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Monday, August 20, 2012

Income Tax Act, 1961 - s.115JB(2)- Explanation, Clause (i) read with proviso - Appellant-assessee had revalued its fixed assets as on 31st March, 2000 (relevant to assessment year 2000-01) - Resultant surplus stood added to the cost of the assets - Revaluation reserve of equivalent amount was created on the liability side - During assessment year 2001-02, Rs.26,11,74,000/-, being the differential depreciation, transferred out of revaluation reserve and credited to P & L Account which the A.O. disallowed and consequently said sum of Rs. 26,11,74,000/- stood added back to the net profits - Challenge to, by assessee - Held: Clause (i) of the explanation to s.115JB(2) mandates reduction from the net profits the amount(s) withdrawn from the reserves earlier created, provided such amount(s) is credited to P & L Account - Adjustment made in the P & L Account was primarily in the nature of contra adjustment in the P & L Account and not a case of effective credit in the P & L Account (as contemplated in clause (i) of Explanation) - Assessee credited amount to the extent of the additional depreciation from the revaluation reserve only to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend - The proviso to clause (i) of the Explanation to s.115JB(2) comes in the way of the claim for reduction made by the assessee under clause (i) to the Explanation - As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. MAT provisions - Object of - Held: Is to bring out the real profit of the companies - The thrust is to find out the real working results of the company. The appellant-assessee is a widely held quoted limited company engaged in the business of manufacture of yarn and polyester. The assessee had revalued its fixed assets as on 31st March, 2000 and the resultant surplus of Rs.288,58,19,000/- stood added to the cost of the assets on the asset side of the balance sheet and to equalize both sides thereof the revaluation reserve of an equivalent amount was created on the liability side of the balance sheet. The figure of profit remained untouched during the assessment year 2000-01 so far as the revaluation of assets to the tune of Rs.288,58,19,000/- was concerned. During the assessment year 2001-02, an amount of Rs.26,11,74,000/-, being the differential depreciation, was transferred out of the said revaluation reserve of Rs.288,58,19,000/- and credited to the P & L Account which the AO disallowed and consequently the said sum of Rs. 26,11,74,000/- stood added back to the net profits. 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 the present appeal. Dismissing the appeal, the Court HELD:1. Book profit is not defined in the Income Tax Act, 1961. It is income computed under the company law. By virtue of the MAT provisions, in the case of a company whose total income as computed under the normal provisions of the Act is less than 30% of the book profit, the total income chargeable to tax will be 30% of the book profit as computed. For the purposes of Section 115J, book profit will be the net profit as shown in the P & L Account prepared in accordance with the provisions of Schedule VI 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 & 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 & 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 & 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 & 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. [Para 20] [867-D-H; 868-A] 2. In the present case, the adjustment made in the P & L Account was as per Accounting Standards 6 and 10 read with Guidance Note issued by Institute of Chartered Accountants of India which is in conformity with Section 211 of the Companies Act. The said adjustment was primarily in the nature of contra adjustment in the P & L Account and not a case of effective credit in the P & L Account (as contemplated in clause (i) of explanation). The credit in the P & L Account implies that the P & L Account per se has been effectively credited by the said amount. Thus, the amount withdrawn from any reserve must in effect impact the net profit as shown in the P & L Account. As per accounting principles, the contra adjustment does not at all affect any particular account to which it has been carried. Unless an adjustment has the effect of increasing the net profit as shown in the P & L Account, that entry cannot be said to be a credit to the P & L Account and, therefore, though the amount has been literally credited to the P & L Account, however, in substance there is no credit to P & L Account. MAT provisions were introduced as number of zero tax companies had grown. It was found that companies had earned substantial book profits and had paid huge dividends but paid no tax. In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31.3.2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation to Section 115JB(2) in respect of depreciation has been rightly rejected by the AO. [Para 21] [868-B-H; 869-A] 3. The revaluation reserve of Rs.288,58,19,000/- was created during earlier assessment year 2000-01. During the accounting year ending 31.3.2001 (assessment year 2001-02), the profits of assessee stood at Rs.120,18,97,000/- whereas depreciation stood at Rs.127,57,06,000/-. Depreciation is a no-cash charge 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 `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. The said reasons are in addition to the reasons given by the Authorities below while rejecting the claim of the assessee. [Paras 22, 23] [869-B-F] 4. Under the provisions, as they then existed, certain adjustments were required to be made to the net profit as shown in the P & L Account. One such adjustment stipulated that the net profit shall be reduced by the amount(s) withdrawn from any reserves, if any such amount is credited to the P & L Account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to P & L Account. From the facts, it is clear that neither the said amount of Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the P & L Account. Thus, the proviso to clause (i) of the explanation to Section 115JB(2) comes in the way of the claim for reduction made by the assessee. The reduction under clause (i) to the explanation could have been availed only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. Further, the revaluation reserve stood created during the earlier assessment year 2000-01. As regards the argument on behalf of the assessee that creation of such reserve did not impact the profits of that year, though the facts show that though the profit was not impacted, depreciation as the head of A/c. was impacted. By inter play of the balance sheet items with Profit & Loss A/c. items the assesseehas sought to project the loss of Rs.7,38,09,000/- as profit of Rs.18,73,65,000/-. [Para 24] [870-C-H; 871-A-B] CIVIL APPELLATE JURISDICTION : Civil Appeal No. 33 of 2011. From the Judgment & Order dated 22.9.2009 of the High Court of New Delhi at Delhi in ITA No. 851 of 2009. Ajay Vohra, Kavita Jha for the Appellant. Bishwajit Bhattacharya, ASG, Rahul Kaushik, Yatinder Chaudhary, Ajay Singh and B.V. Balaram Das for the Respondent.


