1999 (2) TMI 99 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of depreciation on Plant and Machinery to the extent of subsidy received.
2. Disallowance of depreciation on the enhanced value of assets due to revaluation for determining book profit under section 115J of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Plant and Machinery to the Extent of Subsidy Received:

The assessee raised the issue that the Commissioner of Income-tax (Appeals) erred in confirming the disallowance of depreciation amounting to Rs. 1,05,038 on Plant and Machinery to the extent of subsidy of Rs. 15,00,000. However, this ground was not pressed by the counsel for the assessee and was subsequently rejected.

2. Disallowance of Depreciation on Enhanced Value of Assets Due to Revaluation:

The primary contention was regarding the disallowance of depreciation amounting to Rs. 72,94,362 on the enhanced value of assets due to revaluation, which was provided in the profit and loss account for determining book profit under section 115J of the Income-tax Act, 1961. The assessee argued that the revaluation of fixed assets and the method of computing depreciation was permissible under the Companies Act and not prohibited by section 115J of the Income-tax Act.

The counsel for the assessee highlighted that the revaluation was based on a Valuation Report and that depreciation was charged on the revalued amount of the gross block of assets using the straight-line method. It was argued that the enhancement in the value of assets was debited in the account of respective fixed assets and credited to the capital revaluation reserve account without transferring any amount to the Reserve Account by debiting the Profit and Loss Account.

The counsel referenced various Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), which support the provision for depreciation based on the revalued amount and the remaining useful lives of such assets. It was also emphasized that revaluation reserve is not available for payment of dividends, supported by the Companies (Declaration of Dividend out of Reserve) Rules, 1975.

The Department's representative argued that depreciation should be allowable on "actual cost" and that the revaluation was a device to reduce tax liability under section 115J. The representative pointed out that the revaluation was made for Income-tax purposes, as indicated by the valuer's report, and highlighted the significant increase in the value of Plant and Machinery due to revaluation.

Upon careful consideration, it was noted that the Assessing Officer did not dispute the quantum of revaluation or the valuer's report. The manner of writing off depreciation on revalued assets was consistent with the Accounting Standards and Guidance Notes issued by the ICAI. The provisions of Schedule XIV of the Companies Act, 1956, do not prohibit writing depreciation on the revalued amount.

Section 115J(1A) of the Income-tax Act requires the preparation of the Profit & Loss Account in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. The Explanation to section 115J(1A) lists specific items to be added back while computing book profits, none of which include the current year's depreciation on revalued assets. The Assessing Officer failed to demonstrate that the Profit & Loss Account was not prepared in accordance with the Companies Act.

The reference to section 205 of the Companies Act pertains to setting off past losses or unabsorbed depreciation, which was not applicable in this case as it involved only the current year's depreciation.

Conclusion:

The Tribunal concluded that the Assessing Officer was not justified in adding back the depreciation on the revalued amount of assets for computing book profit under section 115J. The CIT (Appeals) should have deleted the addition. Therefore, Ground Nos. 3 and 4 of the assessee's appeal were allowed, and the appeal was partly allowed.