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2016 (7) TMI 576 - ITAT AHMEDABAD

2016 (7) TMI 576 - ITAT AHMEDABAD - TMI - MAT calculation u/s 115JB - revaluation reserve - whether any taxable income arising on account of revaluation, no adjustment could be made to the profit and loss account for the purpose of “book profits” u/s 115JB - Held that:- At the initial stage, the arguments of the Ld AR that the only real gains and only realized gains can be considered for the purpose of taxation seems to be attractive, but the same cannot be accepted in the light of the totality .....

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e basis of the revaluation, issuance of bonus shares to its shareholders even though it was not permissible as per the Guidance note issued by the Institute of Chartered Accountants of India and the Circular issued by Department of Company affairs, Ministry of Law, Justice and Company affairs. Further, it is also not the case of the assessee that the revaluation reserve which has been created is not a mere book adjustment entry but on the contrary has resulted into actual cash inflow and that it .....

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of Assessee. - I.T.A. No.3391/Ahd/2015 - Dated:- 8-7-2016 - Shri Rajpal Yadav, Judicial Member And Shri Anil Chaturvedi, Accountant Member For the Appellant : Shri S.N. Soparkar, AR For the Respondent : Shri R.I. Patel, CIT-DR ORDER Per Shri Anil Chaturvedi, Accountant Member This appeal by the Assessee is directed against the order of the Commissioner of Income Tax(Appeals)-4, Ahmedabad [CIT(A) in short] dated 14/10/2015 for the assessment year 2011-12. 2. Facts as culled out from the material .....

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fter referred to as the Act ) vide order dated 28.3.2014 and the total income under normal provisions was determined at loss of ₹ 20,313/- and the book profits u/s.115JB of the Act was determined at ₹ 19,99,79,887/-. Aggrieved by the order of AO, matter was carried in appeal before ld.CIT(A) who vide order dated 14.10.2015 (in Appeal No.CIT(A)-4/147/Wd-2(2)(2)-14-15) dismissed the appeal of the assessee. Aggrieved by the order of ld.CIT(A), Assessee is now in appeal before us and has .....

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s liable to be paid. 3. The learned CIT(A) has erred on facts and in law in not adjudicating initiation of penalty proceedings under section 271(1)(c) of the Act. 3. Before us at the outset, Ld AR submitted that the solitary issue to be decided is ground No 1 and the other grounds raised by the assessee are general/consequential in nature and therefore require no adjudication. 4. During the course of assessment proceedings AO noticed that Assessee company was incorporated on 30.6.2010 and during .....

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Pvt Ltd), had revalued its intangible business/assets from ₹ 1.05 crores to ₹ 40.02 crores and had thereby created Revaluation Reserve of ₹ 40 crores in its books of accounts. Based on the revaluation of intangibles carried out by Assessee s subsidiary (NSI Infinium Global Pvt Ltd.), Assessee also revalued the value of its investment in the subsidiary from ₹ 1 lac to ₹ 20.01 crore thereby creating Revaluation Reserve of ₹ 20 crore. He also noticed that out of .....

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d 11 issued by the Institute of Chartered Accountants of India (ICAI) and further issuing bonus shares out of revaluation reserves was also not in accordance with Circular No,9/94 dated 6.9.1994 issued by Department of Company Affairs and that the aforesaid facts were also commented upon by the Statutory Auditors in their audit report. AO was of the view that the revaluation reserve arising out of revaluation of investments should have been routed through the Profit and Loss Account instead of d .....

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the act of AO by holding as under:- 5. I have carefully considered the observations of the AO and the submissions made before me by the appellant. Ground No.1 & 2 are against the addition of ₹ 19,52,64,900/- in book profit for calculating MAT u/s 115JB of the Act. It is undisputed fact that the appellant company had revalued its investment which it held in the shares of subsidiary company namely NSI Infinium Global Pvt Ltd from ₹ 1 lakh to ₹ 20,01,00,000/- and while invest .....

