Cit vs M/S Srf Ltd.
2011 Latest Caselaw 3715 Del

*                   THE HIGH COURT OF DELHI AT NEW DELHI

                                        Judgment reserved on: 26.07.2011
%                                       Judgment delivered on: 04.08.2011

+                               ITR 164/1995


CIT                                                      ...... PETITIONER


                                      Vs


M/S SRF LTD.                                             ..... RESPONDENT

Advocates who appeared in this case:

For the Petitioner: Mr Kamal Sawhney, Sr. Standing counsel. For the Respondent: Mr S. Ganesh, Sr. Advocate with Mr Satyen Sethi and Mr Arta Tarna Panda, Advocates.

CORAM :-

HON‟BLE MR JUSTICE SANJAY KISHAN KAUL
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.      Whether the Reporters of local papers may
         be allowed to see the judgment ?                Yes
2.      To be referred to Reporters or not ?             Yes
3.      Whether the judgment should be reported          Yes
         in the Digest ?

RAJIV SHAKDHER, J

1. The captioned reference pertains to assessment year 1989-90.

The reference has been made at the behest of the Revenue for

adjudication of the following questions of law:

"1. Whether on the facts and in the circumstances of the case, the ITAT is correct in holding that the disallowance u/s 37(3) read with Rule 6D of the Income-Tax Act/Rule should be worked out by consolidating all of the travel undertaken by each of the employee in a year.

2. Whether on the facts and in the circumstances of the case, the ITAT is right in holding that the expenses in

respect of rent, repair and other expenditure on the guest house which are normally allowed u/s 30, 31 of the I.T. Act could not be disallowed u/s 37(4) of the I.T. Act.

3. Whether on the facts and in the circumstances of the case the ITAT is correct in law in holding that the credit given to the profit and loss account by the amount withdrawn from re-valuation reserve account is to be reduced."

2. The assessee at the relevant time was in the business of

manufacturing and selling nylon yarn, tyre coard fabrics, flours

chemical etc. which was carried on through four divisions. In the

course of business incurred expenses on travel undertaken by its

employees. In consonance with provisions of section 37(3) of the

Income Tax Act, 1961 (hereinafter referred to as „I.T. Act‟) read with

Rule 6D of the Income Tax Rules, 1962 (hereinafter referred to as

„Rules‟), the assessee had calculated the following disallowances for

each of its four units:

        "ISD/HD             7,65,514
        IFD                 2,16,722
        LD                     1,334
        FCD                   34,537
                            10,18,107"

3. The disallowance had been computed by the assessee by

aggregating trips made by an employee during the year. Thus, if

there was any surplus amount, according to the limits prescribed

under Rule 6D, the same got adjusted against the deficit if any, arising

viz-a-viz a subsequent visit of the same employee in the same year.

The Assessing Officer, however, rejected this method of computation

of disallowance. On a re-computation the Assessing Officer came to

the conclusion that the disallowance had to be pegged at `

12,97,632/-. The break-up of the disallowance of each of the four

units was as under:

        "Division          Disallowance taken for the year
        ISD/HD             9,60,184
        IFD                2,89,540
        LD                    1,781
        FCD                  46,127
                           12,97,632"

4. Aggrieved by the same the assessee preferred an appeal in

respect of this issue to the Commissioner of Income Tax (Appeals)

[hereinafter referred to as „CIT(A)‟]. The CIT(A) following his own

order passed in the earlier assessment year, i.e., assessment year

1988-89, sustained the decision of the Assessing Officer.

5. The assessee carried the matter in appeal to the Tribunal. The

Tribunal following its own decision in ITA 6322/Del/85 in the matter of

Bharat Commerce Industries Ltd. vs ITO and S.V. Ghatalia vs Second

ITO (1983) 4 ITD 583 reversed the view taken by the authorities

below.

6. Aggrieved by the decision of the Tribunal a reference was

sought to this court, as indicated above. Before us the learned

counsel for the revenue has relied upon the following judgments: CIT

vs Aorow India ltd. (1998) 229 ITR 325; CIT vs Alfa Laval (I) Ltd. (2006)

282 ITR 445 and CIT vs Bajaj Auto Ltd. (2010) 322 ITR 29. Based on

the aforesaid judgments it has been contended by the learned counsel

for the Revenue that, the view taken by the Tribunal cannot be

sustained. According to the counsel the disallowance under Rule 6D is

to be calculated with reference to each trip made by the employee

and not by aggregating the trips made by the employee during the

course of the relevant assessment year.

