Full Judgment
2. The assessee-company is engaged in the business of manufacturing, P.P. Caps, Crowns and Pentane etc. The company has set up two factory units in the backward areas at Khopoli (Raigad District) and Murbad (Thane District). As per the incentive scheme declared by the Government of Maharashtra for industries set up in backward areas (1998 and 1993 Package Scheme of Incentive), the company was entitled to avail the benefit of sales tax deferral from the assessment year 1992-93 onwards for Khopoli Division and from 1995-96 onwards for Murbad Division. Under the said sales tax deferral scheme, the assessee could collect the sales tax from the buyers but need not be paid immediately to the Government, as in the case of other dealers. The payment of the sales tax collected from the buyers was deferred for a period of ten years from the respective year of collection. The sales tax collection for a particular year was deferred and had to be paid after the end of the tenth year. The payments were to be made in five equal annual instalments. The payment of the sales tax was at par; without the burden, of any interest, in the books of account maintained by the assessee, the sales tax collected under the above deferral scheme was credited to a separate account on the liability side as sales tax payable account. As a matter of its policy, the assessee-company used to value this sales tax payable liability on the basis of present value of rupee. The valuation was made by actuarial valuer. As the sales tax liability was to be paid without any interest, the valuation was worked out on the basis of appropriate discounting factor. For the impugned assessment year 1998-99, the sales tax payable account was thus discounted for 16 per cent per annum and the present value of the liability was determined. The difference between the sales tax collection account and the present value of the liability as per the valuation certificate was credited by the assessee to profit and loss account as "Revaluation of Deferral Sales Tax".
3. As the sales tax collected was a liability and the payment was deferred for a period of ten years from the respective year of collection, the sales tax liability represented provision and out of this provision account an amount worked out as per the actuarial valuation was deducted and the differential amount was credited to the profit and loss account. According to the assessee, this credit entry in the profit and loss account which disclosed profit/income was only a notional figure worked out for the purpose of proper accounting and accounting policies.
4. The assessee being a company covered by MAT scheme, the assessee had to work out the book profit under Section 115JA as the regular profit was less than the book profit. While working out the book profit under Section 115JA, the assessee reduced the abovementioned credit entry amount of revaluation of deferred sales tax from the book profit. The assessing officer held that the book profit is the profit worked out on the basis of Schedule VI of the Companies Act, 1956 and therefore, the assessee could not reduce the profit on revaluation of deferred sales tax scheme, while working out the book profit under Section 115JA. The assessing officer has also held that the differential credit amount was in the nature of income for the concerned assessment year and therefore, it should form part of the book profit of the assessee-company for the purpose of Section 115JA. This position was confirmed in first appeal by the Commissioner (Appeals). Aggrieved by the above, the assessee has come in second appeal before us.
5. The solitary ground raised by the assessee in this appeal reads as below: On the facts and in the circumstances of the case and in law, the authorities below erred in not reducing the notional credit on account of revaluation of deferred, sales tax liability of Rs. 2,84,76,657 for the purpose of calculation of "book profit" under Section 115 J A of the Act andthe reasons assigned by him for doing so are wrong and contrary to the facts of the case, provisions of Income Tax Act and the rules made thereunder.
6. Sri Shailesh Shah, the Chartered Accountant who appeared for the assessee-company argued the case at length. He explained that the amount of Rs. 2,84,76,657 credited by the assessee-company in its profit and loss account does not have the character of any income. The assessee, being a limited company, is bound by the provisions of Companies Act in preparing final statements of accounts as well as bound by the accounting standards and other rules prescribed for the purpose of disclosure. The assessee-company is supposed to prepare its profit and loss account and balance sheet so as to exhibit a true and fair view of the state of affairs of the company at the end of a particular year. The assessee-company was enjoying the incentive declared by the Government of Maharashtra. The incentive scheme was known as Sales Tax Deferral Scheme. The assessee was permitted to collect sales tax on the sales made to customers. Instead of remitting the sale tax collection immediately to 'the State Government, the assessee was keeping the money with it for improving and stabilizing its business. The amount has to be paid to the sales tax department only at the end of the tenth year. There was no charge of interest.
