Supreme Court of India
INDO RAMA SYNTHETICS (I) LTD.versusC.L.T., NEW DELHI
- Citation
- 2011 INSC 10
- Decided
- 5 January 2011
- Disposal
- Dismissed
- Bench
- S H KAPADIA
Holding
Withdrawal from a revaluation reserve does not qualify for reduction under clause (i) of the explanation to Section 115JB(2) because the reserve did not increase book profit at the time of its creation and the entry is a contra adjustment, not an effective credit to the profit‑and‑loss account.
Summary
Indo Rama Synthetics (I) Ltd. revalued its fixed assets in FY 2000, creating a revaluation reserve of Rs 288.58 crore. In FY 2001 it transferred Rs 26.11 crore of differential depreciation from that reserve to its profit‑and‑loss account, thereby reducing depreciation expense and showing a profit. The Assessing Officer disallowed the reduction under clause (i) of the explanation to Section 115JB(2) of the Income Tax Act, adding the amount back to net profit. The company appealed, arguing that the withdrawal should be deductible because it was credited to the P&L account. The Supreme Court held that the entry was a contra adjustment, not an effective credit that increased book profit, and that the proviso to clause (i) bars reduction when the reserve did not increase book profit in the year of its creation. Consequently, the appeal was dismissed and the lower authorities' orders affirmed.
Issues considered
- The transfer of amount from a revaluation reserve to the profit‑and‑loss account constitutes a credit for purposes of clause (i) of the explanation to Section 115JB(2).
- The proviso to clause (i) precludes reduction when the reserve was created in a previous year and did not increase book profit in that year.
- Whether a revaluation reserve qualifies as a reserve whose withdrawal can be reduced from book profit under Section 115JB(2).
- The proper interpretation of ‘book profit’ and its adjustments under the MAT provisions.
Legislation cited
- Companies Act, 1956s. 210, s. 211
- Income Tax Act, 1961s. 115J, s. 115JA, s. 115JB, s. 115JB(2)
Subjects
Minimum Alternate Taxbook profitrevaluation reserveSection 115JBIncome Tax Actdepreciationcontra adjustmentprofit and loss accountassessment yearMAT provisions
Judgment
[2011] 1 S.C.R. 853
i
INDO RAMA SYNTHETICS (I) LTD. ~
' f v.
-. C.l.T., NEW DELHI
(Civil Appeal No.33 of 2011)
JANUARY 5, 2011
B
[S.H. KAPADIA, CJI., K.S. PANICKER
RADHAKRISHNAN AND SWATANTER KUMAR, JJ.)
Income Tax Act, 1961 - s.115JB(2)- Explanation, Clause
(i) read with proviso - Appel/ant-assessee had revalued its c
fixed assets as on 31st March, 2000 (relevant to assessment
year 2000-01) - Resultant surplus stood added to the cost of
the assets - Revaluation reserve of equivalent amount was
created on the liability side - During assessment year 2001-
02, Rs.26, 11, 74,0001-, being the differential depreciation, D
,. transferred out of revaluation reserve and credited to P & L
' Account which the A.O. disallowed and consequently said
sum of Rs. 26, 11, 74, 0001- stood added back to the net profits
- Challenge to, by assessee - Held: Clause (i) of the
explanation to s. 115JB(2) mandates reduction from the net E
profits the amount(s) withdrawn from the reserves earlier
created, provided such amount(s) is credited to P & L Account
- Adjustment made in the P & L Account was primarily in the
nature of contra adjustment in the P & L Account and not a
case of effective credit in the P & L Account (as contemplated F
in clause (i) of Explanation) - Assessee credited amount to
the extent of the additional depreciation from the revaluation
reserve only to present a more healthy balance sheet to its
shareholders enabling the assessee possibly to pay out a
good dividend - The proviso to clause (i) of the Explanation G
"'t' to s. 115JB(2) comes in the way of the claim for reduction
made by the assessee under clause (i) to the Explanation -
As the am_ount of revaluation reserves had not gone to
853 H
854 SUPREME COURT REPORTS [2011) 1 S.C.R.
A increase the book profits at the time it was created, the benefit
of reduction cannot be allowed.
