TMI Blog1993 (8) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, treating them to be separate undertakings. The contention was that, the authorities below, were in error in allowing one consolidated statutory deduction of Rs. 5,000 on the entertainment allowance, while Rs. 5,000 should have been allowed as a deduction from the profits of each of the business units. The plea was that, this claim has the recognition in Garden Silk Wvg. Factory v. CIT [1991] 189 ITR 512 (SC), Dr. B. A. Rajakrishnan v. ITO [1986] 15 ITD 33 (Coch.), First ITO v. Yash Raj Chopra [1984] 10 ITD 709 (Bom.) and by the Special Bench in Ranbir Raj Kapoor v. ITO [1988] 25 ITD 56 (Bom.)(SB). The departmental representative placed reliance on the orders. 3. The rival submissions in this regard have been given our very careful consideration. Section 37(2A) of the Act prescribes amount of allowance from the expenditure in the nature of entertainment incurred by an assessee, while computing the income from profits and gains from business or profession, of that assessee. It states that, the maximum allowance is limited to 1/2% or Rs. 5,000, whichever is higher on the first Rs. 10 lakhs of the profit and gains from business or profession, on the next Rs. 40 lakhs of the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is that, the disallowance should be worked out by consolidating all of the travel undertaken by each of the employees in a year, and then applying the rate of admissible travel allowance, so that, excess in one trip would get adjusted against another, where the expenses would be very much below the allowable limit. This plea is based on the decisions of the Tribunal, in IT Appeal No. 6322 (Delhi) of 1985, assessment year 1982-83, of Bharat Commerce Industries Ltd. v. ITO and on S. V. Ghatalia v. Second ITO [1983] 4 ITD 583 (Bom.). The above cited decisions have been consistently followed by the Tribunal, and hence, for the sake of consistency, we shall uphold the claim and direct the Assessing Officer to work out the disallowance by consolidating all of the travel undertaken by each of the employees in a year and then work out the disallowance by applying Rule 6D of the IT Rules, 1962. 5. The claim as advanced by the assessee in its fifth grounds of appeal, is that, the rent, repair and expenditure on the guest house expenses that are normally allowed under sections 30, 31 32 of the Act, could not be reconsidered for working out the disallowance under section 37(4) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as raised the following ground as ground No. 1 relating to its claim under section 115J of the Act : 1. That on the facts and in the circumstances of the case and in law the CIT (Appeals) erred in restoring the addition made to the book profits under section 115J of the Act to the file of the Assessing Officer : (i) as the question involved was purely legal and no fresh investigation of facts was required, (ii) without giving a specific direction to dispose of the ground as contemplated in clause (a) of section 251(1) of the Act, and (iii) on the basis which was never challenged by the assessee. 9. The Assessing Officer, directed the appellant company to furnish a computation of its book profit as under section 115J of the Act. The appellant, complied with this direction and according to the said computation, the book profit was shown at a loss of Rs. 10,50,98,557. The computation as submitted by the appellant company, is reproduced below for the sake of convenience : Loss as per profit loss a/c Rs. 1. Industrial Synthetic Division 7,17,17,936 2. Industrial Fabrics Division 2,95,06,996 3. Flurochemicals Division 40,55,837 4. Leasing Division 9,33,344 ------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was that, it was on the advice of the Financial Institutions in 1983 1986, that the assets were revalued so as to reflect the replacement cost of the assets, in the balance sheet of the company. This was so advised keeping in view the inflationary trends, for retaining of sufficient funds for replacing of the assets in the future and to present a realistic picture of the operations of the company. This was based on guidelines and established accountancy principles, which required creation of an account styled ' Revaluation Reserve Account ' and crediting it with an identical amount, by which cost of the assets have been increased. It required charging the profit loss account with depreciation on the revalued cost each year and credit to the appropriation account with the amount of depreciation on that portion of the cost, that is equal to the difference of the revalued cost and the written down value, as a withdrawal from the Revaluation reserve account. The purpose of the revaluation of the assets is to indicate the operating profit, holding gain and to act as an indicator for the decisions taken. Referring to the Guidance Notes issued on ' Accounting for Changing Prices ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ickles was also referred to. It was contended that, the courts have been unanimous in their opinion that, whenever complex questions of accountancy principles arises, then the views of the Institute of Chartered Accountants of India, should be given their weightage. The CIT (Appeals), considered the arguments as advanced by the