REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.                OF 2011 (arising out of S.L.P. (C) No. 35133 of 2009)

Indo Rama Synthetics (I) Ltd. …  Appellant(s)

         versus

C.I.T., New Delhi.          …  Respondent(s)

J U D G M E N T

S.H. KAPADIA, CJI

1. Leave granted.

Facts

2. Assessee is a widely held quoted limited company and  

is  engaged  in  the  business  of  manufacture  of  yarn  and  

polyester.

3. During the previous year ending 31.3.2000 relevant to  

the  assessment  year  2000-01,  fixed  assets  were  revalued  

resulting in increase in the net book value of such assets by  

Rs.288,58,19,000/-,  which  was  credited  to  the  revaluation

reserve.   Consequently,  the  balance  sheet  for  the  preceding  

assessment  year,  resulted  in  enhancement  of  cost  of  fixed  

assets  by  the  said  amount  with  corresponding  credit  to  

revaluation reserve.

4. For  the  previous year  ending 31.3.2001,  relevant  to  

the assessment year 2001-02, the P & L Account showed the  

charge  of  depreciation  at  Rs.127,57,06,000/-  which  was  

reduced by transfer from revaluation reserve to the extent of  

Rs.26,11,74,000/-  resulting  in  a  net  debit  on  account  of  

depreciation  of  Rs.101,45,32,000/-.   The  A.O.,  while  

computing the book profit under Section 115JB of the Act, did  

not  allow  reduction  of  the  afore-stated  amount  of  

Rs.26,11,74,000/- on the ground that the revaluation reserve  

stood created in the assessment year 2000-01 and had not  

been added back while computing the book profit in that year  

in terms of the proviso to clause (i) of explanation to Section  

115JB.  This order was upheld by the C.I.T. (A) and by the  

ITAT and by the High Court, hence, this civil appeal is filed by  

the assessee.

5. In  the  present  case,  the  controversy  is  whether  the  

amount transferred from the revaluation reserve and set off  

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against the amount of depreciation debited to P & L Account  

can be excluded in terms of clause (i) of explanation to Section  

115JB(2) read with the proviso.

Case of the Assessee

6. It is the case of the assessee that the main provision of  

clause (i) seeks to exclude from the net profit, as per P & L  

Account,  any  amount  withdrawn  from  any  reserves  and  

credited to  P & L Account.   According to  the  assessee,  the  

proviso introduces a caveat by providing that such exclusion  

can be made only in circumstances where the book profit of  

the  year  in  which  the  reserve  is  created  (out  of  which  the  

withdrawal has been made in the subsequent years) has been  

increased to the extent of such reserve.  Thus, according to the  

assessee, the said proviso has no application to cases like the  

present  one  because  in  this  case  the  revaluation reserve is  

created,  inter  alia,  for  revaluation  of  assets,  which  are  

ordinarily stated in the balance sheet at the historical cost of  

acquisition  by  debiting  the  value  of  the  fixed  assets  to  the  

extent  of  revaluation  with  corresponding  credit  to  the  

revaluation reserve.  Such creation of the revaluation reserve  

does not impact the P & L Account in the year of creation of  

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such reserves.  That,  such revaluation reserve is not a free  

reserve.  It is not available for distribution of profits.  Unlike  

revenue  reserves,  a  “revaluation  reserve”  is  not  an  

Appropriation of Profits and the same is not debited by way of  

debit entry through the P & L Account.  That, a revaluation  

reserve is in the nature of adjustment entry to balance both  

sides of the balance sheet.  That, the treatment of revaluation  

reserve is governed by the Accounting Standards 10 and 6 and  

the  Guidance  Note  on  Treatment  of  Reserves  Created  on  

Revaluation  of  Fixed  Assets  issued  by  the  Institute  of  

Chartered Accountants of India (ICAI).   That, in the year in  

which the revaluation reserve is created, the amount of such  

reserve is not debited to P & L Account and is credited directly  

to a revaluation reserve as provided by ICAI and, thus, the  

profit as reflected in the P & L Account is not depressed by the  

creation of the reserve and, is, therefore, effectively increased  

to that extent.  Thus, there is no question of increasing the  

amount shown in the P & L Account further by the revaluation  

amount as per Section 115JB, as the profit has, in any case,  

not been reduced by such an amount in the first place.  That,  

since in the year of creation of reserves the book profit suffers  

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full tax, without the same being affected by creation of such  