MAT provisions - Object of- Held: Is to bring out the real
profit of the companies - The thrust is to find out the real
8 working results of the company.
The appellant-assessee is a widely held quoted
limited company engaged in the business of manufacture
of yarn and polyester. The assessee had revalued its
fixed assets as on 31st March; 2000 and the resultant
C surplus of Rs.288,58, 19,000/- stood added to the cost of
the assets on the asset side of the balance sheet and to
equalize both sides thereof the revaluation reserve of an
equivalent amount was created on the liability side of the
balance sheet. The figure of profit remained untouched
D during the assessment year 2000-01 so far as the
re,valuation of assets to the tune of Rs.288,58, 19,000/- was
cqncerned. During the assessment year 2001-02, an
amount of Rs.26, 11,74,000/-, being the differential
de;preciation, was transferred out of the said revaluation
E reserve of Rs.288,58,19,000/- and credited to the P & L
Account which the AO disallowed and consequently the
said sum of Rs. 26,11,74,000/- stood added back to the
net profits. The A.O., while computing the book profit
under Section 115JB of the Act, did not allow reduction
F 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 11 SJB.
G This order was upheld by the C.l.T. (A) and by the ITAT
and by the High Court. Hence ttie present appeal.
Dismissing the appeal, the Court
. HELD:1. Book profit is not defined in the Income Tax
H Act, 1961. It is Income computed under the company law.
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW 855
DELHI
By virtue of the MAT provisions, in the case of a A
-~
t \ company whose total income as computed under the
normal provisions of the Act is less than 30% of the book
profit, the total income chargeable to tax will be 30% of
the book profit as computed. For the purposes of Section
115J, book profit will be the net profit as shown in the P B
& L Account prepared in accordance with the provisions
of Schedule VI to Companies Act, 1956 after certain
-1., adjustments. The net profit will be increased by income
1
tax paid or payable, amount carried to any reserve,
provision made for liabilities etc. provided the amount(s) c
is debited to the P & L Account. The amount so arrived
at is to be reduced by item (i) to item (vii) including
amounts withdrawn from reserves, if any such amount is
credited to P & L Account. Clauses (i) to (vii) of the
explanation to Section 115JB(2) represent items of D
reduction from the net profits. Clause (i) mandates
~
reduction for the amount(s) withdrawn from the reserves
earlier created, provided such amount(s) is credited to P
& L Account. Such credit is mandated so that the true
working result gets reflected in the financial statement of
the assessee-company. The said clause (i) contemplates E
only those reserves which actually affect the net profits
->
as shown in the P & L Account (see also- clause (ii) for
comparison). The object of various clauses (i) to clause
(vii) is to find out the true working result of the assessee-
company. [Para 20] [867-D-H; 868-A] F
2. In the present case, the adjustment made in the P
& L Account was as per Accounting Standards 6 and 10
read with Guidance Note issued by Institute of Chartered
Accountants of India which is in conformity with Section G
211 of the Companies Act. The said adjustment was
primarily in the nature of contra adjustment in the P & L
Account and not a case of effective credit in the P & L
Account (as contemplated in clause (i) of explanation).
