TMI Blog1999 (6) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... is of an Expert Valuation Report (E.V.R.). The amount of depreciation that has been debited in the Profit and Loss Account was the amount worked out on the basis of the enhanced and revalued cost of the assets of the company. The amount of depreciation, if computed on the Written Down Value (W.D.V.) of the assets at Historical Cost would be an amount of Rs. 65,01,742. The Assessing Officer pointed out to the assessee-company that the assessee-company was not entitled to claim enhanced amount of depreciation, which obviously included additional depreciation worked out on the basis of Revalued Cost of the assets and instead the company was entitled to claim only the Regular Depreciation computed on the basis of the Written Down Value of the assets at their Historical Cost. 2. The assessee-company explained to the Assessing Officer that the revaluation of the assets was made for bona fide reasons and on the basis of detailed comprehensive and Expert Valuation Report; that once the value of the assets was enhanced by way of revaluation, depreciation has to be provided on the enhanced value of the assets. The assessee also explained this position in the light of the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its profit and loss account. The Assessing Officer has computed the taxable income under section 115J on the basis of the above revised book profit and completed the assessment accordingly under section 143(3) of the Income-tax Act, 1961. 5. The assessee-company carried its two objections arising out of the above assessment in the first appeal before the CIT (A), Vijayawada. The first objection raised before the CIT(A) was that the Assessing Officer ought to have allowed the additional depreciation in computing the book profit of the company; and the Assessing Officer was not right in law in recomputing the book profit of the assessee-company and making adjustments thereto. The second objection raised before the CIT (A) was that the Assessing Officer ought to have reduced the unabsorbed depreciation also for arriving at the book profits of the company for the purposes of section 115J of the Income-tax Act, 1961. The learned Commissioner (Appeals) considered the contentions of the assessee in detail in the light of the various contentions and the materials produced by the assessee-company before him, and found that he Assessing Officer was right on both the points agitated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 205 of the Companies Act. 9. Without prejudice to the above, the Commissioner of Income-tax (Appeals) failed to appreciate that there was no such thing as 'nil loss' because it could as well be 'nil profit' and the question of taking the lower of the losses could arrive only if there was actual cash loss before depreciation and loss on account of depreciation. In case like that of the appellant, where there was no cash loss and only depreciation loss the latter loss cannot be compared with any other existing loss, and as such it should be allowed in full in arriving at the book profits for the purpose of the section 115J of the Income-tax Act. 10. The Commissioner of Income-tax (Appeals) failed to take note of the figures of the present day market value of the similar machines shown in Column 12 of the statement enclosed to his Order on Page-13. The CIT (A) considered only the original cost of the machines, total depreciation and net depreciated value. He failed to appreciate that depreciation is meant mainly to enable the industry to ensure retention of cash for rehabilitation, replacement and modernisation of fixed assets and to restore the old assets to its original co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the disclosure requirement of the final statement of accounts of the company are concerned. The learned counsel submitted further that the assessee-company is bound under section 211 of the Companies Act, 1956, to exhibit a true and fair view as on the Balance Sheet date, of its state of affairs and recording the profit or loss for the relevant financial year. The assessee-company could exhibit a true and fair view only if the accounts are prepared in compliance with the provisions of Part-II and Part-III of Schedule VI of the Companies Act, the Accounting Standards pronounced by the ICAI, adhering to the standard accounting practices followed in this matter. The assessee-company has complied with all the above requirements dictated both by statute and accepted accounting practices. The learned counsel argued that when the Profit Loss Account is prepared by the assessee-company, strictly according to the statutory norms pointed out above, the Assessing Officer was not entitled to re-draft the Profit Loss Account of the assessee-company for the purposes of section 115 J of the Income-tax Act, 1961. On this point, he relied on the decisions of the Tribunal in Sutlej Cotton Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation relating to the incremental cost of the assets caused on account of the revaluation of the assets. The first part of the depreciation alone, according to him, can be charged to the Profit Loss Account, so as to arrive at the correct profit of the assessee from its business. The second part of the depreciation, he submitted, cannot be charged to the Profit Loss Account, as it would reduce the profit or increase the loss of the assessee-company for the relevant previous year. In this context, the learned Departmental Representative invited our attention to the Accounting Standards pronounced by the ICAI in AS-6 and AS-7 and in IAS-4, and submitted that as per those Accounting Standards, the assessee-company has to create a Reserve, known as the Revaluation Reserve to the extent of the incremental cost of the assets resulted out of the revaluation. When the assessee-company is charging the additional depreciation to the Profit Loss Account, the assessee-company has to transfer an equal amount to the credit of the Profit Loss Account, out of the earlier created Revaluation Reserve. When an amount equal to the additional depreciation is thus transferred to the credit side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year is less than 30 per cent of its book profit, the total income of the assessee chargeable to tax for the relevant assessment year shall be deemed to be an amount equal to 30 per cent of the said book profit. For the purposes of section 115J, book profit means the net profit shown in the Profit Loss Account, for the relevant previous year, but subject to various adjustments provided for in Explanation to Sub-section (1A) of Section 115J. The Profit Loss Account shall, for this purpose, be prepared in accordance with the provisions of Part-II and Part-III of Schedule-VI of the Companies Act, 1956. As per the provisions of Part-II and Part-III of Schedule-VI of the Companies Act, the assessee-company has to charge depreciation to its Profit Loss Account. Sections 205 and 350 of the Companies Act, 1956 and Schedule-XVI thereto prescribe the method and conditions for computing the minimum depreciation that should be invariably charged to the Profit Loss Account of a company. There is no bar on an assessee-company for providing a higher amount of depreciation than the statutory minimum requirement. The assessee-company in the instant case has revalued its assets in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer has disallowed the additional depreciation from the computation of the book profit of the assessee-company for the purposes of the section 115 J of the Income-tax Act, 1961. 