REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2011
(arising out of S.L.P. (C) No. 35133 of 2009)
Indo Rama Synthetics (I) Ltd. ...
Appellant(s)
versus
C.I.T., New Delhi. ...
Respondent(s)
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
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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
3
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Account, any amount withdrawn from any reserves and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
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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 the book profit suffers
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full 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.
Relevant Provisions
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 total
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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 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,
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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:
History of MAT Provisions
9. MAT is applicable only where the normal total income
computed is less than 30% of the book profit.
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10. MAT was introduced by the Finance Act of 1996 w.e.f.
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 1997-98. Section 115JA is made inoperative
w.e.f. 1.4.2001. In its place, the Finance Act, 2000 inserted
Section 115JB. The new 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 MAT company shall follow same
accounting policies and standards as are followed for
preparing its statutory account.
11. For the purposes of the afore-stated provision, "book
profit" means the net profit as shown in the P & L Account in
the relevant previous year in accordance with the provisions of
Part II and Part III of the Schedule VI to the Companies Act,
subject to certain adjustments which increases or decreases
the book profit. Thus, even under Section 115J, certain
9
adjustments were to be made to the net profits as shown in
the 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 reserve created in the same year itself, though the
reserve when created had not gone to increase the book profit.
Such adjustments led 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
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
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.
12. The Finance Act, 2002 now specifically provides vide
1
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 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.
Scope of Section 115JB
13. The expression "book profit" for the purposes of
Section 115JB has been defined in the explanation to Section
115JB(2) to mean: -
the net profit as shown in the P & L Account for the
relevant 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.
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
1
allowances or deductions under any other section from what is
deemed to be total income of the company (assessee).
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 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.
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).
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
1
exclusion. 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 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 xx
Add: (if debited to P & L Account)
(a) Income tax paid/ payable & provision xx
(b) Any transfer for reserves xx
(c) Unascertained liabilities (contingent) xx
(d) Provision for losses of subsidiaries xx
(e) Dividend paid/ proposed xx
(f) Expenses relating to exempt income under sections xx
10, 10A, 10B, 11, 12
Less: (if credited to P & L Account)
(i) Withdrawal from reserves or provisions subject to xx
proviso
Q.: Could Rs.26,11,74,000/-, being the differential
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)?
1
19. The brief facts apropos this issue are that the 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 and to
equalize both sides thereof the revaluation reserve of an
equivalent amount was created on the liability side of the
balance sheet. Thus, the said reserve was merely an
adjustment entry. The figure of profit remained untouched
during the assessment year 2000-01 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.26,11,74,000/-, being the differential depreciation, 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 civil appeal is filed by the assessee.
20. Book profit is not defined in the Act. It is income
computed under the company law. By virtue of the MAT
1
provisions, in the case of a 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 & L Account prepared in accordance with the provisions of
Schedule VI to Companies Act, 1956 after certain
adjustments. 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 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 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 only those
reserves which actually affect the net profits as shown in the
1
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.
21. 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 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 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. 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
1
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
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 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 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.
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 year
1
ending 31.3.2001 (assessment year 2001-02), the profits of
assessee stood at Rs.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.127,57,06,000/- of depreciation as
against profit of Rs.120,18,97,000/-). However, by
withdrawing Rs.26,11,74,000/-, being the differential
depreciation, from the revaluation reserve of
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 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.
23. The reasons given hereinabove are in addition to the
reasons given by the Authorities below while rejecting the
claim of the assessee.
1
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
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 side. Thus, the figure of profit remained untouched so
far as the revaluation 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.26,11,74,000/-, being the
differential depreciation, was 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 A.O. added back the said
1
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 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 115JB were applicable, the assessee became entitled
to reduce the amount withdrawn from such reserves if such
withdrawal is credited to P & L Account. Now, 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
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 assessee. In our view, the reduction under clause
2
(i) to 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 benefit of
reduction cannot be allowed. One more fact needs to be
highlighted. In this case, as indicated above, the revaluation
reserve stood created during the earlier assessment year
2000-01. It has been vehemently argued on behalf of the
assessee that creation of such reserve did not impact the
profits of that year. The facts enumerated hereinabove shows
that though the profit was not impacted, depreciation as the
head of A/c. was impacted. By inter play of the balance sheet
items with Profit & Loss A/c. 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,
hence, the civil appeal filed by the assessee shall stand
dismissed with no order as to costs.
.......................................CJI
2
(S. H. Kapadia)
...........................................J.
(K.S. Panicker Radhakrishnan)
...........................................J.
(Swatanter Kumar)
New Delhi;
January 5, 2011
