Case: Indo Rama Synthetics Ltd Vs. Commissioner of Income Tax, New Delhi

the net profit as shown in the P & L Account, that entry cannot be said to be a credit to the P & L Account and, therefore, though the amount has been literally credited to the P & L Account, however, in substance there is no credit to P & L Account. MAT provisions were introduced as number of zero tax companies had grown. It was found that companies had earned substantial book profits and had paid huge dividends but paid no tax. In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31.3.2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under Clause (i) to the explanation to Section 115JB(2) in respect of depreciation has been rightly rejected by the AO. 20.Take the facts of the present case. As stated above, the revaluation reserve of Rs. 2,88,58,19,000/- was created during earlier assessment year 2000-01. During the accounting year ending 31.3.2001 (assessment year 2001-02), the profits of assessee stood at Rs. 1,20,18,97,000/- whereas depreciation stood at Rs. 1,27,57,06,000/-. Depreciation is a no-cash charge against the profits. Thus, company had a loss of Rs. 7,38,09,000/- (i.e. Rs. 1,27,57,06,000/- of depreciation as against profit of Rs. 1,20,18,97,000/-). However, by withdrawing Rs. 26,11,74,000/-, being the differential depreciation, from the revaluation reserve of Rs. 2,88,58,19,000/- (which is only a notional adjustment entry to balance both sides of the balance sheet) and reducing it from the depreciation of Rs. 1,27,57,06,000/-, the assessee artificially brings down the depreciation only to Rs. 1,01,45,32,000/- which is then deducted from the profits before depreciation amounting to Rs. 1,20,18,97,000/- so that there is a profit of Rs. 18,73,65,000/-. This is how the loss of Rs. 7,38,09,000 got converted to profit of Rs. 18,73,65,000/-. Thus, the financial statement for the year ending 31.3.2001 is made to look healthy. 21.The reasons given hereinabove are in addition to the reasons given by the Authorities below while rejecting the claim of the assessee. 22.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 31.3.2000) and amount of enhancement in valuation was Rs. 2,88,58,19,000/- which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs. 2,88,58,19,000/- was added to the historical cost of assets on the asset 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 liability side. Thus, the figure of profit remained untouched so far as the revaluation of assets to the tune of Rs. 2,88,58,19,000/- is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., 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. 2,88,58,19,000/- and credited to the P & L Account which the A.O. disallowed by placing reliance on the proviso to Clause (i) of the explanation to Section 115JB(2). Consequently, the A.O. added back the said amount of Rs. 26,11,74,000/- to the net profits. We agree with the A.O. Under the provisions, as they then existed, certain adjustments were required to be made to the net profit as shown in the P & L 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 P & L 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 P & L Account. Now, from the above facts, it is clear that neither the said amount of Rs. 2,88,58,19,000/- nor Rs. 26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (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 P & L 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 only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. One more fact needs to be highlighted. In this case, as indicated above, the revaluation reserve stood created during the earlier assessment year 2000-01. It has been vehemently argued on behalf of the assessee that creation of such reserve did not impact the profits of that year. The facts enumerated hereinabove shows that though the profit was not impacted, depreciation as the head of A/c was impacted. By inter play of the balance sheet items with Profit & Loss A/c items the assessee, as stated above, has sought to project the loss of Rs. 7,38,09,000/- as profit of Rs. 18,73,65,000/-. Conclusion 23.For

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending 31.3.2000) and amount of enhancement in valuation was Rs. 2,88,58,19,000/- which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs. 2,88,58,19,000/- was added to the historical cost of assets on the asset 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 liability side. Thus, the figure of profit remained untouched so far as the revaluation of assets to the tune of Rs. 2,88,58,19,000/- is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., 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. 2,88,58,19,000/- and credited to the P & L Account which the A.O. disallowed by placing reliance on the proviso to Clause (i) of the explanation to Section 115JB(2). Consequently, the A.O. added back the said amount of Rs. 26,11,74,000/- to the net profits. We agree with the A.O. Under the provisions, as they then existed, certain adjustments were required to be made to the net profit as shown in the P & L 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 P & L 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 P & L Account. Now, from the above facts, it is clear that neither the said amount of Rs. 2,88,58,19,000/- nor Rs. 26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (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 P & L 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 only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. One more fact needs to be highlighted. In this case, as indicated above, the revaluation reserve stood created during the earlier assessment year 2000-01. It has been vehemently argued on behalf of the assessee that creation of such reserve did not impact the profits of that year. The facts enumerated hereinabove shows that though the profit was not impacted, depreciation as the head of A/c was impacted. By inter play of the balance sheet items with Profit & Loss A/c items the assessee, as stated above, has sought to project the loss of Rs. 7,38,09,000/- as profit of Rs. 18,73,65,000/-.