Amount which was never routed through or debited the profit & loss account could not be considered for the purpose of determination of book profits

ITO Vs. United Estate P. Ltd. (ITAT Mumbai)- The Hon’ble Supreme Court clearly observed in the case of National Hydroelectric Power Corporation Ltd. vs. CIT [supra] that for making an addition under clause (b) of Explanation 1 to sec.115JB two conditions must be satisfied jointly. (1)(a) There must be a debit of the amount to the profit & loss account, (clause (b) of Explanation 1 to sec.115JB) the amount so debited must be carried to the reserve. Further, the reserve contemplated by clause (b) of Explanation 1 to sec.115JB is required to be carried through the profit & loss account.

The Hon’ble court also observed that there can be two types of reserves, namely, those that are routed through the profit & loss account and those which are not routed through the profit & loss account, e.g. capital reserve such as share premium account. Testing the facts on this touchstone it is clear that assessee has debited a sum of Rs.47,39,19,646/- which is the present market value of the work-in progress which has been taken over and, therefore, it cannot be said that it consists of some portion of reserve also. Therefore, there is no debit for creation of reserve and hence reserve of Rs.39,79,89,282/- has not been carried through the profit & loss account. The debit of work-in-progress cannot be called a reserve. It is also to be noted that the Hon’ble Supreme Court observed that AAD which was before them was not appropriation out of profits. Similarly, creation of general reserve out of revaluation reserve cannot be said to be out of appropration of profits. Therefore, in our opinion, the amount which was never routed through the profit & loss account and never debited to the profit & loss account could not be considered for the purpose of determination of book profits under clause (b) of Explanation 1 to sec.115JB. Accordingly, we confirm the order of the ld. CIT(A).

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

I.T.A. NO. 6049/Mum/2010 – A.Y: 2007- 08

The Income Tax Officer-7(3)(2),Mumbai.

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