revaluation reserves, in the year of  withdrawal,  the amount  

withdrawn would be liable to be reduced while computing the  

book profit.   It  cannot be said that even if  the entire  book  

profit has suffered tax in the year of creation of reserve, the  

revaluation  reserve  created  in  that  year  should  artificially  

again be added back for computing such book profit.  That, by  

the Finance Act, 2007, w.e.f. 1.4.2007, clause (iia) is inserted  

in Section 115JB under which the depreciation on historical  

cost alone would be taken into account while calculating the  

book profit.  In other words, depreciation attributable to the  

revaluation  of  the  fixed  assets  to  be  debited  to  the  P  &  L  

Account cannot be taken into account to calculate book profit  

w.e.f. the assessment year 2007-08.

Relevant Provisions

7. We  quote  hereinbelow  the  relevant  provisions  of  

Section 115JB, which reads as under:

Special  provision  for  payment  of  tax  by  certain companies. 115JB. (1)  Notwithstanding  anything  contained in any other  provision of  this  Act,  where  in  the  case  of  an  assessee,  being  a  company, the income-tax, payable on the total  

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income as computed under this Act in respect  of  any  previous  year  relevant  to  the  assessment year commencing on or after the  1st day of April, 2001, is less than seven and  one-half per cent of its book profit, such book  profit shall be deemed to be the total income of  the  assessee  and  the  tax  payable  by  the  assessee  on  such  total  income  shall  be  the  amount of income-tax at the rate of seven and  one-half per cent.

(2) Every assessee, being a company, shall, for  the purposes of this section, prepare its profit  and loss account for the relevant previous year  in accordance with the provisions of  Parts II  and III of Schedule VI to the Companies Act,  1956 (1 of 1956) :

Provided that  while  preparing  the  annual  accounts including profit and loss account,—

(i) the accounting policies; (ii) the  accounting  standards  adopted  

for  preparing  such  accounts  including  profit  and loss account;

(iii) the  method  and  rates  adopted  for  calculating the depreciation, shall be the same as have been adopted for the  purpose of preparing such accounts including  profit  and  loss  account  and  laid  before  the  company  at  its  annual  general  meeting  in  accordance with the provisions of section 210  of the Companies Act, 1956 (1 of 1956) :

Explanation.—For the purposes of this section,  “book profit” means the net profit as shown in  the  profit  and  loss  account  for  the  relevant  previous year prepared under sub-section (2),  as increased by—

(b)the amounts carried to any reserves,

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by  whatever  name  called,  other  than  a  reserve  specified  under  section  33AC; or

if any amount referred to in clauses (a) to (f) is  debited to the profit and loss account, and as  reduced by—

(i) the  amount  withdrawn  from  any  reserve or  provision  (excluding  a  reserve  created  before  the  1st  day  of  April,  1997  otherwise than by way of a debit to the profit  and  loss  account),  if  any  such  amount  is  credited to the profit and loss account:

Provided that where this section is applicable  to  an  assessee  in  any  previous  year,  the  amount  withdrawn  from  reserves  created or  provisions made in a previous year relevant to  the assessment year commencing on or after  the 1st day of April, 1997 shall not be reduced  from the book profit unless the book profit of  such  year  has  been  increased  by  those  reserves or provisions (out of  which the said  amount  was  withdrawn)  under  this  Explanation or Explanation below the second  proviso to section 115JA, as the case may be;

8. Before answering the submissions advanced on behalf  

of  the  assessee,  we  wish  to  explain  the  history  of  MAT  

provisions, which is as follows:

History of MAT Provisions

9.    MAT is applicable only where the normal total income  

computed is less than 30% of the book profit.

