TMI Blog2011 (8) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee other than purchases or the entry recorded in the closing stock amounting to Rs. 30,80,730 is found to be fictitious or false or no such closing stock was found during the course of search, we are of the view that the assessee has made cash purchases of Rs. 30,80,730 which undisputedly found recorded in the inventory of closing stock, therefore, the Assessing Officer was not justified in treating the said purchases of Rs. 30,80,730 as bogus purchases. Regards the application of provisions of section 40A(3) of the Act, find that during the course of search, no such material was found to show that the assessee has made cash payments in violation of provisions of section 40A(3) of the Act - Disallowance cannot be made merely on presumption basis that the assessee had made the purchases by way of cash from the Grey market in violation of the provisions of section 40A(3) of the Act - Held that:- the ld. CIT(A) was not justified in sustaining the addition of Rs. 6,16,346 being 20 per cent of total purchase of Rs. 30,80,730 and accordingly we delete the entire addition of Rs. 30,80,730. The ground taken by the assessee is therefore allowed and the ground taken by the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case, the ITAT is correct in holding that the disallowance under section 37(3) read with Rule 6D of the Income-tax Act/Rule should be worked out by consolidating all of the travel undertaken by each of the employee in a year. 2. Whether on the facts and in the circumstances of the case, the ITAT is right in holding that the expenses in respect of rent, repair and other expenditure on the guest house which are normally allowed under sections 30, 31 of the I.T. Act could not be disallowed under section 37(4) of the I.T. Act. 3. Whether on the facts and in the circumstances of the case the ITAT is correct in law in holding that the credit given to the profit and loss account by the amount withdrawn from revaluation reserve account is to be reduced." Question No. 1 2. The assessee at the relevant time was in the business of manufacturing and selling nylon yarn, tyre coard fabrics, flours chemical etc. which was carried on through four divisions. In the course of business incurred expenses on travel undertaken by its employees. In consonance with provisions of section 37(3) of the Income-tax Act, 1961 (hereinafter referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the counsel the disallowance under Rule 6D is to be calculated with reference to each trip made by the employee and not by aggregating the trips made by the employee during the course of the relevant assessment year. 7. As against this Mr. Ganesh, learned senior counsel, who appeared for the assessee, contended that in Rule 6D there was no mention of the expression 'per trip'. Mr. Ganesh submitted that if the interpretation, as accorded by the revenue, is accepted then, it would amount to re-writing Rule 6D(2). According to him the wording of the Rule left no doubt in the mind that the disallowance had to be calculated bearing in mind the aggregate number of trips that an employee undertook in the assessment year in issue. Mr. Ganesh in support of his contention placed reliance on the judgment of the Division Bench of the Calcutta High Court in the case of CIT v. General Electric Co. of India Ltd. [2002] 255 ITR 22/[2003] 126 Taxman 55. 8. We have heard the learned counsel for the parties. In order to adjudicate upon this issue, it would be necessary to extract relevant portion of Rule 6D(2): "(2) The allowance in respect of expenditure incurred by an assessee in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s down limits in respect of expenditure incurred in connection with such travel, which includes expenditure on hotel expenses or allowances paid, on a per diem basis depending on whether the expenditure is incurred on an employee or a person other than an employee. If the expenditure is incurred on an employee whose salary is Rs. 1,000 per month or more then the limit prescribed is Rs. 150 per day or part thereof, while in case of any other employee it is Rs. 75 per day or part thereof. Similarly, in case of a person other than an employee the limit is calculated keeping in mind the rates applicable to a highest paid employee. 10. As noticed above, there are two provisos to Rule 6D(2). The first proviso specifies that the limits prescribed in the Rule (which are referred to hereinabove by us) shall stand increased by a sum equal to 33.33 per cent if the stay of the employee or any other person outside the headquarters is in Bombay (now Mumbai), Calcutta (now Kolkata) and Delhi. The second proviso enters a further caveat, which is, that if such an employee or other person stays outside his or her headquarters, in a guest house maintained by the assessee then the limits prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, the question in issue is answered in the negative and against the assessee. Question No. 2 13. The counsels, of both the assessee and the revenue, concur that this question is covered against the assessee by virtue of the decision rendered in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546/148 Taxman 468 (SC). Question No. 3 14. Insofar as the aforesaid question is concerned, it may be noted that the Assessing Officer during the course of scrutiny noticed that the computation of book profits submitted by the assessee, as required under the provisions of section 115J of the I.T. Act, vide its letter dated 31-3-1992, showed loss of Rs. 10,50,90,557. The Assessing Officer came to the conclusion that the assessee in calculating the figure of loss had not taken into account the amount transferred from the re-valuation reserve account in respect of two of its divisions, which according to him, ought to have been included so that depreciation debited in the books of account continued to be provided on original cost. According to the Assessing Officer what the assessee had done was that it had provided depreciation in its books of account on revalued assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumvent the law. It could obviously not have been the intention of the legislature to permit companies to revert to this kind of accounting jugglery with a view to getting out of the mischief of section 115-J." 14.1 With aforementioned preface, the Assessing Officer calculated the taxable profits under section 115J at Rs. 2,15,90,554. 