Income Tax Appellate Tribunal - Mumbai
Dcw Ltd. vs Deputy Commissioner Of Income-Tax on 16 May, 2000
Equivalent citations: [2001]77ITD462(MUM)
ORDER
M.A. Bakshi, J.M.
1. The assesses is in appeal for the assessment year 1988-89 against the order dated 10-10-1991 of the CIT (Appeals)-XVI, Bombay.
2. The only ground involved is relating to the computation of book profits under section 115J. As the income of the assessee, after statutory deductions, was less than 30% of the profits and gains derived from business, the provisions of section 115J have been invoked. As provided under section 115J, book profits have been computed and tax levied @ 30% thereof. The assessee's claim is that the sum of Rs. 64,32,496 and another sum of Rs. 27,72,158 withdrawn from revaluation reserve and credited to the profit and loss account ought to have been reduced from book profits as stipulated in clause (i) of Explanation to section 115(1). The CIT(A) has declined to adjust the aforementioned amounts on the ground that though Explanation to section 115J provides for adjustment in respect of the amounts withdrawn from the reserve account, yet the proviso is not applicable as the amount is not credited to the profit and loss account.
3. Giving the background of the claim made by the assessee, the CIT(A) has pointed out that the assessee had revalued its assets in earlier assessment year and adopted the said value in the books of account. The difference in value of an amount of Rs. 1711.62 lakhs was credited to an account described as revaluation reserve account. In the year under appeal, the assessee had debited a sum of Rs. 293.27 lakhs in the profit and loss account on account of depreciation. This amount was arrived at as under:
(In lakhs) (In lakhs) Depreciation on tools for the year 0.97 Depreciation on fixed assets for the year 356.62 Less: Drawn from Revaluation Reserve 64.32 292.30 Total 293.27 The depreciation had been calculated by the assessee at the historical cost of the assets. The figure of Rs. 356.62 lakhs represents depreciation on the revised cost of assets. If the assets had not been revalued, the assessee would have debited the profit and loss account by a sum of Rs. 293.27 lakhs on account of depreciation. However, since as per the books of account, depreciation worked out to Rs. 356.62 lakhs, a sum of Rs. 64.32 lakhs was drawn from revaluation reserve and the balance was drawn from the profit and loss account.
4. Similarly, the assessee-company had written off certain fixed assets, considered obsolete, in the year under appeal. The amount written off was Rs. 45.03 lakhs. The amount written off had been arrived at after deducting an amount of Rs. 27.74 lakhs referable to the increase in the revised cost due to revaluation. If the assessee-company had not revalued the assets, the actual claim of written off would have remained at Rs. 45.03 lakhs. Due to revaluation of assets, the value of the assets written off was Rs. 72.77 lakhs. The assessee had claimed the amount of Rs. 45.03 lakhs only. On the basis of the two adjustments indicated above, it was claimed by the assessee that a sum of Rs. 64.32 lakhs and another sum of Rs. 27.74 lakhs should be treated as having been credited to the profit and loss account. It had been argued before the CIT(A) and reiterated before us that the mere fact that the assessee has made the adjustment in a different manner should not come in the way of allowing the adjustment provided under Explanation (1) to section 115J. However, rejecting the contention the CIT(A) in Para No. 10 of his order, held that the amounts adjusted out of the revaluation reserves of Rs. 64.32 lakhs and Rs. 27.74 lakhs cannot be considered to be the credits to the profit and loss account. The amounts to be treated as credits to the profit and loss account, according to the learned CIT(A), are such amounts as are in the nature of revenue receipts. The deduction claimed, has been, held not to be permissible. The order of the Assessing Officer has thus been confirmed.
