TMI Blog2000 (5) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that though Explanation to section 115J provides for adjustment in respect of the amounts withdrawn from the reserve account, yet the proviso is not applicable as the amount is not credited to the profit and loss account. 3. Giving the background of the claim made by the assessee, the CIT(A) has pointed out that the assessee had revalued its assets in earlier assessment year and adopted the said value in the books of account. The difference in value of an amount of ₹ 1711.62 lakhs was credited to an account described as revaluation reserve account. In the year under appeal, the assessee had debited a sum of ₹ 293.27 lakhs in the profit and loss account on account of depreciation. This amount was arrived at as under : (In lakhs) (In lakhs) Depreciation on tools for the year 0.97 Depreciation on fixed assets for the year 356.62 Less: Drawn from Revaluation Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Assessee is aggrieved. The learned counsel for the assessee contended that section 115J provides the manner of computation of book profits. Relying upon the decision of the Special Bench of the Calcutta Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 199 ITR 164 (AT) and other decision of the Tribunal in the case of SRF Ltd. v. Asstt. CIT [1993] 47 ITD 504 (Delhi) and in the case of J.K. Cotton Spg. Wvg. Mills Co. Ltd. v. Asstt. CIT [1997] 60 ITD 99 (All.), it was contended that the Assessing Officer has no power to disturb the book profits except to make adjustments as authorized under the provisions of section 115J. Since the assessee had withdrawn certain amounts from the reserves and adjusted the profit and loss account by a sum of ₹ 92.06 lakhs, the reduction as claimed by the assessee was permissible under section 115J. The Assessing Officer, according to the learned counsel, was not justified in denying the benefit of the proviso to clause (i) of Explanation to section 115J(1). 6. The learned Departmental Representative on the other hand contended that the assessee revalued its assets in the year 1986 and as a result of revaluation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance 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)to (ha)... if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and ( h) is not credited to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, the difference between the claim of the depreciation on the basis of the value of assets as revalued and the depreciation on the basis of the book value, was adjusted against the revaluation reserve account. Since the assessee had withdrawn from the revaluation reserve account the difference in depreciation etc., the benefit of the adjustment provided in Explanation (i ) is being claimed by the assessee. The said Explanation provides that the profit as computed in accordance with Schedule VI (Part II and Part III of the Companies Act, 1956) be reduced by the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account. There are two conditions for applicability of Explanation (i ) to section 115J. Firstly, the amount to be reduced from profits should have been withdrawn from Reserves and secondly, such amount should have been credited to the profit loss account. We may first consider as to where the two amounts in question have been credited to the profit and loss account. A perusal of profit and loss account reveals that the assessee has not credited the profit and loss account by the amount withdrawn from revaluation res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance sheet given in the evidence of the Institute of Chartered Accountants before the Cohen Committee was approved and adopted as correct by that Committee : The function of a balance-sheet may be stated to be an endeavour to show the share capital, reserves (distinguishing those which are available for distribution as dividends from those not regarded as so available) and liabilities of the company at the date as at which it is prepared, and the manner in which the total monies representing them are distributed over the several types of assets. A balance-sheet is thus a historical document and does not, as a general rule, purport to show the net worth of an undertaking at any particular date, of the present realisable value of such items as goodwill, land, plant and machinery, nor, except in case where the realisable value is less than cost, does it normally show the realisable value of stock-in-trade. 13. Section 211 of the Companies Act gives the form and content of the balance sheet and profit loss account. Section 211(2) reads as under : Every profit and loss account of a company shall give a true and fair value of the profit or loss of the company for the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant provisions of the Companies Act does not leave us in any doubt that the Board of Directors are duty bound to prepare a balance sheet and a profit and loss account in accordance with the provisions of the Companies Act which is to be laid before the company. 16. Section 205 makes it obligatory upon every company to provide depreciation at the rate to the extent specified in section 350 or in respect of each item on depreciable assets for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such assets. In this case, the assessee has opted to provide depreciation in accordance with section 350 of the Companies Act. Section 350 of the Companies Act reads as under : S. 350. Ascertainment of depreciation.-The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount calculated with reference to the written-down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter at the end of the each subsequent financial year, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be debited in accordance with the provisions of section 205 of the Companies Act, 1956, it cannot be said that the amount withdrawn from the revaluation reserve account was credited to the profit and loss account. The profit and loss account of the company as per Part II of Schedule VI to the Companies Act required the assessee to clearly disclose the result of working of the company during the period covered by the account. Debiting of higher depreciation calculated on the basis of value adopted on revaluation would depict distorted results of the company. Therefore, the depreciation as permissible under law alone could be debited to the profit and loss account. In such circumstances, the adjustment claimed by the assessee by reason of withdrawal from the revaluation reserve account is not permissible, as one of the conditions for reduction of such amount from the profits is that such amount is credited to the profit and loss account . In this case, the said amount is neither credited to the profit and loss account nor can it be deemed to have been credited to the said account. 18. Similarly, in the case of the adjustment in respect of obsolete items of machinery, provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... III of the Sixth Schedule to the Companies Act, he is entitled to adjust the profit. To this extent, the power to adjust the book profit will have to be conceded to the Assessing Officer. 21. It seems that the assessee was well aware of the law and that could be the reason that no scope was left for the Assessing Officer to make the adjustment. The claim of depreciation was restricted to the claim as was permissible in law. In this connection, Schedule N to the accounts of the appellant for the year under apeal is relevant: 1. ........ 2. ........ On the revalued Assets, Depreciation is charged on straight line basis at the rates given by the valuer. Since the same is higher than the Depreciation thereon, as per Section 205(2)(b) the difference of ₹ 64.32 lacs (Previous year ₹ 76.68 lacs) has been drawn from the Revaluation Reserve. On the balance Fixed Assets, Depreciation is charged as per Section 205(2)(b) of the Companies Act. 22. Our attention had been drawn to the guidelines issued by the Institute of Chartered Accountants (copy placed on record) relating to Treatment of Reserve created on revaluation of fixed assets. We note that in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to the operations of the company. So far as fixed assets are concerned, these are held for the use in the business and not for sale in the normal course of business. In the circumstance, the difference between the market value and the book value does not represent realised gain and cannot be treated as such in the books of account. 24. We are of the considered view that the above contrary view is appropriate and in consonance with the provisions of the Companies Act. Moreover, it is well settled principle of law that if the guidelines of the institute are in conflict with any law, such guidelines are to be ignored. Reference to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. (supra) is relevant. In this case, it has been held as under: Next, it has been argued that according to well-established accountancy practice the interest earned by the company even before the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justified by any provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retion of the assets of the company will enhance the net worth of the company and unless that assets are sold, the profit of the company cannot be realised. It is thus evident that the entries made by the assessee on enhancing the value of assets and creating an account under the head revaluation reserve account is nothing but an entry to balance the act of revaluation. In the light of above findings, the revaluation reserve account does not qualify to be a reserve within the meaning of the Companies Act. 27. Thus, the benefit of adjustment under Explanation (i ) to section 115J is not available to the assessee on either of the grounds viz., that the amount in question has not been credited to the profit and loss account and that the amount even if deemed to be adjusted, is not out of the reserves. The revenue was therefore justified in not making the adjustment claimed by the assessee. 28. It may be pertinent to mention that the decision of the Tribunal in the case of SRF Ltd. (supra), of which, one of us is a party, is on its own facts. In that case, there was no dispute regarding the credit of the amount to the profit and loss account. The correctness of the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
