Supreme Court: Amounts of revaluation reserve not deductible from 'book profit'

Holding that Companies covered under section 115JB of the Income Tax Act, 1961 would not be entitled to reduce from its book profit, such amounts which are in the nature of capital reserve or more specifically, which exist as revaluation reserve the Hon’ble Supreme Court in Indo Rama Synthetics (I) Ltd. v. C.I.T, New Delhi on 5 January, 2011 observed as follows:

Facts: During the assessment year 2000-01, fixed assets of the assessee were revalued resulting in increase in the net book value of such assets by Rs.288,58,19,000/-, which was credited to the revaluation reserve.

(The revaluation reserve is in the nature of a capital reserve rather than a revenue reserve and thus affecting treatment only in the Balance Sheet)

For the assessment year 2001-02, the AO disallowed a reduction by transfer from revaluation reserve to the extent of Rs.26,11,74,000/- to the depreciation account at Rs.127,57,06,000/- which was resulting in a net debit on account of depreciation of Rs.101,45,32,000/- 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.

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

Dismissing the appeal the Hon’ble Court held:

“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.”

“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.288,58,19,000/- 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.”

The judgment is available here.