Denial of exclusion under clause (i) to Section 115JB(2) for revaluation reserve set off against depreciation upheld

SC upheld denial of exclusion under clause (i) of the explanation to Section 115JB(2) for amounts transferred from revaluation reserve set off against depreciation. The Court found the assessee had used revaluation-related adjustments to inflate reported profits and enable dividend payments despite real losses if full depreciation were taken. MAT aims to reveal true operating profit and tax such arrangements; since the revaluation reserve did not increase book profits when created, the reduction claimed was correctly rejected by the AO and sustained by the Court.

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Issues Involved:
1. Whether the amount transferred from the revaluation reserve and set off against the amount of depreciation debited to the Profit and Loss (P&L) Account can be excluded in terms of clause (i) of the explanation to Section 115JB(2) read with the proviso.

Issue-wise Detailed Analysis:

Facts:
The assessee, a widely held quoted limited company engaged in the manufacture of yarn and polyester, revalued its fixed assets during the previous year ending 31.3.2000, resulting in an increase in the net book value of such assets by Rs.288,58,19,000/-, credited to the revaluation reserve. For the subsequent year ending 31.3.2001, the P&L Account showed a depreciation charge of Rs.127,57,06,000/-, reduced by Rs.26,11,74,000/- transferred from the revaluation reserve, resulting in a net debit of Rs.101,45,32,000/-. The Assessing Officer (A.O.) did not allow the reduction of Rs.26,11,74,000/- while computing the book profit under Section 115JB, a decision upheld by the CIT(A), ITAT, and the High Court, leading to the present civil appeal by the assessee.

Case of the Assessee:
The assessee argued that the main provision of clause (i) seeks to exclude from the net profit any amount withdrawn from reserves and credited to the P&L Account, with the proviso applying only if the book profit of the year in which the reserve was created had been increased by such reserve. The assessee contended that the revaluation reserve, created for the revaluation of assets, did not impact the P&L Account in the year of creation and was not a free reserve available for distribution of profits. The creation of the revaluation reserve did not depress the profit reflected in the P&L Account, and thus, there was no need to increase the amount shown in the P&L Account by the revaluation amount as per Section 115JB. The assessee also highlighted that clause (iia) inserted by the Finance Act, 2007, effective from 1.4.2007, mandates that depreciation on historical cost alone be considered for calculating book profit.

Relevant Provisions:
Section 115JB(1) mandates that if the income-tax payable on the total income is less than 7.5% of the book profit, such book profit shall be deemed the total income, with tax payable at 7.5%. Subsection (2) requires the preparation of the P&L Account in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. The explanation defines "book profit" as the net profit shown in the P&L Account, increased by specified amounts if debited to the P&L Account and reduced by specified amounts if credited to the P&L Account, with a proviso that reserves created or provisions made in previous years relevant to assessment years commencing on or after 1.4.1997 shall not be reduced unless the book profit of such year was increased by those reserves or provisions.

History of MAT Provisions:
MAT was introduced by the Finance Act of 1996 to address the issue of zero-tax companies paying marginal tax due to exemptions, deductions, and high depreciation rates. Section 115JA, operative from assessment year 1997-98, was replaced by Section 115JB effective from 1.4.2001, requiring companies to pay MAT at a specified rate of book profit. The definition of "book profit" under Section 115JB includes adjustments to the net profit shown in the P&L Account, with specific provisions for reserves created on or after 1.4.1997.

Scope of Section 115JB:
The term "book profit" is defined in the explanation to Section 115JB(2) and involves adjustments to the net profit shown in the P&L Account. The first step involves increasing the net profit by specified amounts if debited to the P&L Account, and the second step involves reducing the net profit by specified amounts if credited to the P&L Account. Clause (i) refers to amounts withdrawn from reserves, with an exception that reserves created in previous years relevant to assessment years commencing on or after 1.4.1997 shall not be reduced unless the book profit of such year was increased by those reserves.

Analysis:
The assessee had revalued its fixed assets, creating a revaluation reserve of Rs.288,58,19,000/-, which was an adjustment entry without affecting the profit during the assessment year 2000-01. During the assessment year 2001-02, Rs.26,11,74,000/- was transferred from the revaluation reserve and credited to the P&L Account, which the A.O. disallowed, adding the amount back to the net profits. The court held that the adjustment made in the P&L Account was a contra adjustment and not an effective credit, as the revaluation reserve did not impact the net profit in the year of creation. The court emphasized that the MAT provisions aim to reflect the true working results of the company, and the reduction sought by the assessee was rightly rejected by the A.O.

Conclusion:
The court concluded that the revaluation reserve did not impact the book profits in the year of creation, and thus, the benefit of reduction could not be allowed. The civil appeal filed by the assessee was dismissed with no order as to costs.

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