Vildirect: IncomeTax-caselaws-1999-VIL-103-ITAT-DEL

1999-VIL-103-ITAT-DEL

Equivalent Citation: ITD 072, 068, TTJ 069, 761,

Income Tax Appellate Tribunal DELHI

Date: 05.02.1999

PUNJAB FIBRES LTD.

DEPUTY COMMISSIONER OF INCOME-TAX

BENCH

Member(s) : B. M. KOTHARI., R. TOLANI.

JUDGMENT

Per B.M. Kothari, Accountant Member --- The assessee has raised the following grounds in this appeal :---

"1. The Commissioner of Income-tax (Appeals),Chandigarhhas erred in confirming the disallowance of depreciation amounting to Rs. 1,05,038 on Plant and Machinery to the extent of subsidy of Rs. 15,00,000.

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 Commissioner of Income-tax (Appeals),Chandigarhhas erred in confirming the disallowance of depreciation amounting to Rs. 72,94,362 on enhanced value of assets due to revaluation, provided in profit and loss account for determining the book profit under section 115J of Income-tax 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 profit and loss-account for the year was prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 and depreciation is liable to be allowed in full.

4. Claim of depreciation on revalued assets liable to be allowed in full while working out profits under section 115J of the Income-tax Act, 1961."

2. Ground Nos. 1 and 2 were not pressed by the ld. 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 ld. 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 Schedule 21 to Balance Sheet as on31st March, 1989, a copy whereof has been placed at page 13 of the Paper Book. The ld. counsel contended that the various fixed assets were revalued on the basis of Valuation Report submitted to the Assessing Officer. 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 section 115J of IT Act, 1961. The ld. counsel submitted that the consequent to revaluation of the Plant & Machinery and Land & 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 Profit and Loss Account 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 Schedule XIV inserted by Companies (Amendment) Act, 1988 in the Companies Act, 1956 provide for minimum rate of depreciation. It does not prohibit writing of 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 ion reserve is not avilable for payment of dividends. This view is supported by the Companies (Declaration of Dividend out of Reserve) Rules, 1975. The ld. Counsel also invited our attention towards requirement of part-II and Part-III of Schedule VI of Companies Act with a view to show that Such depreciation written off by the assessee is in conformity with the requirements of Schedule-VI of Companies Act. The ld. counsel also placed reliance on judgments reported in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 199 ITR 164 (Cal.Trib.) (SB), Modern Woollens Ltd. v. Dy. CIT [1993]47 ITD 154 (Bom.), SRF Ltd. v. Asstt. CIT [1993] 47 ITD 504 (Delhi) 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 CWT v. Hashmatunnisa Begum [1989] 176 ITR 98/42 Taxman 133 (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 ld. counsel thus strongly urged that the Assessing Officer has grossly erred in adding back alleged excess depreciation of Rs. 72,94,362 for computing the Book Profits under section 115J of Income-tax Act, 1961. The Assessing Officer should be directed to delete the same for the purposes of computing book profit liable to tax in accordance with section 115J.

4. The ld. Sr. D.R. strongly supported the order of the CIT(A) and relied upon the reasons recorded in the order of the Assessing Officer. 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 section 115J of the Act. He submitted that for a proper interpretation of section 115J, one should look to the object for which the relevant provision was inserted. The provision of section 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 Income-tax Act. It was, therefore, provided that if the normal income computed as per the provisions of Income-tax Act, is less than 30% 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% of such Book Profit. The said provisions were introduced w.e.f. assessment year 1988-89. The assessee company, when it found that it is liable to pay tax under section 115J, it enhanced the value of its fixed assets and debited higher amount of depreciation in its books of account on the revalued value of such assets. Such a course of action was adopted by the assesses for reducing the tax leviable under section 115J. He drew our attention towards the report of the registered valuer placed at page 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 section 115J. He also invited out attention toward Schedule of fixed assets to show that the Plant & Machinery valued at Rs. 3,75,09,345 as on 1-7-1987 have been enhanced as a result Of revaluation by a sum of Rs. 3,47,42,985. The value of the Plant & Machinery has been revalued by almost 100%. This is clearly a device adopted by the assessee for reducing the tax liability under section 115J. He thus strongly supported the order of the CIT (A).

5. We have carefully considered the submissions made by the ld. representatives of the parties. The assessee had duly submitted the entire relevant facts along with audited statements before the Assessing Officer. The copy of relevant Note on Account submitted at page 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 Schedule 21 to Balance Sheet as on31-3-1989.

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 dated 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 Profit & Loss Account. As the valuer's report was adopted by the company later on, the same could not be reflected in the accounts finalised on31st December, 1988.

11. Depreciation on assets has been calculated for the period on Straight Line Basis of the rates specified in Schedule 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 changing 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 30-6-1985. During the period an additional sum of Rs. 4,09,375 debited to Profit and Loss Account (Previous) year Rs. 1,14,818 debited to Capital Revaluation Reserve Account."

The Assessing Officer 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 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 :---

(AS) - 6 as on30-6-1988(Copy at page 25 of P.B.)

"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.

Some contents were repeated in (AS) - 6 (1997 Edition).

Copy placed at page 25-A of the Paper Book.

Extracts from Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets from compendium of guidence (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."

5.1 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.

5.2 The provisions contained in Schedule XIV of Companies Act, 1956 inserted by the Companies Amendment Act, 1988 does not prohibit writing of the depreciation on the revalued amount.

5.3 Let us now examine whether section 115J of Income-tax Act, 1961 provides for disallowance of such amount of depreciation debited in the Profit & Loss account based on the revalued amount of the fixed assets. Section 115(1A) provides that every assessee being a company, shall, for the purposes of this section, prepare its Profit & Loss Account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI of Companies Act, 1956. Explanation below the said provision further provides that the Book Profit as shown in the Profits & Loss Account prepared as per sub-section (1A) will be increased by the various items enumerated in clauses (a) to (ha). The relevant clause (b) provides for adding back of the amount carried to any reserve. No such amount was debited in the Profit & Loss Account 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 clauses (a) to (ha) of the said Explanation supports disallowance of depreciation of current year written off in the Profit & Loss Account in conformity with the provisions of the Companies Act and in accordance with the accounting standards issued by the ICAI. The Assessing Officer has also not been able to point out that the Profit & Loss Account prepared by the appellant company is not in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. The said Explanation to section 115J(1A) enumerated the specific items which can be disallowed while computing the books profits under section 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 clauses (a) to (ha) of the said Explanation.

5.4 The Assessing Officer has referred to section 205 of the Companies Act, 1956, which has been incorporated in sub-clause (ii) appearing below Explanation to section 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 clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956) are applicable."

5.5 The provision of section 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-section (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 years depreciation debited in the Profit & Loss Account for computing the Book Profit under, section 115J of Income-tax Act, 1961.

5.6 In view of the aforesaid facts and discussion, we are of the considered opinion that the Assessing Officer was not justified in adding back the amount of depreciation on revalued amount of assets. In our view, the CIT (Appeals) 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 Account. Hence, Ground Nos. 3 and 4 of assessee's appeal are allowed.

6. In the result, the assessee's appeal is partly allowed.

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