the balance sheet and not debited to the profit and loss account and therefore the amount could not be added under clause (b) of Explanation 1 to section 115JB(2). It is also pertinent to note that clause (iia) was inserted to the Explanation 1 with effect from 1-4-2007 in which it was provided that amount of depreciation debited to the profit and loss account excluding the depreciation on account of revaluation of assets has to be reduced from the net profit. Thus the Legislature though it fit to exclude the depreciation on account of revaluation of assets from the amount to be reduced from the net profit but there were no similar provision inserted for addition of revaluation reserve to the net profit even if the same was not debited to the profit and loss account. Thus no addition could be made to the net profit on account of revaluation reserve directly taken to the balance sheet while computing the book profit. In favour of assessee.

Issues Involved:
1. Computation of book profit under section 115JB.
2. Validity of revaluation of property and its impact on book profit.
3. Applicability of judicial precedents in computing book profit.

Detailed Analysis:

1. Computation of Book Profit under Section 115JB:
The primary issue in this appeal concerns the computation of book profit under section 115JB. The assessee sold a property and recorded a gain of Rs. 92,70,857. However, it debited Rs. 1,44,000 as a loss on the sale of the property in the profit and loss account after revaluing the property at Rs. 97,44,000. The Assessing Officer (AO) rejected the book loss shown by the assessee and added the gain of Rs. 92,70,858 to the book profit, citing it as a device to avoid tax.

2. Validity of Revaluation of Property and Its Impact on Book Profit:
The assessee argued that the book profit was computed based on the profit and loss account prepared under the Companies Act, 1956, and no addition could be made for revaluation reserves under section 115JB. The AO, however, considered the revaluation as a device to avoid tax, referencing the Supreme Court judgment in Mc Dowell & Co. Ltd. v. Commercial Tax Officer. The CIT(A) sided with the assessee, noting that the revaluation reserve was taken directly to the balance sheet and not debited to the profit and loss account, thus no addition could be made to the book profit.

3. Applicability of Judicial Precedents in Computing Book Profit:
The CIT(A) referenced the Supreme Court judgments in Apollo Tyres v. CIT and Malayala Manorama Co. Ltd. v. CIT, which held that the AO cannot alter the net profit disclosed in the profit and loss account prepared under the Companies Act. The Tribunal upheld this view, emphasizing that the AO can only make adjustments specified in the Explanation 1 to section 115JB(2). The Tribunal also noted that the revaluation of property was in line with Accounting Standard 10 (AS-10) and was not a colorable device. The Tribunal dismissed the revenue's appeal, affirming that no addition could be made to the net profit on account of revaluation reserve directly taken to the balance sheet.

Conclusion:
The Tribunal concluded that the revaluation reserve taken directly to the balance sheet should not be added to the book profit, upholding the CIT(A)'s decision and dismissing the revenue's appeal.

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