Case Law Details
RELEVANT PARAGRAPH
9. We quote herein below Explanation- ! to Section 115JB of the 1961 Act which reads as under:
Explanation 1 – 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~
(a) xxx
(b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or
xxx
if any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by …”
10. We find merit in this civil appeal. On reading Explanation- I, quoted above, it is clear that to make an addition under clause (b) two conditions
must be jointly satisfied:
(a) There must be a debit of the amount to the profit and loss account. V
(b) The amount so debited must be carried to the reserve.
11. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account. The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation- I was not applicable. Further, “reserve” as contemplated by clause (b) of the Explanation- i to Section 115JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly two types of reserves, viz, those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capital Reserve such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits. AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil .J “therefore, the assessee cannot use the AAD for any other purpose (which is possible in the case of a reserve) except to adjust the same against future depreciation so as to reduce the tariff.
In the future years as stated, above, at the end of the life of the Plant AAD will be reduced to nil. In fact, Schedule XII-A to the balance sheet for the financial years 2004- 05 on wards indicates recouping. In our view, AAD is “income received in advance”. It is a timing difference. It represents adjustment in future which is in-built in the mechanism notified on 26.5.1997. This adjustment may take place over a long period of time. Hence, we are of the view that AAD is not a reserve.
12. For the aforestated reasons, we hold that AAD is a timing difference, it is not a reserve, it is not carried though profit and loss account and that it is “income received in advance” subject to adjustment in future and, therefore, clause (b) of Explanation- I to Section 115JB is not applicable. Accordingly, the impugned ruling is set aside and the civil appeal filed by the asscssee stands allowed with no order as to costs.
