Income Tax Appellate Tribunal - Ahmedabad
Alembic Limited, Baroda vs Assessee on 13 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
" C " BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.A. No. 4327/ Ahd/2007
(Assessment year 2004-05)
Alembic Limited, Vs. ACIT, Circle 1(1), Baroda
5th Floor, Admin Building,
Alembic road,
Baroda
PAN/GIR No. : AABCA7950P
I.T.A.No. 4561/Ahd/2007
(assessment year 2004-05)
ACIT, Circle 1(1), Vs. Alembic Limited,
Baroda 5th Floor, Admin Building,
Alembic road, Baroda
(APPELLANT) .. (RESPONDENT)
Appellant by: Shri S N Soparkar,
Ms. Urashi Shodhan, AR
Respondent by: Shri S K Gupta, CIT DR
Date of hearing: 13.03.2012
Date of pronouncement: 11.05.2012
ORDER
PER SHRI A. K. GARODIA, AM:-
Thee are cross appeals filed by the assessee and the revenue which are directed against the order of Ld. CIT(A) I, Baroda dated 25.09.2007 for the assessment year 2004-05.
2. First, we take up the appeal of the assessee in I.T.A.No. 4327/Ahd/2007. The ground No.1 is regarding inclusion of scrap sale of 2 I.T.A.No.4327,4561 /Ahd/2007 Rs.1,73,91,640/- as a part of total turnover for the purpose of computing deduction allowable u/s 80HHC.
3. It was fairly conceded by Ld. Counsel for the assessee that this issue is now covered against the assessee by various judgements of Hon'ble Karnataka & Madras High Courts as stated under, except excise duty on scrap sale:
(a) 326 ITR 358 (Ktk.) CIT Vs Motor Industries Co. Ltd.
(b) 308 ITR 377 (Mad.) CIT Vs Lucas TVS Ltd. (c) 297 ITR 107 (Mad.) CIT Vs Ashok Leyland Ltd.
4. Ld. D.R. supported he orders of authorities below.
5. We have considered the rival submissions, perused the material on record and have gone through the judgments cited by the Ld. Counsel for the assessee. We find that this issue is now covered against the assessee by these judgments except excise duty on scrap sale. Respectfully following these judgements, we order accordingly and direct the A.O. to include the scrap sale less excise duty on scrap sale in total turnover for the purpose of computing deduction allowable u/s 80HHC. This gerund is partly allowed.
6. Ground No.2 is regarding consideration of gross interest income, computer charges, conversion charges, insurance claim, foreign exchange gain and rental income for computing profits of the business for the purpose of working out deduction allowable to the assessee u/s 80HHC.
7. It was submitted by the Ld. Counsel for the assessee that this issue should go back to the file of the A.O. for a fresh decision as per the tribunal decision in assessee's own case for the assessment year 2000-01 in I.T.A.No. 1322/Ahd/2004. He submitted a copy of this tribunal decision and drew our attention to para 119-120 of this tribunal order. He 3 I.T.A.No.4327,4561 /Ahd/2007 further submitted that the issue regarding insurance claim is directly covered in favour of the assessee by the tribunal decision rendered in the case of Gujarat Alkali & Chemicals Ltd. 27 TTJ 245 (Ahd.) He also placed reliance on a judgment of Hon'ble Apex Court rendered in the case of ACG Associated Capsules Pvt. Ltd. Vs CIT as reported in 247 CTR 372 (S.C.).
8. As against this, Ld. D.R. supported the orders of authorities below and he placed reliance on the judgment of Hon'ble Apex Court rendered in the case of CIT Vs K Ravindranathan Nair as reported in 295 ITR 228.
9. We have considered rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. We find that in the case of ACG Associated Capital Pvt. Ltd. (supra) cited by the Ld. A.R., Hon'ble Apex Court has duly considered its own earlier judgement rendered in the case of CIT Vs K Ravindranathan Nair (supra) which is cited by the Ld. D.R. and the same was distinguished. Considering these facts that in the earlier year, this issue was restored back by the tribunal to the file of the A.O. for a fresh decision, we feel it proper that in this year also, this issue should go back to the file of the A.O. for a fresh decision after considering all the judgments which are available at that point of time and after considering all the submissions of the assessee. The A.O. should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee. We order accordingly. This ground is allowed for statistical purposes.
10. Ground No.3 is regarding deduction u/s 80HHC in respect of export incentive as DEPB of Rs.5,15,97,048/-.4 I.T.A.No.4327,4561 /Ahd/2007
11. It was submitted by the Ld. A.R. that this issue is now covered in favour of the assessee by the judgment of Hon'ble Apex Court rendered in the case of ACG Associates Capital Pvt. Ltd.(supra) in which, it was held by the Hon'ble Apex Court that sale value of export incentive or face value of DEPB should not be considered u/s 28(iiid) by following its own judgment rendered in the case of Topman Exports Vs CIT and others as report ed in 247 CTR 353 (S.C.). It was held that only profit on sale of DEPB is relevant for the purpose of Section 28(iiid) and not the entire sale proceeds of DEPB. Ld. D.R. placed reliance on the judgment of Hon'ble Bombay High Court rendered in the case of Kalpataru Colour & Chemicals Vs CIT as reported in 328 ITR 451 (H.C.) Bombay (233 CTR (Bom.)313.
12. We have considered the rival submissions, and we find that his issue is now covered by this latest judgment of Hon'ble Apex Court rendered in the case of ACG Associated Capital P. Ltd. (supra) and in the case of Topman Exports (supra) and the judgment of Hon'ble Bombay High Court rendered in the case of Kalpataru Colour & Chemicals (supra) is no more a good law because the same was impliedly overruled by the Hon'ble Apex Court. Hence, respectfully following this decision of Hon'ble Apex Court, we direct the A.O. to consider only profit on sale of DEPB for the purpose of Section 28(iiid) and not the entire sale proceeds of DEPB for the purpose of computation of deduction allowable to the assessee u/s 80HHC. The A.O. should decide this issue afresh in the light of these two judgments of Hon'ble Apex Court. It was also submitted by the Ld. A.R. before us that out of total amount of Rs.515.97 lacs, DEPB credit of Rs.502.92 lacs was internally utilized and there was no transfer/sale of DEPB to this extent. We direct the A.O. to consider all 5 I.T.A.No.4327,4561 /Ahd/2007 these aspects and should consider only profit on sale of DEPB u/s 28(iiid). This ground is allowed for statistical purposes.
13. Ground No.4 is regarding disallowances of deduction u/s 80IA(4) of the Income tax Act, 1961 in respect of business of generation of electricity. It was submitted by the Ld. A.R. that in the present year, income assessed is 'nil' even after disallowance and hence, this issue has no impact in the present year although it may have impact in future years when there is taxable income.