Therefore, according to the accounting concept, the value of the payment of the sales tax after ten years would be lesser in value when compared to the sales tax collected by the assessee during that particular year. This reduction in the liability is measured by a discounting factor. The future value of present liability is valued by an Actuarial valuer by applying appropriate discount rate and thus the fair reduced value of future liability is recorded in the balance sheet. This calls for an adjustment in the accounts by way of passing the journal entry. When the liability account is reduced, a corresponding amount has to be credited under a different account. That corresponding entry is credited in the profit and loss account under the head 'revaluation of deferred sales tax liability'. Except for this technical exercise required for true disclosure of information in the profit and loss account and balance sheet, the said amount did not have any character of income. The assessee never received such amount of income or the assessee never acquired any right to such income. It was only notional in character. The assessee presumes that the value of present liability after a period of ten years would be something lesser than the present amount and that effect should be reflected in its final accounts. But for this technical adjustment in its books of account, there is no question of any income arising or accruing to the assessee-company. So also there is no reduction in the liability of sales tax to be paid to the Government after ten years. He, therefore, submitted that the assessee was right in law in excluding the said amount of revaluation of deferred sales tax liability from the book profit for the purpose of applying Section 115JA.7. In support of his arguments, the Chartered Accountant relied on the decision of ITAT, Mumbai Bench 'H' in the case of Hitkari Fibres Ltd. v. Jt. CIT (2004) 90 ITD 654. In that case liability towards payment of interest to financial institution was provided in the accounts of the assessee for different assessment years prior to the assessment year 1997-98. The said C interest liability was ultimately waived during the previous year relevant to the assessment year 1997-98. Therefore, in order to make the accounts of the assessee compatible to the above situation, the assessee passed appropriate journal entries in the books of account resulting in the write back of provision for interest in its accounts. The interest written back in its books of account created credit entries in its profit and loss account. The question was whether the amounts so written back by the assessee should be treated as part of book profits for the purpose of Section 115 JA. The Tribunal held that Section 115 JA has to be applied on real book profits which have been earned by the companies during the relevant assessment year and not on artificial income which was not accrued to the company during the relevant previous year. The Tribunal held that the credit entries were passed by the assessee-company to comply with the accounting principles and thus the write-back did not generate any income in the hands of the assessee. Therefore, the contention of the assessee was accepted and the credit by way of write-back was ordered to be excluded in computing the book profit under Section 115 JA. The Chartered Accountant also relied on the decision of ITAT, Mumbai Bench 'I' in the case of ITO v. Frigsales (India) Ltd. (2005) 4 SOT 376 wherein the Tribunal has held that a receipt which is not in the nature of income, cannot be taxed as income under Section 115JA. He also relied on the Special Bench decision of ITAT, Calcutta in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT (1993)45 ITD 22:199 ITR 164 (AT) where that Special Bench had considered the case of capital gains, whether to be included for the purpose of book profits or not. The Tribunal held that in the case of capital gains, it is a receipt which is not taxable at all but for a deeming provision. Even the deeming provision is subject to exclusion in respect of certain receipts which fulfils certain conditions such as reinvestment. Section 115 J has recognized this and has provided that the amounts falling under Chapter III are to be excluded. When the amount which forms part of the book profit itself cannot be taxed under Section 115 J, a receipt which does not have income character cannot anyhow be included for the purpose of Section 115J. He has also relied on a very recent judgment of ITAT, Mumbai 'E' Bench in the case of Pal Synthetics Ltd. v. Jt. CIT (IT Appeal No. 1310 (Mum.) of 2003, dated 6-2-2007), where the assessee had credited the industrial subsidy in the profit and loss account and formed part of the profit worked out in the format prescribed in Schedule VI to the Companies Act, 1956. But, while working out the book profits for the purpose of Section 115 J A, the assessee excluded the subsidy amount which was not allowed by the assessing authority as well as the Commissioner (Appeals). The Tribunal held that the Supreme Court in the case of CIT v. P.J. Chemicals Ltd. capital subsidy cannot form part of taxable income and therefore, the amount cannot form part of book profits for the purpose of Section 115 J A, either.
8. Shri Anil Mehta, the learned Commissioner of Income-tax justified the orders passed by the lower authorities. He invited our attention to Sub-section (4) of Section 115JA where it is provided as under- Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.
According to the learned Commissioner, there was no such provision in the earlier Section 115J. He argued, therefore, Sections 115J and 115JA are different and the decisions rendered in the context of Section 115 J cannot be applied in a case falling under the Section 115JA. He submitted that except for the provisions specifically given under Section 115JA, all other provisions of the Act should also be read along with the Section 115JA. He, therefore, submitted that the differential amount is a savings in the hands of the assessee-company as on the last date of the relevant previous year and it cannot be treated as just, notional as contended by the assessee.