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10. MAT was introduced by the Finance Act of 1996 w.e.f.  

1.4.1997.  This was necessary due to a rise in the number of  

zero-tax companies paying marginal tax which situation arose  

in  view  of  preferences  granted  in  the  form  of  exemptions,  

deductions  and  high  rates  of  depreciation.   The  rate  of  

minimum tax was kept at 30% of the book profit as deemed  

total  income.   MAT  was  levied  under  Section  115JA  from  

assessment year 1997-98.  Section 115JA is made inoperative  

w.e.f. 1.4.2001.  In its place, the Finance Act, 2000 inserted  

Section 115JB.  The new provision provides that all companies  

having book profit under the Companies Act, shall be liable to  

pay  MAT  at  a  specified  rate  of  the  book  profit.   It  further  

provides  that  every  MAT  company  shall  follow  same  

accounting  policies  and  standards  as  are  followed  for  

preparing its statutory account.

11. For the purposes of the afore-stated provision, “book  

profit” means the net profit as shown in the P & L Account in  

the relevant previous year in accordance with the provisions of  

Part II and Part III of the Schedule VI to the Companies Act,  

subject to certain adjustments which increases or decreases  

the  book  profit.   Thus,  even  under  Section  115J,  certain  

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adjustments were to be made to the net profits as shown in  

the P & L Account.  One such adjustment stipulates that the  

net profit shall be decreased by the amount withdrawn from  

any reserves,  if  any such amount  is  credited  to  the  P & L  

Account.  Some companies have taken advantage of Section  

115J by decreasing their net profit by the amount withdrawn  

from the reserve created in the same year itself,  though the  

reserve when created had not gone to increase the book profit.  

Such adjustments led to lowering of profits and, consequently,  

the quantum of tax payable got reduced.  Thus, by amending  

Section 115J, it was provided that “book profit” will be allowed  

to be decreased by the amount withdrawn from any reserves  

only in two cases:

(i) if  such  reserve  has  been  created  in  the  previous  

year relevant to the assessment year commencing  

w.e.f. 1.4.1998

OR

(ii) if  the reserve so created in the previous year has  

gone to increase the book profit in any year when  

Section 115J was applicable.

12. The Finance Act, 2002 now specifically provides vide  

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Section 115JB that the amounts withdrawn from any reserves,  

if  credited to the P & L Account, shall be reduced from the  

book profit.  It also provides that any amount withdrawn from  

such  reserves  created  on  or  after  1.4.1997  and  which  is  

credited to P & L Account shall not be reduced from the book  

profit, unless the book profit in the year of creation of such  

reserves stood increased by the amount transferred to such  

reserves at that time.  

Scope of Section 115JB

13. The  expression  “book  profit”  for  the  purposes  of  

Section 115JB has been defined in the explanation to Section  

115JB(2) to mean: –  

the net profit as shown in the P & L Account for the  

relevant previous year  prepared under  Section  115JB(2),  as  

increased by the amount(s) mentioned in clauses (a) to (f) and  

as reduced by the amount(s) covered by clauses (i) to (vii) of  

the said explanation.

14. It is, thus, clear that what is “book profit” has been  

defined  and  explained  in  the  above  explanation.   Section  

115JB is  a  self-contained  code.   It  applies  notwithstanding  

other  provisions  of  the  Act.   There  is  no  scope  for  any  

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allowances or deductions under any other section from what is  

deemed to be total income of the company (assessee).

15. The first step for arriving at the “book profit” is that  

the net profit as shown in the P & L Account for the relevant  

previous  year  prepared  under  Section  115JB(2)  has  to  be  

increased  by  the  amount(s)  in  clauses  (a)  to  (f)  if  such  

amount(s) is debited to the P & L Account.  Clause (b) refers to  

amount(s)  carried to any reserves by whatever  name called.  

As stated above, such increase needs to be made only if any  

amount referred to in clauses (a)  to  (f)  is  debited to P & L  

Account.

