1999 (6) TMI 57 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of additional depreciation based on revalued cost of assets.
2. Deductibility of unabsorbed depreciation while computing book profits under section 115J of the Income-tax Act, 1961.

Detailed Analysis:

1. Allowability of Additional Depreciation Based on Revalued Cost of Assets:

The primary contention revolves around whether the assessee-company can claim additional depreciation based on the revalued cost of its assets. The assessee argued that the revaluation of assets was done for bona fide reasons and in compliance with the Companies Act, 1956, and Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). The company had revalued its assets and charged depreciation based on this revalued cost, which significantly increased the depreciation amount and reduced the reported profit.

However, the Assessing Officer (AO) held that for the purposes of calculating depreciation, the company should consider only the actual cost of the assets, not the revalued cost. Therefore, the additional depreciation due to revaluation was disallowed, and the AO recomputed the book profit by considering only the regular depreciation based on the historical cost of the assets.

The Tribunal examined the provisions of the Companies Act, 1956, and the relevant Accounting Standards (AS-6 and AS-7). It noted that while the Companies Act allows for revaluation of assets and mandates disclosure and provision for depreciation on revalued assets, it does not necessarily require the additional depreciation to be charged against the profit of the year. The Tribunal highlighted that the company could alternatively credit an equivalent amount to the Profit & Loss Account from the Revaluation Reserve, thus neutralizing the impact on profits.

The Tribunal concluded that the AO was justified in disallowing the additional depreciation for the purposes of computing book profits under section 115J. It emphasized that allowing such additional depreciation would distort the true profit of the company and defeat the purpose of section 115J, which aims to tax companies that report substantial profits but declare negligible taxable income.

2. Deductibility of Unabsorbed Depreciation:

The second issue concerned whether the unabsorbed depreciation should be deducted while computing book profits under section 115J. The assessee-company argued that unabsorbed depreciation should be adjusted against the book profits, relying on the decision of the Special Bench of the Tribunal in Surana Steel (P.) Ltd.

The Tribunal noted that the issue was covered by the Supreme Court's decision in Surana Steels (P.) Ltd. v. Dy. CIT, which held that unabsorbed depreciation is part of the loss available for adjustment under section 115J. Consequently, the Tribunal decided this issue in favor of the assessee, directing the AO to deduct the unabsorbed depreciation while computing the book profits under section 115J.

Conclusion:

The Tribunal upheld the AO's decision to disallow the additional depreciation based on the revalued cost of assets, emphasizing that it would distort the true profit of the company and defeat the purpose of section 115J. However, it allowed the deduction of unabsorbed depreciation while computing book profits under section 115J, in line with the Supreme Court's decision in Surana Steels (P.) Ltd. The appeal was thus allowed in part.