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en the assessee has revalued its investment in shares and out of such revaluation reserve has also declared and issued bonus shares, whether such revaluation should have been routed through the profit and loss account or not and whether such revalued amount is to be added to the, book profit under Section 115JB of the Income tax Act ? 5.2 Before deciding the issue few facts needs to be highlighted. The assessee was holding 10,000 shares of ₹ 10/-each in its subsidiary Company namely NSI In .....

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ompany in the ratio of 361 bonus shares for every one Equity Share held Therefore, the question is to be examined in light of the above facts. 5.3 Section 115 JB reads as under :- Special provision for payment of tax by certain companies 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee. being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment .....

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III of Schedule VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing the annual accounts including profit and loss account.- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its ann .....

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rrespond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation 1.-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 .....

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nditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section II or section 12 apply; or] (g) the amount of depreciation, (h) the amount of deferred tax and the provision there for. (i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) lo (i) is debited to the profit and loss account, and as reduced by, (i) the amount withdrawn from any reserve or provision .....

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fit 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; or] (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (35) thereof) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or (iia) the amount of depreciation debited to the p .....

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nclude depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv) the amount of profits eligible for deduction under section 80HHC. computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-se .....

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k industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation. For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (I) of section 3 of the Sick Industrial Companies (Special Provisions) Act. 1985 (I of 1986); .....

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time to time; and (v) Secondary and Higher Education Cess on income-lax, if any, as levied by the Central Acts from time to time.] (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of .....

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as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.] (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.] 5.4 Reading the aforesaid provision it is clear that Section 115 JB is a code by its .....

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he methods and rates adopted for calculating depreciation shall be the same as have been adopted for the purpose of preparing such accounts as laid before the company at its annual general meeting. The Directors in their report to the share holders have confirmed that in preparation of the accounts, the applicable accounting standards have been followed. In Schedule - G to the Annual Accounts, which are "notes forming part of accounts", it has been acknowledged that "NSI Infinium .....

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cording to the assessee due to revaluation in the shares of NSI a revaluation reserve was created which is not considered as capital reserve but rather a free reserve' or "a revenue reserve" and out of which Bonus Shares can be issued. Part - III of Schedule VI to the Companies Act contains certain interpretation so far as Part I and II of the Schedule VI requires. Sub clause (c) of clause 7(1) in part III of schedule VI states as under: (c) the expression "capital reserve&quo .....

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ssessee such revaluation reserve is a free reserve. In respect of such accounting treatment and policy the auditor has opined as under. (d) In our opinion, the balance sheet, statement of profit and loss of cash flow statement dealt with by this report apply that the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act 1956, except the company had investments valued at ₹ 1,00,000/- in subsidiary company. NSI Infinium P ltd. which it got revalued at ͅ .....

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Institute of Chartered Accountants of India. (e) The Company has issued Bonus Shares in September, 2010, for ₹ 19,52,64,900/-(1,95.26,490 Equity Shares of ₹ 10)/- each, fully paid up) by capitalizing its re-valuation reserve. Accordingly, the paid up capital of the company stands increased by ₹ 19,52,64,900/- and the revaluation reserve stands reduced by that amount. The issue of bonus share is not in accordance with the circular issued by the Department of Company Affairs bea .....

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isclosure 25. The following disclosures in financial statements in relation to investments are appropriate:- (a) the accounting policies for the determination of carrying amount of investments; (b) the amounts included in profit and loss statement for; (i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments. Gross income should he stated, the amount of income tax deducted at .....

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arket value of quoted investments; (e) other disclosures as specifically required by the relevant statute governing the enterprise. 5.7 Sub clause (iii) of clause (b) of para 25 provides profit and loss on disposal of long time investment and changes in the carrying amount of such investment should be included in the profit and loss statement. Thus, reading the provision of the Companies Act and the relevant accounting standard it is clear that while making changes in the carrying amount of such .....

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the provision of Sub-section (2) of Section 115 JB it is clear that the profit and loss account to be prepared for the computation of book profit should be such which is in accordance with provision of Part II and III of Schedule -VI to the Companies Act, not only it should be in accordance with Part - II of Schedule - VI of the Companies Act 1956 but it should also be in accordance with the accounting standards adopted for preparing such account including profit and loss account. If the assess .....

