1. This appeal is filed by the assessee, which is a company, in which public are substantially interested. The relevant assessment year is 1990-91. As per the return of income filed by the assessee-company for the relevant assessment year, there was no taxable income, according to the computation made under the provisions of Chapter-IV of the IT Act, 1961. The AO had to examine the applicability of s. 115J for the purpose of assessment, as the assessee is a company. The P&L a/c of the assessee-company disclosed a net loss of Rs. 67,27,701. In this context, the AO has found that the assessee-company has debited an amount of Rs. 3,28,13,931 as depreciation in its P&L a/c, before arriving at the net loss. During the previous year relevant to the assessment year, the assessee-company had revalued its assets to a higher extent on the basis of an expert valuation report (EVR). The amount of depreciation that has been debited in the P&L a/c was the amount worked out on the basis of the enhanced and revalued cost of the assets of the company. The amount of depreciation, if computed on the written down value (WDV) of the assets at historical cost would be an amount of Rs. 65,01,742. The AO pointed out to the assessee-company that the assessee-company was not entitled to claim enhanced amount of depreciation, which obviously included additional depreciation worked out on the basis of revalued cost of the assets and instead the company was entitled to claim only the regular depreciation computed on the basis of the written down value of the assets at their historical cost.
2. The assessee-company explained to the AO that the revaluation of the assets was made for bona fide reasons and on the basis of detailed comprehensive and expert valuation report; that once the value of the assets was enhanced by way of revaluation, depreciation has to be provided on the enhanced value of the assets. The assessee also explained this position in the light of the provisions of the Companies Act, 1956, clarifications issued by the Department of Companies Affairs in the Government of India, Accounting Standards pronounced by the Institute of Chartered Accountants of India (ICAI) etc. But, the AO held that for the purposes of calculating the depreciation, the assessee has to take into consideration only the actual cost of the assets to the company and not the enhanced and revalued cost.
Therefore, he held that the assessee has not provided depreciation as per the provisions of the Companies Act, and therefore, the P&L a/c of the assessee-company was not in conformity with Part-II and Part-III of Sch. VI of the Companies Act. On the basis of this finding, the AO disallowed the additional depreciation caused on account of the revaluation of the assets, in computing the profit or loss of the assessee-company, according to Part-II and III of Sch. VI of the Companies Act. The AO added back an amount of Rs. 3,28,13,937 to the loss reported in the P&L a/c, and thereafter, deducted the allowable regular depreciation of Rs. 65,01,742 worked out on the basis of the historical cost of the assets at their written down value.
3. The assessee-company had suffered losses in earlier years.
Therefore, it was carrying forward unabsorbed business loss as well as unabsorbed depreciation to be adjusted against the profits of succeeding assessment years. While computing the book profits under s.
115J, the assessee-company also sought for adjustment of this unabsorbed depreciation under cl. (iv) of Explanation to sub-s. (1A) of s. 115J. In support of this contention, the assessee-company relied on the decision of the Special Bench of this Tribunal in Surana Steel (P) Ltd., IT Appeal No. 1845/Hyd/1990 dt. 4th February, 1993 [reported at (1993) 46 TTJ (Hyd)(SB) 458]. But the AO did not accept this submission also on the ground that the decision of the Tribunal had not become final. Therefore, he allowed only the claim of unabsorbed business loss to be reduced from the book profit of the assessee-company to the extent of Rs. 46,46,291.
4. As a result of these adjustments made by the AO to the P&L a/c of the assessee-company, he determined the book profit of the assessee at Rs. 1,49,38,197, as against the net loss of Rs. 67,27,701 disclosed by the assessee-company in its P&L a/c. The AO has computed the taxable income under s. 115J on the basis of the above revised book profit and completed the assessment accordingly under s. 143(3) of the IT Act, 1961.