The credit in the P & L Account implies that the P & L H
856 SUPREME COURT REPORTS [2011] 1 S.C.R.
A Account per se has been effectively credited by the said
amount. Thus, the amount withdrawn from any reserve -\ r
must in effect impact the net profit as shown in the P & L
Account. As per accounting principles, the contra
adjustment does not at all affect any particular account
B to which it has been carried. 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 and, therefore, though the amount has
been literally credited to the P & L Account, however, in
c substance there is no credit to P & L Account. MAT
provisions were introduced as number of zero tax
companies had grown. It was found that companies had
earned substantial book profits and had paid huge
dividends but paid no tax. In the present case, had the
0 assessee deducted the full depreciation from the profit
before depreciation during the accounting year ending
31.3.2001, it would have shown a loss and in which event
it could not have paid the dividends and, therefore, the
assessee credited the amount to the extent of the
E additional depreciation from the revaluation reserve to
present a more healthy balance sheet to its shareholders
enabling the assessee possibly to pay out a good
dividend. It is precisely to tax these kinds of companies
that MAT provisions had been introduced. The object of
MAT provisions is to bring out the real profit of the
F companies. The thrust is to find out the real working
results of the company. Thus, the reduction sought by
the assessee under clause (i) to the explanation to
Section 115JB(2) in respect of depreciation has been
rightly rejected by the AO. [Para 21] [868-B-H; 869-A]
G
3. The revaluation reserve of Rs.288,58,19,000/- was ;-
created during earlier assessment year 2000-01. During
the accounting year ending 31.3.2001 (assessment year
2001-02), the profits of assessee stood at
H Rs.120, 18,97,000/- whereas depreciation stood at
INDO RAMA SYNTHETICS (I} LTD. v. C.l.T. NEW 857
DELHI
Rs.127 ,57 ,06,000/-. Depreciation is a no-cash charge A
against the profits. lhus, company had a loss of
Rs.7,38,09,000/- (i.e. Rs.127,57,06,000/- of depreciation as
against profit of Rs.120, 18,97 ,000/-). However, by
withdrawing '26, 11,74,000/-, being the differential
depreciation, from the revaluation reserve of B
Rs.288,58,19,000/-(which is only a notional adjustment
entry to balance both sides of the balance sheet) and
reducing it from the depreciation of Rs.127,57,06,000/-, the
assessee artificially brings down the depreciation only to
Rs.101,45,32,000/- which is then deducted from the c
profits before depreciation amounting to
Rs.120,18,97,000/- so that there is a profit of
Rs.18,73,65,000/-. This is how the loss of Rs.7,38,09,000
got converted to profit of Rs.18,73,65,000/-. Thus, the
.. financial statement for the year ending 31.3.2001 is made
to look healthy. The said reasons are in addition to the
reasons given by the Authorities below while rejecting
D
the claim of the assessee. [Paras 22, 23] [869-B-F] ·
4. Under the provisions, as they then existed, certain
adjustments were required to be made to the net profit E
as shown in the P & L Account. One such adjustment
stipulated that the net profit shall be reduced by the
amount(s) withdrawn from any reserves, if any such
amount is credited to the P & L Account. Thus, if the
reserves created had gone to increase the book profits F
in any year when the provisions of Section 115JB were
applicable, the assessee became entitled to reduce the
amount withdrawn from such reserves if such withdrawal
is credited to P & L Account. From the facts, it is clear
that neither the said amount of Rs.288,58, 19,000/- nor G
Rs.26, 11,74,000/- had ever gone to increase the book
profits in the said year ending 31.3.2000 (bP.ing the
financial year). Thus, when such amount(s) has not gone
to increase the book value at. the time of creation of
reserve(s), there is no question of reducing the amount H
858 SUPREME COURT REPORTS [2011) 1 S.C.R.
A transferred from such revaluation reserves to the P & L
Account. Thus, the proviso to clause (i) of the explanation -"\
to Section 115JB(2) comes in the way of the claim for
reduction made by the assessee. The reduction under
clause (i) to the explanation could have been availed only
B if such revaluation reserve had gone to increase the
book profits. As the amount of revaluation reserves had
not gone to increase the book profits at the time it was
created, the benefit of reduction cannot be allowed.
Further, the revaluation reserve stood created during the
c earlier assessment year 2000-01. As regards the
argument on behalf of the assessee that creation of such
reserve did not impact the profits of that year, though the
facts show that though the profit was not impacted,
depreciation as the head of Ale. was impacted. By inter
0 play of the balance sheet items with Profit & Loss Ale.
items the assesseehas sought to project the loss of -y
Rs. 7,38,09,000/- as profit of Rs.18, 73,65,000/-. [Para 24]
[870-C-H; 871-A-B]
CIVIL AP PELLATE JURISDICTION : Civil Appeal No. 33
E of 2011.
From the Judgment & Order dated 22.9.2009 of the High
Court of Delhi at New Delhi in ITA No. 851 of 2009.
Ajay Vohra, Kavita Jha for the Appellant.
F
Bishwajit Bhattacharya, ASG, Rahul Kaushik, Yatinder
Chaudhary, Ajay Singh and B.V. Balaram Das for the
Respondent.
G The Judgment of the Court was delivered by
+
S.H. KAPADIA, CJI. 1. Leave granted.