12. Revaluation of Assets is optional for the assessee-company, and it is not dictated by any provisions of law. It is the prudence of the Board of Directors of the assessee-company which decides whether it should revalue its assets or not. Neither the Companies Act, 1956 nor the Income-tax Act, 1961 has any role to play in the relevant decisions making process. But, the consequences of such a revaluation have to be taken care of, as provided in the Companies Law and Standard Accounting Practices. Under the Companies Act, 1956, the assessee-company has to make proper disclosures in its Balance Sheet and Profit and Loss Account regarding the factum and effect of the Revaluation of the assets. Provision for depreciation has also to be made on the revalued cost of the assets. These are necessary for the purposes of the exhibiting a true and fair view of the state of the affairs of the company in its Balance Sheet and Profit and Loss Account for the relevant financial year. 13. On the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation reduces the divisible profits of the Company, whereas the provision for additional deprecation which is compulsory to be made, need not reduce the divisible profits of the Company. The compulsion of company law prescribes only to adopt the revalued cost of the assets in the accounts of the Company and to provide depreciation on the basis of that revalued cost, but does not prescribe that the Additional Depreciation should be adjusted only against the profits of the Company. That is why, the law permits the Company to transfer an amount equal to the Additional Depreciation to the credit of its Profit and Loss Account, out of the Revaluation Reserve Account. 15. In the light of the above position of the Company Law, the ICAI has pronounced Accounting Standards (AS-6 and AS-7) as a matter of Standard Accounting Practices to be followed by companies for the purpose of proper accounting of the depreciation arising out of the revaluation of the assets of a company. According to those standards, the Company may charge the additional depreciation to the profits of the Company by debiting it to the Profit and Loss Account without any further adjustment. Alternatively, the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l depreciation calculated on the basis of Written Down Value of the assets at their Historical Cost. 17. When the first option is exercised, the additional depreciation also is debited as a charge to the profits of the Company as in the case of normal depreciation. And the profit of the Company is reduced both by normal depreciation and Additional Depreciation. In the case of second option, even though the Additional Depreciation is also debited to the Profit Loss Account along with normal depreciation, the Additional Depreciation does not become a charge to the profit of the Company, as it effect is offset by the credit entry made in the Profit Loss Account for an equivalent amount. The Profit of the company is reduced only by the normal depreciation and not by the Additional Depreciation. In effect, the Additional Depreciation is finally debited to the Asset Revaluation Reserve Account through the medium of Profit and Loss Account. 18. In the present case, the assessee has chosen for the First Option, and has charged the entire depreciation, including the Additional Depreciation directly to the Profit Loss Account, which has reduced the profit of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the second option is exercised and the Additional Depreciation debited to Profit Loss Account is set off by transferring an equal amount to the credit of the profit and loss account from the Revaluation Reserve Account, even though higher amount of profit uncharged by the Additional Depreciation is transferred to General Reserve Account, to that extent the Revaluation Reserve Account is charged and as such the balance in that account shrinks. Thus whether the first option is exercised or the second option is exercised, the ultimate effect on the assessee-company reflected in the Balance Sheet remains the same, as the aggregate of General Reserve and Revaluation Reserve, both of which appear on the Liability side, would remain the same. 20. We have found that accounting treatment in respect of Additional Depreciation arising out of revaluation of assets is optional, and both the options are in accordance with the requirements of Schedule-VI to the Companies Act. We have also found that the assessee-company has opted for the first method and the Assessing Officer has followed the second method, with both the methods duly complying with the provisions of Schedule-VI to the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible for the assessee to adjust the burden of the additional Depreciation against Revaluation Reserve, instead of making it as a charge against the profit of the year. 22. The additional depreciation debited to the Profit Loss Account, by the assessee is an extraordinary item. This extraordinary item of the Additional Depreciation distorts the normal profit of the assessee-company for the relevant previous year. This distortation violates the principles of consistency in accounting policies. The rule of consistency is very important under the Income-tax Act and in the computation of income. Under the Income-tax Act, profit or income of an assessee is worked out from year to year on a consistent basis. Each assessment year is a separate unit of assessment. By debiting an extraordinary item of additional deprecation in the Profit and Loss Account, the profit of the relevant previous year is substantially reduced by the overloading amount of additional depreciation. What has to be computed for the assessment of income under the Income-tax Act is the real income of the assessee-company from its business. The real income cannot be allowed to be reduced by extraordinary item of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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