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2012 (5) TMI 4 - AT - Income TaxMAT - Book profit - Adjustment of reserves created on revaluation of the assets of the amalgamated Company - held that - Supreme Court clearly observed in the case of National Hydroelectric Power Corpn. Ltd. (2010 -TMI - 77137 - SUPREME COURT) that for making an addition under clause (b) of Explanation 1 to sec.115JB two conditions must be satisfied jointly. (1)(a) There must be a debit of the amount to the profit & loss account, (clause (b) of Explanation 1 to sec.115JB) the amount so debited must be carried to the reserve. - Further, the reserve contemplated by clause (b) of Explanation 1 to sec.115JB is required to be carried through the profit & loss account. - The Hon ble court also observed that there can be two types of reserves, namely, those that are routed through the profit & loss account and those which are not routed through the profit & loss account, e.g. capital reserve such as share premium account. It is clear that assessee has debited a sum of Rs. 47,39,19,646/- which is the present market value of the work-in-progress which has been taken over and, therefore, it cannot be said that it consists of some portion of reserve also. Creation of general reserve out of revaluation reserve cannot be said to be out of appropration of profits - the amount which was never routed through the profit & loss account and never debited to the profit & loss account could not be considered for the purpose of determination of book profits under clause (b) of Explanation 1 to sec.115JB - Decided in favor of the assessee
Issues Involved:
1. Whether the reserves created on revaluation of the assets of the amalgamated company should be added while calculating book profits for the purposes of Sec. 115JB of the Income Tax Act. 2. Whether the CIT(A) erred in not appreciating that clause (b) of Explanation (1) of Sec. 115JB provides that for calculating book profit, the profit as shown in the profit and loss account has to be increased by all reserves by whatever name called, other than a reserve specified under Sec. 33AC. Detailed Analysis: Issue 1: Revaluation Reserves and Book Profits Calculation under Sec. 115JB The assessee argued that the accounts were prepared in accordance with Part II & Part III of Schedule VI of the Companies Act, 1956, and that no provisions of Sec. 115JB were violated. The general reserve was created due to the revaluation of work-in-progress as part of the amalgamation scheme approved by the Hon'ble Bombay High Court. The assessee contended that no income was earned from the sale of any premises, and thus, the provisions of Sec. 115JB were not applicable. The assessee also cited the decision in Apollo Tyres Ltd. v. CIT, asserting that the Assessing Officer (AO) could not rescrutinize the accounts prepared in accordance with the Companies Act. The AO, however, added the general reserve to the book profits, arguing that the revaluation reserve should be included as per clause (b) of Explanation 1 to Sec. 115JB. The AO's computation of book profits included the general reserve amounting to Rs. 39,79,89,282/-. The CIT(A) observed that no reserve had been credited and that the excess or deficit in the amalgamation entries was carried to the reserve account, which did not constitute the creation of a reserve. The CIT(A) also noted that, as per Sec. 43C, the cost of acquisition in case of amalgamation should be the cost to the amalgamating company, and any increase due to revaluation should be ignored. The CIT(A) relied on the decisions in CIT v. M. CT. M. Corpn. (P.) Ltd. and National Hydroelectric Power Corpn. Ltd. v. CIT, concluding that additions on account of notional reserves to book profits were not maintainable. Issue 2: Clause (b) of Explanation (1) to Sec. 115JB The Ld. DR argued that the AO had not rescrutinized the accounts and that any amount carried to any reserve should be added back as per Explanation 1(b) to Sec. 115JB. The DR pointed out that the reserve had been credited out of the value of opening work-in-progress, and thus, the amount debited to the profit & loss account included the reserve amount. The Ld. Counsel for the assessee reiterated that no reserve had been debited to the profit & loss account and that the revaluation was done as per AS-14 and the High Court's order. The Counsel also cited Sec. 43C, which mandates that the cost of assets in case of amalgamation should be reckoned at the cost to the amalgamating company, ignoring any revaluation. The Counsel relied on the decision in National Hydroelectric Power Corpn. Ltd., arguing that the reserve was not routed through the profit & loss account and thus should not be added back under clause (b) of Explanation 1 to Sec. 115JB. Tribunal's Conclusion The Tribunal agreed with the DR that the decision in Apollo Tyres Ltd. was not relevant as the AO had not recast the profit & loss account. Similarly, the decision in M. CT. M. Corpn. (P.) Ltd. was also deemed irrelevant as it dealt with normal provisions of the Act. The Tribunal noted that Sec. 43C, which deals with the cost of assets during amalgamation, was also not relevant for determining book profits under Sec. 115JB. The Tribunal observed that the reserve was generated due to journal entries and not debited to the profit & loss account. The Tribunal referred to the decision in National Hydroelectric Power Corpn. Ltd., where it was held that for an addition under clause (b) of Explanation 1 to Sec. 115JB, the amount must be debited to the profit & loss account and carried to the reserve. Since the reserve in this case was not routed through the profit & loss account, it could not be considered for determining book profits under Sec. 115JB. Judgment The Tribunal upheld the CIT(A)'s decision, confirming that the reserve created on revaluation of assets should not be added while calculating book profits under Sec. 115JB. The appeal by the revenue was dismissed.
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