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2020 (8) TMI 796 - AT - Income TaxMAT computation - Valuation of assets on amalgamation - determining book profit under section 115JB as against book loss declared by the appellant - whether the increase in the value of investment is capital reserve or revaluation reserve? - whether the reserve created by the scheme of amalgamation on account of investing of assets is in the nature of Revaluation Reserve or Capital Reserve and the upward adjustment in terms of Clause (j) and Clause (f) of the Explanation 1 to Section 115JB by the revenue is correct or not? - HELD THAT - AO failed to appreciate that a Revaluation Reserve is created when an enterprise revalues its own assets already acquired and recorded in its books at certain values. When an entity makes reinstatement of the book value of its existing assets it amounts to revaluation of assets. In the instant case the assessee has not revalued its existing asset but as only recorded the fair values of various assets and liabilities acquired by the assessee from the transferor/ amalgamating companies pursuant to the scheme of amalgamation as its cost of acquisition in accordance with the terms of the court-approved scheme of amalgamation and the provisions of AS14. As per the accounting standard upward revaluation of assets is permitted only in terms of AS 10 on Accounting for Fixed Assets . AS 13 which deals with Accounting for Investments does not permit a company to revalue of its long-term investments at a value higher than the cost. For computing book profit sub-section (2) of section 115JB of the Act mandates that every company shall prepare its Profit Loss Account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act 2013 (corresponding to Parts II and III of the erstwhile Companies Act further provides that for computing book profit under the said section the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act 2013 (corresponding to section 210 of the Companies Act; 1956) shall be adopted. Since the capital reserve is out of purview of Section 115JB and the Revaluation Reserve only is considered for upward adjustment of the profit as per the Act the AO tried to being the capital reserve to the fold of Clause (j) which rightly deals with revaluation reserve . Such an action of the AO cannot be sustained. Based on the reading of Clause (j) of Explanation to section 115JB for calculation of book profit u/s. 115JB provisions of Section 129 of the Companies Act AS 14 of the recognized accounting standard keeping in view the fact that the revenue has not brought any tangible material to prove that the scheme is a colourable device to avoid taxes keeping in view the land holding which has been consolidated owing to the amalgamation of the companies and keeping view the accounting resorted by the group companies regarding the book value of investments in shares pre post amalgamation we hereby hold that the appeal of the assessee on this ground is allowed. Upward adjustment in terms of Clause (f) of Explanation 1 of Section 115JB on account of expenditure relatable to earning of exempt income - HELD THAT - There is a clear distinction between a business expenditure and business loss. The former is an indicative of a volition but a loss comes to as ab extra without the role of the assessee. While expenditure is voluntarily business loss is fortuitous CIT Vs New India Assurance Co. Ltd. 1967 (10) TMI 16 - BOMBAY HIGH COURT . Hence the loss cannot be equated with expenditure. The provisions u/s 115JB doesn t envisage enhancement of taxable profits by adding the loss incurred in redemption of mutual fund for the purpose of Section 115JB. Reliance is placed on the judgment of Hon ble High Court of Gujarat in the case of CIT Vs JK Paper Ltd. 2012 (4) TMI 237 - GUJARAT HIGH COURT wherein it was held that the loss incurred by the on account of dividend stripping dealt under sub-Section 7 of Section 97 cannot be applied for the purpose of computing business profit in terms of Section 115JB. Based on the conjoint reading of the provisions of the Act and the judgments of the Hon ble Apex Court the appeal of the assessee on this ground is allowed.
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