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t observed that when accounting standard (AS-5) required prior period expenses/extraordinary items to be shown separately and the assessee was required to prepare P&L account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the fact that prior period expenses/extraordinary items were shown separately after the figure of net profit had been struck down in the P&L account did not mean that they would not constitute part of the net profit From the a .....

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be incorporated in the P&L account as per provisions of Companies Act are not shown in the P&L account before striking out net profit but are separately shown thereafter or are otherwise disclosed in the notes to the accounts as per requirement of Companies Act, the items so separately shown or disclosed in the accounts would form part of net profit shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, an .....

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meeting, and that the Assessing Officer has only the power of examining whether the books of account are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act gives an ample support to the view of the Hon'ble Delhi High Court that the net profit as shown in the P&L account would include such items also which are separately shown or disclosed in the notes to the accounts as per requirement of th .....

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rately in the accounts prepared and laid before company under the Companies Act did not mean that they would not constitute part of the net profit as per Companies Act for the purpose of computing "book profit" under section 115 J or 115 JA of the Act. The Court held that the information disclosed in the notes appended to the accounts or the item shown separately after the net profit had been struck down in the P&L account as per requirement of the provisions of Companies Act would .....

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oss account may be adjusted by the items, which are separately disclosed in the accounts or in the notes to the accounts as per requirement of Companies Act read with Parts II and III of Schedule VI to the Companies Act, 1956, for the purpose of determining net profit as shown in the profit and loss account and, in turn, for the purpose of computing "book profit" under section 115JB of the Act. 5.11 The Supreme Court has held that the Assessing Officer while computing the income under .....

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a and further issue of bonus shares out of revaluation reserve is also not in accordance with the Circular issued by the Department of Company affairs and the recommendation of the Institute of Chartered Accountants of India. Thus it cannot be said that when the Accounting Standard required to be complied with by the appellant company is not so complied with, the profit as shown in the profit and loss account is still in accordance with the companies Act. No doubt various adjustments as envisage .....

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at "book profit" by making adjustments prescribed under Explanation-1 to section 115JB? In my opinion, regard must therefore be had firstly to the requirement of preparation of profit and loss account as per requirement of the Companies Act, 1956 read with the Accounting Standards and if the profit and loss account is not prepared in accordance with the Companies Act, 1956 and does not comply with the accounting standards, the very starting point for making adjustment envisaged in Exp .....

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puting "book profit" is defeating the purpose of section 115JB. It is true that as far as the provisions of normal income computation are concerned, it is only the difference between realized sales consideration and the actual cost which shall be the capital gain liable to be taxed. However, the present issue is not about such actual gain or profit realized while computing income under normal provisions of the Act but the profit which must be shown when the tax is not payable under nor .....

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and by not showing such gain while increasing the value of investment in the books from ₹ 1 Lakh to ₹ 20,01,00,000/- even at the time of actual sale in future, the appellant will show only the difference between the actual sale consideration and the enhanced value of ₹ 20,01,00,000/- as profit in the profit and loss account for MAT purpose in the year of sale because the value of investment is already enhanced in the books to ₹ 20,01,00,000/-. Thus the appellant has adop .....

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e said Guidance Note, while it is stated that revaluation reserve is created as a result of book adjustment and is not realized gain, in the same Guidance Note, the ICAI has further clarified that Share capital represents the amount of money or money's worth received from the owners and the capitalisation of earned profits or other gains arising out of an arm's length transaction and hence bonus shares cannot be issued from revaluation reserve. The appellant in the instant case considere .....

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ok profit and at the same time, arguing that as the same is not credited to the profit and loss account, no adjustment while computing net profit (to arrive at further the figure of 'book profit ) can be made. In my opinion, therefore mere observation of the AO about the revaluation as notional profit does not debar him to look in to the aspect whether the act of the appellant in treating the said revaluation reserve as available for issuing bonus shares particularly in the situation when th .....