9. The learned Commissioner further relied on the decision of Supreme Court in the case of Apollo Tyres Ltd. v. CIT where the Supreme Court has held that the assessing officer has no power to scrutinize except as provided in the Explanation and Section 115 J does not empower the assessing officer to embark upon a fresh enquiry in regard to the entries-made in the books of account of the company and therefore, any adjustment claimed by the assessee as well as made by the assessing authority, both should confine to the items provided under Explanation to Section 115JA. The credit entry of the revaluation of deferred sales tax liability does not come under the Explanation provided in Section 115JA and therefore, in the light of the decision of Apollo Tyres Ltd., it is not permissible to exclude the said entry from computing the book profits for the purpose of Section 115JA.10. The learned Commissioner further explained that the amount involved in the present case is not a capital subsidy or something like that considered by the Tribunal in its earlier decisions. The subject matter of collection in the present case is sales tax which according to the Supreme Court forms part of sales turnover and therefore, it partakes the character of income and cannot be construed as notional income as argued by the assessee-company. The Commissioner has relied on the decision of Chowrangi Sales Bureau (P.) Ltd. v. CIT .
He has also relied on the decision of Supreme Court in the case of Morvi Industries Ltd. v. CIT and also the decision of Supreme Court in the case of State Bank of Travancore v. CIT where the Supreme Court has held that the amount 11. The Chartered Accountant in his reply submitted that revaluation of sales tax liability was in fact, the liability restated at a discounted value and therefore, the notional diminution reflected in the sales tax liability does not become the actual income of the assessee so as to bring under the Section 115JA. He, therefore, submitted that the decision of the Supreme Court in the case of Chowrangi Sales Bureau (P.) Ltd. (supra) is not applicable to the present case.
12. We heard both sides in detail and considered the matter, very carefully. The Supreme Court in the case of Apollo Tyres Ltd. (supra) has held that no adjustment can be made in computing the book profits other than for the items enumerated in the Explanation given under the Section 115J. If we examine the Explanation given under Section 115JA, the first part of the Explanation where the book profit has to be: increased, the items are generally not relating to the income pertaining to the concerned assessment year. In the second part, the items deductible from the book profits have been provided which also show that those items do not have the character of income in that assessment year. Therefore, the decision of the Supreme Court in the case of Apollo Tyres Ltd. (supra) has to be understood in the light of the intended purpose of the Explanation provided in Section 115JA where the Legislature has thought it fit that items not having the character of income of the concerned year should not form part of the book profits even though such items are either credited or debited in the profit and loss account, prepared as directed in Schedule VI to the Companies Act, 1956. Therefore, it is to be seen that while overruling the various adjustments made by the assessing officer in the book profits of a company, the Supreme Court has not overlooked the basic legislative intention regarding the nature of items to be excluded in computing the book profits for the purpose of Section 115JA. It is in the above context that the decisions of the Tribunal placed by the Chartered Accountant appearing for the assessee have to be examined by us. In the case of Hitkari Fibres Ltd. (supra), the Tribunal has held that MAT is levied on real book profit which have been earned by companies and not on artificial income which has not accrued to companies but has been credited to profit and loss accounts as per the accounting principles. In the said case, the assessee had credited the profit and loss account with the amounts of write-backs of liabilities.
The same view was adopted by the Mumbai Tribunal in the case of Frigsales (India) Ltd. (supra). In that case, the Tribunal justified the exclusion of capital gains. The Special Bench of IT AT, Calcutta Bench in the case of Sutlej Cotton Milk Ltd. (supra) has also taken the same view.
