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

2.Assessee is a widely held quoted limited company and is engaged in the business of manufacture of yarn and polyester.3.During the previous year ending 31.3.2000 relevant to the assessment year 2000-01, fixed assets were revalued resulting in increase in the net book value of such assets by Rs. 2,88,58,19,000/-, which was credited to the revaluation reserve. Consequently, the balance sheet for the preceding assessment year, resulted in enhancement of cost of fixed assets by the said amount with corresponding credit to revaluation reserve.4.For the previous year ending 31.3.2001, relevant to the assessment year 2001-02, the P & L Account showed the charge of depreciation at Rs. 127,57,06,000/- which was reduced by transfer from revaluation reserve to the extent of Rs. 26,11,74,000/- resulting in a net debit on account of depreciation of Rs. 101,45,32,000/-. The A.O., while computing the book profit under Section 115JB of the Act, did not allow reduction of the afore-stated amount of Rs. 26,11,74,000/- on the ground that the revaluation reserve stood created in the assessment year 2000-01 and had not been added back while computing the book profit in that year in terms of the proviso to Clause (i) of explanation to Section 115JB. This order was upheld by the C.I.T. (A) and by the ITAT and by the High Court, hence, this civil appeal is filed by the assessee.

Court's reasoning:
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/-.