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2011 Supreme(SC) 21
2011 (4) Supreme 562
SUPREME COURT OF INDIA
CJI S. H. Kapadia, K.S. Panicker Radhakrishnan and Swatanter Kumar, JJ.
Indo Rama Synthetics (I) Ltd. — Appellant(s)
versus
C.I.T., New Delhi. — Respondent(s)
Civil Appeal No. 33 of 2011
(arising out of S.L.P. (C) No. 35133 of 2009)
Decided on : 5-1-2011
IMPORTANT POINT
Unless an adjustment has the effect of increasing the net profit as shown in the P & L Account, that entry cannot be said to be a credit to the P & L Account.
Headnote:(a) Income Tax Act, 1961 – Section 115JB – Net profit shall be decreased by the amount withdrawn from any reserves, if any such amount is credited to the P & L Account – The amounts withdrawn from any reserves, if credited to the P & L Account, shall be reduced from the book profit – Any amount withdrawn from such reserves shall not be reduced from the book profit, unless the book profit in the year of creation of such reserves stood increased by the amount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. (Paras 11and 12)
(b) Income Tax Act, 1961 – Section 115JB(2) – Unless an adjustment has the effect of increasing the net profit as shown in the P & L Account, that entry cannot be said to be a credit to the P & L Account – In substance there is no credit to P&L Account – Reduction sought by the assessee under clause (i) to the explanation to Section 115JB(2) in respect of depreciation rightly rejected by the AO. (Para 21)
(c) Income Tax Act, 1961 – Section 115JB(2) – Even after revaluation of assets figure of profit remaining untouched – The amount of Rs.26,11,74,000/-, being the differential depreciation, transferred out of the revaluation reserve of Rs.288,58,19,000/- and credited to the P & L Account – Rightly disallowed by the A.O. (Para 24)
Facts of the case:
1. 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 by the said amount with corresponding credit to revaluation reserve.
2. For the previous year ending 31.3.2001, relevant to the assessment year 2001-02, the P & L Account showed the charge of depreciation at Rs.127,57,06,000/- which was reduced by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- resulting in a net debit on account of depreciation of Rs.101,45,32,000/-.
3. The A.O., while computing the book profit under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs.26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to clause (i) of explanation to Section 115JB.
4. This order was upheld by the C.I.T. (A) and by the ITAT and by the High Court.
Finding of the Court:
The A.O. rightly disallowed the reduction.
Result : Appeal dismissed.
JUDGMENT
S.H. Kapadia, CJI
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 by the said amount with corresponding credit to revaluation reserve.
4. For the previous year ending 31.3.2001, relevant to the assessment year 2001-02, the P & L Account showed the charge of depreciation at Rs.127,57,06,000/- which was reduced by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- resulting in a net debit on account of depreciation of Rs.101,45,32,000/-. The A.O., while computing the book profit under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs.26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to clause (i) of explanation to Section 115JB. This order was upheld by the C.I.T. (A) and by the ITAT and by the High Court, hence, this civil appeal is filed by the assessee.
5. In the present case, the controversy is whether the amount transferred from the revaluation reserve and set off against the amount of depreciation debited to P & L Account can be excluded in terms of clause (i) of explanation to Section 115JB(2) read with the proviso.
Case of the Assessee
6. It is the case of the assessee that the main provision of clause (i) seeks to exclude from the net profit, as per P & L Account, any amount withdrawn from any reserves and credited to P & L Account. According to the assessee, the proviso introduces a caveat by providing that such exclusion can be made only in circumstances where the book profit of the year in which the reserve is created (out of which the withdrawal has been made in the subsequent years) has been increased to the extent of such reserve. Thus, according to the assessee, the said proviso has no application to cases like the present one because in this case the revaluation reserve is created, inter alia, for revaluation of assets, which are ordinarily stated in the balance sheet at the historical cost of acquisition by debiting the value of the fixed assets to the extent of revaluation with corresponding credit to the revaluation reserve. Such creation of the revaluation reserve does not impact the P & L Account in the year of creation of such reserves. That, such revaluation reserve is not a free reserve. It is not available for distribution of profits. Unlike revenue reserves, a “revaluation reserve” is not an Appropriation of Profits and the same is not debited by way of debit entry through the P & 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 & L Account and is credited directly to a revaluation reserve as provided by ICAI and, thus, the profit as reflected in the P & 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 & 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