5. The assessee-company carried its two objections arising out of the above assessment in the first appeal before the CIT(A), Vijayawada. The first objection raised before the CIT(A) was that the AO ought to have allowed the additional depreciation in computing the book profit of the company; and the AO was not right in law in recomputing the book profit of the assessee-company and making adjustments thereto. The second objection raised before the CIT(A) was that the AO ought to have reduced the unabsorbed depreciation also for arriving at the book profits of the company for the purposes of s. 115J of the IT Act, 1961.
The learned CIT(A) considered the contentions of the assessee in detail in the light of the various contentions and the materials produced by the assessee-company before him, and found that the AO was right on both the points agitated by the assessee-company. Accordingly, the CIT(A) dismissed the assessee's appeal for the detailed reasons given in his order dt. 18th October, 1994. It is against this order of the learned CIT(A), Vijayawada dt. 18th October, 1994, that the assessee-company has now come in the second appeal before us.
6. In this context, the assessee-company has raised the following grounds in this appeal.
(2) The CIT(A) erred in law upholding the assessment completed by the Dy. CIT, Special Range, Vijayawada for the asst. yr. 1990-91 wherein the AO has determined the book profits at Rs. 1,49,38,197 for the purpose of s. 115J of the IT Act against nil profits claimed by the appellant.
(3) The CIT(A) failed to appreciate that the net loss of Rs. 67,27,701 arrived at as per P&L a/c after deducting depreciation of Rs. 3,28,13,931 worked out on revalued assets is strictly in accordance with the provisions of Companies Act, 1956 and also the Accounting Standards prescribed by Institute of Chartered Accountants of India.
(4) The CIT(A) ought not have held that the method of charging depreciation adopted by the appellant was on the "hypothetical basis of replacement cost" when in fact the appellant had adhered to the legal provisions and also to the accounting principles laid down both by the Companies Act and the Institute of Chartered Accountants of India.
(5) The CIT(A) erred in applying the principles laid down by Supreme Court in the case of Mc. Dowell & Co. vs. CIT (1985) 154 ITR 148 (SC) to the facts of the appellant which has no bearing nor relevance.
(6) The CIT(A) failed to appreciate that there are no inherent infirmities in the method of revaluation of assets adopted by the appellant.
(7) The CIT(A) erred in not following the decisions of the Tribunal in the case of Sutlej Cotton Mills Ltd. vs. Asstt. CIT (1993) 46 TTJ (Cal)(SB) 310 : (1993) 199 ITR 164 (AT)(SB) which is applicable to the facts of the appellant's case.
(8) The CIT(A) erred in holding that loss does not include depreciation for the purpose of computation of book profits under s.
115J of the IT Act r/w s. 205 of the Companies Act.
(9) Without prejudice to the above, the CIT(A) failed to appreciate that there was no such thing as 'nil loss' because it could as well be 'nil profit' and the question of taking the lower of the losses could arrive only if there was actual cash loss before depreciation and loss on account of depreciation. In case like that of the appellant, where there was no cash loss and only depreciation loss the latter loss cannot be compared with any other existing loss, and as such it should be allowed in full in arriving at the book profits for the purpose of the s. 115J of the IT Act.
(10) The CIT(A) failed to take note of the figures of the present day market value of the similar machines shown in column 12 of the statement enclosed to his order on p. 13. The CIT(A) considered only the original cost of the machines, total depreciation and net depreciated value. He failed to appreciate that depreciation is meant mainly to enable the industry to ensure retention of cash for rehabilitation, replacement and modernisation of fixed assets and to restore the old assets to its original condition when the life of the assets gets exhausted. The CIT(A) failed to take note of the figures in column 12 of the statement which would have made it obvious that the present cost of the machines increased to 350 per cent from the original cost and that the industry cannot close down once the original machines complete their life. The CIT(A) failed to appreciate that the world over, the system of present cost based depreciation is being adopted presently." 7. Shri A. Satyanarayana, the learned counsel appearing for the assessee-company argued at length on the two contentions raised in this appeal before us. Regarding the first contention with regard to allowability of additional depreciation based on the revalued cost of the assets of the company, the learned counsel submitted that the assessee-company has prepared its P&L a/c strictly in accordance with the provisions of Part-II and Part-III of the Sch. VI of the Companies Act. He submitted that the provisions for depreciation contained in the Companies Act, 1956, under s. 205 r/w s. 350 do not prevent the assessee-company from charging higher amount of depreciation for bona fide reasons, such as revaluation of asset. Those provisions of the Companies Act, on the other hand, stipulate the minimum amount of depreciation worked out on the basis of Sch. XVI as provided under s.
