Income Tax Act, 1961 – Section 115JB – Calculation of ‘book profits’ – Amount withdrawn from revaluation reserve and credited to the Profit and Loss account cannot be reduced from the book profits. Withdrawal from revaluation reserve can be reduced from book profits only where the book profit was increased by the amount of revaluation reserve in the year of creation.
(2011) 2 SCC 168 : 2011 (1) SCR 853 : JT 2011 (1) SC 65 : 2011 (1) SCALE 47
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
S. H. Kapadia (CJI), K.S. Panicker Radhakrishnan and Swatanter Kumar, JJ.
January 5, 2011
Civil Appeal No. 33 of 2011
(Arising out of S.L.P. (C) No. 35133 of 2009)
From the Judgment & Order dated 22.9.2009 of the High Court of New Delhi at Delhi in ITA No. 851 of 2009.
For the Appellant: Ajay Vohra, Kavita Jha; For the Respondent: Bishwajit Bhattacharya, ASG, Rahul Kaushik, Yatinder Chaudhary, Ajay Singh, B.V. Balaram Das.
J U D G M E N T
S.H. KAPADIA, CJI
1. Leave granted.
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 offagainst 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 ofsuch 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 the book profit suffersfull tax, without the same being affected by creation of such revaluation reserves, in the year of withdrawal, the amount withdrawn would be liable to be reduced while computing the book profit. It cannot be said that even if the entire book profit has suffered tax in the year of creation of reserve, the revaluation reserve created in that year should artificially again be added back for computing such book profit. That, by the Finance Act, 2007, w.e.f. 1.4.2007, clause (iia) is inserted in Section 115JB under which the depreciation on historical cost alone would be taken into account while calculating the book profit. In other words, depreciation attributable to the revaluation of the fixed assets to be debited to the P & L Account cannot be taken into account to calculate book profit w.e.f. the assessment year 2007-08.
7. We quote hereinbelow the relevant provisions of Section 115JB, which 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 totalincome 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, 2001, is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one-half per cent.
(2) 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) :
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 annual general meeting in accordance with the provisions of section 210 of 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 (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 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, 1997 shall not be reduced from the book profit unless the book profit 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;
8. Before answering the submissions advanced on behalf of the assessee, we wish to explain the history of MAT provisions, which is as follows: