| SooperKanoon Citation | sooperkanoon.com/70403 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | Feb-05-1999 |
| Judge | B Kothari, R Tolani |
| Reported in | (2000)72ITD68(Delhi) |
| Appellant | Punjab Fibres Ltd. |
| Respondent | Deputy Commissioner of Income Tax |
(2) As such subsidy does not reduce the cost of the assets and the claim of depreciation is liable to be fully allowed.
(3) The CIT(A), Chandigarh, has erred in confirming the disallowance of depreciation amounting to Rs. 72,94,362 on enhanced value of assets due to revaluation, provided in P&L a/c for determining the book profit under s. 115J of IT Act, 1961. Reserve created on revaluation of fixed assets is not the dividend. The CIT(A) failed to appreciate provisions of the Companies Act, 1956, with regard to the disclosure in the accounts. The P&L a/c for the year was prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956, and depreciation is liable to be allowed in full.
(4) Claim of depreciation on revalued assets is liable to be allowed in full while working out profits under s. 115J of the IT Act, 1961." 2. Ground Nos. 1 and 2 were not pressed by the learned counsel appearing on behalf of the assessee. Hence ground Nos. 1 and 2 are rejected as not pressed.
3. As regards ground Nos. 3 and 4, the learned counsel for the assessee drew our attention towards the elaborate facts mentioned in para 10 of the assessment order. He also invited our attention towards the extracts of notes on accounts relevant to revaluation of fixed assets and method of computing depreciation, in Sch. 21 to balance sheet as on 31st March, 1989, a copy whereof has been placed at p. 13 of the paper book. The learned counsel contended that the various fixed assets were revalued on the basis of valuation report submitted to the AO. The depreciation according to straight line method has been charged on the revalued amount of the gross block of assets. It was pointed out that such a course of action is clearly permissible under the provisions of Companies Act and is not prohibited by any of the sub-sections of s.
115J of IT Act, 1961. The learned counsel submitted that the consequent to revaluation of the plant and machinery and the land and buildings, the enhancement in the value of asset was debited in the account of respective fixed assets and the corresponding credit was given to capital revaluation reserve account. No amount was transferred to reserve account by debiting the P&L a/c of the year under consideration. Copies of the relevant entries were also submitted in the compilation. He contended that the rates of depreciation prescribed in Sch. XIV inserted by Companies (Amendment) Act, 1988, in the Companies Act, 1956, provide for minimum rate of depreciation. It does not prohibit writing off depreciation on the revalued cost of assets.
He invited our attention towards various Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) from time to time which clearly provides that where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. It was also pointed out that revaluation reserve is not available for payment of dividends. This view is supported by the Companies (Declaration of Dividend out of Reserve) Rules, 1975. The learned counsel also invited our attention towards requirement of Part II and Part III of Sch. VI of Companies Act with a view to show that such depreciation written off by the assessee is in conformity with the requirements of Sch. VI of Companies Act. The learned counsel also placed reliance on judgments Sutlej Cotton Mills Ltd. vs. Asstt. CIT (1993) 199 ITR 164 (AT), Modern Woollens Ltd. vs. Dy. CIT (1993) 47 ITD 154 (Bom), SRF Ltd. vs. Asstt. CIT (1993) 47 ITD 504 (Del) to support his contention that the various Accounting Standards and the Guidance Notes on Accounting issued by the ICAI have been recognised by the Courts. He also placed reliance on judgment in CWT vs. Hashmatunnisha Begum (1989) 176 ITR 98 (SC) and contended that a liberal interpretation should be made in the case of doubt as to interpretation of a provision of law capable of more than one view. The learned counsel thus strongly urged that the AO has grossly erred in adding back alleged excess depreciation of Rs. 72,94,362 for computing the book of profits under s. 115J of IT Act, 1961. The AO should be directed to delete the same for the purposes of computing book profit liable to tax in accordance with s. 115J.4. The learned Senior Departmental Representative strongly supported the order of the CIT(A) and relied upon the reasons recorded in the order of the AO. He submitted that depreciation is allowable on "actual cost". The concept of actual cost cannot be given a go-by for purposes of computing minimum book profit liable to tax as per s. 115J of the Act. He submitted that for a proper interpretation of s. 115J, one should look to the object for which the relevant provision was inserted. The provision of s. 115J was introduced with a view to ensure that all profit making companies should contribute some amount to the state exchequer, which otherwise reduced their taxable income to zero by virtue of various deductions admissible under the provisions of IT Act. It was, therefore, provided that if the normal income computed as per the provisions of IT Act, is less than 30 per cent of its book profit, the total income of such companies chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 per cent of such book profit. The said provisions were introduced w.e.f.
