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TMI Blog2011 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- resulting in a net debit on account of depreciation of Rs.101,45,32,000/-. The A.O., while computing the book profit under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs.26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to clause (i) of explanation to Section 115JB. This order was upheld by the C.I.T. (A) and by the ITAT and by the High Court, hence, this civil appeal is filed by the assessee. 5. In the present case, the controversy is whether the amount transferred from the revaluation reserve and set off against the amount of depreciation debited to P and L Account can be excluded in terms of clause (i) of explanation to Section 115JB(2) read with the proviso. Case of the Assessee 6. It is the case of the assessee that the main provision of clause (i) seeks to exclude from the net profit, as per P and L Account, any amount withdrawn from any reserves and credited to P and L Account. According to the assessee, the proviso in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in that year should artificially again be added back for computing such book profit. That, by the Finance Act, 2007, w.e.f. 1.4.2007, clause (iia) is inserted in Section 115JB under which the depreciation on historical cost alone would be taken into account while calculating the book profit. In other words, depreciation attributable to the revaluation of the fixed assets to be debited to the P and L Account cannot be taken into account to calculate book profit w.e.f. the assessment year 2007-08. Relevant Provisions 7. We quote hereinbelow the relevant provisions of Section 115JB, which reads as under: Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e.f. 1.4.1997. This was necessary due to a rise in the number of zero-tax companies paying marginal tax which situation arose in view of preferences granted in the form of exemptions, deductions and high rates of depreciation. The rate of minimum tax was kept at 30% of the book profit as deemed total income. MAT was levied under Section 115JA from assessment year 1997-98. Section 115JA is made inoperative w.e.f. 1.4.2001. In its place, the Finance Act, 2000 inserted Section 115JB. The new provision provides that all companies having book profit under the Companies Act, shall be liable to pay MAT at a specified rate of the book profit. It further provides that every MAT company shall follow same accounting policies and standards as are followed for preparing its statutory account. 11. For the purposes of the afore-stated provision, "book profit" means the net profit as shown in the P and L Account in the relevant previous year in accordance with the provisions of Part II and Part III of the Schedule VI to the Companies Act, subject to certain adjustments which increases or decreases the book profit. Thus, even under Section 115J, certain adjustments were to be made to the net prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be increased by the amount(s) in clauses (a) to (f) if such amount(s) is debited to the P and L Account. Clause (b) refers to amount(s) carried to any reserves by whatever name called. As stated above, such increase needs to be made only if any amount referred to in clauses (a) to (f) is debited to P and L Account. 16. The second step for arriving at the "book profit" is that the net profit as shown in the P and L Account for the relevant previous year prepared under Section 115JB(2) and as increased by any amount, as stated above, has to be reduced by the amount(s) in clauses (i) to (vii). 17. For the purposes of deciding this case it may be noted that we are concerned with clause (i) which inter alia refers to an amount(s) withdrawn from any reserves if any such amount(s) is credited to P and L Account. During the relevant assessment year, clause (i) had an exception to such exclusion. That exception was in the form of a proviso which inter alia stated that the exclusion in clause (i) to the explanation will not apply "to the amount(s) withdrawn from reserves created in a previous year relevant to the assessment year 1997-98 or any subsequent assessment year unless the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Companies Act, 1956 after certain adjustments. The net profit will be increased by income tax paid or payable, amount carried to any reserve, provision made for liabilities etc. provided the amount(s) is debited to the P and L Account. The amount so arrived at is to be reduced by item (i) to item (vii) including amounts withdrawn from reserves, if any such amount is credited to P and L Account. Clauses (i) to (vii) of the explanation to Section 115JB(2) represent items of reduction from the net profits. Clause (i) mandates reduction for the amount(s) withdrawn from the reserves earlier created, provided such amount(s) is credited to P and L Account. Such credit is mandated so that the true working result gets reflected in the financial statement of the assessee-company. The said clause (i) contemplates only those reserves which actually affect the net profits as shown in the P and L Account (see also clause (ii) for comparison). The object of various clauses (i) to clause (vii) is to find out the true working result of the assessee-company. 21. In the present case, the adjustment made in the P and L Account was as per Accounting Standards 6 and 10 read with Guidance Note issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the profits. Thus, company had a loss of Rs.7,38,09,000/- (i.e. Rs.127,57,06,000/- of depreciation as against profit of Rs.120,18,97,000/-). However, by withdrawing Rs.26,11,74,000/-, being the differential depreciation, from the revaluation reserve of Rs.288,58,19,000/-(which is only a notional adjustment entry to balance both sides of the balance sheet) and reducing it from the depreciation of Rs.127,57,06,000/-, the assessee artificially brings down the depreciation only to Rs.101,45,32,000/- which is then deducted from the profits before depreciation amounting to Rs.120,18,97,000/- so that there is a profit of Rs.18,73,65,000/-. This is how the loss of Rs.7,38,09,000 got converted to profit of Rs.18,73,65,000/-. Thus, the financial statement for the year ending 31.3.2001 is made to look healthy. 23. The reasons given hereinabove are in addition to the reasons given by the Authorities below while rejecting the claim of the assessee. 24. The matter could be examined from another angle. To recapitulate the facts, the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending 31.3.2000) and amount of enhancement in valua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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