5. Assessee is aggrieved. The learned counsel for the assessee contended that section 115J provides the manner of computation of book profits. Relying upon the decision of the Special Bench of the Calcutta Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 199ITR 164 (AT) and other decision of the Tribunal in the case of SRF Ltd. v. Asstt. CIT [1993] 47 ITD 504 (Delhi) and in the case of J.K. Cotton Spg. & Wvg. Milts Co. Ltd v. Asstt. CIT [1997] 60 ITD 99 (All.), it was contended that the Assessing Officer has no power to disturb the book profits except to make adjustments as authorized under the provisions of section 115J. Since the assessee had withdrawn certain amounts from the reserves and adjusted the profit and loss account by a sum of Rs. 92.06 lakhs, the reduction as claimed by the assessee was permissible under section 115J. The Assessing Officer, according to the learned counsel, was not justified in denying the benefit of the proviso to clause (i) of Explanation to section 115J(1).
6. The learned Departmental Representative on the other hand contended that the assessee revalued its assets in the year 1986 and as a result of revaluation of assets, a reserve had been created. The assessee had not created the reserve out of its profits. In such circumstances, the revaluation reserve account does not qualify to be known as a reserve. In this connection, reliance has been placed on the decision of the Bombay High Court in the case of CITv. Century Spg. & Mfg. Co. Ltd. [1951] 20 ITR 260 where it has been held that the difference of value on revaluation does not qualify to be a reserve. Referring to the instructions issued by the Institute of Chartered Accountants, the Id. DR contended that the Institute has suggested that the depreciation should be provided on historical cost. It was further contended that the reliance on the guidelines of the Institute may not always be permissible in law. In this connection, reliance was placed on the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172 wherein Their Lordships have held that the accounting principles are not necessarily good law. The Id. DR pointed out that there has been an artificial increase in the value of assets and the adjustment made by the assessee is to deflate the true profits. It was accordingly contended that the decision of the CIT(A) may be upheld and the appeal of the assessee dismissed.
7. The Id. counsel for the assessee on the other hand contended that the decision of the Bombay High Court in the case of Century Spg. & Mfg. Co.
Ltd. (supra) is not applicable as it defines business profits. Referring to the guidelines issued by the Institute of Chartered Accountants, the learned counsel contended that the Institute recognises the adjustments in question out of the reserve created on the revaluation of the assets. It was further contended that the CIT(A) has not refuted the claim of the assessee that the amount has been withdrawn from the reserve. It is therefore not permissible for the revenue to contend that it is not a reserve.
8. We have given our careful consideration to the rival contentions. The crucial issue in this case is relating to the interpretation of the provisions of section 115J. It would therefore be useful to reproduce the said section as applicable to the assessment year 1988-89, as under :
" 115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), 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, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(1A) 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).
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 (1 A), as increased by-
(a) to (ha)...
if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account, 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...."
Section 115J, being the only section under Chapter XIIB, was inserted by the Finance Act, 1987, with effect from 1-4-1988. By virtue of section 115J, in the case of a company whose total income as computed under the provisions of the Income-tax Act is less than 30% of the book profits computed under the section, the total income chargeable to tax will be 30% of the book profits as computed in accordance with the provisions of Schedule VI to the Companies Act, 1956, after certain adjustments. The adjustment with which we are concerned is the reduction of any amounts withdrawn from reserves, if any, provided such amount is credited to the profit and loss account. The previous year of the assessee ends on 30-9-1987. Section 115J imposing minimum tax on companies at the rate of 30% of the book profits was incorporated by the Finance Act of 1987 with effect from 1-4-1988. The object of incorporating section 115J was elaborated upon by the CBDT in its Circular No. 495 dated 22-9-1987 (178 ITR St. 110). It has been clarified that as a result of various tax concessions and incentives, certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax. Accordingly, as a measure of equity, section 115J has been introduced. By virtue of this provision, in the case of a company whose total income as computed under the provisions of Income-tax Act is less than 30% of the book profits, computed under the section, the total income chargeable to tax will be 30% of the book profits as computed. In the preceding year for which the previous year ended on 30-9-1986 i.e., for assessment year 1987-88, the assessee decided to revalue the assets and the difference between the book value and revaluation was credited to the revaluation reserve account. In the assessment year under appeal, the assessee calculated the depreciation in respect of the assets as per the value revised in the preceding year. However, as per Company law, in the profit and loss account the depreciation as per the value prior to revaluation was required to be debited and accordingly, the difference between the claim of the depreciation on the basis of the value of assets as revalued and the depreciation on the basis of the book value, was adjusted against the revaluation reserve account. Since the assessee had withdrawn from the revaluation reserve account the difference in depreciation etc., the benefit of the adjustment provided in Explanation (i) is being claimed by the assessee. The said Explanation provides that the profit as computed in accordance with Schedule VI (Part II and Part III of the Companies Act, 1956) be reduced by the amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account. There are two conditions for applicability of Explanation (i) to section 115J. Firstly, the amount to be reduced from profits should have been withdrawn from 'Reserves' and secondly, such amount should have been credited to the profit & loss account. We may first consider as to where the two amounts in question have been credited to the profit and loss account. A perusal of profit and loss account reveals that the assessee has not credited the profit and loss account by the amount withdrawn from revaluation reserve account. Therefore, one of the conditions of Explanation (i)is not satisfied and accordingly the benefit of adjustment under the Explanation is not available to the assessee.