asst. yr. 1988-89. The assessee-company, when it found that it is liable to pay tax under s. 115J, it enhanced the value of its fixed assets and debited higher amount of depreciation in its books of accounts on the revalued value of such assets. Such a course of action was adopted by the assessee for reducing the tax leviable under s.
115J. He drew our attention towards the report of the registered valuer placed at p. 4 of the paper book with a view to show that the purposes for which the valuation was got made has been described by the registered valuer as "income-tax". This clearly shows that the object of revaluation of assets was to reduce the tax payable under s. 115J.He also invited our attention towards schedule of fixed assets to show that the plant & machinery valued at Rs. 3,75,09,345 as on 1st July, 1987, have been enhanced as a result of revaluation by a sum of Rs. 3,47,42,985. The value of the plant and machinery has been revalued by almost 100 per cent. This is clearly a device adopted by the assessee for reducing the tax liability under s. 115J. He thus strongly supported the order of the CIT(A).
5. We have carefully considered the submissions made by the learned representatives of the parties. The assessee had duly submitted the entire relevant facts along with audited statements before the AO. The copy of relevant Notes on Account submitted at p. 13 of the paper book is reproduced hereunder : "Extract of Notes on Accounts relevant to revaluation of fixed assets and method of computing depreciation, in Sch. 21 to balance sheet as on 31st March 1989.
09. During the current period, plant and machinery including electric fittings at site situated at village Rail Majra purchased/commissioned upto 1st July, 1987 have been revalued vide valuer's report dt. 1st January, 1989, at the market price prevailing as on 1st July, 1987. Consequent to revaluation the gross block has increased by Rs. 3,48,07,244. The depreciation of Rs. 68,84,987 on straight line method has been charged on the increased gross block and debited directly to the P&L a/c.
As the valuer's report was adopted by the company later on, the same could not be reflected in the accounts finalised on 31st December, 1988.
11. Depreciation on assets has been calculated for the period on straight line basis of the rates specified in Sch. XIV (inserted by Companies Amendment Act, 1988) in the Companies Act, 1956 instead of the rates hitherto followed by the Company.
19. During the year 1984-85, the company revalued land and buildings of its works at Rail Majra. As a result of revaluation the gross block was increased by Rs. 1,10,49,357 and after charging depreciation of Rs. 1,14,818 on the revalued assets, a sum of Rs. 1,09,34,539 was transferred to Capital Revaluation Reserve Account on 30th June, 1985. During the period an additional sum of Rs. 4,09,375 debited to P&L a/c (previous) year Rs. 1,14,818 debited to Capital Revaluation Reserve Account." 6. The AO has not disputed the quantum of revaluation of assets made by the appellant company nor they have rejected the report of the registered valuer submitted by the assessee in support of such revaluation of assets. The manner and mode of writing off the depreciation on such revalued assets has been explained in various Guidance Notes on Accounting issued by the ICAI. It may be relevant here to reproduce the extracts from some of the Accounting Standards on Depreciation Accounting issued by the ICAI from time to time : "27. Where the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out." 7. Some contents were repeated in [(AS)-6 (1997 Edition)]. Copy placed at p. 25-A of the paper book.