350 should invariably be charged to the P&L a/c. The notes forming part of Part-I, Part-II and Part-III of Sch. VI to the Companies Act make it clear that whenever the assets of a company are revalued to a higher extent, the depreciation has to be provided on the basis of the higher value of the assets. So also, necessary disclosures have to be made in the statement of accounts of a company. The assessee-company has made both compliances by making necessary disclosures in its P&L a/c and balance sheet, about the revaluation of assets. The learned counsel invited our attention to the Accounting Standards pronounced by Institute of Chartered Accountants of India (ICAI) in AS-6 and AS-7 and International Accounting Standards (IAS) No. 4, where method of accounting treatment to be given for charging depreciation on revaluation of assets of a company are prescribed. These accounting standards pronounced by the ICAI are mandatory in nature, as far as the disclosure requirement of the final statement of accounts of the company are concerned. The learned counsel submitted further that the assessee-company is bound under s. 211 of the Companies Act, 1956, to exhibit a true and fair view as on the balance sheet date, of its state of affairs and recording the profit or loss for the relevant financial year. The assessee-company could exhibit a true and fair view only if the accounts are prepared in compliance with the provisions of Part-II and Part-III of Sch. VI of the Companies Act, the Accounting Standards pronounced by the ICAI, adhering to the standard accounting practices followed in this matter. The assessee-company has complied with all the above requirements dictated both by statute and accepted accounting practices. The learned counsel argued that when the P&L a/c is prepared by the assessee-company, strictly according to the statutory norms pointed out above, the AO was not entitled to re-draft the P&L a/c of the assessee-company for the purposes of s. 115J of the IT Act, 1961.
On this point, he relied on the decisions of the Tribunal in Sutlej Cotton Mills Ltd. vs. Asstt. CIT (supra), where the Tribunal has held that unless any mistake or fraud or misrepresentation is alleged in the P&L a/c prepared by the assessee, the AO is not entitled to reject the P&L a/c prepared by the assessee and reworking the P&L a/c on a different footing. The learned counsel has also relied on the decisions of the Tribunal in SRF Ltd. vs. Asstt. CIT (1993) 47 ITD 504 (Del) and in J.K. Cotton Spg. & Wvg. Mills Co. Ltd. vs. Asstt. CIT (1997) 60 ITD 99 (All) to support his view that the additional depreciation was to be deducted from the computation of profit or loss.
8. As regards the second contention raised in this appeal with regard to deductibility of unabsorbed depreciation from the profits, the learned counsel for the assessee submitted that the issue is now covered in favour of the assessee-company by the recent decision of the Hon'ble Supreme Court in the case of Surana Steels (P) Ltd. vs. Dy. CIT (1999) 237 ITR 777 (SC).