15. Aggrieved by the decision of the Assessing Officer, the assessee carried the matter in appeal to the CIT(A). Various submissions were made to bring home the point that Assessing Officer had erred in computing the taxable profits under section 115J at Rs. 2,15,90,554 as against the returned income which was declared as 'nil'. The CIT(A) after recording in detail the submissions of the assessee came to the conclusion that since the assessment order was passed on the same day on which the computation of book profits was handed over by the assessee, i.e., 31-3-1992, the Assessing Officer was not able to devote sufficient time with regard to the issue at hand, which in turn had prevented the assessee from putting forth his argument before the Assessing Officer, and hence, in the fitness of things the order of the Assessing Officer ought to be set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year under appeal, the profit or the year would have been higher because of depreciation on the historical cost would be lower, because historical cost is lower than the revalued cost. But, the charge of depreciation of the revalued cost is not the same thing as creation of the reserve, because, creation of the reserve means debit to the profit and loss account by an amount and giving credit to the reserve by an equivalent amount. According to the amendment made effective from 1-4-1988 the credit to the profit loss account by the amount withdrawn from the reserve account, created in the previous year relevant to the assessment year commencing on or after 1st day of April, 1988, by debit to the profit and loss account, shall not be allowable to be reduced from the book profit, unless the book profit of such year has been increased by those reserves. Since, the revaluation reserve was created before 1-4-1988, and by not debiting to the profit loss account, in the light of the explanation rendered at the time of the amendment, giving the intent of the legislature (reproduced above), and by virtue of the conclusion of the Special Bench (supra), the credit that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any reserves, by whatever named called in item (b), that is to say, if the Reserve is created out of current years book profits. If out of current year profit, any amount is transferred to Reserve Account it would diminish the Book Profits. Therefore, the Explanation provided that the book profits be shown at their original level, by bringing back to the profit and loss account the amount transferred to reserve account. The revenue, when it insisted on bringing back to the profit loss account, the amount transferred to reserve account, it postulates that the reserve was a transfer out of current profits, which was not a fact." The above is suggestive of the position that, notwithstanding that, the profit loss account has been credited with the amount that has been withdrawn from revaluation reserve account, it could not be added to the book profit, because, the prerequisite for such an addition postulates that, the reserve was created out of current years profits, which is not a fact in the instant case too. Therefore, the Special Bench decision, squarely provides answer on the issue, that, the addition to the book profit, by the amount withdrawn from the revaluation reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation appended to section 115J. 18.1 Mr. Ganesh submitted that the judgment of the Supreme Court in the case of Indo-Rama Synthetics (I.) Ltd. (supra) had no application in view of the fact that the facts obtaining therein would clearly demonstrate that the reserves were created after the insertion of section 115JB, which is, 1-4-1997. Therefore, according to the learned counsel the proviso appended to clause (i) of the explanation contained in section 115JB had got triggered in that case, whereas in the present case, the proviso had no application as the revaluation reserves have been created prior to 1-4-1988. 19. We have heard the learned counsel for the parties on this issue as well. In order to decide this issue it would be pertinent to bear in mind that Minimum Alternate Tax (in short 'MAT') was introduced in the IT Act only to get over a situation whereby, companies which were otherwise earning large profits and distributing huge amounts in the form of dividend to its shareholders were paying no tax or a negligible amount of tax by virtue of deductions and exemptions made available to them under various provisions of the IT Act. The Legislature, therefore, devised a me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). 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 (1A)], as increased by - (a) The amount of income-tax paid or payable, and the provision therefor; or (b) The amounts carried to any reserves (other than the reserves specified in section 80HHD, or sub-section (1) of section 33AC) 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; or (g) The amount withdrawn from the reserve account under section 80HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section; or (h) The amount credited to the reserve account under section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956, .. Explanation. For the purpose 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 - . (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 loss account and is 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 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king the provisions of clause (i) of the explanation given in section 115J. It is not disputed that when the revaluation reserves were first created in 1983 and 1986, the increase in the value of the assets was reflected by debiting the asset account and crediting the revaluation reserve account. The profit and loss account by this methodology was kept undisturbed. In these circumstances, can it be said that when the amount is withdrawn from the reserves it reflects the difference in the depreciation calculated on the revalued or the enhanced value of the assets and that which is calculated on the historical cost. In other words can the assessee be permitted to reduce the amount withdrawn from the revaluation reserve if in the first instance was created not by crediting any amount to the profit and loss account but to the revaluation reserve account. 22. Mr. Ganesh has argued that clause (i) appended to the explanation appearing in section 115J would have to be given its full play. As noticed above, it was his contention that the only situation in which such a reduction is not permissible where reserves are created by an assessee on or after 1-4-1988. Therefore, his contention is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of Rs. 2,88,58,19,000 is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., 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. 2,88,58,19,000 and credited to the profit and loss account which the Assessing Officer disallowed by placing reliance on the proviso to clause (i) of the Explanation to section 115JB(2). Consequently, the Assessing Officer added back the said amount of Rs. 26,11,74,000 to the net profits. We agree with the Assessing Officer. Under the provisions, as they then existed certain adjustments were required to be made to the net profit as shown in the profit and loss 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 profit and loss 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 withd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts withdrawn from the reserves or provision only if reserves had been created before 1-4-1988 or where reserves or provisions have been made after 1-4-1988 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. A close reading of the memorandum to the amendment would show that the initial object of allowing reduction under clause (i) to the explanation contained in section 115J was not diluted. In other words the reduction of the amount withdrawn from the reserves created or provisions made was only available if such an amount in the first instance have been credited to the profit and loss account. This is clear if one adverts to the following extract from the memorandum: " .Under the existing provisions certain adjustments are made to the net profit as shown in the profit and loss account. One such adjustment stipulates that the net profits is to be reduced by the amount withdrawn from reserves or provisions, if any, such amount is credited to the profit and loss account ..." [Emphasis supplied] 26. Therefore, the submission of Mr. Ganesh that it is only when the proviso is attracted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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