7. As against this Mr. Ganesh, learned senior counsel, who

appeared for the assessee, contended that in Rule 6D there was no

mention of the expression „per trip‟. Mr Ganesh submitted that if the

interpretation, as accorded by the revenue, is accepted then, it would

amount to re-writing Rule 6D(2). According to him the wording of the

Rule left no doubt in the mind that the disallowance had to be

calculated bearing in mind the aggregate number of trips that an

employee undertook in the assessment year in issue. Mr Ganesh in

support of his contention placed reliance on the judgment of the

Division Bench of the Calcutta High Court in the case of CIT vs General

Electric Co. of India Ltd. (2002) 255 ITR 22.

8. We have heard the learned counsel for the parties. In order to

adjudicate upon this issue, it would be necessary to extract relevant

portion of Rule 6D(2):

"(2) The allowance in respect of expenditure incurred by an assessee in connection with travelling by an employee or any other person within India outside the headquarters of such employee or other person for the purposes of the business or profession of the assessee shall not exceed the aggregate of the amounts computed as hereunder:-

(a) in respect of travel by rail, road, waterway or air, the expenditure actually incurred;

(b) in respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel, and amount calculated at the following rates or the period spent outside such headquarters:

(i) in respect of any employee Rs. 150 per day or Whose salary is Rs 1000 per month part thereof or more

(ii) in respect of any other employee Rs. 75 per day or part thereof

(iii) in respect of any other person an amount calculated at the rates applicable in the case of the highest paid employee of the assessee Provided that if the stay of such employee or other person outside his headquarters is at Bombay, Calcutta or Delhi, the amount computed at the aforesaid rates shall be increased by a sum equal to (thirty-three and one-third) per cent of such amount:

Provided further that in a case where such employee or other person on any day of his stay outside his headquarters, stays free of charge in a guest house maintained by the assessee, the amount under this clause shall be calculated at one-third of the aforesaid rates and where the employee or such other person is provided lodging only free of charge, at one-half of the aforesaid rates."

9. It is not in dispute that we are presently concerned with

expenditure incurred by the assessee in connection with travel

undertaken by its employee within India for the purposes of its

business. A plain reading of Rule 6D(2) would show that the

expenditure incurred by an assessee which is given by way of an

allowance to an employee or any other person in respect of travel

within India outside the headquarters of such employee or any other

person, for the purposes of business or profession of the assessee, are

broadly classified under two heads. Under clause (a) of sub-Rule (2)

actual expenditure incurred on the mode of travel, i.e., whether it be

rail, road, waterway or air is a permissible allowance. Clause (b) of

sub-rule (2) lays down limits in respect of expenditure incurred in

connection with such travel, which includes expenditure on hotel

expenses or allowances paid, on a per diem basis depending on

whether the expenditure is incurred on an employee or a person other

than an employee. If the expenditure is incurred on an employee

whose salary is ` 1000 per month or more then the limit prescribed is

` 150 per day or part thereof, while in case of any other employee it is

` 75 per day or part thereof. Similarly, in case of a person other than

an employee the limit is calculated keeping in mind the rates

applicable to a highest paid employee.

10. As noticed above, there are two provisos to Rule 6D(2). The first

proviso specifies that the limits prescribed in the Rule (which are

referred to hereinabove by us) shall stand increased by a sum equal

to 33.33% if the stay of the employee or any other person outside the

headquarters is in Bombay (now Mumbai), Calcutta (now Kolkata) and

Delhi. The second proviso enters a further caveat, which is, that if

such an employee or other person stays outside his or her

headquarters, in a guest house maintained by the assessee then the

limits prescribed shall be pegged at 1/3rd of the rates prescribed, and

where, the employee or such other person is provided only free

lodging, the limits prescribed shall stand reduced to one-half.