9. Shri C. P. Ramaswamy, the learned Departmental Representative appearing for the Revenue, contented that the assessee-company is not entitled in law to claim the allowance of additional depreciation worked out on the revaluation cost of the assets of the company. He submitted that the book-profit of the assessee-company would not be different from the real income of the assessee-company for the relevant previous year. He invited our attention to the requirements of law as provided in s. 211 of the Companies Act. According to him, the assessee-company is bound by law to give a true and fair view of the profit or loss for the relevant previous year when the P&L a/c is overloaded with the additional depreciation worked out on the basis of revalued cost of the assets, the true and fair picture of profit or loss of the assessee-company for the relevant previous year would get distorted, and the real profit of the assessee-company to the extent of additional depreciation would stand reduced. He submitted that as far as the assessee before us is concerned, the claim for depreciation consists of two parts. The first part relates to regular depreciation to be worked out on the basis of the Written Down Value of the assets of the company at the historical cost. The second part is the additional depreciation relating to the incremental cost of the assets caused on account of the revaluation of the assets. The first part of the depreciation alone, according to him, can be charged to the P&L a/c, so as to arrive at the correct profit of the assessee from its business. The second part of the depreciation, he submitted, cannot be charged to the P&L a/c, as it would reduce the profit or increase the loss of the assessee-company for the relevant previous year. In this context, the learned Departmental Representative invited our attention to the Accounting Standards pronounced by the ICAI in AS-7 and in IAS-4 and submitted that as per those Accounting Standards, the assessee-company has to create a reserve, known as the revaluation reserve to the extent of the incremental cost of the assets resulted out of the revaluation. When the assessee-company is charging the additional depreciation to the P&L a/c, the assessee-company has to transfer an equal amount to the credit of the P&L a/c, out of the earlier created revaluation reserve. When an amount equal to the additional depreciation is thus transferred to the credit side of the P&L a/c from the revaluation reserve, the additional depreciation does not become a charge on the profit of the year, and effectively the regular depreciation on the basis of the historical cost of the assets alone is charged to the P&L a/c. He submitted that the assessee is bound to adopt this practice of accounting, while debiting the additional depreciation to the P&L a/c. The learned Departmental Representative submitted that the additional depreciation should be set off against the revaluation reserve and not against the P&L a/c. When this is the position, the AO is quite justified in computing the profit or loss of the assessee-company in accordance with the provisions of Part-II and Part-III of the Companies Act and after making adjustments on this point of additional depreciation. The learned Departmental Representative submitted that the Special Bench decision of the Tribunal in Sutlej Cotton Mills Ltd.'s case (supra) relied upon by the learned counsel for the assessee is clear mandate for the AO to adjust the items of P&L a/c for valid reasons. Explanation provided under sub-s. (1A) of s. 115J of the Act provided for adjustment of various items by way of addition or reduction to the profit or loss disclosed in the P&L a/c of an assessee-company. Therefore, there is no basis for the learned counsel for the assessee to argue that the P&L a/c prepared by the assessee-company as such has to be accepted for the purposes of the assessment under s. 115J of the IT Act.
10. We heard both sides in detail in the light of the grounds of appeal and the orders of the lower authorities, besides the cash-law cited before us, and the Accounting Standards pronounced by the ICAI in AS-6, AS-7 and IAS-4. We have also perused the detailed paper-book and considered the rival contentions in detail.
11. Firstly, we may examine the contention of the assessee-company in respect of allowance of additional depreciation worked out on the basis of the revaluation cost of the assets of the assessee-company. This contention arises in the context of the application of s. 115J of the IT Act, 1961. According to s. 115J, where the total income as computed under the IT Act, 1961 in respect of the relevant previous year is less than 30 per cent of its book profit, the total income of the assessee chargeable to tax for the relevant assessment year shall be deemed to be an amount equal to 30 per cent of the said book profit. For the purposes of s. 115J, book profit means the net profit shown in the P&L a/c, for the relevant previous year, but subject to various adjustments provided for in Explanation to Sub-s. (1A) of s. 115J. The P&L a/c shall, for this purpose, be prepared in accordance with the provisions of Part-II and Part-III of Sch.-VI of the Companies Act, 1956. As per the provisions of Part-II and Part-III of Sch.-VI of the Companies Act, the assessee-company has to charge depreciation to its P&L a/c. Secs.