                                                           REPORTABLE


                 IN THE SUPREME COURT OF INDIA
                  CIVIL APPELLATE JURISDICTION
                CIVIL APPEAL NO.               OF 2011
             (arising out of S.L.P. (C) No. 35133 of 2009)

Indo Rama Synthetics (I) Ltd.                        ...
Appellant(s)

        versus

C.I.T., New Delhi.                                           ...
Respondent(s)




                          JUDGMENT

S.H. KAPADIA, CJI


1.       Leave granted.

Facts

2.       Assessee is a widely held quoted limited company and

is engaged in the business of manufacture of yarn and

polyester.

3.       During the previous year ending 31.3.2000 relevant to

the assessment year 2000-01, fixed assets were revalued

resulting in increase in the net book value of such assets by

Rs.288,58,19,000/-, which was credited to the revaluation
                                                                2


reserve.    Consequently, the balance sheet for the preceding

assessment year, resulted in enhancement of cost of fixed

assets by the said amount with corresponding credit to

revaluation reserve.

4.         For the previous year ending 31.3.2001, relevant to

the assessment year 2001-02, the P & L Account showed the

charge of depreciation at Rs.127,57,06,000/- which was

reduced 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
                                                                 3


against the amount of depreciation debited to P & 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 & L

Account, any amount withdrawn from any reserves and

credited to P & L Account.         According to the assessee, the

proviso introduces a caveat by providing that such exclusion

can be made only in circumstances where the book profit of

the year in which the reserve is created (out of which the

withdrawal has been made in the subsequent years) has been

increased to the extent of such reserve. Thus, according to the

assessee, the said proviso has no application to cases like the

present one because in this case the revaluation reserve is

created, inter alia, for revaluation of assets, which are

ordinarily stated in the balance sheet at the historical cost of

acquisition by debiting the value of the fixed assets to the

extent   of   revaluation   with   corresponding   credit   to   the

revaluation reserve. Such creation of the revaluation reserve

does not impact the P & L Account in the year of creation of
                                                              4


such reserves.    That, such revaluation reserve is not a free

reserve. It is not available for distribution of profits. Unlike

revenue   reserves,   a   "revaluation   reserve"   is   not   an

Appropriation of Profits and the same is not debited by way of

debit entry through the P & L Account. That, a revaluation

reserve is in the nature of adjustment entry to balance both

sides of the balance sheet. That, the treatment of revaluation

reserve is governed by the Accounting Standards 10 and 6 and

the Guidance Note on Treatment of Reserves Created on

Revaluation of Fixed Assets issued by the Institute of

Chartered Accountants of India (ICAI).     That, in the year in

which the revaluation reserve is created, the amount of such

reserve is not debited to P & L Account and is credited directly

to a revaluation reserve as provided by ICAI and, thus, the

profit as reflected in the P & L Account is not depressed by the

creation of the reserve and, is, therefore, effectively increased

to that extent.   Thus, there is no question of increasing the

amount shown in the P & L Account further by the revaluation

amount as per Section 115JB, as the profit has, in any case,

not been reduced by such an amount in the first place. That,

since in the year of creation of reserves the book profit suffers
                                                            5


