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TMI Blog2012 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, 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 - IT APPEAL NO. 6049 (MUM.) OF 2010 - - - Dated:- 3-2-2012 - D. MANMOHAN, T.R. SOOD, JJ. Subhachan Ram for the Appellant. V.C. Shah for the Respondent. ORDER T.R. Sood, Accountant Member In this appeal, assessee has raised the following two grounds: 1. "On the facts and circumstances of the case and in law the CIT(A) has erred in holding that the reserves created on revaluation of the assets of the amalgamated Company will not be added while calculating Book Profits for the purposes of Sec.115JB of the Act." 2. "On the facts and circumstances of the case and in law the CIT(A) has erred in not appreciating that clause (b) of the Explanation (1) of Sec. 115JB provides that for calculating book profit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f adjustments provided under Explanation 1 to sec.115JB and debit in respect of one work-in-progress was not included as one of the adjustments. The assessee has not debited any reserve to the profit loss account. It was also argued that assessee has not earned any income on sale of any premises and, therefore, there being no income there was no question invoking provisions of sec.115JB. It was also submitted that as per clause (b) of Explanation 1 to sec.115JB only actual amount carried to reserve arising out of profit could be considered for adjustment and notional increase to reserve by way of revaluation of work-in-progress could not be considered under the same clause. It was also clarified that work-in-progress consisted of cost of work-in-progress acquired on amalgamation and no further cost was incurred. It was also contended that in view of the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562, it was not open to the Assessing Officer to rescrutinize the accounts to verify whether the same have been prepared in accordance with the provisions of the Companies Act. Reliance was also placed on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of amalgamation sanctioned under the provisions of the Companies Act,1956 or any other statute may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. Where the treatment is so prescribed; the same is followed." It was contended that assessee has simply followed the order of the High Court and gave the treatment to various items as ordered by the High Court. It was also argued that in any case sec.43C of the I.T. Act, 1961 which has been specifically enacted for valuation of assets in case of amalgamation provides that only the original cost of such assets had to be reckoned, which means any revaluation reserve has to be ignored. Since one could not make any profit on revaluation without any sale, there was no question of invoking the provisions of sec.115JB. Further reference may be made to sec.32 of the I.T. Act which deals with depreciation and clearly provides that when revaluation of fixed assets is done on amalgamation, same has to be ignored for the purpose of grant of depreciation. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. ( supra ), for the proposition that AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sec.115JB. he also submitted that sec.43C has no relevance for computing the profits u/s.115JB. 6. On the other hand, Ld. Counsel of the assessee reiterated the submissions made before the CIT(A) and emphasised that no reserve has been debited to the profit loss account. In fact, cost of work-in-progress has been revalued as per the valuation report and has been dealt with as per AS-14, which clearly recommends in the scheme of amalgamation treatment to various reserves have to be given as per the various statutory provisions and the scheme. The amalgamation was sanctioned by the Hon'ble High Court and copy of High Court's order is annexed in the paper book wherein it was clearly provided that excess or deficit shall be credited by the transferee company to the general reserve or debited to the goodwill, as the case may be. He referred to page-19 of the paper book which is a copy of the journal entries made regarding work-in-progress, which resulted in surplus and has been carried to the general reserve and profit loss account has not been debited for creation of this reserve and in this regard he referred to pages 22 as well as 41 of the paper book which are the copies o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement etc. This means any revaluation has to be ignored but the whole provision deals with the normal provisions of computation and, in our opinion, has no relevance for determination of book profits. 9. The profit loss account and balance sheet of the assessee company read as under: P L for year ended on 31st March; 2007 Particulars (Dr) Particulars (Cr.) Expenditure (Cost of properties sold) 1,517,163 Income Sale of developed properties Other income Closing- Working-in-progress 1,615,000 2,046 475,598,694 WIP Opening- NIL Add-Addition amalgamation-as per scheme of 473,919,646 Add - Direct Expenses incurred during the year 168,915 Add- expenses incurred during the year-Finance Cost- 1,050,714 Personnel expenses - 328,729 Depreciation 83,362 Provision for taxes 56,000 475,598,694 Net Profit (after Taxation) 43,883 477,215,740 477,215,740 Balance Sheet as on 31st March, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Charges 6,211 Insurance Expenses 12,600 Miscellaneous Expenses 23,854 Petrol Expenses 57,213 Telephone Expenses 13,906 Interest 37,092 3,28,729 By Net Profit Transferred 99,883 TOTAL 47,72,15,741 TOTAL 47,72,15,741 The case of the AO is that when the sum of Rs. 47,39,19,646/- was debited to the profit loss account it consisted the amount of reserve also. The Ld. DR mainly relied on this portion because as per clause (b) of Explanation 1 to sec.115JB amount carried to any reserve by whatever name called has to be considered for adjustment under clause (b) of Explanation 1 to sec.115JB. On the other hand, the case of the assessee is that in view of the decision of the Hon'ble Supreme Court in the case of National Hydroelectric Power Corpn. Ltd. ( supra ) this cannot be treated as a debit to the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble High Court while sanctioning the scheme has dealt with this issue in clause 13 and the issue regarding treatment of reserve is contained in clause 13.4 which reads as under: "13.4 The excess or deficit, if any, remaining after recording the aforesaid entries shall be credited by the Transferee Company to general reserve or debited to goodwill, as the case may be." From the above it is clear that assessee has simply debited the amount of work-in-progress at the new value and therefore it cannot be said that it consists of reserve also. In fact, the reserve was generated because of the journal entries which have been extracted by the ld. CIT(A) at pages 11 to 13 which are as under: On account of amalgamation of United Real Estate Buildings P. Ltd. Date Details Debit Rs. Credit Rs. 1-1-2007 Deposit for Cellular Phone 8,500 Deposit - Universal Motors 5,000 Deposit Tata Tele Service 500 Fringe Benefit Tax (A '(2007-08) 41,586 Advance Income Tax (A.Y. 2006-07) 614,537 Advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofessional Fees Payable 70,6 To FBT Payable 18,8 To Security Expenses Payable 67,4 To TDS Payable 303,3 To Rent Maintenance Payable 209,4 To Petrol Expenses Payable 5,0 To Electricity Exp. Payable 2,5 To BMC Assessment Tax Payable 6,0 To Interest Payable 2,566,1 To Income Tax and FBT 18,0 To FBT Tax Provisions (A Y 2007-08) 22,3 To Income Tax Provisions (AY 2006-07) 300,0 To FBT Tax Provisions (A Y 2006-07) 20,0 To Income Tax Provisions (AY 2005-06) 243,4 To General Reserve 178,552,670 TOTAL 237,495,427 237,495,427 On A/c of Amalgamation of Sukh Sagar Developers (P) Ltd. Date Details Debit Rs. Credit Rs. 1-1-2007 Deposit for Electric Meter Reliance En ..... X X X X Extracts X X X X X X X X Extracts X X X X
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