205 and 350 of the Companies Act, 1956 and Sch. XVI thereto prescribe the method and conditions for computing the minimum depreciation that should be invariably charged to the P&L a/c of a company. There is no bar on an assessee-company for providing a higher amount of depreciation than the statutory minimum requirement. The assessee-company in the instant case has revalued its assets in the previous year relevant to the assessment year under appeal. The revaluation has been done on the basis of a valuation report. While preparing its final accounts according to the provisions of Sch. VI to the Companies Act as on 31st March, 1990, the assessee-company has adopted the revalued cost of its assets in its accounts, instead of the historical cost of the assets brought down from the preceding year at its written down value. The assessee-company has computed the depreciation under the provisions of the Companies Act on the revalued cost of the assets. It worked out to Rs. 3,28,13,931. As against this, the depreciation on the written down value of the historical cost of the assets brought down from the preceding year worked out to Rs. 65,01,742. The amount of depreciation that the assessee-company has charged and debited to P&L a/c is the amount worked out on the revalued cost of assets. Thus, the assessee-company has charged a higher amount of depreciation based on the revalued cost of assets. Consequently, if the assessee-company has not revalued its assets the depreciation chargeable would have been a lesser amount, since it would be worked out on the basis of the historical cost of the assets at their written down value, only. Instead of charging the depreciation on the written down value the assessee-company has charged the higher amount of depreciation, which invariably included the additional depreciation brought out on account of revaluation of assets. As a result of this, the book profit of the assessee-company has come down substantially, which has a direct bearing on the computation of deemed income under s.
115J of the IT Act, 1961. Therefore, the charging of the additional depreciation on account of the revaluation of the asset was objected by the AO. The AO held that for the purposes of computing the "book profit", the assessee-company could adopt only the lesser amount of depreciation calculated on the basis of the written down historical cost of the assets, that the assessee-company could not charge the additional depreciation worked out on the revalued cost of the assets to its profits. Accordingly, he substituted the historical cost depreciation of Rs. 65,01,742 in place of the revalued cost depreciation of Rs. 3,28,13,931 and recomputed the book profit. In effect, the AO has disallowed the additional depreciation from the computation of the book profit of the assessee-company for the purposes of the s. 115J of the IT Act, 1961.
12. Revaluation of assets is optional for the assessee-company, and it is not dictated by any provisions of law. It is the prudence of the board of directors of the assessee-company which decides whether it should revalue its assets or not. Neither the Companies Act, 1956 nor the IT Act, 1961 has any role to play in the relevant decisions making process. But, the consequences of such a revaluation have to be taken care of, as provided in the Companies Law and Standard Accounting Practices. Under the Companies Act, 1956, the assessee-company has to make proper disclosures in its balance sheet and P&L a/c regarding the factum and effect of the revaluation of the assets. Provision for depreciation has also to be made on the revalued cost of the assets.
These are necessary for the purposes of the exhibiting a true and fair view of the state of the affairs of the company in its balance sheet and P&L a/c for the relevant financial year.
13. On the question of revaluation of assets and providing for depreciation thereon, company law have prescribed certain compulsions on the part of a company. These compulsions are of two types : disclosure compulsions and accounting compulsions. We are not directly concerned with the former. The accounting compulsions are two-fold. The first one is that, if the assets of the company have been revalued, then those assets have to be reflected in the balance sheet at their revalued cost. The second is that the depreciation has to be provided for on the revalued cost of those assets. Both the needs have to be satisfied for, in the relevant financial year itself. The above two accounting compulsions do not anyhow press the company to charge the additional depreciation to its profit. What is to be essentially made a charge to the profits of the company, so as to reduce its profits, is only the minimum depreciation as contemplated in the provisions of s.
