ORDER
R.S. Syal, Accountant Member
1. This appeal by the Revenue is directed against the order passed by the CIT (A) on 19-11-1996 in relation to the assessment year 1990-91
2. The solitary ground projects the grievance of the Revenue as under:
“That on the facts and in the circumstances of the case, the ld. CIT (A) has erred in directing the A.O. to exclude the amount of Rs. 2,54,09,727/-, being the amount transferred from revaluation reserve, as profit chargeable to tax for the purpose of computation of book profit Under Section 115J of the Income tax Act.”
3. Briefly stated, the facts of the case are that the assessee calculated profit under Section 115J as under.
"Net profit as per P&L account: Rs. 6414756/-
Add:
Provisions of doubtful debts: 81626/-
Provisions for gratuity: 202475/-
Rs. 284104/-
Rs. 6698857/-
30% of the above profits: Rs. 2009658/-
As against this the Department at the time of processing the case Under Section 143(1) (a) and thereafter Under Section 154 worked out profits Under Section 115J as under:
Net profits: Rs. 1342496/-
Add:
i. Provision for doubtful debts. Rs. 81626/-
ii. Provision for gratuity Rs. 202475/-
iii. Provision for tax. Rs. 2000000/-
iv. Transfer to Investment Allowance reserve Rs. 3072260/-
v. Transfer from Investment Allowance reserve Rs. 249250/-
vi. Re-valuation reserve. Rs. 25409727/-
Rs. 32357834
Less investment allowance reserve in view
of explanation (i) to Section 115-J(1) Rs. 249250/-
Total book profits; Rs. 32108584/-
30% of the above.... Rs. 9632575/-"
4. The assessee challenged the processing of return under Section 143(1)(a) and the learned CIT(A) in his order upheld the computation in which the re-valuation reserve was added, with which we are concerned in the present appeal. The relevant facts further show that the said order of the CIT(A) was reversed by the Tribunal in ITA No. 735(ASR) 1993 by holding that it was a debatable issued and no prima facie adjustment could have been made. In the regular assessment Under Section 143(3), the assessee was called upon to show as to why the transfer of Rs. 2,54,09,727/- from the computation of book profits. It was stated on behalf of the assessee that the assessee’s factory building, plant and machinery were revalued in the year under consideration and the amount of enhancement in valuation was at Rs. 89735695/- (Rs. 7482740/- on account of factory building and Rs. 82252955/- on account of plant and machinery). It was further explained by the assessee that notional reserve to this extent was created to the balance both the sides of balance sheet. It was further explained that on the figure of enhancement, the assessee claimed depreciation to the tune of Rs. 25409727/-, which was included in the claim for total depreciation debited to the profit & loss account and equal amount of Rs. 25409727/- was transferred out of this reserve and credited to the profit & loss account. It was explained that Note 3 was given at page 12 of the Annual Audit Report to this effect. It was further explained that the revaluation reserve to the extent of Rs. 25409727/- was first transferred to the profit & loss account and then to the general reserve. The learned A.O. took note of the proviso to Clause (i) of the Explanation to Section 115J(1A) and held that the said amount Rs. 25409727/- was not liable to be excluded from the book profits for the purpose of Section 115J.
5. In the first appeal, the learned CIT(A) concurred with the submissions advanced on behalf of the assessee and held that the assessee was justified in deduction the amount of Rs. 25409727/- being the amount transferred from the Revaluation Reserve account to the Profit and Loss Appropriation Account while computing the book profit for the purposes of Section 115J. While reaching this conclusion, he drew support from the order passed by the Delhi Bench of the Tribunal in the case of SRF Ltd. v. ACIT (1993) 47 ITD, 504. It was further held that revaluation reserve did not represent the real income and hence any amount transferred from fictitious income could not form part of the book profit of the company. Accordingly, the action of the A.O. was overturned to this extent.
6. Before us, the learned D.R. strongly opposed the impugned order by pointing that the A.O. had rightly enhanced the book profits.
7. In the opposition, the learned counsel for the assessee argued that the assessee had, in fact, claimed depreciation of Rs. 25409727/- on the enhancement in the value of assets in accordance with the permission from the Company. Law Board and if the claim of the Revenue is now accepted, it would amount to negating the effect of reduction in book profits as a result of depreciation on the enhancement in the value of fixed assets. It was contended that the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR, 273 (SC) has clearly laid down that the A.O. had no power to scrutinize the profit and loss account of the Company, which is prepared in accordance with Schedule VI of the Companies Act. The learned counsel further relied on the Tribunal order SRF Ltd. (supra) and contended that it was passed in relation to the assessment year 1989-90 in which it was held that the withdrawal from the revaluation reserve in such circumstances could not be added to the figure of profits to arrive at the book profits under Section 115J.