14. Ld. D.R. supported the orders of authorities below.
15. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. In view of this fact that in the present year, this issue is of academic interest only because the income assessed is Rs. 'nil' even after various disallowances, we feel that no adjudication is called for in the present year on this issue because the same is of academic interest only in the present year and hence, this issue will be decided in such year where it has some impact on the income of the assessee and, therefore, this ground is rejected as being of academic interest only.
16. Ground No.5 is regarding restriction of deduction u/s 80HHC (erstwhile 80IA(9)).
17. The Ld. A.R. of the assessee placed reliance on the judgment of Hon'ble Bombay High Court rendered in the case of Associated Capsules Pvt. Ltd. Vs DCIT and Another as reported in 332 ITR 42 (Bom.). He also placed reliance on the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs Millipore India P. Ltd. as repot ed in 341 ITR 219(Karn.).6 I.T.A.No.4327,4561 /Ahd/2007
18. Ld. D.R. of the revenue placed reliance on the decision of Special bench of the Tribunal rendered in the case of Hindustan Mint as reported in 119 ITR 117 (SB).
19. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgments cited by both the sides. Since now, the judgements of two different High Courts are available on this issue, decision of Special bench of the Tribunal is no more relevant and hence, we decide this issue by following the judgment of Hon'ble Bombay High Court rendered in the case of Associated Capsules Pvt. Ltd. (supra). In that case, it was held by the Hon'ble Bombay High Court that the tribunal was not right in holding that as per Section 80-IA(9) of the Income tax Act, 1961, the amount of profit allowed as deduction u/s 80-IA(1) of the Income tax Act, 1961 has to be reduced from the profit of the business of the undertaking while computing deduction under any other section under the Chapter VI-A of the Income tax Act, 1961. Hon'ble Bombay High Court has already considered the decision of Special bench of the Tribunal rendered in the case of CIT Vs Hindustan Mint (supra). By respectfully following this judgement of Hon'ble Bombay High Court, we direct the A.O. to compute the deduction allowable to the assessee u/s 80HHC in the light of this judgment. This ground is also allowed for statistical purposes.
20. Ground No.6 is regarding reduction of amount of profit eligible for deduction u/s 80HHC from the book profit u/s 115JB.
21. Ld. A.R. placed reliance on the judgement of Hon'ble Apex Court rendered in the case of Ajanta Pharma Ltd. Vs CIT as reported in 327 ITR 305 and also on another judgment of Hon'ble Apex Court rendered 7 I.T.A.No.4327,4561 /Ahd/2007 in the case of CIT Vs Bhari Information Techno systems Pvt. Ltd. as reported in 295 ITR 01 (S.C.).
22. Ld. D.R. of the revenue supported the order of Ld. CIT(A).
23. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgments cited by the Ld. A.R. In the case of Ajanta Pharma Ltd.
(supra), it was held by the Hon'ble Apex Court that the tribunal was right in holding that 100% of export profit earned by the assessee as computed u/s 80HHC(3) was eligible by deduction under clause (iv) of Explanation to Section 115JB. We direct the A.O. to decide this issue in the light of this judgment of Hon'ble Apex Court and this ground is also allowed for statistical purposes.
24. Ground No.7 is regarding deduction of Rs.67.88 lacs being dividend distribution tax from book profit u/s 115JB of the Income tax Act, 1961. This ground was not pressed by the Ld. A.R. of the assessee in view of the retrospective amendment and hence, this ground of the assessee is rejected as not pressed.
25. In the result, appeal of the assessee stands partly allowed in the terms indicated above.
26. Now, we take up the revenue's appeal i.e. I.T.A.No. 4561/Ajd/2007. Ground No.1 raised by the revenue is as under:
"1. (a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in excluding indirect costs claimed as not attributable to exports before apportioning the same in the ratio of export turnover of trading goods to total turnover, for reduction of indirect costs from the export turnover of trading goods in computing deduction in accordance with section 80HHC(3), thus whittling down the substance and the purpose of the definition of 'indirect costs' in clause (e) of the Explanation below section 80HHC(3).8 I.T.A.No.4327,4561 /Ahd/2007
(b) The Id CIT(A) failed to appreciate that the formula of apportionment in clause (e) of the Explanation aims at removing subjectivity, which will be reinforced if the assessee is held as entitled to outright exclusion of a component of indirect costs determined as not attributable to exports and then reducing the export turnover only by the proportionate amount of the rest of the indirect costs when the formula is meant for determining the amount to be reduced with reference to entire indirect costs.
(c) The Id. CIT(A) failed to appreciate that his order permits double benefit, once by outright exclusion of indirect costs not attributable to export of trading goods and then by exclusion of the proportionate amount out of the balance of indirect costs that is attributable to domestic turnover, which defies all logic and leads to absurd and unintended results."
27. Ld. D.R. supported the assessment order whereas the Ld. A.R. supported the order of Ld. CIT(A). He placed reliance on the tribunal decision rendered in the case of Flexo Smooth Earthmovers as reported in 197 TTJ 108 (Del.) and the decision of Special bench of the Tribunal rendered in the ser of Surendra Engineering Corporation as reported in 78 TTJ 347 (SB).
28. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by the Ld. A.R. We find that Ld. CIT(A) has cancelled the addition made by the A.O. by following these two tribunal decisions cited by the Ld. A.R. before us. In the assessment order and in the order of Ld. CIT(A), there is no mention regarding expenses which are not considered by the assessee as indirect cost attributable to export of trading goods and without examining the nature of expenses, the issue cannot be decided in the light of these two tribunal decisions and hence, we feel that in the interest of justice, this matter should go back to the file of the A.O. for a fresh decision in the light of these two tribunal decisions 9 I.T.A.No.4327,4561 /Ahd/2007 after finding out and examining the nature of expenses in question and accordingly, we set aside the order of Ld. CIT(A) and restore this matter to the file of the A.O. for a fresh decision . The assessee has to explain the nature of those indirect expenses which are not considered by the A.O. as relatable to export of trading goods and thereafter, the A.O. should pass necessary order as per law in the lights of these two tribunal decision after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
29. Ground No.2 raised by the revenue is as under:
"2.(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the disallowance of Rs.3,90,519/- u/s 14A towards interest and other expenses incurred in relation to exempted income of dividend and tax-free interest, without taking note of the landmark decision in the case of CIT(A) vs Abhishek Industries Ltd. 286ITR 01 (P&H), laying down that, in view of section 106 of the Indian Evidence Act, the facts being in the special knowledge of the assessee, it was up to him to adduce evidence that all the borrowings were used for the purposes of business and it is assessee's own surplus funds that were invested in the shares and deposits earning exempted income and, even in case of mixed funds, the disallowance of interest could be made.