16. The second step for arriving at the “book profit” is that  

the net profit as shown in the P & L Account for the relevant  

previous  year  prepared  under  Section  115JB(2)  and  as  

increased by any amount, as stated above, has to be reduced  

by the amount(s) in clauses (i) to (vii).   

17. For the purposes of deciding this case it may be noted  

that we are concerned with clause (i) which inter alia refers to  

an  amount(s)  withdrawn  from  any  reserves  if  any  such  

amount(s) is credited to P & L Account.  During the relevant  

assessment  year,  clause  (i)  had  an  exception  to  such  

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exclusion.  That exception was in the form of a proviso which  

inter  alia  stated  that  the  exclusion  in  clause  (i)  to  the  

explanation will not apply “to the amount(s) withdrawn from  

reserves created in a previous year relevant to the assessment  

year 1997-98 or any subsequent assessment year unless the  

book profit of such year stood increased by those reserves (out  

of which the said amount(s) stood withdrawn)”.

18. Thus, the book profits calculation would be as under:

Take profit as per P & L Account xx Add: (if debited to P & L Account) (a) Income tax paid/ payable & provision xx (b) Any transfer for reserves xx (c) Unascertained liabilities (contingent) xx (d) Provision for losses of subsidiaries xx (e) Dividend paid/ proposed xx (f) Expenses relating to exempt income under sections       10, 10A, 10B, 11, 12

xx

Less: (if credited to P & L Account) (i) Withdrawal from reserves or provisions subject to       proviso

xx

Q.: Could  Rs.26,11,74,000/-,  being  the  differential  

depreciation recouped from the revaluation reserves created  

during  the  earlier  assessment  year  2000-01,  be  said  to  be  

credited in the P & L Account during the assessment year in  

question in terms of clause (i)  to the explanation to Section  

115JB(2)?

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19. The brief facts apropos this issue are that the assessee  

had revalued its fixed assets as on 31st March, 2000 and the  

resultant surplus of  Rs.288,58,19,000/-  stood added to the  

cost of the assets on the asset side of the balance sheet and to  

equalize  both  sides  thereof  the  revaluation  reserve  of  an  

equivalent  amount  was  created  on  the  liability  side  of  the  

balance  sheet.  Thus,  the  said  reserve  was  merely  an  

adjustment entry.   The figure  of  profit  remained untouched  

during the assessment year 2000-01 so far as the revaluation  

of  assets to the tune of  Rs.288,58,19,000/- was concerned.  

During  the  assessment  year  2001-02,  an  amount  of  

Rs.26,11,74,000/-,  being  the  differential  depreciation,  was  

transferred  out  of  the  said  revaluation  reserve  of  

Rs.288,58,19,000/- and credited to the P & L Account which  

the  AO  disallowed  and  consequently  the  said  sum  of  

Rs.26,11,74,000/- stood added back to the net profits. Hence,  

this civil appeal is filed by the assessee.

20. Book profit  is  not  defined in  the  Act.   It  is  income  

computed  under  the  company  law.   By  virtue  of  the  MAT  

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provisions, in the case of a company whose total income as  

computed under the normal provisions of the Act is less than  

30% of the book profit, the total income chargeable to tax will  

be 30% of the book profit as computed.  For the purposes of  

Section 115J, book profit will be the net profit as shown in the  

P & L Account prepared in accordance with the provisions of  

Schedule  VI  to  Companies  Act,  1956  after  certain  

adjustments.  The net profit will be increased by income tax  

paid  or  payable,  amount  carried  to  any  reserve,  provision  

made for liabilities etc. provided the amount(s)  is debited to  

the P & L Account.  The amount so arrived at is to be reduced  

by  item  (i)  to  item (vii)  including  amounts  withdrawn  from  

reserves, if  any such amount is credited to P & L Account.  