205 of the Companies Act r/w s. 350 and Sch. XVI thereto. The minimum depreciation is to be calculated either by the written down value method (WDV) or straight line method (SLM) on the basis of the "actual cost" of the assets of the Company. Provision for the additional depreciation does not necessarily become a charge to the profits of the company as it is in the case of the provisions for the minimum and mandatory depreciation. When additional depreciation on account of revaluation is to be debited to the P&L a/c, the law equally permits the company to credit to its P&L a/c an amount equal to the additional depreciation. That credit has to be made corresponding to a debit made to the asset revaluation reserve account for the equivalent amount. In this way, while the company law insists that the minimum depreciation need to be provided for and that should be charged to the profit of the company, there is no such compulsion that the additional depreciation on account of the revaluations of the assets should be a charge to the profits of the company.
14. It is to be seen that, as far as the minimum and mandatory depreciation is concerned, it is to be provided as a charge to the profits of the company, whereas the additional depreciation has to be provided in the accounts, but need not be a charge to the profits of the company.
15. The provision for the minimum and mandatory depreciation reduces the divisible profits of the company, whereas the provision for additional depreciation which is compulsory to be made, need not reduce the divisible profits of the company. The compulsion of company law prescribes only to adopt the revalued cost of the assets in the accounts of the company and to provide depreciation on the basis of that revalued cost, but does not prescribe that the additional depreciation should be adjusted only against the profits of the company. That is why, the law permits the company to transfer an amount equal to the additional depreciation to the credit of its P&L a/c, out of the revaluation reserve account.
16. In the light of the above position of the company law, the ICAI has pronounced Accounting Standards (AS-6 and AS-7) as a matter of Standard Accounting Practices to be followed by companies for the purpose of proper accounting of the depreciation arising out of the revaluation of the assets of a company. According to these standards, the company may charge the additional depreciation to the profits of the company by debiting it to the P&L a/c without any further adjustment.
Alternatively, the company while debiting the additional depreciation to the P&L a/c may also credit an amount equal to that additional depreciation to the P&L a/c passing a corresponding debit to the asset revaluation reserve account which has already been created by the company at the time of revaluation of the assets, so that the deminishing effect on the profits of the company is neutralised. But the Accounting Standards suggest that the additional depreciation may be debited to the P&L a/c as a charge to the profit, without affecting the asset revaluation reserve account Because, the company may get more funds out of the divisible profits for investments, so that the company could better combat the inflationary pressures at the time of future replacement of these assets. Anyhow, this suggestion is more relevant for better funds and financial management of the Company and not for any statutory purposes either under the companies Act or the IT Act.
17. It is clear therefore, that it is optional for the assessee-company to select any of the alternate accounting methods considered above for providing additional depreciation resulting out of the incremental value of the assets impregnated by revaluation. The optional accounting entries available to the assessee-company are as follows : The sum of normal depreciation and additional depreciation is debited to the P&L a/c as a charge to the profit of the company. Second Option To Asset Account (at revalued cost) xxxx And 18. The sum of normal depreciation and additional depreciation is debited to the P&L a/c and simultaneously the P&L a/c is again credited with an amount equal to the additional depreciation, corresponding debit being given to Asset Revaluation Reserve Account. Therefore, what is actually charged to the profit of the year is the only the normal depreciation calculated on the basis of written down value of the assets at their historical cost.
19. When the first option is exercised, the additional depreciation also is debited as a charge to the profits of the company as in the case of normal depreciation. And the profit of the company is reduced both by normal depreciation and additional depreciation. In the case of second option, even though the additional depreciation is also debited to the P&L a/c along with normal depreciation, the additional depreciation does not become a charge to the profit of the company, as its effect is offset by the credit entry made in the P&L a/c for an equivalent amount. The profit of the company is reduced only by the normal depreciation and not by the additional depreciation. In effect, the additional depreciation is finally debited to the Asset Revaluation Reserve Account through the medium of P&L a/c.