appellant company and the objections of the Assessing Officer. The CIT (Appeals) summarised the contentions of the appellant company, and these are--- (a) provisions which prescribe that depreciation should be granted only with reference to historical cost are not a bar to claim depreciation on revalued figures as 115J applies notwithstanding what is contained in other provisions ; (b) when revaluation is done, depreciation has to be claimed on the revalued figures and the differential amount of depreciation has to be credited to the profit loss account as the act of revaluation and consequential claim of depreciation are, in effect, healthy trend recognising the importance of retaining sufficient funds through additional depreciation in the event of replacement of fixed assets. This is more conducive to the true and fair view ; (c) section 115J does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the appellant company, vehemently argued that, the issue as to whether, withdrawal from revaluation reserve account that is credited to profit loss account, could be treated as profit for arriving at the figure of book profit, involves pure question of law, without requiring investigation of any further facts and therefore, despite the question not having been answered by the CIT (A), the Tribunal, in its inherent power, should decide this question. He pleaded that, under section 103 of the Civil Procedure Code, the High Court, in its capacity as the second appellant authority has been given the power to decide on an issue, that is raised during the hearing in appeal, though the first appellate authority may not give any conclusion on that point. He submitted that, this power of the High Court to decide a question is subject to only one condition, that the evidence in connection therewith is available on the records and it does not require any investigation into any facts. He pleaded that, had the issue required investigation into any facts, then, the remand by the CIT (A), would not have caused any grievance to the company. 15. He submitted that, the CIT (A), had to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would not be open to the Assessing Officer, to consider the withdrawal from the reserve, as part of the profit, in the year in which credit is given to the profit loss account. He contended that, the Special Bench, had also observed that, there arises no profit by the revaluation of assets, but, only at the time of their sale. He pleaded that, the Explanation that was introduced effective from1-4-1988, was also considered in the Special Bench and it was held that, since the reserve was created prior to1-4-1988, and that too by not debiting to the profit loss account, the Assessing Officer could not consider the withdrawal from the reserve, in the computation of the book profit. He accordingly pleaded that, in view of the fact that, the Special Bench having concluded the issue as had been raised by the assessee, the withdrawal from revaluation reserve created prior to 1-4-1988, by corresponding increase to the value of the assets and not by means of a debit to the profit loss account, could not be considered in the computation of the book profit. 17. The DR, vehemently objected to the various claims put forth by the appellant's counsel. He pleaded that, the CIT (A) had r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account is excess charged by that amount of depreciation representing the portion of revaluation, it needs to be discarded, which is the same thing as that, the withdrawal from the revaluation reserve to the extent of amount of depreciation charged on that portion of revaluation of assets, is to be added to the profit that has been reduced by that amount of depreciation represented by the revaluation portion. 19. We have considered the rival submissions on the issue. We have no doubt in our minds that, the issue as has been raised before us involves pure question of law, that requires no investigation of facts. The action of the CIT (A) in remanding the issue back to the files of the Assessing Officer, for consideration of the various submissions put forth by the appellant company, knowing fully well that it does not require any investigation of facts, but pure interpretation of the provisions of section 115J of the Act, together with the accounting concepts in these circumstances, cannot but be held as inappropriate. Since this is an issue raised before us, we have to hold that, the order of the CIT (A), in the circumstances of the case, is highly arbitrary and needs to be set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assets, the difference between original cost and revalued cost was credited to an account opened specifically for the purpose of balancing both sides of the balance-sheet, which has been styled as ' Revaluation Reserve Account ', i.e., the reserve was not created by debiting the profit of any earlier year or years, thus reducing the profit of that year or those years. It is an admitted fact that, since the revaluation of the assets, the profit loss account had been charged with depreciation on the revalued cost and the profit loss appropriation account had been credited with an equivalent amount representing the difference in the amount of depreciation on the original/written down value of the assets and the revalued cost, as a withdrawal from revaluation reserve account. The controversy is limited to the aspect of the amount that is credited to the profit loss account, representing the withdrawal from revaluation reserve account, is to be added to the profit for arriving at the book profit or should be disregarded. 