Facts
H 2. Assessee is a widely held quoted limited company and
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW 859
DELHI [S.H. KAPADIA, CJI.]
is engaged in the business of manufacture of yarn and A
·~ 1-" 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
B
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.
c
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
D
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 E
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.l.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 F
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.
G
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
H
860 SUPREME COURT REPORTS [2011] 1 S.C.R.
A 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
B been made in the subsequent years) has been incrE)ased 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
c 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
0
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
E 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
F 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
G 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 suffers
full tax, without the same being affected by creation of such
H revaluation reserves, in the year of withdrawal, the amount
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW 861
DELHI [S.H. KAPADIA, CJI.]
withdrawn would be liable to be reduced while computing the A
.;- 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 B
Section 11 SJB 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 c
assessment year 2007-08.
Relevant Provisions
7. We quote hereinbelow the relevant provisions of
Section 11 SJB, which reads as under: D
~
Special provision for payment of tax by ce.rtain companies.
11 SJB. (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 E
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, 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 F
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 G
purposes of this section, prepare its profit and loss account
for the relevant previous year in accordance with the
provisions of Parts II and Ill of Schedule VI to the
Companies Act, 1956 (1 of 1956) :
H
862 SUPREME COURT REPORTS [2011] 1 S.C.R.
A Provided that while preparing the annual accounts
including profit and loss account,-
(1) the accounting policies;
(i1) the accounting standards adopted for preparing
B 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
c
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) :
D Explanation.-For the purposes of this section, "book
profit" means the net profit as shown in the profit and loss T
account for the relevant previous year prepared under sub-
section (2), as increased by-
E (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-
F
(1) 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
G profit and loss account:
t-
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 ye~u commencing on or after ·
H
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW 863
DELHI [S.H. KAPADIA, CJI.]
the 1st day of April, 1997 shall not be reduced from the A
-+- 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; ' B
' \
8. Before answering the submissions advanced on behalf
,..,, of the assessee, we wish to explain the history of MAT
provision~. ,which is as follows:
Histo~ of MAT Provisions c
. 9. MAT is applicable only where the ~or~fltaUncome
computed is less than 30% of the book profit.
10. MAT was introduced by the Finance Act of 1996 w.e.f.
D
1.4.1997. This was necessary due to a rise in the number of
zero-tax companies paying marginal tax which situation arose
in view of preferences granted in the form of exemptions,
deductions and high rates of depreciation. The rate of minimum
tax was kept at 30% of the book profit as deemed total income.
MAT was levied under Section 115JA from assessment year E
1997-98. Section 115JA is made inoperative w.e.f. 1.4.2001.
In its place, the Finance Act, 2000 inserted Section 115JB. The
~-
neVJ provision provides that all companies having book profit
under the Companies Act, shall be liable to· pay MAT at a
specified rate of the booK profit. It further provides that every F
MAT company shall follow same accounting policies and
standards as are followed for preparing its statutory account.
. ;,;jt ·. .
.11. For the purposes ijf the afore-stated provision, "book
profir means the net profit as si\6wn in the P & L Account in G
_, -r the relevant previous year in accordance with the provisions of
Part II and Part Ill of the Schedule VI to the Companies Act,
subject to certain adjustments which increases or decreases ..
the book profit. \hus, even under Section 115J, certain
adjustments were to be made to the net profits as shown in the
H
864 SUPREME COURT REPORTS [2011] 1 S.C.R.
A P & L Account. One such adjustment stipulates that the net profit
shall be decreased by the amount withdrawn from any reserves,
if any such amount is credited to the P & L Account. Some
companies have taken advantage of Section 115J by
decreasing their net profit by the amount withdrawn from the
B reserve created in the same year itself, though the reserve
when created had not gone to increase the book profit. Such
adjustments ~ed to lowering of profits and, consequently, the
quantum of tax payable got reduced. Thus, by amending
Section 115J, it was provided that "book profit" will be allowed
c to be decreased by the amount withdrawn from any reserves
only in two cases:
(i} if such reserve has been created in the previous
year relevant to the assessment year commencing
w.e.f. 1.4.1998
D
OR
(ii} if the reserve so created. in the previous year has
gone to increase the book profit in any year when
Section 115J was applicable.