(b) The Id. CIT(A) erred in accepting the assessee's plea that the investment in shares and deposits being less than the assessee's own funds in the balance sheet, no disallowance of interest was called for, without appreciating that the assessee's own funds already stood invested in fixed assets or as working capital when the borrowings were made; otherwise, there was no need for such borrowings and hence it is these borrowings which were utilized to earn exempted income and the co-relation between the borrowings and utilization can not be reflected in the balance sheet prepared on a particular date.
(c) The Id. CIT(A) failed to appreciate that when the Assessing Officer show-caused the assessee against proposed disallowance, it was up to him to prove by furnishing day-to-day cash flow that no interest-bearing funds were deployed to earn exempted income 10 I.T.A.No.4327,4561 /Ahd/2007 and, in the absence of the same, the Assessing Officer was justified in drawing inference as per the ratio settled in the case of CIT vs Motor General Finance Ltd. 254ITR 449 (Del) since confirmed in principal by the Supreme Court in the case of Motor General Finance vs CIT 267 ITR 381 (SC).
(d) The Id. CIT(A) erred in deleting the entire disallowance by putting arbitrary and narrow meaning on the term 'incurred' in section 14A when this section nowhere refers to incurring of expressly quantified expenditure in relation to exempted income and, instead, uses the wider expression "in relation to" and not "for earning of".
30. Ld. D.R. supported the assessment order. He has submitted that as per the judgements of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Pvt. Ld., as reported in 194 Taxman 203 (Bom), this issue should go back to the file of the A.O. for a fresh decision.
31. As against this, the Ld. A.R. of the assessee placed reliance on the judgment of Hon'ble Kerala High Court rendered in the case of Raghubir Synthetics as reported in 231 CTR 164. In the rejoinder, it was submitted by the Ld. D.R. that this judgment of Hon'ble Kerala High Court is not in respect of Section 14A of the Income tax Act, 1961.
32. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. We feel that in the interest of justice, this matter should go back to the file of the A.O. for a fresh decision because it was held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Pvt. Ltd. (supra) that prior to assessment year 2008-09, Rule 8D is not applicable. In the present case, the A.O. has made ad-hoc disallowance of 10% of the exempted income of Rs.31,95,189/- and the Ld. CIT(A) has deleted the entire disallowance. In the interest of justice, we feel that this issue should go back to the file 11 I.T.A.No.4327,4561 /Ahd/2007 of the A.O. for a fresh decision in the light of this judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Mfg. Pvt. Ltd. (supra). He should also consider the judgement of Hon'ble Kerala High Court rendered in the case of Raghubir Synthetics (supra) or any other judgment of any High Court or Supreme Court which may be available at that point of time and thereafter, he should pass necessary order as per law after providing adequate opportunity of being heard to the assessee. This ground is also allowed for statistical purposes.
33. Ground No.3 raised by the revenue is as under:
"3. (a) On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in negating the adjustment of provision for bad debts in the computation of book profit u/s 115JB on the ground that it was not a liability for expenses but a liability relating to assets, without appreciating that the word 'liability' in clause (c) of the Explanation below section 115JB(2) does not distinguish between a liability towards expenses and a liability relating to assets both of which are a charge on the profits.
(b) Without prejudice, the Id CIT(A) failed to appreciate that if the amount did not constitute liability, it was a reserve 'by whatever name called' within the meaning of clause (b) of the Explanation below section 115JB (2) in view of not being actual amount of debts written off but only an arbitrary provision at an estimated fraction of total debts, which is treated as reserve even under rule 7(2) of Schedule VI of the Companies Act without the extension of meaning as in clause (b) of the aforesaid Explanation."
34. It was fairly conceded by the Ld. A.R. that this issue is now covered against the assessee by the subsequent retrospective amendment and accordingly, on this issue, order of Ld. CIT(A) is reversed and that of the A.O. is restored. This ground of the revenue is allowed.
35. Ground No.4 of the revenue is as under:
"4. On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in negating the adjustment of diminution in the 12 I.T.A.No.4327,4561 /Ahd/2007 value of investments in the computation of book profit u/s 115JB on the ground that it was not a liability for expenses but a liability relating to assets, without appreciating that the word 'liability' in clause (c) of the Explanation below section 115JB(2) does not distinguish between a liability towards expenses and a liability relating to assets both of which are a charge on the profits.
(b) Without prejudice, the Id CIT(A) failed to appreciate that if the amount did not constitute liability, it was a reserve 'by whatever name called' within the meaning of clause (b) of the Explanation below section 115JB (2) in view of not being actual diminution in the value of investments but an arbitrary provision to meet the diminution in future at the time of actual disposal of the investments, which is treated as reserve even under rule 7(2) of Schedule VI of the Companies Act without the extension of meaning as in clause (b) of the aforesaid Explanation.
36. Regarding this issue also, it was fairly conceded by the Ld. A.R. that this issue is now covered against the assessee by the subsequent retrospective amendment in Section 115JB. Accordingly, on this issue also, the order of Ld. CIT(A) is reversed and that of the A.O. is restored. This ground of the revenue is also allowed.
37. Ground No.5 of the Revenue is as under:
"5. (a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing to adjust deduction u/s 80HHC as per book profit and not as computed under the provisions of section 80HHC in the computation of deemed total income under section 115JB, by ignoring the language of clause (iv) of the Explanation below section 115JB(2) referring to amount of profits eligible for deduction u/s 80HHC as computed under section 80HHC(3) subject to the conditions specified in section 80HHC, which includes the condition laid down in Explanation (baa) below section 80HHC.
(b) The CIT(A) erred in placing an interpretation which is discriminatory between an assessees paying tax on the normal total income and an assessee paying tax on the deemed total income under section 115JB, making only the latter entitled to benefit unintended in the letter as well as the scheme of the Act."13 I.T.A.No.4327,4561 /Ahd/2007
38. Ld. D.R. supported the assessment order whereas the Ld. A.R. supported the order of Ld. CIT(A). He also submitted that this issue is now covered in favour of the assessee by the judgement of Hon'ble Apex Court rendered in the case of Ajanta Pharma Ltd. (supra). He also submitted that this issue is interconnected with Ground No.6 of the assessee's appeal.
39. We have considered the rival submissions, perused the material on record and have gone through the orders of authorizes below. We find that while deciding ground No.6 of the assessee's appeal, we have directed the A.O. to decide this issue afresh in the light of the judgment of Hon'ble Apex Court rendered in the case of Ajanta Pharma Ltd. (supra). Since this is a connected issue for ground No.5 of the revenue's appeal also, we set aside the order of Ld. CIT(A) on this issue and restore the matter back to the file of the A.O. for fresh decision in the light of the judgement of Hon'ble Apex Court rendered in the case of Ajanta Pharma Ltd. (supra). This ground of the revenue is also allowed for statistical purposes.