9. The assessee, however, claims that if the entries made by the assessee are looked into in proper perspective then it is clear that they have, in fact, credited the amount withdrawn from revaluation reserve account insofar as it is by reason of that credit alone that the profit of the assessee has been reduced to the extent of the amount withdrawn from the said account. In order to consider the claim of the assessee, it is necessary to consider the provisions of section 115J. Section 115J as already pointed out creates a liability of tax at 30% of the book profits. Book profits are defined to mean the book profits prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956 (1 of 1956). Since section 115J requires the determination of the book profits in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956 (1 of 1956) [hereinafter referred to as the Companies Act'], it will be necessary to refer to the provisions of the Companies Act in regard to the preparation of profits and loss account.
10. Section 210 of the Companies Act provides that every Annual General Meeting held in pursuance of section 166, the Board of Directors of the company shall lay before the company (a) a balance sheet (b) a profit and loss account.
11. In the case of a company not carrying on the business for profit, the section provides for laying of the income and expenditure account before the Company.
12. Balance sheet is formal agreement of facts and figures in an intelligible manner, showing the total value of assets owned and total amount of liabilities by a business on a particular date or at the end of the particular period so that the net worth of the business may be ascertained. It is a statement of the position of the business in terms of the formula: Assets, Liabilities plus Paid Up Capital and Surplus, as of a particular time, usually the end of the accounting period. It is a look, so to speak, between two successive income statements. It is of great interest not only to the Board of Directors and shareholders but also to the suppliers of the credit to the company. The following statement of the function of a balance sheet given in the evidence of the Institute of Chartered Accountants before the Cohen Committee was approved and adopted as correct by that Committee:
"The function of a balance-sheet may be stated to be an endeavour to show the share capital, reserves (distinguishing those which are available for distribution as dividends from those not regarded as so available) and liabilities of the company at the date as at which it is prepared, and the manner in which the total monies representing them are distributed over the several types of assets. A balance-sheet is thus a historical document and does not, as a general rule, purport to show the net worth of an undertaking at any particular date, of the present realisable value of such items as goodwill, land, plant and machinery, nor, except in case where the realisable value is less than cost, does it normally show the realisable value of stock-in-trade."
13. Section 211 of the Companies Act gives the form and content of the balance sheet and profit & loss account. Section 211(2) reads as under:
"Every profit and loss account of a company shall give a true and fair value of the profit or loss of the company for the financial year and shall subject.
as aforesaid, comply with the requirement of Part II of Schedule VI, so far as they are applicable thereto."
14. Section 205 provides for payment of dividend out of profits. Since the dividends are to be paid out of the profits, the section becomes relevant for appreciating as to how the profits are to be determined in the case of companies.
Section 205 of the Companies Act reads as under:
"(1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of subsection (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government:
Provided....
