Madras H.C : the assessee was right in claiming deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA

High Court Of Madras

CIT vs. W.S. Industries (India) Ltd.

Assessment Year : 1989-90

Section : 115JA, 115JB

Mrs. Chitra Venkataraman And M. Jaichandren, JJ.

Tax Case (Appeal) No. 200 Of 2005

August 22, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The tax case appeal is filed by the Revenue against the order of the Income-tax Appellate Tribunal, Madras “B” Bench, dated November 29, 2004, in I.T.A. No. 875/Mds/98 relating to the assessment year 1989-90 raising the following substantial questions of law :

“1. Whether, in 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of the case, the Tribunal was right in holding that the assessee was right in claiming deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA ?

2. 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in the facts and circumstances of the case, the Tribunal was right in holding that denial of deduction of the amounts withdrawn from the revaluation reserve during the assessment year, from the book profit under section 115JA would amount to double addition ?”

2. The assessee filed its return for the above said assessment year admitting the income of Rs. 32,44,880 under section 115J of the Income-tax 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 section 148. The assessee defended the said course of action and contended that as per section 115JA(1)(i ) of the Act, any amount withdrawn from the reserve account credited to the profit and loss account can be deducted while arriving at the book profit.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contention and pointed out that the amount of Rs. 8,65,459 deducted from the book profit did not represent the amount withdrawn from the reserve or provisions which was credited to the profit and loss account. Thus, having taken the additional depreciation to the reserve account on the revaluation directly from the balance-sheet and not from the profit and loss account, the claim of the assessee could not be sustained under section 115JA(1)(i ). Aggrieved by this, the assessee went before the Commissioner of Income-tax (Appeals). The assessee contended that it revalued the assets as on September 30, 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 March 31, 1989, the assessee claimed depreciation in its account as follows :

Revaluation done as at 30th September, 1985
	Rs.	Rs.
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 30th September, 1985		5,43,52,066
Less : Transfer from revaluation reserve for the year ended 30th September, 1986		8,65,459
Balance as at 31st March, 1988		5,19,22,960
For the year ended 31st March, 1989, the appellant has claimed depreciation as under in it’s profit and loss account profit before depreciation		2,34,60,529
Depreciation	1,25,85,586
Less : Transfer from revaluation reserve	8,65,459	1,17,20,127
		1,15,80,402

3. The assessee contended that considering the fact that the proviso carved out under section 115JA(1)(i) restricted the scope of reduction from the reserve for the period commencing on or after April 1, 1997, as the reserve created was much before the introduction of section 115JA, the claim of the assessee merited acceptance under section 115JA(1)(i) of the Act.

4. The Commissioner of Income-tax (Appeals), however, rejected the assessee’s contention, holding that the claim was not in accordance with Schedule 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 profit and loss account and that the revaluation was reduced by corresponding reduction in the value of the assets and had no repercussion in the profit and loss account, the assessee was not entitled to the relief. Aggrieved by the same, the assessee went on appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate 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 crores and Rs. 1.17 crores alone was debited to the profit and loss account. Aggrieved by the same, the Revenue is on appeal before this court.

5. Learned standing counsel appearing for the Revenue placed reliance in the case of Indo Rama Synthetics (I.) Ltd. v. CIT [2011] 330 ITR 363/ 196 Taxman 539/ 9 taxmann.com 25 (SC), wherein the apex court considered an identical situation falling under section 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 section 115JA(1)(i), he submitted that, to accept such contention, would really defeat the very purport of section 115J of the Act and grant a deduction of the amount which had not gone through the profit and loss account. He further emphasised that what is contemplated under section 115JA, Explanation to section 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 dated August 4, 2011, in the case of CIT v. SRF Ltd. [2012] 342 ITR 106 /[2011] 201 Taxman 73/ 12 taxmann.com 429 (Delhi)) which is also a case relating to the assessment year 1989-90. Thus, going by the said decision, the issue is no longer res integra to take a different decision.

6. 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 section 115JA(1)(i) and as the proviso refers to the reserve created after April 1, 1997, the reserves created prior to April 1, 1997, necessarily, are to be granted reduction under the substantive part covered in section 115JA(1)(i). He contended that the restriction on claiming reduction on the withdrawal point to reserve created out of the profit and loss account would have relevance only to those credited after April 1, 1997. Thus, pointing out to the fact that the decision of the Supreme Court concerning section 115JB cannot be applied straight to the case of the assessee falling under section 115JA and that reserve was created when section 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 emphasis that the claim of the assessee cannot be, in any manner, cornered by any general principles of accountancy.

7. Heard learned standing counsel appearing for the Revenue and the learned counsel for the assessee and perused the documents available on record.

8. Before going into the decision of the apex court and the Delhi High Court, the provisions of section 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 profit and loss account for the relevant previous year prepared under sub-section (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 clauses (a) to (f) is debited to the profit and loss account, and as reduced by,-

(i) the amount withdrawn from any reserves or provisions 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 (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”

9. A reading of section 115JB, which came up for consideration before the Supreme Court in the decision reported in Indo Rama Synthetics (I.) Ltd. (supra) shows that materially there is no difference between section 115JA and section 115JB, except for the fact that section 115JA of the Act is applicable on and from April 1, 1997, and section 15JB is applicable on and from April 1, 2001. The assessee therein revalued its assets as on March 31, 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 profit and loss account. The Assessing Officer disallowed a sum of Rs.26,11,74,000. Consequently, the said sum was added to the net profit.

10. The apex court pointed out that clauses (i) to (vii) of section 115JB of the Act represent items of reduction from the net profits. Referring to clause (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 profit and loss account. 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 profit and loss account, that entry cannot be said to be a credit to the profit and loss account and, therefore, though the amount has been literally credited to the profit and loss account, in substance, there is no credit to the profit and loss account. Thus, in terms of the abovesaid principle, the Supreme Court held that if the reserves created are not referable to the profit and loss account 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 profit and loss account does not arise at all. The apex court pointed out that reduction under section 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.

11. As far as the present case is concerned, as rightly pointed out by the Revenue, even though it relates to section 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 August 4, 2011. The said case is also one relatable to the assessment year 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 section 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 clause (i) would arise only when reserve had relevance to the profit and loss account of the assessee. The Delhi High Court pointed out to the distinction between section 115JA and section 115JB and held that as far as the principles of accounting is concerned, if the reserve had been created at the first instance with reference to the profit and loss account, 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 profit and loss account, 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 section 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.

12. 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 profit and loss account, the question of the assessee claiming reduction to the book profit did not arise.

13. 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.

14. 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 section 115JA Explanation (i). Consequently, the order of the Tribunal is set aside. The tax case appeal stands allowed. No costs.

[Citation : 342 ITR 231]