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pellant to avoid tax under MAT for the year under consideration as also for the year in which the same might be sold. 5.13 The appellant's reliance on the judgment of the Supreme Court in the case of Indo Rama Synthetics (I) Ltd 330 ITR 363 is misplaced. The judgment on the contrary supports the action of the AO as it has been held that 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 .....

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pellant as here the appellant had actually utilized revaluation reserve for issuing bonus shares during the year and yet did not include the amount as part of its profit. The appellant's further contention that even if complete effect of AS 13 is given, the resultant profit / loss remains unchanged and therefore no adjustment in "book profit" should be made, cannot be accepted since in that situation, there would be no upward valuation of investment and no revaluation reserve enabl .....

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ellant had complied with the requirements of the Companies Act, 1956 read with notified Accounting Standards is therefore not correct in view of the fact that the AS 13 was not complied with as reported by the auditors. Supreme Court in the case of Apollo Tyres has held that the A.O. has to satisfy himself as to whether, the auditors have certified that profit and loss account is in accordance with part II and III of the Schedule VI. Such exercise of the A.O. has to be with a definite purpose an .....

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ent and ultra vires with the provisions of the Companies Act, 1956 and hence the same is not relevant for deciding the issue whether revaluation reserve actually utilized for issue of bonus shares is part of the book profit or not. Besides this factual difference, the Supreme Court has laid down in the said case that measurement and recognition methods are not the items under the Companies Act and the methods of recognition and measurements are talked about by the provisions of the Companies Act .....

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utilized the sais gain in issue of bonus shares and in the balance sheet the value of investment is enhanced. The question of adjustment prescribed under Explanation-1 to section 115JB(2) will arise only after the true net profit is computed keeping in view the basic purpose of introducing the provisions of section 115JB which is quite different than the purpose of taxing income under normal computation. 5.15 Regarding reliance placed by the appellant on AS-10, the said Accounting Standard deal .....

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ook profit and hence are not relevant decisions for the issue in the present appeal. I have also considered the various other decisions relied upon by the appellant. However, in all such decisions, the accounts were certified by the auditors to be in accordance with the provisions of the Companies Act, 1956 unlike the case in hand where the auditors have qualified the accounts and the revaluation reserve created out of enhanced value of investment is actually utilized for issuing the bonus share .....

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of revaluation report in the case of subsidiary company namely NSI Infinium Global Pvt Ltd shows that the appellant designed the whole scheme of utilizing the enhanced value of investment by way of distributing the reserve for benefit of such shareholders who are in the close relation. The Supreme Court in the case of Juggilal Kamlapat vs CIT 73 ITR 702 has held that income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction. The Court h .....

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y if it is used for tax evasion or to circumvent tax obligation. As discussed above, the appellant has adopted the device of avoiding tax under the provisions of section 115JB permanently on the ground that revaluation is not real profit but at the same time, utilizing the same for issuance of bonus shares. No consent to such a method can be sanctioned in law in view of the fact that the accounts are not prepared by following the accounting standard and bonus shares have already been issued from .....

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as available for distribution by way of issuance of bonus shares, the action of the AO in making the addition of the amount in the net profit for the purpose of arriving at the book profit before starting adjustments prescribed in Explanation-1 to section 115JB(2) is affirmed. The addition of ₹ 19,99,79,887/- as computed book profit u/s 115JB is sustained. This ground of appeal is dismissed. 5. Before us, ld.AR reiterated the submissions made before AO and ld.CIT(A) and further submitted .....

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ofits declared in the Profit and loss account. He further submitted that the adjustment made by the AO to the Profit and Loss account is neither permissible under Explanation-1 to s. 115JB(2) of the Act nor recasting of the Profit and loss account is permitted. He further submitted that even assuming but though not admitting, that AO has power to make adjustment to the Profit and loss account, then also by revaluing the investments no real profit/income has been earned by the assessee. For the p .....

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have not been sold and therefore there is no tax liability and if at all any tax liability under clause (j) of Explanation (1) to s. 115JB of the Act will arise, it would be only in the year of retirement or disposal of asset. He submitted that since during the year, there is no disposal of shares which are held by the assessee as investments, no adjustments could have been made under clause (j) of Explanation (1) to s. 115JB of the Act. He further placed reliance on the following decisions: 1. .....