8. Extracts from Guidance Note on Treatment of Reserve created on Revaluation of Fixed Assets from Compendium of Guidance Note (Vol. 1, 2nd Edition) issued by the ICAI. "11. The revaluation reserve is not available for payment of dividends. This view is also supported by the Companies (Declaration of Dividend out of Reserves) Rules, 1975 ....
12. The revaluation of fixed assets is normally done in order to bring into books the replacement cost of such assets. This is a healthy trend as it recognises the importance of retaining sufficient funds through additional depreciation in the business for replacement of fixed assets. As such, it will be prudent not to charge the additional depreciation against revaluation reserve, though this may result in reduction of distributable profits. This practice would also give a more realistic appraisal of the company's operations in an inflationary situation." 9. It is clear from the aforesaid Accounting Standards and Guidance Notes issued by the ICAI that the amount of depreciation based on the revalued amount of asset was in conformity with the Accounting Standards and Guidance Notes issued by the ICAI.10. The provisions contained in Sch. XIV of Companies Act, 1956, inserted by the Companies (Amendment) Act, 1988 do not prohibit writing off the depreciation on the revalued amount.
11. Let us now examine whether s. 115J of IT Act, 1961, provides for disallowance of such amount of depreciation debited in the P&L a/c based on the revalued amount of the fixed assets. Sec. 115J(1A) provides that every assessee being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI of Companies act, 1956. Explanation below the said provision further provides that the book profit as shown in the P&L a/c prepared as per sub-s. (1A) will be increased by the various items enumerated in cls.
(a) to (ha). The relevant cl. (b) provides for adding back of the amount carried to any reserve. No such amount was debited in the P&L a/c while revaluing the assets. The enhancement in the value of assets was debited in the account of the respective fixed assets and the corresponding credit was made to capital revaluation reserve account.
None of the other items enumerated in cl. (a) to (ha) of the said Explanation supports disallowance of depreciation of current year written off in the P&L a/c in conformity with the provisions of the Companies Act and in accordance with the accounting standards issued by the ICAI. The AO has also not been able to point out that the P&L a/c prepared by the appellant company is not in accordance with the provisions of Parts II and III of Sch. VI of the Companies Act, 1956.
The said Expln. to s. 115J(1A) enumerated the specific items which can be disallowed while computing the books profits under s. 115J. The amount of depreciation written off by the assessee according to SLM method on revalued amount is not one of those specific items enumerated in cls. (a) to (ha) of the said Explanation.
12. The AO has referred to s. 205 of the Companies Act, 1956, which has been incorporated in sub-cl. (iv) appearing below Explanation to s.
115J(1A). The said sub-clause is reproduced hereunder : "(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of cl. (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act, 1956 (1 of 1956), are applicable." 13. The provision of s. 205(1)(b) provides that if any company has incurred any loss in any previous financial year or years, then, the amount of loss or an amount which is equal to the amount provided for depreciation for that previous year or those previous years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases, after providing for depreciation in accordance with the provisions of sub-s. (2) or against both. The aforesaid provisions clearly indicate that this applies only in cases where the past losses or past unabsorbed depreciation is required to be set off against profits of the relevant previous year. In the present case, the depreciation written off on the revalued amount relates only to the current year's depreciation and does not involve carry forward or set off of any unabsorbed loss or unabsorbed depreciation of earlier years. Therefore, the aforesaid provisions also do not in any manner support the disallowance of current year's depreciation debited in the P&L a/c for computing the book profit under s. 115J of IT Act, 1961.
14. In view of the aforesaid facts and discussion, we are of the considered opinion that the AO was not justified in adding back the amount of depreciation on revalued amount of assets. In our view, the CIT(A) ought to have deleted the said addition of Rs. 72,94,362 being the amount of depreciation on enhanced value of assets due to revaluation, provided in the books of accounts. Hence, ground Nos. 3 and 4 of assessee's appeal are allowed.