Book profit under section 115J distinguishes revaluation-based depreciation from unabsorbed depreciation, allowing only the latter as adjustment.

For book profit computation under section 115J, depreciation arising only from revaluation of assets was not treated as a mandatory charge to profits where company law permitted adjustment against the revaluation reserve; the additional depreciation claim was therefore disallowed. By contrast, unabsorbed depreciation was held to form part of the loss available for statutory adjustment, following Surana Steels, and was allowed as a reduction from book profit. The note thus draws a distinction between revaluation-driven depreciation, which cannot reduce book profit in that setting, and unabsorbed depreciation, which can be deducted while computing book profit under section 115J.

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Issues: (i) Whether additional depreciation attributable to revaluation of assets could be deducted in computing book profit under section 115J of the Income-tax Act, 1961. (ii) Whether unabsorbed depreciation was allowable as a reduction from book profit under section 115J.

Issue (i): Whether additional depreciation attributable to revaluation of assets could be deducted in computing book profit under section 115J of the Income-tax Act, 1961.

Analysis: The book profit mechanism under section 115J requires the profit and loss account to be prepared in accordance with the Companies Act, 1956, but the Tribunal held that depreciation arising only from revaluation of assets is not a mandatory charge to profits for income-tax purposes. Where revaluation is optional and the company law and accounting standards permit the burden to be adjusted against revaluation reserve, charging the enhanced depreciation to the profit and loss account would distort the true profit for the year and defeat the object of section 115J.

Conclusion: The disallowance of additional depreciation on revalued assets was upheld and the issue was decided against the assessee.

Issue (ii): Whether unabsorbed depreciation was allowable as a reduction from book profit under section 115J.

Analysis: The Tribunal followed the Supreme Court ruling in Surana Steels, under which unabsorbed depreciation forms part of the loss eligible for adjustment while computing book profit under section 115J. On that basis, the assessee was entitled to reduce unabsorbed depreciation from the book profit.

Conclusion: The claim for deduction of unabsorbed depreciation was allowed in favour of the assessee.

Final Conclusion: The assessment was sustained on the disallowance of additional depreciation on revalued assets, but relief was granted on the adjustment of unabsorbed depreciation, resulting in a partial allowance of the appeal.

Ratio Decidendi: For section 115J computation, depreciation arising merely from revaluation of assets need not be treated as a charge against profits where company law permits adjustment against revaluation reserve, but unabsorbed depreciation is part of the loss available for statutory adjustment.

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