full tax, without the same being affected by creation of such

revaluation reserves, in the year of withdrawal, the amount

withdrawn would be liable to be reduced while computing the

book profit.   It cannot be said that even if the entire book

profit has suffered tax in the year of creation of reserve, the

revaluation reserve created 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 & 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
                                                  6


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
amount of income-tax at the rate of seven and
one-half per cent.

(2) 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) :

Provided that while preparing the annual
accounts including profit and loss account,--
         (i) the accounting policies;
        (ii) the accounting standards adopted
for preparing such accounts including profit
and loss account;
       (iii) the method and rates adopted for
calculating the depreciation,
shall be the same as have been adopted for the
purpose of preparing such accounts including
profit and loss account and laid before the
company at its annual general meeting in
accordance with the provisions of section 210
of 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 (2),
as increased by--

     (b)the amounts carried to any reserves,
                                                              7


                by whatever name called, other than a
                    reserve specified under section
                    33AC; or

          if any amount referred to in clauses (a) to (f) is
          debited to the profit and loss account, and as
          reduced by--
                  (i) the amount withdrawn from any
          reserve or provision (excluding a reserve
          created before the 1st day of April, 1997
          otherwise than by way of a debit to the profit
          and loss account), if any such amount is
          credited to the profit and loss account:

          Provided that where this section is applicable
          to an assessee in any previous year, the
          amount withdrawn from reserves created or
          provisions made in a previous year relevant to
          the assessment year commencing on or after
          the 1st day of April, 1997 shall not be reduced
          from the book profit unless the book profit of
          such year has been increased by those
          reserves or provisions (out of which the said
          amount      was     withdrawn)    under     this
          Explanation or Explanation below the second
          proviso to section 115JA, as the case may be;


8.      Before answering the submissions advanced on behalf

of the assessee, we wish to explain the history of MAT

provisions, which is as follows:

History of MAT Provisions

9.      MAT is applicable only where the normal total income

computed is less than 30% of the book profit.
                                                                  8


10.     MAT was introduced by the Finance Act of 1996 w.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 & 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
                                                              9


adjustments were to be made to the net profits as shown in

the P & L Account. One such adjustment stipulates that the

net profit shall be decreased by the amount withdrawn from

any reserves, if any such amount is credited to the P & L

Account.       Some companies have taken advantage of Section

115J by decreasing their net profit by the amount withdrawn

from the reserve created in the same year itself, though the

reserve when created had not gone to increase the book profit.

Such adjustments led to lowering of profits and, consequently,

the quantum of tax payable got reduced. Thus, by amending

Section 115J, it was provided that "book profit" will be allowed

to be decreased by the amount withdrawn from any reserves

only in two cases:

      (i)      if such reserve has been created in the previous

               year relevant to the assessment year commencing

               w.e.f. 1.4.1998

                                 OR

      (ii)     if the reserve so created in the previous year has

               gone to increase the book profit in any year when

               Section 115J was applicable.

12.          The Finance Act, 2002 now specifically provides vide
                                                           1


Section 115JB that the amounts withdrawn from any reserves,

if credited to the P & L Account, shall be reduced from the

book profit. It also provides that any amount withdrawn from

such reserves created on or after 1.4.1997 and which is

credited to P & L Account shall not be reduced from the book

profit, unless the book profit in the year of creation of such

reserves stood increased by the amount transferred to such

reserves at that time.

Scope of Section 115JB

13.     The expression "book profit" for the purposes of

Section 115JB has been defined in the explanation to Section

115JB(2) to mean: -

        the net profit as shown in the P & L Account for the

relevant previous year prepared under Section 115JB(2), as

increased by the amount(s) mentioned in clauses (a) to (f) and

as reduced by the amount(s) covered by clauses (i) to (vii) of

the said explanation.

