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Judgment
Mrs. Chitra Venkataraman, J.—The tax case appeal is filed by the Revenue against the order of the Tribunal, Madras "B" Bench, dt. 29th Nov., 2004, in ITA No. 875/Mad/1998 relating to the asst. yr. 1989-90 raising the following substantial questions of law :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was right in claiming deduction of the amounts withdrawn from the revaluation reserve during the assessment year from the book profit under s. 115JA ?
Whether, in the facts and circumstances of the case, the Tribunal was right in holding that denial of deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under s. 115JA would amount to double addition ?
The assessee filed its return for the abovesaid assessment year admitting the income of Rs. 32,44,880 under s. 115J of the IT Act, 1961 (hereinafter called as "the Act"). Subsequent to the completion of the assessment, it was noticed that in the computation of book profit, the assessee had reduced the withdrawal from the revaluation reserve account. The Revenue pointed out that the said amount of Rs. 8,65,459 was already reduced from the book depreciation worked out after revaluation, hence, further deduction was not permissible. In the circumstances, the assessment was sought to be reopened under s. 148. The assessee defended the said course of action and contended that as per s. 115JA(1)(i) of the Act, any amount withdrawn from the reserve account credited to the P&L a/c can be deducted while arriving at the book profit. The assessing authority, however, rejected the said contention and pointed out that the amount of Rs. 8,65,459 deducted from the book profit did not represent the amount withdrawn from the reserve or provision which was credited to the P&L a/c. Thus, having taken the additional depreciation to the reserve account on the revaluation directly from the balance sheet and not from the P&L a/c, the claim of the assessee could not be sustained under s. 115JA(1)(i). Aggrieved by this, the assessee went before the CIT(A). The assessee contended that it revalued the assets as on 30th Sept., 1985, and a sum of Rs. 5,43,52,066 was kept as revaluation reserve in the balance sheet. It is stated that the assessee had not claimed depreciation relatable to the revaluation reserve in the balance sheet in any of the subsequent years. However, it reduced the value of the assets by the amount equal to the depreciation relatable reserve by similar account. The assessee pointed out that for the year ending 31st March, 1989, the assessee claimed depreciation in its account as follows :
Revaluation done as at 30th Sept, 1985
Increase in value of building
2,62,26,036
Increase in value of land
2,81,26,040
Balance in revaluation reserve account as at 30-9-1985
5,43,52,066
Less : Transfer from revaluation reserve for the year ended 30-9-1986
8,65,459
Balance as at 31-3-1988
5,19,22,960
For the year ended 31-3-1989, the appellant has claimed depreciation as under in its P&L a/c profit before depreciation
2,34,60,529
Depreciation
1,25,85,586
Less : Transfer from revaluation reserve
8,65,4591,17,20,127
1,15,80,402
The assessee contended that considering the fact that the proviso carved out under s. 115JA(1)(i) restricted the scope of reduction from the reserve for the period commencing on or after 1st April, 1997, as the reserve created was much before the introduction of s. 115JA, the claim of the assessee merited acceptance under s. 115JA(1)(i) of the Act.
The CIT(A), however, rejected the assessee''s contention, holding that the claim was not in accordance with Sch. VI to the Companies Act, since the depreciation was calculated on the revalued assets. As no amount was withdrawn from the revaluation reserve and credited to the P&L a/c and that the revaluation was reduced by corresponding reduction in the value of the assets and had no repercussion in the P&L a/c, the assessee was not entitled to the relief. Aggrieved by the same, the assessee went on appeal before the Tribunal. The Tribunal allowed the claim of the assessee by merely stating the contention of the assessee that the transfer from the revaluation reserve was Rs. 0.08 crore and Rs. 1.17 crores alone was debited to the P&L a/c. Aggrieved by the same, the Revenue is on appeal before this Court.
Learned standing counsel appearing for the Revenue placed reliance on the case of Indo Rama Synthetics (I) Ltd. Vs. Commissioner of Income Tax , New Delhi, wherein the apex Court considered an identical situation falling under s. 115JB of the Act. Barring the difference in the assessment year involved therein, viz., 2000-01, the law declared by the apex Court in the said decision would fully cover the case on hand. Learned standing counsel pointed out that on the admitted fact that the revaluation reserve was created with reference to the assets side of the balance sheet and admittedly, the depreciation reserve not being one created out of the profits of the company by way of appropriation of the profit of the company, the assessee cannot sustain its claim for a reduction solely by placing reliance on the proviso. Referring to the contention of the assessee that the reserve being one created during 1985-86 and hence saved by the proviso to s. 115JA(1)(i), he submitted that, to accept such contention, would really defeat the very purport of s. 115J of the Act and grant a deduction of the amount which had not gone through the P&L a/c. He further emphasised that what is contemplated under s. 115JA, Explanation to s. 115JA(1)(i) is only the withdrawal from the reserves, which are created by way of appropriation of the profit of the company and not otherwise. Learned standing counsel further placed reliance on the judgment of the Delhi High Court dt. 4th Aug., 2011, in the case of CIT Vs. SRF Ltd., which is also a case relating to the asst. yr. 1989-90. Thus, going by the said decision, the issue is no longer res integra to take a different decision.