11. To our minds, clearly the disallowance will have to be worked on

per journey basis. The reason being: it is quite possible that an

employee or any other person may embark on a journey say in the

first instance, to a place other than Bombay (now Mumbai), Calcutta

(now Kolkata) and Delhi, while a subsequent journey may take him on

a visit to one of the three places referred to in the first proviso, i.e.,

Bombay (now Mumbai), Calcutta (now Kolkata) and Delhi. The

maximum limit would vary where the first proviso gets triggered.

Similarly, it is quite possible that in one city the assessee may

maintain a guest house where food and lodging is provided to such an

employee or any other person undertaking a journey for the purposes

of business of the assessee, while in the another city the assessee

may maintain a guest house where only lodging is provided. Here

again the limits would change. There could be another situation

where an employee may take yet another trip during the same year to

a place where the assessee does not have a guest house.

11.1 There are thus myriad possibilities, in respect of journeys

undertaken by an employee or any other person on behalf of the

assessee for the purpose of business. Therefore, the intrinsic evidence

which is available in the Rule demonstrates that the disallowance

available qua an employee or such other person ought to be

calculated in respect of each of the journey undertaken. This,

according to us, is the most straightforward and uncomplicated way of

reading the Rule.

12. Broadly, a similar view has been taken by the Bombay High

Court in CIT vs Aorow India Limited (1998) 229 ITR 325; a view which

we respectfully agree with.

12.1 We may only mention at this juncture that Mr Ganesh had

argued that the observations made in the Aorow India Ltd. (supra) to

the effect that it would make no difference whether the disallowance

is calculated based on each journey or trip, as against the aggregate

of all trips, is something that we have not factored in, while coming to

the conclusion we have arrived at hereinabove. We, therefore,

respectfully disagree with the view taken by the Calcutta High Court in

the case of CIT vs General Electric Co. of India ltd. 92002) 255 ITR 22.

Thus, the question in issue is answered in the negative and against

the assessee.

13. The counsels, of both the assessee and the revenue, concur that

this question is covered against the assessee by virtue of the decision

rendered in the case of Britannia Industries Ltd. vs CIT (2005) 278 ITR

546.

14. In so far as the aforesaid question is concerned, it may be noted

that the Assessing officer during the course of scrutiny noticed that

the computation of book profits submitted by the assessee, as

required under the provisions of Section 115J of the I.T. Act, vide its

letter dated 31.03.1992, showed loss of ` 10,50,90,557/-. The

Assessing Officer came to the conclusion that the assessee in

calculating the figure of loss had not taken into account the amount

transferred from the re-valuation reserve account in respect of two of

its divisions, which according to him, ought to have been included so

that depreciation debited in the books of accounts continued to be

provided on original cost. According to the Assessing Officer what the

assessee had done was that it had provided depreciation in its books

of accounts on revalued assets but had not credited the profit and loss

account with the difference between depreciation charged on the

revalued account and that which was chargeable on the original cost.

This, according to the Assessing officer, had resulted in a higher

amount of depreciation being charged to the accounts which resulted

in the book profits being deflated. The Assessing Officer also noted

that prior to the insertion of Section 115J in the I.T. act (i.e., prior to

assessment year 1988-89) the assessee used to reflect the amount

transferred from re-valuation reserve above the line, i.e., in the profit

and loss account itself. However, from the assessment year 1988-89

the assessee had been reflecting the transfer from re-valuation

reserve below the line, i.e., in the profit and loss appropriation

account. In view of the above, the Assessing officer made the

following observations, while re-working the book profits of the

assessee under the provisions of Section 115J:

"As per the explanation below section 115-J(IA) amount transferred to any reserve by whatever name called is to be added to net profit and any amount withdrawn from reserves is to be reduced if such amount is debited to P&L A/c. For the purpose of applicability of Section 115-J it is important to determine the nature of a particular reserve. A reserve is different from a provision in so far as the former is an appropriation of profit while the later is a charge against the profit. The revaluation reserve stands on a different footing altogether from other reserves which are appropriations of profit and which would have to be adjusted in accordance with the explanation below Section 115-J(IA). The transfer from valuation reserve is essentially an equalization device meant to ensure that depreciation continues to be provided in the books at the original costs prior to such revaluation and that the accounts present a true and fair picture of the net profit. The amount of transfer from revaluation reserve will therefore have to be either credited to P&L A/c or reduced from the depreciation provided in the books of accounts on the revalued cost of assets. The amount withdrawn from revaluation reserve would therefore not be covered under clause (i) of explanation below section 115-J(IA) of the I.T. Act. What the assessee company had done in (SIC) to attempt to bend the well recognized principles of accountancy and to circumvent the law. It could obviously not have been the intention of the legislature to permit companies to revert to this kind of accounting jugglery with a view to getting out of the mischief of section 115-J."

14.1 With aforementioned preface, the Assessing Officer calculated

the taxable profits under Section 115J at ` 2,15,90,554/-

15. Aggrieved by the decision of the Assessing Officer, the assessee

carried the matter in appeal to the CIT(A). Various submissions were

made to bring home the point that Assessing Officer had erred in

computing the taxable profits under Section 115J at ` 2,15,90,554/- as

against the returned income which was declared as „nil‟. The CIT(A)

after recording in detail the submissions of the assessee came to the

conclusion that since the assessment order was passed on the same

day on which the computation of book profits was handed over by the

assessee, i.e., 31.03.1992, the Assessing officer was not able to

devote sufficient time with regard to the issue at hand, which in turn

had prevented the Assessee from putting forth his argument before

the Assessing Officer, and hence, in the fitness of things the order of

the Assessing officer ought to be set aside on the said issue, and the

matter remanded for a de novo adjudication.

16. The assessee, however, carried the matter in a further appeal to

the Tribunal. Before the Tribunal it was contended that the issue

involved, was a pure question of law, and hence, the Tribunal could

hear and decide the issue. The Tribunal agreed with the contention of

the assessee. The Tribunal on the merits agreed with the contention

of the assessee that the amount withdrawn from the re-valuation

reserve account would have been reduced in consonance with the

provision of Section 115J of the I.T. Act in order to arrive at the correct

figure of book profits as envisaged under the said Act. The reasoning

supplied in the impugned order of the Tribunal is largely contained in

paragraph 27; the same being relevant, is extracted hereinbelow:

"Section 115J of the Act, is a specific code by itself, and required drawing up of the profit and loss account uniformly as on 31st March, 1989, by all companies irrespective of whether their accounting year ends on that date or not. It starts with the profit as per the profit and loss account drawn in accordance with Part II and III of schedule VI to the Companies Act, 1956 and describes various adjustments for arriving at the end result „book profit‟. The transfer to and from the reserve from the profit are as a matter of accounting practice reflected or shown in the profit and loss appropriation account.

The amendment has been explained earlier, consists of two parts, namely, reserves created before 1.4.1988 and reserves created on or after 1.4.1988. In regard to reserves created before 1.4.1988, since, Section 115J of the Act was not applicable to those years, the words „and have gone to increase the book profits in any year when the provisions of section 115J of the Act were applicable‟, have not been made part of it. The reason is obvious because, for all the assessment years up to 1987-88, the income was to be computed with reference to the normal provisions of the Act, and depreciation on the fixed assets were allowable at the rates prescribed in the I.T. Rules and the charging of depreciation to the profit and loss account, on the revalued cost had no effect in the computation of income.

There is no denial that, but for the charge of depreciation on the revalued cost of assets, to the profit and loss account in the previous year relevant to the assessment year under appeal, the profit or the year would have been higher because of depreciation on the historical cost would be lower, because historical cost is lower than the revalued cost. But, the charge of depreciation of the revalued cost is not the same thing as creation of the

reserve, because, creation of the reserve means debit to the profit and loss account by an amount and giving credit to the reserve by an equivalent amount.

According to the amendment made effective from 1.4.1988 the credit to the profit & loss account by the amount withdrawn from the reserve account, created in the previous year relevant to the assessment year commencing on or after 1st day of April, 1988, by debit to the profit and loss account, shall not be allowable to be reduced from the book profit, unless the book profit of such year has been increased by those reserves. Since, the revaluation reserve was created before 1.4.1988, and by not debiting to the profit & loss account, in the light of the explanation rendered at the time of the amendment, giving the intent of the legislature (reproduced above), and by virtue of the conclusion of the Special Bench (supra), the credit that has been given to the profit & loss account by the amount that is withdrawn from the revaluation reserve account, count not have been considered at all for arriving at the figure of the book profit.

If, it is proceeded as if the reference to the net profit as per profit and loss account, is that figure after all adjustments on account of transfers to and from the reserves, then, since the revaluation reserve was not created by any debit to the profit & loss account, in the previous year relevant to the assessment year under appeal, then, by virtue of the explanation rendered at the time of amendment, as reproduced earlier, then, the amount withdrawn from the revaluation reserve account, is to be reduced to give the figure of book profit. This is obvious because, all adjustments as are provided in the Section 115J, has to be necessarily to be given effect to.

If, it is proceeded on the basis that, the figure of net profit is that, before any adjustments from it for transfer to and from the reserves, by whatever name called, then, in view of the Special Bench decision (supra) which has been given after considering the explanation to the amendment, the amount withdrawn from revaluation reserve could not be added, but given a reduction, for the reason that, that reserve was not created in the previous year, relevant to the assessment year under appeal.

In either case, from the figure of net profit, adjustments as envisaged by the section for adding to the profit and reducing from the figure of profit have to be given, after which adjustments only, the amount of book profit would be the result.

The AO had taken the figure of profit below the line, i.e., after all adjustments for transfers to and from reserves, including the amount withdrawn from the revaluation reserve, but had not allowed reduction of the amount withdrawn from the revaluation reserve account that the credited to the profit & loss appropriation account. Since the AO has to apply the provisions of Section 115J in the like manner as was intended to by the legislature, he could have only reduced the amount withdrawn from the reserve from the profit amount taken by him.

The Special Bench (supra) in para 17 of the order has given this salient finding.

"However, the explanation to section 115J provides for the book profit to be increased by the amounts carried to any reserves, by whatever named called in item (b), that is to say, if the Reserve is created out of current years book profits. If out of current year profit, any amount is transferred to Reserve Account it would diminish the Book Profits. Therefore, the

Explanation provided that the book profits be shown at their original level, by bringing back to the profit and loss account the amount transferred to reserve account. The Revenue, when it insisted on bringing back to the profit & loss account, the amount transferred to Reserve account, it postulates that the reserve was a transfer out of current profits, which was not a fact."

The above is suggestive of the position that, notwithstanding that, the profit & loss account has been credited with the amount that has been withdrawn from revaluation reserve account, it could not be added to the book profit, because, the prerequisite for such an addition postulates that, the reserve was created out of current years profits, which is not a fact in the instant case too. Therefore, the Special Bench decision, squarely provides answer on the issue, that, the addition to the book profit, by the amount withdrawn from the revaluation reserve is not tenable, because the credit to the reserve account was not by means of any debit to the profit & loss account in the current year, but, by the enhancement of the value of the assets, that too, in the earlier years, viz, 1983 & 1986. Respectfully following the Special bench (supra) decision, we hold that, the AO, having introduced his own criteria of adjustments, not intended by the legislature, of taking the profit figure after credit of withdrawal from the revaluation reserve without deducting that amount of withdrawal of revaluation reserve, for calculating the books profit, is clearly contrary to both the provisions and the intent of the legislature and hence, is erroneous and without any sanction. We therefore hold that, the credit given to the profit & loss account by the amount withdrawn from

revaluation reserve account is to be reduced for arriving at the figure of books profit."

17. In support of the reference on this question the learned counsel

for the revenue submitted that the Tribunal had erred in allowing the

assessee to reduce the amount withdrawn from the revaluation

reserve account by taking recourse to the provisions of clause (i) of

the explanation contained in Section 115J of the Income Tax Act. It is

argued by the learned counsel for the revenue that the Assessing

officer had taken a correct view in law. In support of his submissions

the learned counsel placed reliance on the judgment of the Supreme

Court in the case of Indo Rama Synthetics (I) Pvt. Ltd. vs CIT (2011)

330 ITR 363 (SC).

18. On the other hand Mr Ganesh argued that the Tribunal had

taken the correct view in law. It was contended that the Assessing

Officer had committed an error in as much as it had lost sight of the

fact that the revaluation reserve was created much before the

insertion of Section 115J. It was stated that, as found by the

Assessing Officer, the revaluation reserve was created in 1983 and

1986; therefore, as mandated by provisions of clause (i) of the

explanation appended in Section 115J, any withdrawal from the

revaluation reserve had to be reduced in arriving at the taxable book

profit since, the only situation in which the said clause would not get

triggered when a reserve is created on and after 1st April, 1988. This,

according to Mr Ganesh, was clear on a bare reading of the proviso to

clause (i) of the explanation appended to Section 115J.

