TMI Blog2016 (7) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 represents realized gains. Before us, in support of its claim, Ld AR had relied on various decisions but however we find that the ratio of decisions relied upon by the assessee in its support are not applicable to the present facts of the case because in none of the cases relied upon by the Ld AR, the revaluation reserve was used for the purpose of issuing bonus shares. In view of the aforesaid facts, we find no reason to interfere with the order of Ld CIT(A) and we therefore dismiss the ground 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 Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticed that Assessee was holding 10,000 equity shares of ₹ 10 each, i.e. investments worth ₹ 1 lac in NSI Infinium Global Pvt Ltd., its subsidiary company (which was incorporated in 2002). AO noted that during the year, on the basis of the report of Chartered Accountant, the subsidiary company (i.e. NSI Infinium Global 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 the Revaluation Reserve that was created, ₹ 19,52,64,900/- was utilized by the Assessee for issuing bonus shares to the shareholders [in the ratio of 361 (three sixty one) bonus equity shares for every 1 (one) equity shares held by the shareholders of the assessee] and the balance of ₹ 47,35,100/- continued to be reflected as Revaluation Reserve in its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Infinium Global P. Ltd. (hereinafter referred to as 'NSI for short). NSI revalued its business assets to ₹ 40.02 crores as against ₹ 1.05 crore on the basis of Chartered Accountants report dated 21.8.2010. The assessee even prior thereto revalued its investment in shares of NSI and valued the same at ₹ 20.01 crore against the cost of ₹ 1,00,000/-. Out of the revaluation reserve, as per Resolution dated 10.8.2010 bonus shares were issued to the shareholders of Assessee Company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation. 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); or (viii) the amount of deferred tax. if any such amount is credited to the profit and loss account.] Explanation 2.-For the purposes of clause (a) of Explanation I, the amount of income-tax shall include- (i) any tax on distributed profits under section 115-0 or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Part - II of Schedule - VI to the companies Act requires the profits or losses on investment to be declared in the profit and loss account. According 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 shall not include any amount regarded as free for distribution through profit and loss account; and the expression revenue reserve shall mean any reserve other than a capital reserve; 5.5 As per balance sheet of appellant company containing schedule B relating to reserve and surplus shows revaluation reserve separately and not under the head capital reserve . Out of such revaluation reserve, even bonus shares are issued. Thus, according to the assessee such revaluation reserve is a free reserve. In respect of such accounting treatment and policy th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax deducted at source being included under Advance Taxes Paid; (ii) profits and losses on disposal of current investments and changes in carrying amount of such investments; (iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments; (c) significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal; (d) the aggregate amount of quoted and unquoted investments, giving the aggregate market 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 investments, the assessee should have disclosed in the profit and loss account such changes. Instead of effecting changes through the profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, and the Book profit , for the purpose of section 115JB, shall be computed accordingly. 5.10 The view of Hon'ble Supreme Court in the cases of Apollo Tyres Ltd. (supra) and HCL Comnet Systems Services Ltd. (supra ) to the effect that the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act being certified by the auditors and laid before the company in its general 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case of the appellant, the auditor's have clearly qualified the report on such accounts in Para 4(d) and 4(e) stating that upward revaluation of investment in the subsidiary company is not in line with the AS 13 issued by the Institute of Chartered Accountants of India 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 envisaged in Explanation-1 to section 115JB can be made to the net profit as shown in the Profit and loss account for arriving at book profit , the issue which is relevant is if the very starting point for making such adjustment viz: net profit is arrived at from the profit and loss account which is not prepared in accordance with the requirements of the Companies Act, 1956 read with notes thereon and the qualification of audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adopted a devise or dubious method whereby the appellant has sought to avoid tax under section 115JB for the year under consideration as also for the year in which there will be actual sale of the investment. 5.12 Regarding the argument of the appellant that revaluation is only a notional profit and the reference to the Guidance Note of ICAI on Availability of Revaluation Reserve for issue of Bonus shares, the guidance note is regarding revaluation of fixed assets and not for investments. Even in the 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 considered the revaluation reserve as available for issui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 115JB which is not the case of the appellant 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 enabling issue of bonus shares as the appellant has done. Regarding judgment of the Supreme Court in the case of Apollo Tyres Ltd vs CIT 255 ITR 273, again said judgment is on different facts as in the said case, the profit and loss account was prepared in accordance with the requirements of the Companies Act, 1956 read with the Accounting Standards and there was no question of issuance of bonus shares from reserve created due to revaluation of investment. The contention of the appellant that the appellant 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be applied to the facts of the appellant particularly when the revaluation reserve is utilized for issuing bonus shares in the year of its creation. 5.16 Regarding the judgment in the case of N.J.Jose Co vs. ACIT 321 ITR 132 (Ker) and decision in the case of Rain Commodities Ltd vs. DCIT, they merely hold that the capital gain even if exempt under normal provisions u/s 54E or section 47(iv), they cannot be excluded while computing book 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 shares and hence those decisions are not relevant to the facts of the appellant's case. 5.17 As regards acceptance of the accounts at the AGM, it is again pertinent to note that as discussed by the AO, the major shareholders of the appellant comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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 that it is a fact that Assessee had revalued the investments and the revaluation reserve created on the revaluation of investments was credited directly the Reserves and Surplus account in the Balance Sheet without routing it to the Profit and Loss account. He further submitted that Assessee has complied with all the requirement of Para II and III of Schedule VI of the Companies Act 1956 as well as Accounting Standards and in such a situation the AO has no authority to make adjustments to the profits 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus it was a case of indirect disposal of investment by issuing bonus shares. He further submitted that a company can only issue bonus shares out of the free or distributable reserve and the reserve created out of revaluation of assets is not a reserve which could have been distributed by 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. He thus strongly supported the order of AO and Ld.CIT(A). 6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. It is a fact that during the year the Assessee was having investment of ₹ 1,00,000 (10,000 equity shares of ₹ 10 each) in the equity shares of NSI Infinium Global P Ltd, its 100% subsidiary. During the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 31st march 2010 and 2011. (ii) Comparative figures for the two years i.e. 31st March 2011 and 31st March 2010 shows that the losses for the year ended 31st march 2011 have increased with the increase in turnover. (iii) The net worth of the company (i.e. share capital + reserves surplus Debit balance of Profit and loss account) was negative as on 31st march 2010. (iv) The net worth of the company as on 31st march 2011 is positive only due to revaluation reserve of the intangibles/assets which 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 Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus shares out of the reserves created by the revaluation of fixed assets. (Emphasis supplied) (vii) The Guidance note on Availability 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 arm s length transaction; it represents an expert s perception of value. The revaluation reserve thus does not represent a realized gain. (emphasis supplied) 5. Share capital represents the amount of money or money s worth received by the owners and the capitalization of earned profits or other gains arising out of an arm s length transaction. It has, therefore, been a cardinal principle that only such profits as are earned or the relevant capital receipts (e.g. share premium) as are realized, can be capitalized. (viii) It is also a fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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