Clauses  (i)  to  (vii)  of  the  explanation  to  Section  115JB(2)  

represent items of  reduction from the net  profits.  Clause (i)  

mandates  reduction  for  the  amount(s)  withdrawn  from  the  

reserves earlier created, provided such amount(s) is credited to  

P  &  L  Account.  Such  credit  is  mandated  so  that  the  true  

working result gets reflected in the financial statement of the  

assessee-company. The said clause (i) contemplates only those  

reserves which actually affect the net profits as shown in the  

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P & L Account (see also clause (ii) for comparison).  The object  

of  various  clauses  (i)  to  clause  (vii)  is  to  find  out  the  true  

working result of the assessee-company.

21. In the present case, the adjustment made in the P & L  

Account was as per Accounting Standards 6 and 10 read with  

Guidance Note issued by Institute of Chartered Accountants of  

India  which  is  in  conformity  with  Section  211  of  the  

Companies  Act.  The  said  adjustment  was  primarily  in  the  

nature of contra adjustment in the P & L Account and not a  

case of effective credit in the P & L Account (as contemplated  

in clause (i) of explanation). The credit in the P & L Account  

implies  that  the  P & L Account  per  se  has been effectively  

credited  by  the  said  amount.  Thus,  the  amount  withdrawn  

from any reserve must in effect impact the net profit as shown  

in the P & L Account. As per accounting principles, the contra  

adjustment  does  not  at  all  affect  any  particular  account  to  

which it has been carried. Unless an adjustment has the effect  

of increasing the net profit as shown in the P & L Account,  

that entry cannot be said to be a credit to the P & L Account  

and, therefore, though the amount has been literally credited  

to the P & L Account, however, in substance there is no credit  

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to P & L Account.  MAT provisions were introduced as number  

of zero tax companies had grown. It was found that companies  

had  earned  substantial  book  profits  and  had  paid  huge  

dividends  but  paid  no  tax.  In  the  present  case,  had  the  

assessee deducted the full depreciation from the profit before  

depreciation during the accounting year ending 31.3.2001, it  

would have shown a loss and in which event it could not have  

paid the dividends and, therefore,  the assessee credited the  

amount to the extent of the additional depreciation from the  

revaluation reserve to present a more healthy balance sheet to  

its shareholders enabling the assessee possibly to pay out a  

good dividend. It is precisely to tax these kinds of companies  

that MAT provisions had been introduced. The object of MAT  

provisions is to bring out the real profit of the companies. The  

thrust is to find out the real working results of the company.  

Thus, the reduction sought by the assessee under clause (i) to  

the explanation to Section 115JB(2) in respect of depreciation  

has been rightly rejected by the AO.

22. Take the facts of the present case. As stated above, the  

revaluation reserve of Rs.288,58,19,000/- was created during  

earlier assessment year 2000-01. During the accounting year  

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ending  31.3.2001  (assessment  year  2001-02),  the  profits  of  

assessee  stood  at  Rs.120,18,97,000/-  whereas  depreciation  

stood at Rs.127,57,06,000/-. Depreciation is a no-cash charge  

against  the  profits.  Thus,  company  had  a  loss  of  

Rs.7,38,09,000/-  (i.e.  Rs.127,57,06,000/-  of  depreciation as  

against  profit  of Rs.120,18,97,000/-).  However,  by  

withdrawing  Rs.26,11,74,000/-,  being  the  differential  

depreciation,  from  the  revaluation  reserve  of  

Rs.288,58,19,000/-(which is only a notional adjustment entry  

to balance both sides of  the balance sheet)  and reducing it  

from  the  depreciation  of  Rs.127,57,06,000/-,  the  assessee  

artificially  brings  down  the  depreciation  only  to  

Rs.101,45,32,000/- which is then deducted from the profits  

before depreciation amounting to Rs.120,18,97,000/- so that  

there is a profit of Rs.18,73,65,000/-. This is how the loss of  

Rs.7,38,09,000 got  converted to profit  of  Rs.18,73,65,000/-.  

Thus, the financial statement for the year ending 31.3.2001 is  

made to look healthy.