40. Ground No.6 is as under:
"6. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing reduction of Rs.16,54,000/- being withdrawal from revaluation reserve with the observation that the issue was decided by him in the assessment year 2002-03 whereas no such issue arose in that assessment year and, moreover, such reduction was not permitted in view of the proviso to clause(i) of the Explanation below section 115JB(2)."
41. It was submitted by the Ld. D.R. that this issue should be decided against the assessee as per clause (i) of Explanation (1) to Section 115JB. He supported the assessment order. Ld. A.R. of the assessee supported the order of Ld. CIT(A).
14 I.T.A.No.4327,4561 /Ahd/200742. At this juncture, the bench wanted to know from the Ld. A.R. as to whether the reserve was created before 01.04.1997 and whether it was created by way of debit to P & L account or otherwise. In reply, it was submitted by the Ld. A.R. that revaluation reserve was created prior to 01.04.1997 and it was created otherwise than by way of debiting to P & L account. Then, it was pointed out by the bench that under these facts, there appears to be no case of the assessee on this issue as per the clear provisions of clause (i) of Explanation (1) to Section 115JB. In reply, it was submitted by the Ld. A.R. that he wants to file a written note on this issue and for this, he wanted some time. Ld. D.R. did not have any serious objection and accordingly, time was allowed to the Ld. A.R. for filing the note. Note was submitted by him which is reproduced below:
"Submission on Withdrawal from the Revaluation Reserve of Rs. 16.54.000:
1. Section 115 JB is a deeming provision which has been inserted by Finance Act, 2001, w.e.f. 1-4-2001, wherein the assessee being a company, income tax liability under the Act is less than such book profits would be deemed to be total income and tax at the rate of seven and half percent would be levied on such income.
2. Explanation to section 115 JB(2) has prescribed certain adjustments to be made to book profits, whereby book profit is required to be increased by certain adjustments as prescribed in sub clause (a) to (f). No further addition is allowed other than those prescribed in sub clause (a) to (f).
3. The Assessee has withdrawn an amount from revaluation reserve and credited the said amount to profit & loss A/c. While computing book profit u/s 115JB the said amount was reduced from net profit as per profit & loss account.
4. We reproduce the provisions of Clause (i) to Explanation to Sec 115JB, under which amount withdrawn from reserve has been reduced, as below:
"as
(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than 15 I.T.A.No.4327,4561 /Ahd/2007 by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account:....."
The provision of the above stated clause states that the amount withdrawn from the reserves or provision if credited to the Profit & Loss Account shall be reduced from the Profit & Loss Account while computing book profits. However exclusion has been provided in the said clause wherein any reserves created before the 1st day of April 1997, in a way other than by way of debit to the profit and loss account is not to be considered.
5. We wish to highlight the fact that the said provision is applicable only to those reserves which in the normal course "are created" or "can be created" by debiting the profit and loss account and crediting the respective reserve account. However, revaluation reserve is never created by impacting or giving any effect to the profit and loss account. At the time of creation of the revaluation reserve, the fixed asset is debited / credited by the amount revalued and a corresponding effect to that extent is given in the revaluation reserve. Hence no where the profit and loss account is effected or changed.
6. Hence the exclusion inserted in Clause (i) to Explanation to Sec 115JB is applicable to only those reserves which are capable of being created by debit to the profit and loss account. If the reserve is not capable of being created by debit to the profit and loss account, then the exclusion will not apply.
7. In the present case, creation of the revaluation reserve does not impact the P&L a/c in the year of creation of such reserves. 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 a/c. 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 a/c and is credited directly to a revaluation reserve as provided by ICAI and, thus, the profit as reflected in the P&L a/c is not depressed by the creation of the reserve.
16 I.T.A.No.4327,4561 /Ahd/20078. The intention of introduction of such provision was that if reserve is created by debit to profit & loss A/c, then deduction would be allowed while computing book profit u/s 115JB at time of debit to profit & loss A/c. Hence at time of withdrawal from the said reserve the deduction should not be allowed for computing book profit u/s 115JB. If deduction is allowed then it will amount to double deduction.
9. In the present case the assessee at the time of creating the revaluation reserve did not reduce the amount of revaluation from the book profits, hence the book profits were not affected and were taxed on the whole amount i.e. the amount outstanding in the profit and loss account. Hence when the amount is withdrawn from the revaluation reserve and credited to the profit and loss account, the said amounts cannot be subjected to tax again. The assessee cannot be subjected to tax on amount which in any case does not effect the profit and loss account. Hence it clearly brings out the fact that the provisions to Clause (i) to Explanation to Sec 115JB are not applicable in the present case.
10. Further the proviso to Clause (i) to Explanation 1 to Sec 115JB also supports the contention of the Assessee that the reserve which is not created by way of debit to profit & loss should not be considered for exclusion provided in above referred clause. We reproduce herewith proviso:
".....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 11'5JA, as the case may be;"
If book profit of the year in which reserve was created is not reduced by the amount transferred to the reserve then in year of withdrawal the amount withdrawn from the said reserve should be allowed as deduction.
11. The said ground is also covered by Hon'ble IT AT in our own case for AY 2006-07, AY 97-98 to AY 01-02 (combined order for 5 years), 2005-06 and 2002-03.
In view of above, the adjustment to book profits u/s 115JB carried out by the Assessing Officer is not permissible."
17 I.T.A.No.4327,4561 /Ahd/200743. We have considered rival submissions and also the written note submitted by the Ld. Counsel for the assessee which is reproduced above. In the written note filed by the Ld. Counsel for the assessee, it is not disputed by him that the revaluation reserve was not created before 01.04.1997. His own submission is this that since revaluation reserve could not be created by way of debit to P & L account, this exclusion in clause (i) of Explanation (1) to Section 115JB is not applicable and the same is applicable only to those reserves which are capable of being created by debit to the P & L account. We find no merit in this contention of the Ld. counsel for the assessee because there is no mention in the section which is quoted by Ld. counsel for the assessee in the written note reproduced above that the exclusion is applicable only to those reserves which can be created by way of debit to P & L account and was not so created. In our humble opinion, this exclusion is applicable to all those cases where reserve is not created by way of debit to P & L account prior to 01.04.1997 and this is not relevant as to whether reserve was capable of being created by way of debit to P & L account or not. Regarding proviso to clause (i) to Explanation (1) to Section 115JB referred to by Ld. A.R. in his written note, we find that the field of both are different. As per exception carved out in clause (i) of Explanation (1), reduction from book profit is not allowable if the reserve is created before 01.04.1997 by way of without debiting the P & L account and the field of the proviso is that if the reserve is credited by way of debit to P&L account and was not added back to book profit in the year of creation of book profit. In our humble opinion, creation of reserve without debiting the P & L account means some income is directly credited to reserve a/c instead of P & L account and hence, this exception.
18 I.T.A.No.4327,4561 /Ahd/2007The fallacy in this argument of Ld. A.R. can be better understood by way of a hypothetical example in the light of our understanding noted above.
