Indo Rama Synthetics (I) Ltd vs. CIT (Supreme Court)

Amount withdrawn from revaluation reserve & credited to P&L A/c cannot be reduced from book profit even if in year of creation of reserve, the P&L A/c was not debited

In AY 2000-01 the assessee revalued its fixed assets by Rs. 288.58 crores and credited the said sum to the revaluation reserve. In AY 2001-02, the assessee debited Rs.127.57 crores towards depreciation and in accordance with Accounting Standard AS-10 & AS-6 transferred Rs. 26.11 crores from revaluation reserve & set it off against the depreciation resulting in a net depreciation charge of Rs.101.45 crores. In computing the book profits u/s 115JB, the assessee claimed that the amount of Rs. 26.11 crores transferred from the reserves had to be excluded and the depreciation charge had to be considered at Rs. 127.57 crores. The AO, CIT (A), Tribunal & High Court rejected the claim of the assessee. On appeal to the Supreme Court, HELD dismissing the appeal:

(i) The assessee’s argument that as the creation of the revaluation reserve was not debited to the P&L A/c, the withdrawal from the reserve should be excluded from the P&L A/c in terms of clause (i) of the Explanation to s. 115JB(2) read with the Proviso is not acceptable because had the assessee deducted the full depreciation from the profit before depreciation in AY 2001-02 it would have shown a loss and could not have paid the dividends. 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 s. 115JB(2) in respect of depreciation has been rightly rejected by the AO;

(ii) Further, clause (i) of the Explanation to s. 115JB(2) permits the net profit to be reduced by the amount withdrawn from reserves only if in the year of creation of the reserves, the book profits had been increased. As in the year of creation of the reserves (AY 2000-01), the amount of Rs.288.58 crores or Rs.26.11 crores had not gone to increase the book profits there is no question of reducing the amount transferred from such revaluation reserves to the P & L Account. The argument that creation of the reserve did not impact the profits of that year is also not acceptable because though the profit was not impacted, depreciation was impacted and by the inter play of the balance sheet items with P&L A/c the assessee had projected a loss of Rs.7.38 crores (before transfer from reserves) as profit of Rs.18.73 crores.