14.     It is, thus, clear that what is "book profit" has been

defined and explained in the above explanation.       Section

115JB is a self-contained code.    It applies notwithstanding

other provisions of the Act.      There is no scope for any
                                                             1


allowances or deductions under any other section from what is

deemed to be total income of the company (assessee).

15.     The first step for arriving at the "book profit" is that

the net profit as shown in the P & L Account for the relevant

previous year prepared under Section 115JB(2) has to be

increased by the amount(s) in clauses (a) to (f) if such

amount(s) is debited to the P & 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 & L

Account.

16.     The second step for arriving at the "book profit" is that

the net profit as shown in the P & 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 & L Account. During the relevant

assessment year, clause (i) had an exception to such
                                                            1


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

book profit of such year stood increased by those reserves (out

of which the said amount(s) stood withdrawn)".

18.     Thus, the book profits calculation would be as under:

Take profit as per P & L Account                             xx
Add: (if debited to P & L Account)
(a) Income tax paid/ payable & provision                     xx
(b) Any transfer for reserves                                xx
(c) Unascertained liabilities (contingent)                   xx
(d) Provision for losses of subsidiaries                     xx
(e) Dividend paid/ proposed                                  xx
(f) Expenses relating to exempt income under sections        xx
    10, 10A, 10B, 11, 12
Less: (if credited to P & L Account)
(i) Withdrawal from reserves or provisions subject to        xx
    proviso

Q.:     Could   Rs.26,11,74,000/-,    being   the   differential

depreciation recouped from the revaluation reserves created

during the earlier assessment year 2000-01, be said to be

credited in the P & L Account during the assessment year in

question in terms of clause (i) to the explanation to Section

115JB(2)?
                                                                  1




19.      The brief facts apropos this issue are that the assessee

had revalued its fixed assets as on 31st March, 2000 and the

resultant surplus of Rs.288,58,19,000/- stood added to the

cost of the assets on the asset side of the balance sheet and to

equalize both sides thereof the revaluation reserve of an

equivalent amount was created on the liability side of the

balance sheet. Thus, the said reserve was merely an

adjustment entry.     The figure of profit remained untouched

during the assessment year 2000-01 so far as the revaluation

of assets to the tune of Rs.288,58,19,000/- was concerned.

During    the   assessment       year    2001-02,   an   amount    of

Rs.26,11,74,000/-, being the differential depreciation, was

transferred     out   of   the    said    revaluation    reserve   of

Rs.288,58,19,000/- and credited to the P & L Account which

the AO disallowed and consequently the said sum of

Rs.26,11,74,000/- stood added back to the net profits. Hence,

this civil appeal is filed by the assessee.



20.      Book profit is not defined in the Act.          It is income

computed under the company law.               By virtue of the MAT
                                                            1


provisions, in the case of a company whose total income as

computed under the normal provisions of the Act is less than

30% of the book profit, the total income chargeable to tax will

be 30% of the book profit as computed. For the purposes of

Section 115J, book profit will be the net profit as shown in the

P & L Account prepared in accordance with the provisions of

Schedule   VI   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 & 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 & 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 & 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
                                                           1


P & 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 & L

Account was as per Accounting Standards 6 and 10 read with

Guidance Note issued by Institute of Chartered Accountants of

India which is in conformity with Section 211 of the

Companies Act. The said adjustment was primarily in the

nature of contra adjustment in the P & L Account and not a

case of effective credit in the P & L Account (as contemplated

in clause (i) of explanation). The credit in the P & L Account

implies that the P & L Account per se has been effectively

credited by the said amount. Thus, the amount withdrawn

from any reserve must in effect impact the net profit as shown

in the P & L Account. As per accounting principles, the contra

adjustment does not at all affect any particular account to

which it has been carried. Unless an adjustment has the effect

of increasing the net profit as shown in the P & L Account,

that entry cannot be said to be a credit to the P & L Account

and, therefore, though the amount has been literally credited

to the P & L Account, however, in substance there is no credit
                                                            1


to P & L Account. MAT provisions were introduced as number

of zero tax companies had grown. It was found that companies

had earned substantial book profits and had paid huge

dividends but paid no tax. In the present case, had the

assessee deducted the full depreciation from the profit before

depreciation during the accounting year ending 31.3.2001, it

would have shown a loss and in which event it could not have

paid the dividends and, therefore, the assessee credited the

amount to the extent of the additional depreciation from the

revaluation reserve to present a more healthy balance sheet to

its shareholders enabling the assessee possibly to pay out a

good dividend. It is precisely to tax these kinds of companies

that MAT provisions had been introduced. The object of MAT

provisions is to bring out the real profit of the companies. The

thrust is to find out the real working results of the company.