" Suppose, a reserve of Rs.100/- is created without debit to P & L account and the profit as per such P & L account is Rs.900/-. Then, if this income of Rs.100/- which is directly credited to reserve account is credited to P & L account, profit as per P & L account would have been Rs.1000/-. Then, if a reserve is created of Rs.100/- by way of debit to P & L account and is added back to book profit as per clause (b) of Explanation (1) to section 115JA/115JB, then the book profit will be Rs.1000/- but when reserve is created without debit to P & L account, book profit is only Rs.900/- because this amount of Rs.100/- was not credited to P & L account and was directly credited to reserve account. Hence, the effect is the same i.e. in the exception and in the proviso because in both the situations, book profit of the year of creation of reserve goes down by the amount of reserve & hence, no further reduction is allowable in the year of withdrawal from such reserve as in the present case. Therefore, we feel that on this issue, the order of Ld. CIT(A) is not sustainable.
44. Regarding this submission of the Ld. counsel for the assessee that this issue is also covered by the Tribunal decision in assessee's own case for the assessment year 2006-07 and assessment year 1996-97 to assessment year 2001-02, we find that it is noted by the tribunal in para 57 of the tribunal order that additional ground raised by the assessee in respect of non reduction of withdrawal from revaluation reserve for the exclusion from book profit u/s 115JB of Rs.16,54,735/- is raised by the assessee as additional ground and the said ground was admitted being legal issue and the matter was restored back to the file of the A.O. to decide the same in accordance with law after giving the assessee 19 I.T.A.No.4327,4561 /Ahd/2007 opportunity of being heard. Hence, there is no Tribunal decision on merit of this issue and nothing was produced before us to show that after restoring back the issue by the tribunal to the file of the A.O., the issue was decided by the A.O. in favour of the assessee.
45. Regarding one more Tribunal decision for the assessment year 2002-03, and 2005-06, on which reliance was placed by the Ld. counsel for the assessee in the written note, we find that in this tribunal order, as per para 13, it is noted by the tribunal that in the tribunal order dated 06.06.2008, in the assessee's own case in I.T.A.No. 3594/Ahd/2007 relating to assessment year 2003-04, while deciding this issue, the tribunal followed earlier Tribunal decision in assessee's own case in I.T.A.No. 1706/Ahd/2003 dated 27.09.2005. Para 85 & 86 of this tribunal decision is reproduced in the tribunal order and thereafter, it was held by the tribunal that in view of these paras of the Tribunal order, there is no merit in the ground raised by the revenue. When we examine para 85 & 86 of the tribunal order dated 27.09.2005, copy of which is available before us, we find that these two paras are not in connection with the issue regarding not granting the reduction in respect of withdrawal from reserve by way of credit to P & L account but these paras are in relation to other issue i.e. for not allowing deduction of depreciation in respect of revaluation portion of value of assets for the purpose of determining book profit u/s 115JA of the Income tax Act, 1961. Hence, these two paras of the tribunal order are not relevant in connection with the issue regarding reduction in respect of withdrawal from revaluation reserve. The copy of tribunal order in I.T.A.No. 3594/Ahd/2007 dated 06.06.2008 for the assessment year 2003-04 is also available in the paper book. As per para 78 on page 113 of case laws 20 I.T.A.No.4327,4561 /Ahd/2007 paper book, it was held that the assessee is entitled to reduce the amount of depreciation on revalued assets for working out profit for MAT u/s 115JB. In the present case, the issue is different and hence, this Tribunal order is also of no help to the assessee. We, therefore reverse the order of Ld. CIT(A) on this issue and restore that of the A.O. in the light of above discussion. This ground of revenue is also allowed.
46. Ground No 7 of the revenue's appeal is as under:
"7. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing deduction towards depreciation on the enhanced component of the value of assets in computing book profit u/s 115JB, without appreciating that the revaluation had no connection with the original cost and the age of the assets and was made arbitrarily only to reduce MAT liability. The CIT(A) failed to appreciate that such artificial depreciation is not allowable under the Companies Act and, in any case, being a colorable device, it was not allowable as deduction in computing the book profit u/s 115JB r.w. Parts II and III of Schedule VI of the Companies Act.
(b) The Id CIT(A) failed to appreciate that the depreciation with reference to arbitrarily enhanced value of assets constituted reserve 'by whatever name called' within the meaning of clause (b) of the Explanation below section 115JB(2) and also a reserve in terms of rule 7(2) of Schedule VI of the Companies Act and hence it was to be added back under the Explanation."
47. The Ld. D.R. supported the assessment order. H also submitted that it is noted by the A.O. on page 27 of the assessment order that the order of Hon'ble Apex Court rendered in the case of Apollo Tyres as reported in 255 ITR 277 is not applicable in the present case because even after this judgment, the A.O. can examine as to whether, there is compliance of the provision of Company's Act or not. It is also noted by the A.O. that in the present case, the norms of clause 13 of accounting standards 10 have not been followed and revaluation was done arbitrarily simply to reduce book profit so as to avoid MAT. He submitted that in 21 I.T.A.No.4327,4561 /Ahd/2007 the light of this finding of the A.O., even as per the judgment of Hon'ble Apex court rendered in the case of Apollo tyres (supra), addition was properly and validly made by the A.O. in the book profit.
48. As against this, Ld. A.R. supported the order of Ld. CIT(A). He also submitted that this issue is covered by the tribunal order in assessee's own case in the earlier year as well as in later years. Regarding the auditor's remarks in the audit report, it was submitted by him that it is not a qualification by the auditor. Regarding the tribunal decision, he drew our attention to para 81 of the tribunal order for the assessment year 1998-99 and he also drew our attention to para 122 - 138 of the tribunal order for the assessment year 2002-03 in I.T.A.No. 2906/Ahd/2007 dated 06.06.2008 and submitted that this Tribunal decision is available on pages 136-141 of the paper book relating to judgements. Regarding the tribunal order for assessment year 2003-04, our attention was drawn to pages 104- 113 of the paper book relating to the judgements and in particular our attention was drawn to para 28 of this tribunal decision. He also submitted that in assessment year 2005-06 and 2006-07, no ground was raised by the revenue on this aspect although the issue was decided by the Ld. CIT(A) in favour of the assessee. He also submitted that on pages 286 of the paper book is the audit report. At this juncture, it was pointed out by the bench that as per the audit report, there is a qualification that the revaluation was not in conformity with the accounting standard 10 of accounting for fixed assets prescribed by the Institute of Chartered Accountants of India. It was pointed out by the bench that this amounts to qualification in the audit repot and hence, this cannot be said that as per the judgment of Hon'ble Apex Court rendered in the case of Apollo Tyres (supra), the book profit as per the P & L account cannot be tinkered 22 I.T.A.No.4327,4561 /Ahd/2007 with by the A.O. In reply, it was submitted by the Ld. A.R. that on this issue also, he wants to file a written note. Since Ld. D.R. did not object seriously, time was allowed to the Ld. A.R. to file the written note on this issue also which was subsequently filed by him, which is also reproduced below:
"Submission on Reduction of amount of Depreciation of Rs. 1.53.80.240 /- on revaluation of fixed assets from the book profits u/s. 115JB:
1. The Appellant had revalued certain assets in the earlier years and provided depreciation on the revalued figures in its books of accounts in accordance with the Guidance Note issued on the Treatment of Reserve Created on Revaluation of Fixed Assets and Accounting Standard 6 issued by the Institute of Chartered Accountants. While computing the tax liability u/s 115JB, the Assessing Officer had held that the depreciation claimed on the revalue portion of the assets was not allowable and accordingly increased the book profits by the said amount of depreciation.