Per contra, Learned Counsel appearing for the assessee used the phrase "amount withdrawn from any reserve or provision, if any", there being no qualifying words to reserve in s. 115JA(1)(i) and as the proviso refers to the reserve created after 1st April, 1997, the reserves created prior to 1st April, 1997, necessarily, are to be granted reduction under the substantive part covered in s. 115JA(1)(i). He contended that the restriction on claiming reduction on the withdrawal point to reserve created out of the P&L a/c would have relevance only to those credited after 1st April, 1997. Thus, pointing out to the fact that the decision of the Supreme Court concerning s. 115JB cannot be applied straight to the case of the assessee falling under s. 115JA and that reserve was created when s. 115JA(1)(i) of the Act was not there, Learned Counsel submitted that no exception could be taken to the order of the Tribunal. He further drew the attention of this Court to the Finance Act, 2002 and the Finance Act, 2007, to emphasise that the claim of the assessee cannot be, in any manner, cornered by any general principles of accountancy.
Heard learned standing counsel appearing for the Revenue and the Learned Counsel for the assessee and perused the documents available on record.
Before going into the decision of the apex Court and the Delhi High Court, the provisions of s. 115JA, particularly with reference to the Explanation contained therein, need to be noted :
115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, 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, 1997 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit...
Explanation.--For the purposes of this section, ''book profit'' means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (2), as increased by--
(a) the amount of income tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;
if any amount referred to in cls. (a) to (f) is debited to the P&L a/c, and as reduced by,--
(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the P&L a/c :
Provided that, where this section is applicable to an assessee in any previous year (including the relevant 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"
A reading of s. 115JB, which came up for consideration before the Supreme Court in the decision reported in Indo Rama Synthetics (1) Ltd. vs. CIT (supra) shows that materially there is no difference between s. 115JA and s. 115JB, except for the fact that s. 115JA of the Act is applicable on and from 1st April, 1997 and s. 115JB is applicable on and from 1st April, 2001. The assessee therein revalued its assets as on 31st March, 2000, which resulted in the surplus value of Rs. 2,88,58,000. In order to equalise both sides of the balance sheet, revaluation account was created in the balance sheet. The profit remained untouched during the year 2000-01. So far as the revaluation of the assets is concerned, a sum of Rs, 26,11,74,000 being the differential depreciation was transferred to the said revaluation account and credited to the P&L a/c. The AO disallowed a sum of Rs. 26.11.74.000. Consequently, the said sum was added to the net profit.
The apex Court pointed out that cls. (i) to (vii) of s. 115JB of the Act represent items of reduction from the net profits. Referring to cl. (i), the apex Court pointed out that in the computation of the book profit, for the purpose of reduction, the amount withdrawn from any reserve must, in effect, impact the net profit as shown in the P&L a/c. Referring to the accounting principles, the apex Court pointed out that unless an adjustment has the effect of increasing the net profit as shown in the P&L a/c, that entry cannot be said to be a credit to the P&L a/c and, therefore, though the amount has been literally credited to the P&L a/c, in substance, there is no credit to the P&L a/c. Thus, in terms of the abovesaid principle, the Supreme Court held that if the reserves created are not referable to the P&L a/c and the amount had not gone to increase the book value at the time of creation of the reserve, the question of deducting the amount transferred from such valuation reserves from the P&L a/c does not arise at all. The apex Court pointed out that reduction under s. 115J(1)(i) to the Explanation could have been availed of only if such revaluation reserve had gone to increase the book profit. Thus, at the time of creation of revaluation reserves, the benefit of reduction could not be allowed.
As far as the present case is concerned, as rightly pointed out by the Revenue, even though it relates to s. 115JA of the Act, the facts herein fully fit in what had been stated in the abovesaid decision. The same was considered by the Delhi High Court in its decision rendered on 4th Aug., 2011. The said case is also one relatable to the asst. yr. 1989-90, as has been considered in the present case before us. The assessee therein raised the same contention as has been done before us. It was contended by the assessee therein that in view of the proviso, revaluation reserve created much prior to the introduction of s. 115JA of the Act should be allowed as reduction in the computation and relied on the decision of the Supreme Court to point out that the question of invoking cl. (i) would arise only when reserve had relevance to the P&L a/c of the assessee. The Delhi High Court pointed out to the distinction between s. 115JA and s. 115JB and held that as far as the principle of accounting is concerned, if the reserve had been created at the first instance with reference to the P&L a/c, then, in the computation of profit the assessee would certainly be entitled to reduction. However, if at the first instance of the creation of reserve, the same is not referable to the P&L a/c, but to the balance sheet, the question of granting relief to the assessee did not arise. The Delhi High Court also pointed out to the amendment brought forth to s. 115JB under the Finance Act, 2002, and held that the position before the amendment as well as thereafter, thus, does not, in any manner, advance the case of the assessee. In so holding, the Delhi High Court also referred to the Memorandum Explaining the Provisions in the Finance Bill, 1989, to reject the case of the assessee.
In sum and substance, the Delhi High Court applied the decision of the apex Court in the context of the fact that creation of the revaluation reserve account being referable to the balance sheet assets portion and not by way of appropriation to the P&L a/c, the question of the assessee claiming reduction to the book profit did not arise.
In the light of the decision of the Delhi High Court laying down the law, we do not find anything exists in the case of the present assessee to emphasise that the amendment brought forth in 2002 by way of clarification to the proviso have relevance to the facts of the case. Thus, going by the provisions, we hold that the assessee is not entitled to reduction in respect of the withdrawal from the reserve account in terms of s. 115JA, Expln. (i). Consequently, the order of the Tribunal is set aside. The tax case appeal stands allowed. No costs.