18.1 Mr Ganesh submitted that the judgment of the Supreme Court in

the case of Indo Rama Synthetics (supra) had no application in view of

the fact that the facts obtaining therein would clearly demonstrate

that the reserves were created after the insertion of Section 115JB,

which is, 01.04.1997. Therefore, according to the learned counsel the

proviso appended to clause (i) of the explanation contained in Section

115JB had got triggered in that case, whereas in the present case, the

proviso had no application as the revaluation reserves have been

created prior to 01.04.1988.

19. We have heard the learned counsel for the parties on this issue

as well. In order to decide this issue it would be pertinent to bear in

mind that Minimum Alternate Tax (in short „MAT‟) was introduced in

the I.T. Act only to get over a situation whereby, companies which

were otherwise earning large profits and distributing huge amounts in

the form of dividend to its shareholders were paying no tax or a

negligible amount of tax by virtue of deductions and exemptions

made available to them under various provisions of the I.T. Act. The

Legislature, therefore, devised a methodology whereby at least 30%

of the book profits were made taxable by insertion of such like

provisions. The MAT provisions have been amended from time to

time. The history of MAT has been pithly noted by the Supreme Court

in the judgment rendered in Indo Rama Synthetic case. Therefore, we

need not reiterate the same. However, since much stress was laid by

the revenue on the observations it would be relevant to note what it

dealt with and the observations made therein.

19.1 It is not disputed as it cannot be that the provision of the I.T. Act

dealt with in Indo Rama Synthetics case is somewhat similar if not

identical. What is however, to be discerned is whether the principle

enunciated in Indo Rama Synthetic case would apply to the facts

obtaining in the instant case. If it does then the question will have to

be answered against the assessee.

19.2 Therefore, it would be important at this stage to notice what

Indo Rama Synthetics (supra) case concerned itself with. First and

foremost the Supreme Court was dealing with the provisions of

Section 115JB. The said provision as indicated above is pari materia

with the provision we are called upon to examine, i.e., Section 115J

with some variation which we will notice as we go along, and its

impact, if any. It may be perhaps therefore be useful to extract the

relevant portions of both Section 115JB as well as Section 115J:

CHAPER XII-B SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES

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 (1A)], as increased by -

(a) The amount of income-tax paid or payable, and the provision therefor; or

(b) The amounts carried to any reserves (other than the reserves specified in section 80HHD, or sub- section (1) of section 33AC) by whatever name called; or

(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) The amount by way of provision for losses of subsidiary companies; or

(e) The amount or amounts of dividends paid or proposed; or

(f) The amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or

(g) The amount withdrawn from the reserve account under section 80HHD, where it has been utilised for any purpose other than those referred to in sub- section (4) of that section; or

(h) The amount credited to the reserve account under section 80HHD, to the extent that amount has not been utilised within the period specified in sub-section (4) of that section;

(ha) The amount deemed to be the profits under sub-section (3) of section 33AC;

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, where this section is applicable to an assessee in any previous year (including the relevant 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, 1988 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;

115JB. Special provision of payment of tax by certain companies. - (1) Notwithstanding anything contained in

any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on 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, 2001, is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one-half per cent.

(2) 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):

Provided that while preparing the annual accounts including profit and loss account,-

        (i)        the accounting policies;
        (ii)       the accounting standards adopted for preparing such

accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956.....

Explanation. - For the purpose 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 (2), as increased by - ....

(b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under Section 33AC;

or if any amount referred to in clause (a) to (f) is debited to the profit & loss account and is reduced by -

(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997, otherwise than by way of a debit to the profit and loss account, if any such amount is credited to the profit & loss account:

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 115JAA, as the case may be;"

20. As would be evident on a bare perusal of both section 115JB and

Section 115J the explanation defines as to the manner in which book

profit for the purposes of levy of MAT is to be calculated. Broadly, in

both Sections, book profit means net profit as shown in the profit and

loss account which is to be increased and reduced in terms of

provisions contained therein. Book profits are required to be

calculated bearing in mind the provisions part II and III of Schedule VI

of the Companies Act, 1956.

