2012 (6) TMI 564 - HC - Income Tax

MAT - Whether Tribunal was right in holding that the assessee was right in claiming deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA - contended by the assessee that in view of the proviso, revaluation reserve created much prior to the introduction of section 115JA of the Act should be allowed as reduction in the computation Held that - if the reserve had been created at the first instance with reference to the profit and loss account, then, in the computation of profit the assessee would certainly be entitled to reduction. However, if at the first instance of the creation of reserve, the same is not referable to the profit and loss account, but to the balance-sheet, the question of granting relief to the assessee did not arise. assessee is not entitled to reduction in respect of the withdrawal from the reserve account in terms of section 115JA Explanation (i). Consequently, the order of the Tribunal is set aside. The tax case appeal stands allowed

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the assessee was right in claiming deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA?
2. Whether the Tribunal was right in holding that denial of deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA would amount to double addition?

Detailed Analysis:

Issue 1: Deduction of Amounts Withdrawn from Revaluation Reserve
The assessee filed its return for the assessment year 1989-90, reducing the withdrawal from the revaluation reserve account in the computation of book profit. The Revenue contended that this amount was already reduced from the book depreciation worked out after revaluation, making further deduction impermissible. The assessing authority rejected the assessee's claim under section 115JA(1)(i) of the Income-tax Act, 1961, as the amount deducted did not represent the amount withdrawn from the reserve or provisions credited to the profit and loss account.

The Commissioner of Income-tax (Appeals) upheld the assessing authority's decision, stating that the depreciation was calculated on the revalued assets and no amount was withdrawn from the revaluation reserve and credited to the profit and loss account. Hence, the assessee was not entitled to the relief.

The Income-tax Appellate Tribunal allowed the assessee's claim, prompting the Revenue to appeal. The Revenue cited the Supreme Court's decision in Indo Rama Synthetics (I.) Ltd. v. CIT, which dealt with a similar issue under section 115JB, emphasizing that the reserve must impact the net profit as shown in the profit and loss account for it to be deductible.

The High Court noted that there is no significant difference between sections 115JA and 115JB, except for their applicability dates. The Supreme Court's interpretation in Indo Rama Synthetics clarified that only reserves impacting the net profit in the profit and loss account could be deducted. Since the revaluation reserve in this case was not created out of the profits of the company by way of appropriation, the assessee's claim for deduction was unsustainable.

Issue 2: Double Addition
The Tribunal's decision suggested that denying the deduction would amount to double addition. However, the High Court, referencing the Supreme Court and Delhi High Court judgments, clarified that reserves not created from the profit and loss account do not qualify for deductions under section 115JA. The Delhi High Court's decision in CIT v. SRF Ltd. reinforced this principle, highlighting that the revaluation reserve created prior to the introduction of section 115JA did not impact the profit and loss account and hence, could not be deducted.

Conclusion:
The High Court concluded that the assessee was not entitled to a reduction in respect of the withdrawal from the reserve account under section 115JA Explanation (i). The Tribunal's order was set aside, and the tax case appeal was allowed, emphasizing that the reserves must be created out of the profits of the company and impact the profit and loss account to qualify for deductions. The appeal was allowed with no costs.