(2) For the purpose of sub-section (1), depreciation shall be provided either-
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such asset; or
(c) or any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety-five per cent of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid down by the Indian Income-tax Act, 1922, or the rule made thereunder, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case:
Provided that where depreciation is provided for in the manner laid down in clause (b) or clause (c), then, in the event of the depreciable asset being sold, discarded, demolished or destroyed the written down value thereof at the end of the financial year in which the asset is sold, discarded, demolished or destroyed, shall be written off in accordance with the proviso to section 350."
15. A perusal of the relevant provisions of the Companies Act does not leave us in any doubt that the Board of Directors are duty bound to prepare a balance sheet and a profit and loss account in accordance with the provisions of the Companies Act which is to be laid before the company.
16. Section 205 makes it obligatory upon every company to provide depreciation at the rate to the extent specified in section 350 or in respect of each item on depreciable assets for such an amount as is arrived at by dividing ninety-five per cent of the original cost thereof to the company by the specified period in respect of such assets. In this case, the assessee has opted to provide depreciation in accordance with section 350 of the Companies Act. Section 350 of the Companies Act reads as under :
S. 350. Ascertainment of depreciation.--The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount calculated with reference to the written-down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter at the end of the each subsequent financial year, at the rate specified for the assets by the Indian Income-tax Act, (1961), and the rules made thereunder for the time being in force, as normal, depreciation including therein extra and multiple shift allowances but not including therein any special, initial or other depreciation or any development rebate, whether allowed by the Act or those rules or otherwise."
17. Considering the provisions of the Companies Act, in particular sections 205, 350 and Parts II and III of the Schedule VI of the Companies Act, it is abundantly clear that the assessee is required to deduct depreciation out of the profits of the company on the basis of the written down value and not on the value as may be adjusted from time to time at the discretion of the management. It is in the light of these provisions of the Act, we are to ascertain the nature of the adjustment made by the company in respect of the depreciation. As is observed from section 205 of the Companies Act, 1956, the requirement under the law is to debit the depreciation allowance with reference to the historical cost and not with reference to the amount as revalued. Therefore, the act of debiting depreciation in the profit and loss account by only such amount as was with reference to the value of the assets before its revaluation was the requirement of law and not at the will or discretion of the management. The adjustment made by the assessee was necessitated by compulsory provisions of the Act and with a view to keep the accounts intact without disturbing the value as enhanced after revaluation. The depreciation debited to the profit and loss account after adjustment from the revaluation reserve account is the appropriate depreciation that could be debited to the profit and loss account. Deducting of higher depreciation would be contrary to the provisions of section 205 of the Companies Act, 1956 (1 of 1956). Had it been permissible for the assessee to debit depreciation on the basis of the value adopted after revaluation, perhaps the contention on behalf of the assessee that adjustment from revaluation reserve was a credit to the profit and loss account, would be worth consideration. But that is not so. The condition for reduction of the amount withdrawn from any reserve is that the amount should be credited to the profit and loss account. As the amount of depreciation claimed by the assessee is the amount as required to be debited in accordance with the provisions of section 205 of the Companies Act, 1956, it cannot be said that the amount withdrawn from the revaluation reserve account was credited to the profit and loss account. The profit and loss account of the company as per Part II of Schedule VI to the Companies Act required the assessee to clearly disclose the result of working of the company during the period covered by the account. Debiting of higher depreciation calculated on the basis of value adopted on revaluation would depict distorted results of the company. Therefore, the depreciation as permissible under law alone could be debited to the profit and loss account. In such circumstances, the adjustment claimed by the assessee by reason of withdrawal from the revaluation reserve account is not permissible, as one of the conditions for reduction of such amount from the profits is that "such amount is credited to the profit and loss account'. In this case, the said amount is neither credited to the profit and loss account nor can it be deemed to have been credited to the said account.
18. Similarly, in the case of the adjustment in respect of obsolete items of machinery, proviso to section 205 2(d) makes it obligatory for the assessee to write off the written down value so discarded in accordance with proviso to section 350. The said proviso to section 350 reads as under:
"Provided that if any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full the excess, if any, of the written-down value of such asset over its sale proceeds or, as the case may be, its scrap value, shall be written off in the financial year in which the asset is sold, discarded, demolished or destroyed."