21. Before we proceed further we may notice the relevant

distinction in clause (i) of the Explanation appended to Sections 115JB

and 115J, respectively. In clause (i) of the explanation in Section

115JB, in the bracketed portion, the following words appear "excluding

a reserve created before the 1st day of April, 1997, otherwise than by

way of a debit to the profit and loss account". There is no such

mention in clause (i) to the explanation contained in Section 115J.

Furthermore, in the proviso appended to clause (i) to the explanation

in Section 115JB, there is a reference to the effect that where the

section is applicable to an assessee in any previous year, the amount

withdrawn from reserves created or provisions made in the previous

year relevant to the assessment year commencing on or after 1st April,

1997, shall not be reduced from the book profit unless the book profit

of such year has been increased by the reserves of provisions. As

against this in the proviso to clause (i) of the explanation contained in

Section 115J, the wording is identical save and to the extent date

mentioned in the proviso is: "on or after 1st day of April, 1998". A

conjoint reading of clause (i) to the explanation appended to Section

115JB, read with, the proviso gives a clear clue that it covers period

both prior to 01.04.1997 as well as that which commences on or after

01.04.1997. As indicated above, the bracketed portion, which

appears in clause (i) to the explanation appearing in Section 115JB,

does not find mention in Section 115J.

21.1 This is in so far as the distinction in the two Sections goes. The

issue, therefore is, whether the assessee ought to be allowed to

deduct the amount withdrawn from the revaluation reserves by

invoking the provisions of clause (i) of the explanation given in Section

115J. It is not disputed that when the revaluation reserves were first

created in 1983 and 1986, the increase in the value of the assets was

reflected by debiting the asset account and crediting the revaluation

reserve account. The profit and loss account by this methodology was

kept undisturbed. In these circumstances, can it be said that when

the amount is withdrawn from the reserves it reflects the difference in

the depreciation calculated on the revalued or the enhanced value of

the assets and that which is calculated on the historical cost. In other

words can the assessee be permitted to reduce the amount withdrawn

from the revaluation reserve if in the first instance was created not by

crediting any amount to the profit and loss account but to the

revaluation reserve account.

22. Mr Ganesh has argued that clause (i) appended to the

explanation appearing in Section 115J would have to be given its full

play. As noticed above, it was his contention that the only situation in

which such a reduction is not permissible where reserves are created

by an assessee on or after 01.04.1988. Therefore, his contention is,

that since, the revaluation reserves were created in 1983 and 1986

the assessee ought to be allowed a reduction of the amounts drawn

from the revaluation reserve. In our view at first blush this argument

appears to be both plausible and attractive as well. However, a closer

scrutiny would show that clause (i) appended to the explanation

appearing in Section 115J would get triggered only if amount is

withdrawn from reserves or provisions, if such reserve or provision

was created by crediting the amount to the profit and loss account.

Admittedly, such is not the situation in the instant case. The intention

of the legislature in inserting clause (i) appended to the explanation to

Section 115J is to counter a situation where credit is made to the profit

and loss account in the first instance at the time of creation of the

reserve. When such a situation arises the book profit would stand

increased and thus consequently, any withdrawal from the revaluation

reserve would stand squared off by reducing the amount from the

book profit. Since such a situation did not arise in the instant case,

the assessee in our view cannot be allowed reduction in the amount.