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A) be set aside. 5.2. Ld DR on the other hand supported the order of AO and Ld.CIT(A) and further submitted that in the present case, the subsidiary company had revalued its assets, and on the basis of revaluation exercise carried out by the subsidiary, the Assessee also proceeded to revalue its investment. He further submitted that Assessee did not stop at just revaluation of investments but proceeded to declare bonus shares to its shareholders and thereafter assessee also came out with a publi .....

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y the assessee. He further submitted that the act of revaluing the investments and appropriating the reserve so created by issue of bonus shares is also not in accordance with the Accounting Standards prescribed by the Institute of Chartered Accountants of India and the Companies Act and that there is also a qualification to that effect by the statutory auditors of the Company. He further submitted that the assessee should have routed the revaluation reserve through the Profit and Loss Account. .....

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, Chartered Accountants, (report dated 21.08.2010) estimated the business of the Company at ₹ 42.20 crores. Based on the aforesaid valuation report, NSI Infinium Global P Ltd, the subsidiary of the Assessee company, revalued the assets as on 31st March 2011. At this moment it will be relevant to consider the audited financials results of NSI Infinium Global P Ltd, which are placed at page 32 to 48 of the paper book and from which the following key figures are extracted. As at 31st March 20 .....

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400 2,97,600 Profit & Loss Account 1,83,19,278 79,05,780 Total assets (net) 4,36,76,77,123 5,26,69,449 6.1. Key Figures of audited Profit and loss account of NSI Infinium Global P Ltd are as under:- 31st march 2011 31st march 2010 Sales 40,60,38,796 23,82,20,023 Depreciation 28,66,296 5,07,304 Net Loss 1,04,13,498 24,95,698 6.2. The key observations on the analysis of the above financial results of NSI Infinium Global P Ltd are as under:- (i) Company has incurred cash losses in year ending 3 .....

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ich have been considered on the basis of valuer report of 21.08.2010. If the revaluation reserve is excluded, the net worth of the company as on 31st march 2011 continues to be negative. 6.3 As far as the Assessee is concerned, it is significant to note the following:- (i) The assessee company is a closely held public limited company and the entire shareholding is held by individual shareholders/associates and family members. (ii) The investment of the Assessee in its subsidiary (NSI Infinium Gl .....

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. CIT(A) has noted that the report of Chartered Accountant (the basis of which the revaluation of assets was undertaken) who valued the assets of NSI Infinium Global Pvt Ltd was dated 21.08.2010 but however the assessee passed a Special Resolution on 10.8.2010 for issuing fully paid bonus shares in the ratio of 361 fully paid equity shares for every 1 share held by the shareholders of the assessee company. It can thus be seen that the resolution for issuing bonus shares to the shareholders by th .....

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6.9.1994 issued by the Department of Company Affairs, Ministry of Law, Justice and Company Affairs, Government of India. 1. I am directed to say that it has come to the notice of the Department that a number of unlisted companies (existing private/closely held public companies) are resorting to revaluation of their assets and issuing bonus shares therefrom. The latest SEBI s guidelines on bonus shares dated 13.4.1994, inter alia, stipulate that the bonus issue has to be made out of free reserve .....

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ty of Revaluation Reserve for issue of bonus shares, issued by the Institute of Chartered Accountants of India, at para 4 states that the revaluation reserve does not represent a realized gain. For ready reference Clause 4 is reproduced and it reads as under: 4.It may be noted that the excess of the revalued amount over the net book value of the fixed assets, which is credited to revaluation reserve, is created as a result of book adjustment only. The revaluation reserve does not result from an .....

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an be capitalized. (viii) It is also a fact that after the issue of bonus shares to the shareholders of the Assessee company, the assessee company came out with a public issue of shares, whereby it offered the shares to the public at large at a huge premium. 7. At the initial stage, the arguments of the Ld AR that the only real gains and only realized gains can be considered for the purpose of taxation seems to be attractive, but the same cannot be accepted in the light of the totality of the fa .....

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