E
12. The Finance Act, 2002 now specifically provides vide
Section 115JB that the amounts withdrawn from any reserves,
if credited to the P & L Account, shall be reduced from the book
profit. It also provides that any amount withdrawn from such
F reserves created on or after 1.4.1997 and which is credited to
P & L Account 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.
G
Scope of Section 115JB
13. The expression "book profit" for the purposes of
Section 115J B has been defined in the explanation to Section
115JB(2} to mean: -
H
- INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW
DELHI [S.H. KAPADIA, CJI.]
865
the net profit as shown in the P & L Account for the relevant A
.... previous year prepared under Section 115JB(2), as increased
by the amount(s) mentioned in clauses (a) to (f) and as reduced
by the amount(s) covered by clauses (i) to (vii) of the said
explanation.
B
14. It is, thus, clear that what is "book profit" has been.
defined and explained in the above explanation. Section 115JB
is a self-contained code. It applies notwithstanding other
-{
provisions of the Act. There is no scope for any allowances or
deductions under any other section from what is deemed to be
total income of the company (assessee).
.c
15. The first step for arriving at the "book profit" is that the
net profit as shown in the P & L Account for the relevant previous
year prepared under Section 115JB(2) has to be increased by
the amount(s) in clauses (a) to (f) if such amount(s) is debited D
to the P & L Account. Clause (b) refers to amount(s) carried to
any reserves by whatever name called. As stated above, such
increase needs to be made only if any amount referred to in
clauses (a) to (f) is debited to P & L Account.
E
16. The second step for arriving at the "book profit" is that
the net profit as shown in the P & L Account for the relevant
previous year prepared under Section 115JB(2) and as
increased by any amount, as stated above, has to be reduced
by the amount(s) in clauses (i) to (vii).
F
17. For the purposes of deciding this case it may be noted
that we are concerned with clause (i) which inter alia refers to
an amount(s) withdrawn from any reserves if any such
amount(s) is credited to P & L Account. During the relevant
assessment year, clause (i) had an exception to such exclusion. G
--..,-
That exception was in the form of a proviso which inter alia
stated that the exclusion in clause (i) to the explanation will not
apply "to the amount(s) withdrawn from reserves created in a
previous year relevant to the assessment year 1997-98 or any
subsequent assessment year unless the book profit of such H
866 SUPREME COURT REPORTS [2011] 1 S.C.R.
A year stood increased by those reserves (out of which the said
amount(s) stood withdrawn)". ~
18. Thus, the book profits calculation would be as under:
Take profit as per P & L Account )()(
B
Add: (if debited to P & L Account)
(a) Income tax paid/ payable & provision xx
(b) Any transfer for reserves )()(
c
(c) Unascertained liabilities (contingent) xx
(d) Provision for losses of subsidiaries. xx
(e) Dividend paid/ proposed )()(
D
(f) Expenses relating to exempt income under sections
10, 10A, 108, 11, 12 xx
Less: (if credited to P & L Account)
E
(i) Withdrawal from reserves or provisions subject to
proviso
Q.: Could Rs. 26, 11, 7 4,000/-, being the differential
F depreciation recouped from the revaluation reserves created
during the earlier assessment year 2000-01, be said to be
credited in the P & L Account during the assessment year in
question in terms of clause (i) to the explanation to Section
115JB(2)?
G
19. The brief facts apropos this issue are that the --r
assessee had revalued its fixed assets as on 31st March, 2000
and the resultant surplus of Rs. 288,58,19,000/- stood added
to the cost of the assets on the asset side of the balance sheet
H and to equalize both sides thereof the revaluation reserve of
- ,,.
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW
DELHI [S.H. KAPADIA, CJI.]
867
an equivalent amount was created on the liability side of the A
··~
balance sheet. Thus, the said reserve was merely an
adjustment entry. The figure of profit remained untouched during
the assessment year 2900-0.1 so far as the revaluation of
assets to the tune of Rs. 288,58,19,000/- was concerned.
During the assessment year 2001-02, an amount of Rs. B
26, 11, 74,000/-, being the differential depreci~tion, was
transferred out of the. said revaluation reserve of Rs.