22. In the Special Bench case, the Assessing Officer had included the profit on sale of investments, and allowed deduction of the amount withdrawn from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for any purposes other than those referred to in sub-section (4) of that section ; (h) the amount credited to the reserve account under section 80HHD, to the extent that amount has not been utilised within the period specified in sub-section (4) of that section ; if any amount referred to in clauses (a) to (f) is debited or, as the case may, the amount referred to in clauses (g) and (h) is not credited to the profit loss account, and as reduced by,--- (i) the amount withdrawn from reserves (other than reserves specified in section 80HHD) or provisions, if any such amount is credited to the profit 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 the previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, shall not be reduced from the book profit unless the book profit of such year has not been increased by those reserves or provisions (out of which the said amount was withdrawn under this Explanation ; (ii) the amount of income to which the provisions of Chapter III applies, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n created or provisions have been made before 1st day of April, 1988 ; or (ii) if the reserves have been created or provisions have been made after 1st day of April, 1988, and have gone to increase the book profits in any year when the provisions of section 115J of the Income-tax Act were applicable. 25. The Special Bench, in para 15.1 considered the power of the Assessing Officer with reference to the adjustments to be made to the profit, in the calculation of the book profit. The observations have been made to the effect that, the profit of the year is to be computed only with reference to the figures of opening balance reflected in the accounts. Reference was made to the Supreme Court ruling in Chainrup Sampatram v. CIT [1953] 24 ITR 481, for the observation that, no profit arises on a mere revaluation of the assets, and thus there was no escapement of any income in any earlier year. Reference was made to the amendment to the section with effect from1-4-1989and also to the memorandum explaining the amendment and the following conclusion was arrived at, which is reproduced for the sake of facility. At para 9.6 above, we have set down the amendment providing for the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reserves from the profit, are as a matter of accounting practice reflected or shown in the profit loss appropriation account. The amendment has been explained earlier, consists of two parts, namely, reserves created before1-4-1988and reserves created on or after1-4-1988. In regard to reserves created before 1-4-1988, since, section 115J of the Act was not applicable to those years, the words ' and have gone to increase the book profits in any year when the provisions of section 115J of the Act were applicable ', have not been made part of it. The reason is obvious because, for all the assessment years up to 1987-88, the income was to be computed with reference to the normal provisions of the Act, and depreciation on the fixed assets were allowable at the rates prescribed in the IT Rules and the charging of depreciation to the profit loss account, on the revalued cost had no effect in the computation of income. There is no denial that, but for the charge of depreciation on the revalued cost of assets, to the profit loss account in the previous year relevant to the assessment year under appeal, the profit of the year would have been higher because of depreciation on the histo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under appeal. In either case, from the figure of net profit, adjustments as envisaged by the section for adding to the profit and reducing from the figure of profit, have to be given, after which adjustments only, the amount of book profit would be the result. The Assessing Officer had taken the figure of profit below the line, i.e., after all adjustments for transfers to and from reserves, including the amount withdrawn from the revaluation reserve, but had not allowed reduction of the amount withdrawn from the revaluation reserve account that was credited to the profit loss appropriation account. Since the Assessing Officer has to apply the provisions of section 115J in the like manner as was intended to by the Legislature, he could have only reduced the amount withdrawn from the reserve from the profit amount taken by him.The Special Bench in para 17 of the order has given this salient finding : " However, the Explanation to section 115J provides for the book profit to be increased by the amounts carried to any reserves, by whatever name called in item (b), that is to say, if the Reserve is created out of current year's book profits. If out of current year's profit, any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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