8. We have considered the rival submissions in extenso in the light of the material placed before us and precedents relied upon. It is obvious that the assets of the Company were revalued in the year under consideration to the Company were revalued in the year under consideration to the tune of Rs. 8.97 crores. Depreciation was claimed, inter alia, on the said enhancement at the specified rates which amounted to Rs. 25409727/-. The said amount of depreciation together with the depreciation on the profit and loss account and an amount of Rs. 25409727/- was transferred from the revaluation reserve, created in the year itself, to the credit of the Profit and Loss Appropriation Account. It is clear that at the time of revaluation of the assets, the said figure of Rs. 8.97 crores was added to the historical cost of assets on the assets side of the balance sheet and in order to equalize both sides of the balance sheet, revaluation reserve to this extent was created in the liability side. The figure of profit remained untouched so far as revaluation of assets to the tune of Rs. 8.97 crores is concerned. In other words, the profits were not increased by this amount when the asset was revalued. The A.O. by relying on the prescription of proviso to Clause (i) of Explanation to section 115J(1) held that the amount of Rs. 25409727/-, which was towards the transfer from the revaluation reserve to the credit of Profit and Loss Appropriation Account was not liable to be reduced from the “book profits”, as was claimed by the assessee. The main thrust of the arguments raised by the learned counsel for the assessee is that the A.O. had disturbed the figure of depreciation claimed to the debit side of the profit and loss account on the enhancement of value of assets to the extent of Rs. 25409727/-, which was claimed in concurrence with the view expressed by the Company Law Board vide their letter dated 1-7-1996. We are afraid that this contention of the learned A.R. is not tenable in view of the fact that the A.O. had, at no stage, disputed or disturbed the claim of depreciation. What he, in fact, did was to reduce the amount of revaluation reserve of Rs. 25409727/- credited to the Profit and Loss Appropriation Account in terms of proviso to Clause (i) of the afore noted explanation. We are at loss to appreciate as to how the A.O. could be said to have embarked upon a fresh enquiry in regard to the entries made in the account books which is the mandate of the Apex Court decision in the case of Apollo Tyres Ltd., on which the ld. A.R. has placed strong reliance. On the contrary, this decision is an authority for the proposition that the A.O. is empowered to adjust the net profits as provided in the Explanation, which, in reality, is the prescription of Section 115J. Adverting to the facts of the instant case, it is found that the A.O. had accepted the authenticity of the accounts and had not, in any manner, disturbed the Profit and loss account which was stated to be prepared in accordance with the Parts II and III of the Schedule VI of Companies Act. He had not gone into the verification of figure of depreciation shown in the profit and loss account. Rather he had simply not reduced the figure of Rs. 2.54 crores from net profits, in accordance with the requirements of the Explanation to Section 115J. Their Lordships of the Supreme Court in this case have categorically held that the A.O. “thereafter, has the limited power of making increases and reductions provided for in the Explanation to Section 115J.
9. What remains to be examined is as to whether the action of the A.O. in not reducing Rs. 25409727/-, namely, the amount transferred from revaluation reserve to the credit side of the Profit and Loss Appropriation Account, is in accordance with the requirement of Explanation to Section 115J(1A). It would be apposite to extract the relevant portion of this Explanation as under:
“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) ………………………………………………….
(b) ………………………………………………….
(c) ………………………………………………….
(d) ………………………………………………….
(e) ………………………………………………….
(f) …………………………………………………..
(g) ………………………………………………….
(h) ………………………………………………….
(ha) ………………………………………………..
and as reduced by,-
(i) the amount withdrawn from reserves (other than the reserves specified in Section 80HHD) or provisions, 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 (including the relevant 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 1988 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)”
The aforesaid proviso was inserted by the Finance Act, 1989 with retrospective effect from 1-4-1988. The C.B.D.T. in its Circular No. 550 Bearing F. No. 133/513/89-TPL dated 1-1-1990 vide para Nos. 24.4 and 24.5, has explained the relevant portion of the Explanation to Section 115J in the following terms:-
“24.4 Further under the existing provisions certain adjustments are made to the net profit as shown in the profit and loss account One such adjustment stipulates that the net profit is to be reduced by the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account. Some companies have taken the advantage of this provision by reducing their net profit by the amount withdrawn from the reserve created or provision made in the same year itself, though the reserve when created had not gone to increase the book profits. Such adjustments lead to unintended lowering of profits and consequently the quantum of tax payable gets reduced. By amending Section 115J with a view to counteract such a tax avoidance device, it has been provided that the “book profits” will be allowed to be reduced by the amount withdrawn from reserves of provisions only in two situations namely:-
(i) if the reserves have been created or provisions have been made in a previous year relevant to the asstt year commencing before 1st April, 1988 or
(ii) if the reserves have been created or provisions have been made in a previous year relevant to the asstt year commencing on or after 1st April, 1988 and have gone to increase the book profits in any year when the provisions of Section 115J of the Income tax Act were applicable.