19. The above mentioned provision does not leave us in doubt that the assessee was required to debit the profit and loss account, the written down value of the discarded assets only and, not the value as adopted after revaluation. Since the assessee could not have debited the value of the discarded assets as revalued, necessary adjustment had to be made by the assessee in the account of revaluation reserve account.
20. It may be pertinent to mention that if profit and loss account were debited by the depreciation as calculated on the value after revaluation, could the Assessing Officer make the necessary adjustment in respect of depreciation as per provisions of section 205. The answer is in affirmative. The issue came up for consideration of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd v. Asstt. CIT 45 ITD 22 (Cal.) (SB). The relevant finding relating to the aforementioned issue is quoted as under:
"In the present case as could be seen from the Finance Minister's speech and the Memorandum explaining the provisions, the intention was to make the company pay tax on income which would otherwise be reduced by reason of certain deductions available under the Act. As regards the question whether the Assessing Officer can recast the book profits, an implied mandate is given to the Assessing Officer to verify and satisfy himself whether the net profit was as shown in the profit andloss account for the relevant previous year and as to whether the profit and loss account was prepared in accordance with Part II and Part in of the Sixth Schedule to the Companies Act. If in case the Assessing Officer finds that the net profit was not as shown by the profit and loss account or the profit and loss account was not prepared in accordance with Part II and Part in of the Sixth Schedule to the Companies Act, he is entitled to adjust the profit. To this extent, the power to adjust the book profit will have to be conceded to the Assessing Officer."
21. It seems that the assessee was well aware of the law and that could be the reason that no scope was left for the Assessing Officer to make the adjustment. The claim of depreciation was restricted to the claim as was permissible in law. In this connection, Schedule "N" to the accounts of the appellant for the year under apeal is relevant:
"1 .....
2 .....
On the revalued Assets, Depreciation is charged on straight line basis at the rates given by the valuer. Since the same is higher than the Depreciation thereon, as per Section 205(2)(b) the difference of Rs. 64.32 lacs (Previous year Rs. 76.68 lacs)has been drawn from the Revaluation Reserve. On the balance Fixed Assets, Depreciation is charged as per Section 205(2)(6) of the Companies Act."
22. Our attention had been drawn to the guidelines issued by the Institute of Chartered Accountants (copy placed on record) relating to Treatment of Reserve created on revaluation of fixed assets. We note that in para 9 of the guidelines, it has been stated as under:
"9. A question may arise, as to whether the additional depreciation provision required in consequence of revaluation can be adjusted against 'Revaluation Reserve'. As stated earlier, deprecation is required to be provided with reference to the total value of the fixed assets as appearing in the account after revaluation. However, for certain statutory purposes e.g., dividends, managerial remuneration etc., only depreciation relatable to the historical cost of the fixed assets to be provided out of the current profits of the company. In the circumstances, the additional depreciation relatable to revaluation may be adjusted against "Revaluation Reserve" by transfer to Profit and Loss account. In other words, as per the requirements of Part II of Schedule VI to the Companies Act, the company will have to provide for depreciation on the total book value of the fixed assets (including the increased amount as a result of revaluation) in the Profit & Loss account for the relevant period, and thereafter the company can transfer an amount equivalent to the additional depreciation from the Revaluation Reserve. Such transfer from Revaluation reserve should be shown in the Profit and Loss Account separately and an appropriate note by way of disclosure would be desirable. Such a disclosure would appear to be in consonance with the requirement of Part I of Schedule VI to the Companies Act, prescribing disclosure of write-up in the value of fixed asset for the first five years after revaluation."