20. In the present case, the assessee has chosen for the first option, and has charged the entire depreciation, including the additional depreciation directly to the P&L a/c, which has reduced the profit of the assessee-company for the relevant previous year to that extent. As against this, by disallowing the additional depreciation, what the AO has actually done was to opt for the second option available under the provisions of law and the concerned accounting standards for the treatment of additional depreciation. When the AO has disallowed the additional depreciation from the computation of profit, he has taken away the effect of additional department and has taken into account only its normal depreciation. So also, if the second option was exercised by the assessee, the result would be the same, viz., the burden of the additional depreciation was not going to affect the profit of the assessee-company for the relevant financial year. The fact is that the AO has acted as per the second option but in a different manner without adhering to the technical aspects of accounting entries, but anyway yielding the same arithmetical result.
Thus, the conclusion reached by the AO by following the arithmetical route is the same that would have been reached by going in for the second option as per the Company Law and Accounting Standards. As such, de facto, the AO has gone for the computation as per the second option as far as the accounting treatment of additional depreciation is concerned. As a result, it has to be seen that the AO has also recast the P&L a/c in accordance with the provisions of Part-II and Part-III of Sch.-VI to the Companies Act, for the purposes of giving a true and fair view of the profit of the assessee-company for the previous year relevant to the assessment year under consideration.
21. The ultimate effect of both the accounting options may be examined here. When the additional depreciation is charged to P&L a/c without a corresponding entry in the credit side of that account to the extent of the additional depreciation, the profit for the relevant year is reduced, which results in a reduced profit being transferred to the general reserve or the assessee-company. Even though the general reserve of the company is credited with the reduced profit on account of the absorption of the additional depreciation by the profit of the year, the Revaluation Reserve Account created at the time of revaluation of the assets, remains intact and undiminished. If the second option is exercised and the additional depreciation debited to P&L a/c is set off by transferring an equal amount to the credit of the P&L a/c from the Revaluation Reserve Account, even though higher amount of profit uncharged by the additional depreciation is transferred to General Reserve Account, to that extent the Revaluation Reserve Account is charged and as such the balance in that account shrinks.
22. Thus whether the first option is exercised or the second option is exercised, the ultimate effect on the assessee-company reflected in the balance sheet remains the same, as the aggregate of General Reserve and Revaluation Reserve, both of which appear on the liability side, would remain the same.
23. We have found that accounting treatment in respect of additional depreciation arising out of revaluation of assets is optional, and both the options are in accordance with the requirements of Sch.-VI to the Companies Act. We have also found that the assessee-company has opted for the first method and the AO has followed the second method, with both the methods duly complying with the provisions of Sch.-VI to the Companies Act. In the circumstances, we cannot say that the AO has gone wrong in recasting the P&L a/c of the assessee-company in the course of assessment.
24. The next question therefore is whether the option exercised by the assessee-company is sustainable in law for the purposes of s. 115J of the IT Act, 1961. The provisions of s. 205 of the Companies Act, 1956 prescribe that a company cannot declare dividends without providing for depreciation in its accounts. Sec. 350 of that Act provides for the depreciation on the basis of Sch. XVI thereto. It is clear from these provisions of law that for the purposes of calculation of depreciation, the assessee may use the method of written down value of straight line method based on 'actual cost' of the asset. It is clear that the depreciation under the provisions of Companies Act has to be worked out on the basis of 'actual cost' and not on the basis of any notional or replacement cost. If assets are revalued, it is mandatory, as argued by the learned counsel, to provide for the depreciation on enhanced value of the assets. But, we should not forget that revaluation of assets by itself is not mandatory. Since the revaluation by itself is not mandatory, law as well as accounting practices have prescribed options for the company to provide for the additional depreciation either against the profit of each year or against the Revaluation Reserve Account. Hence, it is not mandatory that the additional depreciation should be charged to the profit of the year. It is equally permissible to charge the same against the Revaluation Reserve Account. When these options are available for the assessee-company, additional depreciation does not become a mandatory charge to the profit of the assessee-company, for the purpose of the IT Act. Therefore, the contention of the assessee to charge the additional depreciation to the profit of the assessee-company is not sustainable for the purposes of the s. 115J of the Act, since that course opted by the assessee would lead to a distorted picture of the actual profit of the assessee from its business for the relevant previous year on account of that additional charge, though separate reserve is available to take care of that additional charge. It is all the more so, when even as per the Companies Act, it is legally permissible for the assessee to adjust the burden of the additional depreciation against Revaluation Reserve, instead of making it as a charge against the profit of the year.
