TMI Blog2011 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ced. 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. . 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. - C.A. 33 OF 2011 (arising out of S.L.P. (C) No. 3513 3 of 200 9) - - - Dated:- 5-1-2011 - S.H. Kapadia, Chief Justice, K.S. Panicker Radhakrishnan and Swatanter Kumar, JJ JUDGMENT S.H. Kapadia, Chief Justice 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 reserve. Consequently, the balance sheet for the preceding assessment year, resulted in enhancement of cost of fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not an Appropriation of Profits and the same is not debited by way of debit entry through the P and 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 and L Account and is credited directly to a revaluation reserve as provided by ICAI and, thus, the profit as reflected in the P and 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 and 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 full tax, without the same being affected by creation of such revaluation reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 115J was applicable. 12. The Finance Act, 2002 now specifically provides vide Section 115JB that the amounts withdrawn from any reserves, if credited to the P and 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 and 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 and 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 allowances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to Section 115JB(2)? 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 and 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 provisions, in the case of a company whose total income as computed under the normal prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and L Account, however, in substance there is no credit to P and 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 reva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) of the explanation to Section 115JB(2). Consequently, the A.O. added back the said 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 and 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 and 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 and 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 and L Account. Thus, the proviso to clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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