2. Section 115 JB is a deeming provision, which has been inserted by Finance Act, 2001, w.e.f. 1-4-2001, wherein the assessee being a company, income tax liability under the Act is less than such book profits would be deemed to be total income and tax at the rate of seven and half percent would be levied on such income.
3. Explanation to section 115 JB(2) has prescribed certain adjustments to be made to book profits, whereby book profit is required to be increased by certain adjustments as prescribed in sub clause (a) to (f). No further addition is allowed other than those prescribed in sub clause (a) to (f).
4. The said item doesn't fall under any of the sub clause (a) to (f) to the explanation to sec 115 JB(2). Hence the said item cannot be added to the book profits computed u/s.115 JB.
5. The auditor in his audit report for FY 03-04 has mentioned the following clause:
"The company has revalued some items of plant and machinery on a selective basis rather than for a class of assets as at 01.04.97 as detailed in note no. 5 to the accounts. Such selective application of revaluation is not in conformity with AS 10 'Account for Fixed Assets' prescribed by ICAI even though accounting per se of such revaluation is as per accepted accounting 23 I.T.A.No.4327,4561 /Ahd/2007 practice. We further report that the effect of our above observation is not quantified/quantifiable.
Subject to above................. true and fair view"
6. In the present case, the comment of the Auditor is not on whether revaluation of fixed assets is not in accordance with the Accounting Standards, the qualification is only on the aspect of selective revaluation of certain assets. The Assessee company has exercised a limited choice when it could have revalued the entire class of assets. However there is no error in carrying out the revaluation, as revaluation of fixed assets is permissible under the Accounting Standards.
7. Further, in the above comment, the auditor has not stated that there was an error in calculating the amount of depreciation on the revaluation, but merely stated that the only some assets were revalued and others were not and the same is not in line with AS
10. Had all the assets of the class been revalued then the depreciation on these assets would have been on a higher side. The auditor has not raised any question on the accounting of depreciation or treatment of depreciation or the amount of depreciation and the same is in compliance with AS 6. In fact revaluation done on some assets has been done in accordance with accepted per accepted accounting practice, the same has been also been stated by auditor.
We submit that the revaluation of fixed assets has been allowed by the Institute itself. Accordingly, the Appellant had created a revaluation reserve. It is further submitted that the depreciation claimed is as per the provisions of AS-6 issued by the ICAI. In AS
- 6, it has been clearly stated that depreciation can be claimed on the amount substituted for historical cost when the asset has been revalued. Thus the depreciation was claimed on the revalued figures. The relevant extracts from Accounting Standard are reproduced herein as under: Relevant extracts to Accounting Standard 6 - Para 26 is reproduced as under:
"26. Where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out."
Relevant extracts to Accounting Standard 10 - Para 27 to Para 30 is reproduced as under:
24 I.T.A.No.4327,4561 /Ahd/2007"27. When a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed.
28. The revaluation in financial statements of a class of assets should not result in the net book value of that class being greater than the recoverable amount of assets of that class.
29. When a fixed asset is revalued upwards, any accumulated depredation existing at the date of the revaluation should not be credited to the profit and loss statement.
30. An increase in net book value arising on revaluation affixed assets should be credited directly to owners' interests under the head of revaluation reserve, except that, to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement. A decrease in net book value arising on revaluation affixed asset should be charged directly to the profit and loss statement except that to the extent that such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it may be charged directly to that account."
9. A Qualified Opinion report is issued when the auditor encounters situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or "clean opinion", but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. In the present case the auditor has merely stated that instead revaluation was carried out on certain assets, the revaluation should have been applied on all assets of that class. The qualification made in the auditor's report nowhere affects the book profits of the Company or does not in any way gives effect of reducing the book profits. Instead if all the assets were to be revalued based on the claim made by the auditor, then there would have been a higher claim of depreciation on the revalued figures.
Hence the comment of the auditor is restricted to the quantum of assets on which the revaluation should have taken place. But there is no dispute on the treatment of the revaluation or the treatment of depreciation on the revalued assets.
25 I.T.A.No.4327,4561 /Ahd/200711. The said ground is also covered by Hon'ble ITAT in our own case for AY 1998-99. Further, the department has not filed any further appeal before Hon'ble ITAT for AY 06-07 on this ground.
In view of the above submissions, the said item cannot be added to Book Profits computed u/s.115JB."
49. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We have gone through the written note filed by the Ld. A.R. and the judgement of Hon'ble Apex Court rendered in the case of Apollo Tyres (supra) and also various judgements of the tribunal in the assessee's own case which are cited by the Ld. A.R. We have also gone through the audit report. First, we reproduce qualification note given by the auditor in the audit report on page 286 of the paper book which is as under:
"(vii) The Company has revalued some items of plant and machinery on a selective basis rather than for a class of assets as at 1st April, 1997 as detailed in note no.5 to the accounts. Such selective application of revaluation is not in conformity with the Accounting Standard 10 on. "Accounting for Fixed Assets"
prescribed by the Institute of Chartered Accountants of India even though the accounting per se of such revaluation is as per accepted accounting practice;
We further report that the effect of our observations at (vi) and
(vii) above is not quantified/quantifiable.
Subject to para vi and vii above, in our opinion and to the best of our information and according to the explanation given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India;
a) in the case of the Balance Sheet of the state of the affairs of the Company as at 31st March, 2004;
b) in case of the Profit and Loss Account, of the Profit for the year ended on that date; and
c) in the case of Cash flow statement of the cash flows for the year ended on that date."
26 I.T.A.No.4327,4561 /Ahd/200750. Now, as per the written note submitted by the assessee which is already reproduced by us above, following contentions are raised by the Ld. A.R. in a nutshell.
