ACIT CIRCLE 3(2)(1), MUMBAI vs. SOL ENTERTAINMENT PRIVATE LIMITED, MUMBAI

The present appeal of the Revenue concerns only the third issue relating to computation of book profit under section 115JB.

During the course of assessment proceedings, the Assessing Officer observed that the assessee had adjusted accumulated losses against revaluation reserve and share premium. The Assessing Particulars March-2012 March-2013 Opening balance Rs.13,77,296 (-) Rs.2,35,23,919 Add: Profit/(Loss) for the year (-) Rs.2,49,01,214 (-) Rs.1,40,97,605 Net surplus/(deficit) (-) Rs.2,35,23,919 (-) Rs.3,76,21,524 Add: Revaluation reserve — Rs.4,52,00,000 Add: Share premium — Rs.2,39,55,000 Balance (-) Rs.2,35,23,919 Rs.3,15,33,476

The Assessing Officer held that the assessee had shown positive financial status by recognizing revaluation reserve and share premium but had not added the same back while computing book profit under section 115JB. Accordingly, relying on the decision of the Hon’ble Supreme Court in Indo Rama Synthetics (India) Ltd. v. CIT (2011) 333 ITR 18 (SC), the Assessing Officer recomputed book profit as under:

Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). With regard to the addition under section 115JB, the assessee submitted that the revaluation reserve was created by recognizing a corresponding intangible asset on the asset side of the balance sheet and the reserve was created directly in the balance sheet without routing the entry through the profit and loss account. It was contended that under Explanation 1(b) to section

The assessee placed reliance on the judgment of the Hon’ble Supreme Court in National Hydroelectric Power Corporation Ltd. v. CIT (2010) 320 ITR 374 (SC) and the decision of the Co-ordinate Mumbai Bench in case of ITO v. United Estate Pvt. Ltd. in ITA No. 6049/MUM/2010.

The CIT(A) examined the financial statements and the provisions of Explanation 1 to section 115JB and observed that the revaluation reserve had not been debited to the profit and loss account. Therefore, the condition prescribed under clause (b) of Explanation 1 to section 115JB was not satisfied.

The CIT(A) therefore held that the addition made by the Assessing Officer was not sustainable and deleted the addition of Rs. 4,52,00,000/-.

During the course of hearing before us, the learned Departmental Representative (DR) relied upon the assessment order and submitted that the assessee had improved its financial position by recognizing revaluation reserve and share premium and therefore the same ought to have been added back while computing book profit under section 115JB. The learned DR invited our attention to the relevant portion of the assessment order and submitted that the Assessing Officer had correctly recomputed the book profit relying upon the judgment of the Hon’ble Supreme Court in Indo Rama Synthetics (India) Ltd.

The accountant of the assessee appeared; however, no submissions on merits were advanced on behalf of the assessee.

Explanation 1(b) to section 115JB provides that the net profit as per the profit and loss account shall be increased by the amount carried to any reserve by whatever name called. However, the Hon’ble Supreme Court in National Hydroelectric Power Corporation Ltd. v. CIT (supra) has held that two conditions must be satisfied before invoking clause (b):

In the present case, the material on record clearly shows that the revaluation reserve was created by recognising a corresponding intangible asset on the asset side of the balance sheet and the entry was not routed through the profit and loss account. Therefore, the creation of revaluation reserve did not have the effect of reducing the net profit shown in the profit and loss account.

A similar view has been taken by the coordinate bench in case of ITO v. United Estate Pvt. Ltd. (supra)wherein it was held that where a reserve is created directly through balance sheet adjustment without routing the entry through the profit and loss account, the same cannot be added back while computing book profit under section 115JB.

The Assessing Officer has placed reliance on the judgment of the Hon’ble Supreme Court in Indo Rama Synthetics (I) Ltd. v.

In the present case, the controversy does not arise in the context examined by the Hon’ble Supreme Court in the aforesaid decision. The issue here relates to the treatment of reserve which has not been routed through the profit and loss account and has not impacted the net profit. Therefore, the factual and legal context in which the Hon’ble Supreme Court rendered the decision in Indo Rama Synthetics (I) Ltd. (supra) is materially different, and the said judgment does not advance the case of the Revenue in the present proceedings.

It is also relevant to note the principle laid down by the Hon’ble Supreme Court in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) wherein it was held that the Assessing Officer cannot disturb the profit shown in the profit and loss account prepared in accordance with the Companies Act except to the extent specifically provided in the Explanation to section 115JB.

In view of the above discussion and respectfully following the judgment of the Hon’ble Supreme Court in National Hydroelectric Power Corporation Ltd. (supra) as well as the decision of the coordinate bench in United Estate Pvt. Ltd. (supra), we find no infirmity in the order of the learned CIT(A) in deleting the addition of Rs. 4,52,00,000/- made by the Assessing Officer while computing book profit under section 115JB.

In the result, the appeal of the Revenue is dismissed.