13. The above decisions are dealing with the extraordinary items credited or debited by a assessee-company in its profit and loss account while drawing its final accounts in the format prescribed in Schedule VI to the Companies Act, 1956. The Tribunal has consistently held that wherever the receipts credited in the profit and loss account were not of income nature, such items could not be held forming part of book profit, even though those items have not been specifically excluded under Section 115JA.14. On the question of treating extraordinary items reflected in the profit and loss of the company, there is a decision of ITAT, Hyderabad Bench 'A' in the case of Vijay Spg. Milk Ltd. v. Dy. CIT 344. In that case, the assessing officer observed in the context of Section 115J that the assessee-company had debited certain amounts as depreciation in its profit and loss account, before arriving at the net loss. He found that during the relevant previous year, the assessee-company had revalued its assets to a higher extent on the basis of the valuation report. The amount of depreciation debited in the profit and loss account was the amount worked out on the basis of increased cost of the assets of the company resulted because of the revaluation. The amount of depreciation, if computed on the Written Down Value (WDV) of the assets on the historical cost would be a lesser amount. The assessing officer pointed out that the assessee was not entitled to claim the enhanced amount of depreciation, which included an additional depreciation worked out on the basis of the revalued cost of the assets. He held that the assessee was entitled to claim depreciation on the written down value of assets made out from the historical cost. The assessing officer held that for the purpose of calculating the depreciation the assessee had to take into consideration only the actual cost of assets of the company and not the enhanced or revalued cost. On the ground that the assessee had not provided depreciation as per the provisions of the Companies Act and therefore, its profit and loss account was not in conformity with Schedule VI thereof, the assessing officer added back the depreciation amount and thereafter deducted the allowable regular depreciation and worked out the book profit for the purpose of Section 115J. In the first appeal, the adjustment made by the assessing authority was upheld. The assessee came in second appeal before the Tribunal. The Tribunal held that revaluation of assets is optional for the assessee company and it is not dictated by any provisions of law. It is the prudence of Board of Directors of the assessee company who decides whether it should revalue its assets or not. Neither the Companies Act, 1956 nor the Income Tax Act, 1961 has any role to play in the relevant decision making process. But, the consequences of such revaluation have to be taken care of, as provided in the Company Law and standard accounting practices. Under the Companies Act, the assessee-company has to make proper disclosure in its balance sheet and profit and loss account regarding the factum and effect of revaluation of assets. The provision for depreciation has also to be made on the revalued cost of the assets. These are necessary for the purpose of exhibiting a true and fair view of the state of affairs of the company in its balance sheet and profit and loss account for the relevant previous year.
15. The Tribunal continued to hold in the said decision that the Company Law have prescribed certain compulsions on the part of a company in the matter of revaluation of assets and providing depreciation thereon. The compulsions are two types: Disclosure compulsions & Accounting compulsions. The Accounting compulsions which are relevant in the present case 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 depreciation has to be provided for on the revalued cost of those assets. Both the requirements have to be satisfied for in the relevant financial year itself. The second accounting compulsion 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 Section 205 of the Companies Act read with Section 350 and Schedule XVI thereof. The provision for the additional depreciation does not necessarily become a charge to the profits of the company as in the case of a provision for the minimum and mandatory depreciation. When the additional depreciation on account of revaluation is to be debited to the profit and loss account, the law permits the company to credit its profit and loss account with 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 minimum depreciation need to be provided for and that should be charged to the profits of the company. There is no such compulsion that additional depreciation on account of the revaluation of assets should be a charge to the profits of the company. 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. According to the accounting standards prescribed by ICAI, a company may charge additional depreciation to the profits of the company by debiting it to the profit and loss account without any further adjustment or alternatively, the company while debiting the additional depreciation to the profit and loss account may also credit the amount equal to that amount of additional depreciation to the profit and loss account after passing a corresponding debit to asset revaluation reserve account which has already been created by the company at the time of revaluation of assets, so that the diminishing effect on the profit is neutralised.
16. The Tribunal further held that it being an extraordinary item not compulsorily forming part of profit and loss account of the assessee, the assessing officer was justified in disallowing the additional depreciation on account of revaluation, in computing the book profit of the assessee-company. The Tribunal upheld the action of the assessing officer in not allowing the assessee-company to claim more amount of losses.
17. The present case is also similar to the above case, but on the reverse side. In the case considered by the Tribunal that of Vijay Spg.
Mills Ltd. (supra), the assessee was debiting the additional expenditure. In the present case, the assessee has credited the additional income just like the case of Vijay Spg. Mills Ltd. (supra).
The revaluation of future liability was made by the assessee-company at its own option and not by any compulsion of law. In the case of Vijay Spg. Milb Ltd. (supra), it was the case of revaluation of assets. In the present case, it is a case of revaluation of future liabilities.
The surplus arising out of revaluation of the future liability is an accounting profit in the hands of the assessee-company and does not form part of the profit and loss account by dictum of the Companies Act. Therefore, such an entry passed by the assessee-company in its profit and loss account should not be permitted to artificially boost the income of the assessee for the purpose of Section 115JA. Such extraordinary item reflected in the profit and loss account, as a result of accounting policies followed by the assessee-company, has to be excluded in computing the real book profit in accordance with the Schedule VI of the Companies Act.
18. Therefore, in the facts and circumstances of the case and in the light of the above decisions, we hold that the assessee was justified in excluding the amount of Rs. 2,84,76,657 from the computation of book profits for the purpose of Section 115JA.19. We may also state here that the other decisions of the Supreme Court relied on by the learned Commissioner, especially the case of Chowrangi Sales Bureau (P) Ltd. (supra) do not match with the issue involved in the present case.