(a) That the audit repot is not a qualified opinion of the auditors because, it nowhere states that revaluation of assets is not in accordance with accounting standard. The qualification is this that there is selective reevaluation and hence, it does not in any way give effect of reducing the book profit. It was contended that if all the assets were revalued based on the claim made by the auditors, then there would have been higher claim of depreciation on the revalued figure. On the basis of this argument, it is contended that the comments of the auditors is restricted to the quantum of assets on which revaluation should have been taken place and there is no dispute on the treatment of revaluation or the treatment of depreciation of the revalued assets.
(b) The second contention raised is this that this issue is covered in favour of the assessee by the Tribunal order in assessee's own case for assessment year 1998-99 and that no such issue was raised by the revenue in assessment year 2006-07 by way of filing appeal before the Tribunal.
51. We have considered these submissions of the Ld. A.R. but we find no force in these contentions. Regarding this contention that the auditor's report is not a qualified audit repot, we find that the auditors have clearly stated in the report, relevant portion reproduced above, that subject to para (vi) & (vii) above, the account giving the information required by the Companies Act, 1956 in the manner so required and give the true and fair view in conformity with the accounting principles generally accepted in India in the case of P & L account of the profits for the year. It means 27 I.T.A.No.4327,4561 /Ahd/2007 that effect of Note No.(vii) is here in the profit of the assessee company reported in P & L account although the auditor had stated that effect of this observation at para (vi) & (vii) is not quantified / quantifiable. The crux of the contention raised by the Ld. A.R. before us is this that if all the assets were revalued then depreciation of revalued assets would have been higher. But there is no basis of saying so because as per para 27 o AS-10 reproduced by the Ld. A.R. in his written note, when a fixed asset is revalued in financial statement, an entire class of assets should be revalued and selection of assets for revaluation should be made on a systematic basis and this basis should be disclosed. It is reported by the auditors in the present case that the company has valued some items of plant & machinery on a selected basis instead for a class of assets and such selective application of revaluation is not in conformity with AS-10 of fixed assets prescribed by the ICAI. As per this note of auditors, it is clear that entire class of assets was not revalued and such selective revaluation was not as per AS-10. Now, Ld. A.R. has submitted that if entire class is revalued, the depreciation on revaluation will be higher but it may not be true in all the cases. In a class of assets, on the date of revaluation, the revaluation of asset might be more for some assets and it can be less in respect of remaining assets and if only those assets are revalued which are having more value on the date of revaluation, it cannot be said that if the entire asset of a class of asset is revalued, total revaluation amount will be more and resultantly, depreciation will be more. It may be in a given case that if all the assets or a class of assets are revalued as required in AS-10 then the total revalued value of such class of assets may be less and in that situation, there will be no extra depreciation allowable to the assessee or the depreciation allowable may 28 I.T.A.No.4327,4561 /Ahd/2007 be less. We do not know about the facts of the present case but in the light of this qualification note of the auditors, it has to be accepted that the profits shown by the assessee in the P & L account is not giving a true and fair view in conformity with the Accounting Principles generally accepted in India and this is not said by the A.O. or by the Ld. CIT(A) or by us but it is said by the statutory auditors of the assessee company. 5.2 Now, regarding the second contention of the Ld. A.R. in the note given by him, it has been stated that this issue is covered in favour of the assessee by the Tribunal order in assessee's own case for the assessment year 1998-99 and this issue was decided by the tribunal as per para 81-86 in I.T.A.No. 1706/Ahd/03 dated 27.09.2005, copy of which is available before us. The relevant paras of this tribunal order are reproduced below:
"81. The Ld. CIT(A) has erred in confirming the Ld. A.O.'s action of not allowing deduction of depreciation of book profit u/s 115JA of the I.T. Act, 1961."
82. Brief facts are- the A.O. found that while working out profit under Section 115JA, the assessee has claimed excess depreciation of Rs.1,87.82,2487- by revaluing its assets A report of K.D. Engineers & Associates, in this behalf was furnished. The details are given in page no.22 of the AO's order. The AO questioned some of the revaluation figures. The AO held that though, the assessee entitled to revaluation of assets, as per the Companies Act, however, revaluation in the instant case was done with an intention to claim higher depreciation. The assessee has not revalued the assets for last 38 years. Hon'ble Supreme Court judgment in the case of Mcdowell India Pvt. Ltd. Vs. C1T, 47 CTR 126 was applied and it was held that revaluation of assessee was a colourable devise to reduce MAT liability and was not acceptable to the department. Before the CIT(A), the assessee relied on the decisions in the ease of Apollo Tyres Ltd. Vs. CIT 255 ITR 273 (SC) and CIT Vs. Echjay Forgings P.Ltd., 251 ITR 15 (Bom), Punjab Fibres Ltd. Vs. DC1T, 72 1TD 68 (Delhi) and Bell Ceramics 69 ITD 156(Ahd). The C1T(A), however, confirmed the AO's order.
29 I.T.A.No.4327,4561 /Ahd/200783. The learned counsel for the assessee contended that the assessee is permitted to revalue its assets as per the Companies Act, the same was in conformity with the Accounting Standard and Guideline Notes issued by ICA1, Books of accounts were duly approved by the AGM, the assessee was entitled to higher depreciation for working unit the profits under Section 115JA. Reference was placed on Apollo lyres Ltd. (Supra), besides the Delhi Tribunal decision in the ease of Punjab Fibres Ltd. (Supra) has decided the issue on similar facts in favour of the assessee.'
84. The learned DR supported the order of the lower authorities.
85. We have heard the rival submissions and perused the material available on record. The Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (Supra) in clear terms has held as under:
"The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, ahs the limited power of making increases and reductions as provided for in the Explanation to section 115J; The Assessing Officer does not have the jurisdiction to go behind, the net profits shown in the profit and loss account except to the extent provided I the Explanation. The use of words "in accordance with the provisions of Parts II and HI of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely-upon the authentic statement of accounts of the company. While so looking in to the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference of the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the name to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirement of the Companies Act. Subsection (IA) of Section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of company.30 I.T.A.No.4327,4561 /Ahd/2007
Held accordingly, that, while determining the "book profits" under section J15J, the Assessing Officer could not recomputed (he profits in the profit and loss account by excluding provisions made for arrears of depreciation.' In this case also, the assessee made provision for arrears of depreciation which was disallowed by the AO which working out profit under Section 115J. Hon'ble Supreme Court laid down the:
principle that once provision made is in accordance with the Companies Act, duly audited, approved by the Company in the general meeting, the AO cannot make any variation except once specifically provided in Explanation to Section 115.!. Variation in depreciation given by the assessee including arrears of depreciation being not provided in the said Explanation could not be done by the A.O. Similarly, Ahmedabad Tribunal in the case of Parle International Ltd. in ITA No.94/Ahd/2U04 dated 30-11-2004 has followed the Supreme Court judgement and held as under: "7. These observations, in our opinion, are contrary to in a decision of (he Supreme Court referred to above and the facts of the instant case do not give any dijferc.nl picture to decide the issue within the ratio of the decision of the Supreme Court in the case of Apollo Tyres (Supra). In view of the legal position that the AO does not have jurisdiction to go behind the net profit shown in (he profit and loss account as audited by the CA and not objected to by the authority under the Companies Act., we do not feel it necessary to discuss the merit of the case as to whether the capital gain was a part of book profit or whether it can be directly taken to capital reserve account. The order of the CIT(A) as well as of the AO is accordingly vacated and the AO is directed to compute the book profit as per the books prepared by the qualified Chartered Accountant under the Companies Act. "
86. In the facts and circumstances of the assessee case, there is"
no dispute that -
(a) revaluation of assets is provided by the Companies Act and in accordance with the Companies Law;
(b) the books of accounts are duly audited and approved by the auditors;
(c) audit accounts are accepted by I he AGM and authorities under Companies Act;
(d) such type of adjustment is not specifically provided by Explanation-2 to Section 115J 31 I.T.A.No.4327,4561 /Ahd/2007 Under these circumstances, in our view, the Supreme Court judgment in the case of Apollo Tyres (supra) is fully applicable to the assessee's case, therefore, we uphold that the assessee has U> be allowed deduction of the above depreciation in respect of revaluation of fixed assets, for the purpose of determining the profits under Section 115J of the I.T. Act, therefore, the same book profits shall be worked out accordingly."