24.5 This amendment will come into force with effect from 1st April, 1988 and will accordingly apply in relation to the asstt. year 1988-89 and subsequent year.”
Prior to the aforesaid amendment, this proviso was not there and the assessee was entitled to reduction of the amount withdrawn from reserve if such amount was credited to the profits and loss account. As a result of the amendment, by way of insertion of the proviso, the assessee became entitled to reduce the amount withdrawn from reserve only in two situations, as noted above in the circular read with the provision.
10. It is found that the case of the assessee can’t be considered in the aforesaid situation (i) for the reason that the revaluation reserve was not made in any A.Ys. prior to 1988-89. Hence it needs to be examined in the situation (ii) only which, in turn states that the reduction from the book profits for the amount withdrawn from the reserve is permissible only if such reserve was made in the assessment year 1988-89 or thereafter and it has gone to increase the book profits in any year when the provisions of Section 115J were applicable. Admittedly, the revaluation reserve was created in the assessment year under consideration, namely, 1990-91 when the asset were revalued. It is clear from the copy of profit and loss account placed on record that the said amount of Rs. 8397 crores or Rs. 2.54 crores at the time of revaluation had not gone to increase the book profits in the said year. When such amount had not increased the book profits of the company at the time of creating reserve there is no question of reducing the time of creating reserve there is no question of reducing the amount transferred from revaluation reserve to the profit and loss appropriation account as per the interpretation of the said Clause (i) of Explanation to Section 115J (1A). We notice that the idea behind the substitution of this clause by the Finance Act. 1989 with retrospective effect from 1-4-1988, as borne out from the above noted circular, only to curb such practices aimed at lowering the “book profits” of the company for the purposes of Section 115J . It is only this proviso which is coming in the way of the assessee’s claim.
11. At this juncture, it would be relevant to consider the decision of the Special Bench in the case of SRF Ltd. (supra) on which the learned CIT(A) as well as the learned counsel for the assessee has strongly relied. On going through the said order, we find a finding at para 26 that the revaluation reserve in that case was created before 1-4-1988 and the Tribunal in those circumstances held that such amount would be allowed to be deducted in arriving at book profit. It can be clearly seen that the SRF Ltd.’s case falls in category (i) of para 24.4 of the above noted Circular No. 550 because the reserve in that case was created before the assessment year 1988-89. On the contrary, in the instant case, revaluation reserve was created in the assessment year under consideration i.e. 1990-91, namely, category (ii) and the reduction could have been availed only if such reserve had gone to increase the book profits. As the amount of revaluation reserve credited to the Profit & Loss Appropriation Account of company had not increased the book profits at the time of creation of reserves in any manner whatsoever, the benefit of reduction can also not be allowed.
12. During the course of arguments, our attention was drawn on behalf of the assessee towards findings contained in the impugned order to the effect that the stand taken by the assessee was in accordance with the effect that the stand taken by the assessee was in accordance with the view expressed by the Institute of Chartered Accountants of India. In holding so, the learned CIT(A) had relied upon the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. C.I.T., (1975) 98 I.T.R., 167(SC). We have gone through the facts of that case in which the subject-matter for consideration was “actual cost”. It was observed that since this expression was not defined in the Act, it should be construed in the sense in which no commercial man would misunderstand. While deciding the issue, the Hon’ble Apex Court also took into consideration the view expressed by the Institute of Chartered Accountants of India. This case of Challapalli Sugars Ltd. (supra) (of two Judge) was considered subsequently by the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. C.I.T. (1997) 227 ITR, 172)SC) (of three Judges). In this judgment, it was held that the question of law was required to be decided by the Court on basis of the provisions of the Act. It was further observed that the accountants might have taken some other view but the accountancy practice was not necessarily a good law. A conjoint reading of the two decisions is a clear pointer towards the fact that in interpreting any provision, its express prescription cannot be lost sight of and any contrary view expressed by the statutory bodies deserves to be ignored. Adverting to the facts of the case, we find that the stand taken the A.O. is in consonance with the Explanation to Section 115J (1A). If we go by the submissions of the learned A.R. it would amount to ignoring the effect of the proviso to Clause (i) of this Explanation, which in our considered opinion, would amount to clear violation of the provisions of the Act. As such, we reject this contention of the assessee’s counsel.
13. In view of the foregoing discussion, we re satisfied that the learned CIT(A) did not rightly consider the relevant provision of the Act and was swayed by the fascinating arguments advanced before him. As such, his order is set-aside to this extent and that of the A.O. is restored.
14. In the result, the appeal of the Revenue is allowed.