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TMI Blog2000 (5) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforementioned amounts on the ground that though Explanation to section 115J provides for adjustment in respect of the amounts withdrawn from the reserve account, yet the proviso is not applicable as the amount is not credited to the profit and loss account. 3. Giving the background of the claim made by the assessee, the CIT(A) has pointed out that the assessee had revalued its assets in earlier assessment year and adopted the said value in the books of account. The difference in value of an amount of ₹ 1711.62 lakhs was credited to an account described as revaluation reserve account. In the year under appeal, the assessee had debited a sum of ₹ 293.27 lakhs in the profit and loss account on account of depreciation. This amount was arrived at as under : (In lakhs) (In lakhs) Depreciation on tools for the year 0.97 Depreciation on fixed assets for the year 356.62 Less: Drawn from Revaluation Reserve 64.32 292.30 Total 293.27 The depreciation had been calculated by the assessee at the historical cost of the assets. The figure of ₹ 356.62 lakhs represents depreciation on the revised cost of assets. If the assets had not been revalued, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. Asstt. CIT [1997] 60 ITD 99 (All.), it was contended that the Assessing Officer has no power to disturb the book profits except to make adjustments as authorized under the provisions of section 115J. Since the assessee had withdrawn certain amounts from the reserves and adjusted the profit and loss account by a sum of ₹ 92.06 lakhs, the reduction as claimed by the assessee was permissible under section 115J. The Assessing Officer, according to the learned counsel, was not justified in denying the benefit of the proviso to clause (i) of Explanation to section 115J(1). 6. The learned Departmental Representative on the other hand contended that the assessee revalued its assets in the year 1986 and as a result of revaluation of assets, a reserve had been created. The assessee had not created the reserve out of its profits. In such circumstances, the revaluation reserve account does not qualify to be known as a reserve. In this connection, reliance has been placed on the decision of the Bombay High Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. [1951] 20 ITR 260 where it has been held that the difference of value on revaluation does not qualify to be a reserve. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). Explanation.-For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by- (a)to (ha)... if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and ( h) is not credited to the profit and loss account, and as reduced by,- (i)the amount withdrawn from reserves (other than the reserves specified in section 80HHD) or provisions, if any such amount is credited to the profit and loss account: Provided that, ...." Section 115J, being the only section under Chapter XIIB, was inserted by the Finance Act, 1987, with effect from 1-4-1988. By virtue of section 115J, in the case of a company whose total income as computed under the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed in accordance with Schedule VI (Part II and Part III of the Companies Act, 1956) be reduced by the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account. There are two conditions for applicability of Explanation (i ) to section 115J. Firstly, the amount to be reduced from profits should have been withdrawn from 'Reserves' and secondly, such amount should have been credited to the profit & loss account. We may first consider as to where the two amounts in question have been credited to the profit and loss account. A perusal of profit and loss account reveals that the assessee has not credited the profit and loss account by the amount withdrawn from revaluation reserve account. Therefore, one of the conditions of Explanation (i ) is not satisfied and accordingly the benefit of adjustment under the Explanation is not available to the assessee. 9. The assessee, however, claims that if the entries made by the assessee are looked into in proper perspective then it is clear that they have, in fact, credited the amount withdrawn from revaluation reserve account inso- far as it is by reason of that credit alone that the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the total monies representing them are distributed over the several types of assets. A balance-sheet is thus a historical document and does not, as a general rule, purport to show the net worth of an undertaking at any particular date, of the present realisable value of such items as goodwill, land, plant and machinery, nor, except in case where the realisable value is less than cost, does it normally show the realisable value of stock-in-trade." 13. Section 211 of the Companies Act gives the form and content of the balance sheet and profit & loss account. Section 211(2) reads as under : "Every profit and loss account of a company shall give a true and fair value of the profit or loss of the company for the financial year and shall subject, as aforesaid, comply with the requirement of Part II of Schedule VI, so far as they are applicable thereto." 14. Section 205 provides for payment of dividend out of profits. Since the dividends are to be paid out of the profits, the section becomes relevant for appreciating as to how the profits are to be determined in the case of companies. Section 205 of the Companies Act reads as under: "(1) No dividend shall be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ninety-five per cent of the original cost thereof to the company by the specified period in respect of such assets. In this case, the assessee has opted to provide depreciation in accordance with section 350 of the Companies Act. Section 350 of the Companies Act reads as under : "S. 350. Ascertainment of depreciation.-The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount calculated with reference to the written-down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter at the end of the each subsequent financial year, at the rate specified for the assets by the Indian Income-tax Act, (1961), and the rules made thereunder for the time being in force, as normal, depreciation including therein extra and multiple shift allowances but not including therein any special, initial or other depreciation or any development rebate, whether allowed by the Act or those rules or otherwise." 17. Considering the provisions of the Companies Act, in particular sections 205, 350 and Parts II and III of the Schedule VI of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of value adopted on revaluation would depict distorted results of the company. Therefore, the depreciation as permissible under law alone could be debited to the profit and loss account. In such circumstances, the adjustment claimed by the assessee by reason of withdrawal from the revaluation reserve account is not permissible, as one of the conditions for reduction of such amount from the profits is that "such amount is credited to the profit and loss account". In this case, the said amount is neither credited to the profit and loss account nor can it be deemed to have been credited to the said account. 18. Similarly, in the case of the adjustment in respect of obsolete items of machinery, proviso to section 205 2(d) makes it obligatory for the assessee to write off the written down value so discarded in accordance with proviso to section 350. The said proviso to section 350 reads as under: "Provided that if any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full the excess, if any, of the written-down value of such asset over its sale proceeds or, as the case may be, its scrap value, sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the accounts of the appellant for the year under apeal is relevant: "1. ........ 2. ........ On the revalued Assets, Depreciation is charged on straight line basis at the rates given by the valuer. Since the same is higher than the Depreciation thereon, as per Section 205(2)(b) the difference of ₹ 64.32 lacs (Previous year ₹ 76.68 lacs) has been drawn from the Revaluation Reserve. On the balance Fixed Assets, Depreciation is charged as per Section 205(2)(b) of the Companies Act." 22. Our attention had been drawn to the guidelines issued by the Institute of Chartered Accountants (copy placed on record) relating to Treatment of Reserve created on revaluation of fixed assets. We note that in para 9 of the guidelines, it has been stated as under: "9. A question may arise, as to whether the additional depreciation provision required in consequence of revaluation can be adjusted against "Revaluation Reserve". As stated earlier, deprecation 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 remunerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the provisions of the Companies Act. Moreover, it is well settled principle of law that if the guidelines of the institute are in conflict with any law, such guidelines are to be ignored. Reference to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is relevant. In this case, it has been held as under: "Next, it has been argued that according to well-established accountancy practice the interest earned by the company even before the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justified by any provision of the statute or is contrary to it." 25. Considering the totality of facts and circumstances of the case, the position thus emerges as follows. The assessee had revalued its assets. The difference between the book value of assets and the value as per valuation could not be adjusted by the assessee under any head. The difference was accordingly credited to an account named as 'revaluation reserve account'. If one were to keep in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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