...( 288,58, 19,000/- and credited to the P & L Account which the
AO disallowed and consequently the said sum· of Rs,
· 26, 11,74,000/- stood added back to the net profits, Hence, this \c
civil appeal is filed by the assessee.
20. Book profit is not defined in the Act. It is income
computed under the company law. Bywirtue of the MAT
provisions, in the case of a company whose total income as
..,. computed un.der the normal provisions Of the Act is less than
D
30% of the book profit, the total income chargeable to tax will
be 30% of the book profit as computed. For the. purpo~es of
Section 115J, book profit will be the net profit as shown,. in the
P1 & L Account prepared in accordance with the provisions of
Schedule VI to Companies Act, 1956 after certain adjustments. E
The net profit will be increased by income tax paid or payable,
amount carried to any reserve, provision made for liabilities etc.
-+
provided the amount(s) is.debited to the P & L Account. The
amount so a.rrived at is to be reduced by item (i) to item (vii)
including amounts withdrawn from reserves, if any such amount F
is credited to P & L Account. Clauses (i) tE> (vii) of the
explanation to Section 115JB(2) represent items of reduction
from the net profits. Clall6e (i) mandates· reduction for the
amount(s) withdrawn from the reserve~ earlier created,
provided such amount(s) is credited to P & L Account. Such G
--·
(
credit is mandated so that the true working result gets reflected
in the financial statement of the assessee-company. The said
clause (i) contemplates only those reserves which actually affect .
the net profits as shown in the P & L Account (see also clause
(Ii) for comparison~. The object of various clauses (i) to clause H
A
868 SUPREME COURT REPORTS (2011) 1 S.C.R.
(vii) is to find out the true working result of the assessee-
-
company. + r
21. In the present case, the adjustment made in the P & L
Account was as per Accounting Standards 6 and 10 read with
B Guidance Note issued by Institute of Chartered Accountants of
India which is in conformity with Section 211 of the Companies
Act. The said adjustment was primarily in the nature of contra
adjustment in the P & L Account and not a case of effective
credit in the P & L Account (as contemplated in clause (i) of }-
explanation). The credit in the P & L Account implies that the
c P & L Account per se has been effectively credited by the said
amount. Thus, the amount withdrawn from any reserve must in
effect impact the net profit as shown in the P & L Account. As
per accounting principles, the contra adjustment does not at all
affect any particular account to which it has been carried.
D 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 and, therefore, though the amount
has been literally credited to the P & L Account, however, in
substance there is no credit to P & L Account. MAT provisions
E were introduced as number of zero tax companies had grown.
It was found that companies had earned substantial book
profits and had paid huge dividends but paid no tax. In the
present case, had the assessee deducted the full depreciation
from the profit before depreciation during the accounting year
F ending 31.3.2001, it would have shown a loss and in which
event it could not have paid the dividends and, therefore, the
assessee credited the amount to the extent of the additional
depreciation from the revaluation reserve to present a more
healthy balance sheet to its shareholders enabling the
,.G assessee possibly to pay out a good dividend. It is precisely
to tax these kinds of companies that MAT provisions had been .......
introduced. The object of MAT provisions is to bring out the real
profit of the companies. The thrust is to find out the real working
results of the company. Thus, the reduction sought by the
H assessee under clause (i) to the explanation to Section
- INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW
DELHI [S.H. KAPADIA, CJI.]
115JB(2) in respect of depreciation has been rightly rejected
869
A
.. _,. by the AO.
22. Take the facts of the present case. As stated above,
the revaluation reserve of Rs. 288,58, 19,000/- was created
during earlier assessment year 2000-01. During the accounting B
year ending 31.3.2001 (assessment year 2001-02), the profits
of assessee stood at '120,18,97,000/- whereas depreciation
stood at Rs. 127,57,06,000/-. Depreciation is a no-cash
charge against the profits. Thus, company had a loss of Rs.