23. The above represents one view. There is a contrary view which is described in the same instructions issued by the Institute of Chartered Accountants. Para 5 may be appropriate to the context:
"5. There is a contrary view that such Revaluation Reserve is created as a result of a book adjustment only and therefore, such a reserve is an unrealised reserve which is not available for distribution as dividends. When accounts are disclosed on the basis of historical costs, measurement of profits can be made by comparing the cost of the assets at the beginning and at the end of the accounting period. As such there is no justification for taking credit for unrealised gains because theincrease in market value may be due to various extraneous factors such as fall in the purchasing power of currency or other factors not related to the operations of the company. So far as fixed assets are concerned, these are held for the use in the business and not for sale in the normal course of business. In the circumstance, the difference belween the market value and the book value does not represent realised gain andcannot be treated as such in the books of account."
24. We are of the considered view that the above contrary view is appropriate and in consonance with the provisions of the Companies Act, Moreover, it is well settled principle of law that if the guidelines of the institute are in conflict with any law, such guidelines are to be ignored. Reference to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is relevant, In this case, it has been held as under:
"Next, it has been argued that according to well-established accountancy practice the interest earned by the company even before the commencement of business from investing borrowed capital will have to be set off against interest payable by the company on that borrowed capital. The argument based on accountancy practice has little merit, if such practice cannot be justified by any provision of the statute or is contrary to it.'
25. Considering the totality of facts and circumstances of the case, the position thus emerges as follows. The assessee had revalued its assets. The difference between the book value of assets and the value as per valuation could not be adjusted by the assessee under any head. The difference was accordingly credited to an account named as 'revaluation reserve account'. If one were to keep in mind the fact that the company i^ required to make profit and loss account, in order to depict the financial results in a particular year, then it becomes abundantly clear that the revaluation of assets does not fit in the scheme of the Companies Act. The assessee was therefore, compelled to make the necessary adjustments in the manner in which such adjustments have been made. The assessee, as already pointed out, has restricted the claim of depreciation and obsolescence allowance in accordance with the provisions of the Companies Act and therefore, it cannot be presumed that there was credit in the profit and loss account of the difference between the depreciation and obsolescence allowance determined with reference to the enhanced value on revaluation of assets. The claim of the assessee is therefore, liable to be rejected. This is one aspect of the matter. The claim of the assessee is liable to be rejected, even on another ground. We may have to consider as to whether the revaluation reserve account qualifies to be classified as a 'Reserve'.
26. We find merit in the contention advanced on behalf of the revenue that the amount credited to the valuation reserve account does not qualify to be called as a 'reserve' within the meaning of the Companies Act. The term 'reserve' is not defined in the Companies Act. The Institute of Chartered Accountants, England, has defined reserve as "amount set aside out of profits and other surpluses which are not designed to meet any liability, contingent, commitment or diminution in value of assets know to exist as on the date of the balance sheet [Recommendations on Accounting Principles, Vol., 6, Para 43]. It is therefore clear that the enhanced value of the assets credited to revaluation reserve account of the company does not represent a reserve within the meaning of the Companies Act, as the same is not out of the profits of the company as understood under the Companies Act. The net accretion of the assets of the company will enhance the net worth of the company and unless that assets are sold, the profit of the company cannot be realised. It is thus evident that the entries made by the assessee on enhancing the value of assets and creating an account under the head revaluation reserve account is nothing but an entry to balance the act of revaluation. In the light of above findings, the revaluation reserve account does not qualify to be a 'reserve' within the meaning of the Companies Act.
27. Thus, the benefit of adjustment under Explanation (i) to section 115J is not available to the assessee on either of the grounds viz., that the amount in question has not been credited to the profit and loss account and that the amount even if deemed to be adjusted, is not out of the reserves. The revenue was therefore justified in not making the adjustment claimed by the assessee.
28. It may be pertinent to mention that the decision of the Tribunal in the case of SRF Ltd. (supra), of which, one of us is a party, is on its own facts. In that case, there was no dispute regarding the credit of the amount to the profit and loss account. The correctness of the claim of the representative was also not considered in that case.
29. Taking totality of facts and circumstances of the case into account, we hold that the reduction sought by the assessee under Explanation (1) to section 115J in respect of depreciation as well as obsolescence allowance has rightly been rejected.
30. In the result, the appeal of the assessee is accordingly dismissed.