To that extent the Assessing Officer is right in his conclusion. We are

fortified in our view by the observations made in this regard by the

Supreme Court. The Supreme Court has considered the matter from

various angles. One such angle from which the matter has been

considered and the resultant view and the observations made by the

supreme court completely negate, in our opinion, the submissions

made by Mr Ganesh before us. We can do no better than extract the

observation of the Supreme Court in that regard:

"The matter could be examined from another angle. To recapitulate the facts, the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e., financial year ending March 31, 2011) and amount of enhancement in valuation was ` 288,58,19,000 which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs 288,58,19,000 was added to the historical cost of assets on the assets side of the balance sheet and in order to equalize both sides of the balance sheet the revaluation reserve to that extent was created on the liabilities side. Thus, the figure of profit remained untouched so far as the revaluation

of assets to the tune of Rs 288,58,19,000 is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., the assessment year 2001-02, an amount of Rs 26,11,74,000, being the differential depreciation, was transferred out of the said revaluation reserve of Rs 288,58,19,000 and credited to the profit and loss account which the Assessing Officer disallowed by placing reliance on the proviso to clause (i) of the Explanation to Section 115JB(2). Consequently, the Assessing officer added back the said amount of Rs 26,11,74,000 to the net profits. We agree with the Assessing Officer. Under the provisions, as they then existed certain adjustments were required to be made to the net profit as shown in the profit and loss account. One such adjustment stipulated that the net profit shall be reduced by the amount(s) withdrawn from any reserves, if any such amount is credited to the profit and loss account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to the profit and loss account. Now, from the above facts, it is clear that neither the said amount of Rs 288,58,19,000 nor Rs 26,11,74,000 had ever gone to increase the book profits in the said year ending march 31, 2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the profit and loss account. Thus, the proviso to clause (i) of the Explanation to section 115JB(2) comes in the way of the claim for reduction made by the assessee. In our view, the reduction under clause (i) to the Explanation could have been availed of only if such

revaluation reserve had gone to increase the book profits."

(emphasis is ours)

23. Mr Ganesh had tried to take advantage of the fact that in the

observations extracted hereinabove there is a reference to the proviso

appended to clause (i) of the explanation to Section 115JB. A closer

scrutiny of the observations made by the Supreme Court would show

that the main burden of the rationale supplied by the Supreme Court

is not pivoted on the proviso. As noticed by us hereinabove clause (i)

of the explanation appearing in Section 115JB read with the proviso

covers the period both before and after 01.04.1997. Even though this

is not specifically mentioned in clause (i) to the explanation to Section

115J, the plain reading of the said clause would show that it only

applies in those situations where credit is made to the profit and loss

account at the time of creation of the reserve or the provision.

24. If there was any doubt it stands clarified by having regard to the

"Memorandum Explaining the Provisions in the Finance Bill, 1989" (in

short the memorandum). The memorandum, according to us, clearly

indicates that the proviso was inserted to clause (i) of the explanation

appended to Section 115J to deal with a situation where some

delinquent companies were taking advantage of clause (i) of the

explanation appended to Section 115J by reducing their net profit by

the amount withdrawn from the reserve created or provision made in

the same year itself, though the reserve when created was not added

to the book profit. It was to clarify this position that the memorandum

stated that clause (i) to the explanation contained in Section 115J

would apply to amounts withdrawn from the reserves or provision only

if reserves had been created before 01.04.1988 or where reserves or

provisions have been made after 01.04.1988 and have gone to

increase the book profits in any year when the provisions of Section

115J of the Income-Tax Act were applicable.

25. A close reading of the memorandum to the amendment would

show that the initial object of allowing reduction under clause (i) to the

explanation contained in Section 115J was not diluted. In other words

the reduction of the amount withdrawn from the reserves created or

provisions made was only available if such an amount in the first

instance have been credited to the profit and loss account. This is

clear if one adverts to the following extract from the memorandum:

"....Under the existing provisions certain adjustments are made to the net profit as shown in the profit and loss account. One such adjustment stipulates that the net profits is to be reduced by the amount withdrawn from reserves or provisions, if any, such amount is credited to the profit and loss account......"

(emphasis is ours)

26. Therefore, the submission of Mr Ganesh that it is only when the

proviso is attracted that the assessee would be disabled from seeking

reduction in terms of clause (i) to the explanation appended to Section

115J even though the reserves when created or provision made did

not get reflected in the profit and loss account, is a submission,

according to us, that cannot be accepted.

27. For the foregoing reasons, we set aside the order of the Tribunal

in respect of this issue as well. The question of law is thus answered

in the negative and against the assessee.

28. The reference is disposed of accordingly. The cost shall follow

the result of the reference.

RAJIV SHAKDHER, J

SANJAY KISHAN KAUL, J AUGUST 04, 2011 kk