5.3 From the above paras of the tribunal order, we find that it is noted by the tribunal in para 86 reproduced above that there is no dispute that books of account are duly audited and approved by the auditors. It may be that there was no qualification note by the auditors in this year or such note of the auditor in that year was not brought to the notice of the Tribunal in that year. Be this as it may, but this is clear that this Tribunal order is not after taking note of this fact that there is any qualification note by the auditors on this issue regarding revaluation and depreciation on revaluation. Therefore, this tribunal order cannot be considered as a binding precedent where there is a qualification note by the auditors which means that the book results are not approved by the auditors. Hence, this tribunal order is also of no help to the assessee in the present case. For the next contention that in assessment year 2006-07, this issue was not raised by the revenue before the Tribunal, we find that in this year also, it is not shown that similar note of auditor was there in that year and Ld. CIT(A) had decided after considering that note. Hence, this argument is also not relevant.
5.4 Now, we consider the applicability of the judgement of the Hon'ble Apex Court rendered in the case of Apollo Tyres Ltd. as reported in 255 ITR 273. We find that in that case, it is held by the Hon'ble Apex Court that A.O. under the Income tax Act, 1961 has to accept the authenticity of accounts within the definition of the provisions of the Companies Act 32 I.T.A.No.4327,4561 /Ahd/2007 which obligates the company to maintain its accounts in a manner provided by the Companies Act and the same is to be scrutinized and verified by the statutory auditors. If it has been so done, then the profit reported in such accounts cannot be questioned by the A.O. But in the present case, we have already noted that the statutory auditors have not certified the accounts as true and fair without giving a qualification note. In the present year, a qualification note has been given by the statutory auditors that the profit reported by the company in P & L account is subject to note No.(vii) given by them which has been reproduced by us above and the auditor has not quantified the effect of this note on the profit of this company by saying that such effect is not quantified / quantifiable. In our considered opinion, unless it is worked out that what will be the depreciation allowable to the assessee in the present year on the revalued assets after revaluation of whole class of assets, this quantification cannot be done by the auditor and therefore, merely because no quantification is done by the auditor, it cannot be said that the comments of the auditor is not qualifying the book results of the assessee company. Therefore, this judgement of Hon'ble Apex Court is also not rendering any help to the assessee in the present case because in the present case, the auditor has given a qualified audit report. 5.5 In view of the above discussion, we find that even after considering the written note given by the Ld. counsel for the assessee on this issue, we are not satisfied about the allowability of depreciation on revalued fixed assets and, therefore, the order of Ld. CIT(A) on this issue is not sustainable. We, therefore, reverse the same and restore the assessment order on this issue. In the result, this ground of the revenue is allowed.
6. Ground No.8 of the revenue is as under:
33 I.T.A.No.4327,4561 /Ahd/2007"8. (a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in negating the adjustment of deferred income-tax liability of Rs.8,27,02,000/- under clause (a) of the Explanation below section 115JB(2), without appreciating the expansive language used in Explanation (a) referring to income-tax paid or payable and the provision therefore, thus covering all amounts pertaining to income-tax liability.
(b) The Id. CIT(A) erred in holding that, for being covered by clause (a) of the Explanation, the income-tax should be paid or payable out of the profits earned for the year under consideration, by reading something that is not there in the letter of the law nor is in conformity with the scheme of the Explanation aimed at neutralizing subjective debits under the Companies Act so as to work out near objective income under the Income-tax Act by making necessary adjustments in the profits under the Companies Act.
(c) Without prejudice, the CIT(A) failed to appreciate that the amount constituted a reserve by whatever name called in terms of clause (b) and an unascertained liability in terms of clause (c) of the Explanation."
6.1 It was fairly conceded by the Ld. Counsel for the assessee that this issue is now covered in favour of the revenue by the subsequent retrospective amendment. Accordingly, this ground of the revenue is allowed. The order of Ld. CIT(A) is reversed and that of the A.O. is restored.
7. Ground No.9 is as under:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in negating the adjustment of wealth tax liability of Rs.9 lacs under clause (c) of the Explanation below section 1125JB(2), without appreciating that this liability was not based on any working of net wealth and was purely unascertained."
7.1 Ld. D.R. supported the assessment order. He also submitted that it was unascertained liability. As against this, Ld. A.R. supported the order of Ld. CIT(A). It is also submitted by the Ld. counsel for the assessee 34 I.T.A.No.4327,4561 /Ahd/2007 that this issue is also covered in favour of the assessee by the tribunal decision dated 30.08..2011 in assessee's own case for assessment year 1998-99 to assessment year 2001-02 and the relevant para of the Tribunal order is available on page 17 of the decisions paper book. 7.2 We have considered the rival submission and perused the material on record and we find that in assessment year 1998-99 to assessment year 2001-02, Tribunal has decided this issue in favour of the assessee by following various other tribunal orders. Hence, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue. This ground of the revenue is rejected.
8. In the result, appeal of the revenue is partly allowed.
9. In the combined result, appeal of the assessee and of the revenue are partly allowed.
10. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(KUL BHARAT) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
35 I.T.A.No.4327,4561 /Ahd/2007
1. Date of dictation...26/4....
2. Date on which the typed draft is placed before the Dictating Member 27/4.......Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S.
4. Date on which the fair order is placed before the Dictating Member for pronouncement ......11/5
5. Date on which the fair order comes back to the Sr. P.S./P.S.11/5
6. Date on which the file goes to the Bench Clerk ......11/5/12
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................