7,38,09,000/- (i.e. Rs. 127,57,uC,GOO/- of depreciation· as
against profit of Rs. 120, 18,97,000/-). However, by withdrawing
c
Rs. 26, 11,74,000/-, being the differential depreciation, from the
revaluation reserve of '288,58, 19,000/-(which is only a notional
adjustment entry to balance both sides of the balance sheet)
and reducing it from the depreciation of Rs. 127,57,06,000/-,
the assessee artificially brings down the depreciation only to D
Rs. 101,45,32,000/- which is then deducted from the profits
before depreciation amounting to Rs. 120,18,97,000/- so that
there is a profit of Rs. 18, 73,65,000/-. This is how the loss of
Rs. 7,38,09,000 got converted to profit of Rs. 18,73,65,000/-.
Thus, the financial statement for the year ending 31.3.2001 is E
made to look healthy.
23. The reasons given hereinabove are in addition to the
reasons given by the Authorities below while rejecting the claim
of the assessee. .F
24. The matter could be examined from another angle. To
recapitulate the facts, the fixed assets of the assessee were
revalued in the earlier assessment year 2000-01 (i.e. financial
year ending 31.3.2000) and amount of enhancement in
valuation was Rs. 288,58,19,000/- which was credited to the G
-t-
revaluation reserve. In other words, at the time of revaluation
of assets, the said figure of Rs. 288,58,19,000/- was added
to the historical cost of assets on the asset side of the balance
sheet and in order to equalize both sides of the balance sheet
the revaluation reserve to that extent was created on the liability H
870 SUPREME COURT REPORTS [2011] 1 S.C.R.
A side. Thus, the figure of profit remained untouched so far as
the rev.aluation of assets to the tune of Rs. 288,58, 19,000/- is
concerned. The profits were not increased by the said amount
when the asset was revalued. During the assessment year in
question, i.e., assessment year 2001-02, an amount of Rs.
B 26, 11,74,000/-, being the differential depreciation, was
1 "" transferred out of the said revaluation reserve of Rs.
288,58, 19,000/- and credited to the P & L Account which the
A.O. disallowed by placing reliance on the proviso to clause
(i) of the explanation to Section 115JB(2). Consequently, the
c A.O. added back the said amount of Rs. 26, 11, 74,000/- to the
net profits. We agree with the A.O. Under the provisions, as
they then existed, certain adjustments were required to be made
to the net profit as shown in the P & L Account. One such
adjustment stipulated that the net profit shall be reduced by the
amount(s) withdrawn from any reserves, if any such amount is
0
credited to the P & L Account. Thus, if the reserves created
had gone to increase the book profits in any year when the-
provisions of Section- 11 SJB were applicable, the assessee
became entitled to reduce the amount withdrawn from such
reserves if such withdrawal is credited to P & L Account. Now, ..
•
E from the above facts, it is clear that neither the said amount of
Rs. 288,58, 19,000/- nor Rs. 26, 11,74,000/- had ever gone to
increase the book profits in the said year ending 31.3.2000
(being the financial year). Thus, when such amount(s) has not
gone to increase the book value at the time of creation of
F reserve(s), there is no question of reducing the amount
transferred from such revaluation reserves to the P & L Account.
Thus, the proviso to clause (i) of the explanation to Section,
115JB(2) comes in the way of the claim for reduction made
by the as$essee. In our view, the reduction under clause (i) to
G the explanation could have been availed.only if such revaluation ,.
reserve had gone to increase the book profits. As the amount
of revaluation reserves had not gone to increase the book
profits at the time it was created, the beriefit of reduction
cannot be allowed. One more fact needs to be highlighted. In
H this case, as -indicated above, the revaluation reserve stood
I
INDO RAMA SYNTHETICS (I) LTD. v. C.l.T. NEW 871
DELHI [S.H. KAPADIA, CJI.]
created during the earlier assessment year 2000-01. It has A
been vehemently argued on behalf of the assessee that creation
of such reserve did not impact the profits of that year. The facts
enumerated heteinabove shows that though the profit was not
impacted, depreciation as the head of Ale. was impacted. By
inter play of .the balance sheet items with Profit & Loss Ale. B
items the assessee, as stated above, has sought to project the
loss of Rs. 7·,38,09,000/- as profit of Rs. 18, 73,65,000/-.
--( Conclusion
25. For above reasons, we see no reason to interfere, C
hence, the civil appeal filed by the assessee shall stand
dismissed with no order as to costs. ·
8.B.B. , Appeal dismissed .
..,. .
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "Minimum Alternate Tax"Sign in to search