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TMI Blog2013 (1) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 143 (1) (a) vide intimation dated 31.8.1991, following prima facie adjustment in the return income. The book profits under Section 115J of the Act was determined at Rs. 81,26,600/- and the tax was levied on the total adjusted income of Rs. 81,26,600/-. 5. On computation of book profit under Section 115J of the Act the assessee was asked to justify the claim of depreciation on revalued assets. The assessee filed written submissions and stated that "the depreciation of assets of revalued figures are to be allowed because in Section 115J there is nothing to disallow the depreciation on revalued figure so as to arrive at the figure of book profit". 6. The A.O. observed that in computation of book profit under Section 115-J two options are available namely whether claim of depreciation be accepted on revalued assets; and whether the loss can be taken inclusive of depreciation for the purposes of deduction under Section 205 (1) (b) of the Companies Act, 1956. So far as claim of depreciation of revalued assets, the A.O. held that under sub-section (2) of Section 205 of the Companies Act two methods are provided for depreciation namely; (1) written down value method and (ii) stra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt for the relevant asstt. year under appeal it is seen that the appellant has debited depreciation in the books to the extent of Rs. 1,32,20,584/- which also includes depreciation on revalued assets to the extent of Rs. 17,26,809/-. However, it is also noticed that out of the revaluation reserve a sum of Rs.17,26,809/- has been transferred to the profit and loss account and credited to the said account. Thus the effect of higher claim of depreciation on the revalued assets to the extent of Rs.17,26,809/- gets sets off against a like amount of Rs.17,26,809/- transferred from the revaluation reserve and credited to the profit and loss account. I am of the considered view that the computation of book profits was liable to be made by the AO with reference to the book profits of Rs. 2,70,88,675/- as rightly pointed out by the AO. Starting from that stage the AO should have made further adjustments, inter alia, within the meaning of clause (1) read with proviso thereto of the Explanation to Sec.115J. In terms of the said clause the book profits have to be reduced by the amount withdrawn from reserves, if any, such amount is credited to the profit and loss account. The proviso to the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submissions as to whether depreciation can be allowed to revaluation reserve, the Delhi High Court held that where credit is made to the profit and loss accounts in the first instance at the time of creation of the reserve, the book profit would stand increased and consequently any withdrawal from the revaluation reserve would stand squared of by reducing the amount from the book profit. Since that situation did not arise in the case considered by the Delhi High Court it was held that the assessee cannot be allowed reduction in the amount and relied upon the Explanation (i) appended to Clause 115J dealing with situation, where some delinquent companies were taking advantage by reducing their net profit by the amount withdrawn from the reserve created or provision made in the same year itself, though reserve, when created was not added to the book profit. Explanation (i) was to apply to amount withdrawn from the reserves or provision only if reserves were created before April 1st, 1988. The Court did not accept the contention that it is only when the Proviso is attracted that the assessee would be disabled from seeking reduction in terms of Clause (i) to the Explanation appended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,70,88,675 Less: Deduction u/s 205 (1) (b) of Companies Act 1956 as computed below Nil Book Profit 2,70,88,675 30% thereof = Rs.81,26,602 or Rs.81,26,600/- Computation u/s 205 (1) (b) of Company Act, 1956: Business loss = Nil Unabsorbed Depreciation as per accounts = 6,62,93,280 Business loss or Depn. whichever is less = Nil" 13. Shri Rupesh Jain has relied upon notes of the audited annual accounts along with notes of accounts of the assessment year 1990-91 by the respondent assessee in which the auditors have provided:- "(c) An amount of Rs.17,26,803/- has been transferred from revaluation reserve to profit and loss account being the difference between the depreciation on revalued account and original cost, WDV of the assets". 14. Shri Rupesh Jain has referred to copy of AS-6; "accounting for fixed assets" issued by the Institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reserve. It is, therefore, argued that past accumulated losses as well as depreciation for the year or arrears of depreciation for earlier years which are required to be provided under Section 205 of the Companies Act can be written off or adjusted against such Revaluation Reserve. 5. There is a contrary view that such Revaluation Reserve is created as a result of a book adjustment only and, therefore, such a reserve is an unrealised reserve which is not available for distribution as dividends. When accounts are prepared on the basis of historical cost, measurement of profits can be made by comparing the cost of the assets at the beginning and at the end of the accounting period. As such there is no justification for taking credit for unrealised gains because the increase in market value may be due to various extraneous factors such as fall in the purchasing power of currency or other factors not related to the operations of the company. So far as fixed assets are concerned, these are held for the use in the business and not for sale in the normal course of business. In the circumstance, the difference between the market value and the book value does not represent realised ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of revaluation can be adjusted against "Revaluation Reserve". As stated earlier, 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. In other words, as per the requirements of Part II of Schedule VI to the Companies Act, the company will have to provide the depreciation on the total book value of the fixed assets (including the increased amount as a result of revaluation) in the Profit and Loss Account of the relevant period, and thereafter the company can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve. Such transfer from Revaluation Reserve should be shown in the Profit and Loss Account separately and an appropriate note by way of disclosure would be desirable. Such a disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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