Thus, the reduction sought by the assessee under clause (i) to

the explanation to Section 115JB(2) in respect of depreciation

has been rightly rejected by the AO.

22.     Take the facts of the present case. As stated above, the

revaluation reserve of Rs.288,58,19,000/- was created during

earlier assessment year 2000-01. During the accounting year
                                                                          1


ending 31.3.2001 (assessment year 2001-02), the profits of

assessee stood at Rs.120,18,97,000/- whereas depreciation

stood at Rs.127,57,06,000/-. Depreciation is a no-cash charge

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.
                                                                  1


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

valuation was Rs.288,58,19,000/- which was credited to the

revaluation reserve. In other words, at the time of revaluation

of assets, the said figure of Rs.288,58,19,000/- was added to

the historical cost of assets on the asset side of the balance

sheet and in order to equalize both sides of the balance sheet

the revaluation reserve to that extent was created on the

liability side. Thus, the figure of profit remained untouched so

far   as     the   revaluation   of   assets   to   the    tune    of

Rs.288,58,19,000/- is concerned.          The profits were not

increased by the said amount when the asset was revalued.

During the assessment year in question, i.e., assessment year

2001-02,      an   amount   of   Rs.26,11,74,000/-,       being   the

differential depreciation, was transferred out of the said

revaluation reserve of Rs.288,58,19,000/- and credited to the

P & L Account which the A.O. disallowed by placing reliance

on the proviso to clause (i) of the explanation to Section

115JB(2).      Consequently, the A.O. added back the said
                                                                 1


amount of Rs.26,11,74,000/- to the net profits. We agree with

the A.O. Under the provisions, as they then existed, certain

adjustments were required to be made to the net profit as

shown in the P & L Account. One such adjustment stipulated

that the net profit shall be reduced by the amount(s)

withdrawn from any reserves, if any such amount is credited

to the P & L Account. Thus, if the reserves created had gone

to increase the book profits in any year when the provisions of

Section 115JB were applicable, the assessee became entitled

to reduce the amount withdrawn from such reserves if such

withdrawal is credited to P & L Account. Now, from the above

facts,   it   is   clear   that   neither   the   said   amount   of

Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to

increase the book profits in the said year ending 31.3.2000

(being the financial year). Thus, when such amount(s) has not

gone to increase the book value at the time of creation of

reserve(s), there is no question of reducing the amount

transferred from such revaluation reserves to the P & L

Account. Thus, the proviso to clause (i) of the explanation to

Section 115JB(2) comes in the way of the claim for reduction

made by the assessee. In our view, the reduction under clause
                                                                         2


(i) to the explanation could have been availed only if such

revaluation reserve had gone to increase the book profits. As

the amount of revaluation reserves had not gone to increase

the book profits at the time it was created, the benefit of

reduction cannot be allowed.        One more fact needs to be

highlighted.    In this case, as indicated above, the revaluation

reserve stood created during the earlier assessment year

2000-01.       It has been vehemently argued on behalf of the

assessee that creation of such reserve did not impact the

profits of that year. The facts enumerated hereinabove shows

that though the profit was not impacted, depreciation as the

head of A/c. was impacted. By inter play of the balance sheet

items with Profit & Loss A/c. items the assessee, as stated

above, has sought to project the loss of Rs.7,38,09,000/- as

profit of Rs.18,73,65,000/-.

Conclusion

25.     For above reasons, we see no reason to interfere,

hence, the civil appeal filed by the assessee shall stand

dismissed with no order as to costs.



                                 .......................................CJI
                                                           2


                  (S. H. Kapadia)


                  ...........................................J.
                  (K.S. Panicker Radhakrishnan)


                  ...........................................J.
                  (Swatanter Kumar)

New Delhi;
January 5, 2011

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