23. The reasons given hereinabove are in addition to the  

reasons  given  by  the  Authorities  below  while  rejecting  the  

claim of the assessee.

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24. The matter could be examined from another angle.  To  

recapitulate  the facts,  the fixed assets  of  the assessee were  

revalued in the earlier assessment year 2000-01 (i.e. financial  

year  ending  31.3.2000)  and  amount  of  enhancement  in  

valuation was Rs.288,58,19,000/- which was credited to the  

revaluation reserve.  In other words, at the time of revaluation  

of assets, the said figure of Rs.288,58,19,000/- was added to  

the historical cost of assets on the asset side of the balance  

sheet and in order to equalize both sides of the balance sheet  

the  revaluation  reserve  to  that  extent  was  created  on  the  

liability side.  Thus, the figure of profit remained untouched so  

far  as  the  revaluation  of  assets  to  the  tune  of  

Rs.288,58,19,000/-  is  concerned.   The  profits  were  not  

increased by the said amount when the asset was revalued.  

During the assessment year in question, i.e., assessment year  

2001-02,  an  amount  of  Rs.26,11,74,000/-,  being  the  

differential  depreciation,  was  transferred  out  of  the  said  

revaluation reserve of Rs.288,58,19,000/- and credited to the  

P & L Account which the A.O. disallowed by placing reliance  

on  the  proviso  to  clause  (i)  of  the  explanation  to  Section  

115JB(2).   Consequently,  the  A.O.  added  back  the  said  

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amount of Rs.26,11,74,000/- to the net profits.  We agree with  

the A.O.  Under the provisions, as they then existed, certain  

adjustments  were  required  to  be  made  to  the  net  profit  as  

shown in the P & L Account.  One such adjustment stipulated  

that  the  net  profit  shall  be  reduced  by  the  amount(s)  

withdrawn from any reserves, if any such amount is credited  

to the P & L Account.  Thus, if the reserves created had gone  

to increase the book profits in any year when the provisions of  

Section 115JB were applicable, the assessee became entitled  

to reduce the amount withdrawn from such reserves if such  

withdrawal is credited to P & L Account.  Now, from the above  

facts,  it  is  clear  that  neither  the  said  amount  of  

Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to  

increase the book profits in the said year ending 31.3.2000  

(being the financial year).  Thus, when such amount(s) has not  

gone  to  increase  the  book  value  at  the  time  of  creation  of  

reserve(s),  there  is  no  question  of  reducing  the  amount  

transferred  from  such  revaluation  reserves  to  the  P  &  L  

Account.  Thus, the proviso to clause (i) of the explanation to  

Section 115JB(2) comes in the way of the claim for reduction  

made by the assessee.  In our view, the reduction under clause  

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(i)  to  the  explanation  could  have  been availed  only  if  such  

revaluation reserve had gone to increase the book profits.  As  

the amount of revaluation reserves had not gone to increase  

the  book  profits  at  the  time  it  was  created,  the  benefit  of  

reduction  cannot  be  allowed.    One  more  fact  needs  to  be  

highlighted.   In this case, as indicated above, the revaluation  

reserve  stood  created  during  the  earlier  assessment  year  

2000-01.    It  has been vehemently argued on behalf  of  the  

assessee  that  creation  of  such  reserve  did  not  impact  the  

profits of that year.  The facts enumerated hereinabove shows  

that though the profit was not impacted, depreciation as the  

head of A/c. was impacted.  By inter play of the balance sheet  

items with Profit  & Loss A/c.  items the assessee,  as stated  

above, has sought to project the loss of Rs.7,38,09,000/- as  

profit of Rs.18,73,65,000/-.

Conclusion

25. For  above  reasons,  we  see  no  reason  to  interfere,  

hence,  the  civil  appeal  filed  by  the  assessee  shall  stand  

dismissed with no order as to costs.

………..……………………….CJI

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          (S. H. Kapadia)

……..……………………………..J.             (K.S. Panicker Radhakrishnan)

……..……………………………..J.            (Swatanter Kumar)

New Delhi;  January 5, 2011

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