2013 (1) TMI 59 - HC - Income Tax

Claim of depreciation on the revalued assets set off against revaluation reserve and credited to the profit & loss account - whether permissible for computation of income under Section 115J? - Held that - As per Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets issued by ICAI depreciation is required to be provided with reference to the total value of the fixed assets as appearing in the account after revaluation. However, for certain statutory purposes e.g., dividends, managerial remuneration etc., only depreciation relatable to the historical cost of the fixed assets is to be provided out of the current profits of the company. In the circumstance, the additional depreciation relatable to revaluation may be adjusted against Revaluation Reserve by transfer to Profit and Loss Account. Part II of Schedule VI to the Companies Act allows the company to provide the depreciation on the total book value of the fixed assets (including the increased amount as a result of revaluation) in the P/L Account of the relevant period, and thereafter can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve. Such transfer should be shown in the P/L Account separately and an appropriate note by way of disclosure would be desirable. Such a disclosure would appear to be in consonance with the requirement of Part I of Schedule VI to the Companies Act, prescribing disclosure of write- up in the value of fixed asset for the first five years after revaluation. If a company has transferred the difference between the revalued figure and the book value of fixed assets to the Revaluation Reserve and has charged the additional depreciation related thereto to its Profit and Loss Account, it is possible to transfer an amount equivalent to accumulated additional depreciation from the revaluation reserve to the Profit and Loss Account or to the General Reserve as the circumstances may permit, provided suitable disclosure is made in the accounts as recommended in this guidance note - The accounting standards prescribed by the ICAI are applicable by virtue of Section 211(3)(c) of the Companies Act, until such time the accounting standards prescribed by the Central Government in consultation with the National Advisory Committee, on Accounting Standards established u/s 210A(1) which are not yet prescribed so far - Thus the Tribunal did not commit any error in law in allowing the depreciation on the revaluation reserve, which is a prescribed and statutory method of accounting, and by which the book profits do not get reduced, giving any added benefit to the companies including Minimum Alternate Tax (MAT) companies - in favour of assessee.

Issues Involved:
1. Justification of the Tribunal's decision on depreciation on revalued assets for computation of income under Section 115J of the Income Tax Act, 1961.
2. Tribunal's decision on allowing a reduction of Rs. 17,26,809/- within the meaning of Clause (1) read with proviso thereto of the Explanation to Section 115J.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal's decision on depreciation on revalued assets:

The primary issue was whether the Tribunal was justified in upholding the order of CIT (A) regarding the depreciation on revalued assets. The Assessing Officer (A.O.) had disallowed the depreciation on revalued assets for the computation of book profit under Section 115J of the Income Tax Act, 1961. The A.O. referred to the provisions of Section 205 of the Companies Act, 1956, and a circular which prohibited companies from taking revalued figures for the purposes of calculating depreciation. The CIT (A) upheld this finding, stating that the business loss being lower than the unsupported depreciation, no deduction under Section 205 (1) (b) of the Companies Act was liable to be set off against the book profits.

The Tribunal, however, held that the effect of the higher claim of depreciation on the revalued assets was set off against a like amount transferred from the revaluation reserve and credited to the profit and loss account. The Tribunal noted that the computation of book profits had to be made with reference to the book profits as per the books of account, adjusted by the additions and deductions enumerated under the Explanation to Section 115J. The Tribunal found that the assessee had transferred an amount equal to the depreciation on revalued assets from the revaluation reserve to the profit and loss account, thus neutralizing the effect of the higher depreciation claim.

2. Tribunal's decision on allowing a reduction of Rs. 17,26,809/-:

The second issue was whether the Tribunal was justified in allowing a reduction of Rs. 17,26,809/- within the meaning of Clause (1) read with proviso thereto of the Explanation to Section 115J. The CIT (A) had directed the A.O. to allow this reduction, as the amount was credited to the profit and loss account from the revaluation reserve. The Tribunal upheld this decision, observing that the treatment given by the A.O. amounted to double addition.

The Tribunal's decision was challenged by the revenue, arguing that depreciation on revalued assets is not permissible for the computation of income under Section 115J. The revenue relied on the Delhi High Court's decision in CIT v. SRF Ltd., which discussed the scheme of Chapter XII-B introducing minimum alternate tax (MAT) to ensure companies paying negligible tax despite large profits. The Delhi High Court had held that any withdrawal from the revaluation reserve should be squared off by reducing the amount from the book profit if the reserve was credited to the profit and loss account initially.

The respondent-assessee relied on the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which held that the A.O. has limited power to make increases and reductions as provided in the Explanation to Section 115J and cannot go behind the net profit shown in the profit and loss account. The respondent demonstrated that the effect on the depreciation of the revaluation reserve was set off by transferring an equal amount from the revaluation account to the profit and loss account.

The Tribunal's decision was further supported by the accounting standards prescribed by the Institute of Chartered Accountants of India, which allow for the adjustment of additional depreciation on revalued assets against the revaluation reserve. These standards are applicable by virtue of Section 211(3)(c) of the Companies Act.

Conclusion:

The High Court upheld the Tribunal's decision, concluding that the Tribunal did not commit any error in law in allowing the depreciation on the revaluation reserve. The prescribed and statutory method of accounting ensures that book profits do not get reduced, thus not giving any added benefit to the companies, including MAT companies. Both questions of law were decided in favor of the respondent-assessee, and the income tax appeal was dismissed.

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