25. The additional depreciation debited to the P&L a/c, by the assessee is an extraordinary item. This extraordinary item of the additional depreciation distorts the normal profit of the assessee-company for the relevant previous year. This distortion violates the principles of consistency in accounting policies. The rule of consistency is very important under the IT Act and in the computation of income. Under the IT Act, profit or income of an assessee is worked out from year to year on a consistent basis. Each assessment year is a separate unit of assessment. By debiting an extraordinary item of additional depreciation in the P&L a/c, the profit of the relevant previous year is substantially reduced by the overloading amount of additional depreciation. What has to be computed for the assessment of income under the IT Act is the real income of the assessee-company from its business. The real income cannot be allowed to be reduced by extraordinary item of the nature of additional depreciation, brought about by optional and notional revaluation of assets. Therefore, in our opinion, the option exercised by the assessee-company resulting in the violation of the rule of consistency and distortion of true profits of the assessee from its business in the relevant previous year is not sustainable in the IT law. As rightly pointed out by the learned Departmental Representative, charging of additional depreciation to the P&L a/c of the assessee-company instead of charging it to the Revaluation Reserve Account, in fact, does injustice to the spirit of true and fair view, as far as the true profits of the assessee-company for the relevant previous year is concerned.
26. If the option exercised by the assessee-company is accepted as legitimate for the purposes of the IT Act, that will defeat the very purposes of s. 115J of the Act, which as been brought on the statute book to overcome the instances of 'NIL' or negligible incomes disclosed by the companies notwithstanding substantial profits disclosed by their P&L a/c. By making additional depreciation a charge against profit of the previous year, assessee, presenting a distorted version of the true profits earned by it from the business during the year, is getting away by disclosing loss in its return, by overcoming the deeming provisions of s. 115J as well. Even though the accounting methods that may be followed by the assessee are optional to the assessee, the matter has to be examined from the angle of the IT Act and the liability of the assessee to be charged to tax on its true profits of the year. The assessee-company has two options for the treatment of the depreciation in its accounts, on account of revaluation of its assets. The first option reduces the profits of the company by the amount of additional depreciation. In the second option, the additional depreciation does not reduce the profits of the company. The assessee-company may choose any of the above two options for the purposes of company law. But for the purpose of s. 115J of the IT Act, the assessee-company has to choose the second option. Because, additional depreciation is not mandatory charge to the profit of the assessee-company under the provisions of company law.
27. In view of the above detailed discussions, we feel that the AO has correctly disallowed deduction towards additional depreciation, while computing the book profit for the purposes of s. 115J of the IT Act.
Accordingly this issue is decided against the assessee-company.
28. As for the second issue regarding the adjustment of unabsorbed depreciation under cl. (iv) to Explanation below sub-s. (1A) of s. 115J of the IT Act, we find that this is covered in favour of the assessee and against the Revenue by the decisions of the Hon'ble Supreme Court in the case of Surana Steels (P) Ltd. (supra) wherein it was held that unabsorbed depreciation was part of loss available for adjustment under s. 115J of the IT Act. In this view of the matter, this issue is decided in favour of the assessee-company.
29. In the circumstances, the AO is directed to deduct the unabsorbed depreciation while computing the book profits under s. 115J keeping in view our finding that the assessee is not entitled to claim additional depreciation worked out on the revalued cost of the assets.