Section 115JB — Adjustment to book profit — Revaluation of assets sold — Whether the amount taken to balance sheet as revaluation reserve can be added to the book profit — Held, No.
Facts:
During the year the assessee sold its office premises for Rs.96 lakh. Its book value was Rs.3.29 lakh. However, the assessee revalued the said premises at Rs.97.44 lakh. The gain on revaluation of Rs.94.15 lakh was credited to revaluation reserve. Based on the revalued figure, the loss on sale of the premises was determined at Rs.1.44 lakh.
During the year the assessee had returned its income as per section 115JB. According to the AO, the revaluation of property made by the assessee was only a device to reduce the book profit. Further, he also relied on the decision of the Bombay High Court in the case of Veekaylal Investment Pvt. Ltd. (249 ITR 597). Therefore, the book profit as computed by the assessee was adjusted by him by adding the sum of Rs.92.71 lac to the book profit. On appeal, the CIT(A) following the Supreme Court decision in the case of Apollo Tyres Ltd. (255 ITR 273) allowed the appeal.
Before the Tribunal the Revenue relied on the decision of the Karnataka high Court in the case of CIT v. Brindavan Beverages Ltd., (321 ITR 197) in which case, according to the Revenue, the judgment in the case of Apollo Tyres Ltd. was considered. It also referred to the observation of the Supreme Court in the case of Motibhai Phulabhai Patel & Co. (AIR 1970 SC 829) that no rule of law should be interpreted so as to permit or encourage its circumvention. It pointed out that the assessee had not revalued all its assets and he had revalued only the immovable property, which makes it clear that the assessee had used it as a device to avoid tax.
Held:
Relying on the Supreme Court decision in the case of Apollo Tyres Ltd., the Tribunal noted that once the profit and loss accounts prepared as per Part II and Part III of the Schedule VI of the Companies Act and adopted at the Annual General Meeting of the company, the net profit disclosed in such accounts can only be adjusted for items specified in Explanation I to section 115JB(2).
In respect of the decision of the Karnataka High Court in the case of Brindavan Beverages Ltd. relied on by the Revenue, the Tribunal noted that in the said decision, the Court had only remanded the matter back to the AO and it was not held that the gain arising from the sale of the assets had to be added to the book profit.
As regards the contention of the Revenue that the assessee had adopted colourable device, hence, should be struck down applying the ratio of the Supreme Court decision in the case of McDowell & Co. (154 ITR 148), the Tribunal noted that the para 13 of the accounting standard on Fixed Assets (AS- 10) allows the assessee to revalue any property and para 13.7 of the Standard requires that increase in net book value on account of revaluation to be taken to the capital account as revaluation reserve and was not available for distribution. It also rejected the argument of the Revenue that the assessee had made selective revaluation to avoid payment of tax, since according to it, the Standard required that the whole class of assets should be revalued. And the assessee had only one immovable property which had been revalued and therefore, the entire class of immovable property got revalued in accordance with the Standard.
The Tribunal also noted that as per the provisions of Explanation 1 to section 115JB(2), the amount carried to any reserve had to be added to the net profit if the amount had been debited to the profit and loss account. In the case of the assessee, the amount had been directly taken to the balance sheet without debit to the profit and loss account. Further, the clause (iia) of Explanation 1 inserted w.e.f. 1-4- 2007 only provides for making adjustment qua the depreciation on account of revaluation of assets. It does not provide for addition of revaluation reserve to the net profit even if the same was not debited to the profit and loss account.
In view of the forgoing, the Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.
