Law:

Section:

Section 115J of the Income-tax Act, 1961 - Zero-tax companies - Assessment year 1990-91 - Assessee revalued its factory building, plant and machinery in year under consideration and amount of enhancement in valuation was worked out and accordingly created a notional reserve to that extent to balance both sides of balance sheet and transferred certain amount out of reserve to profit and loss appropriation account - Assessee claimed said transferred amount could not be added to net profit for computing book profits as reserve represented merely notional income and not real income - Whether since reserve had been created in year under consideration and book profits of that year had not been increased by said reserve, withdrawal made by assessee from revaluation reserve was clearly hit by proviso to clause (i) of Explanation to section 115J(1A) and, therefore, such transferred amount could not be deducted out of net profit while computing book profits for purpose of section 115J - Held, yes FACTS The assessee had filed its return of income for the assessment year 1990-91. The book profits under section 115J were computed and the income was declared at 30 per cent of the book profits. During the course of assessment proceedings, the assessee was called upon to show as to why the amount transferred from the revaluation reserve be not added to the figure of net profit for the computation of book profits under section 115J. The assessee explained that its factory building, plant and machinery were revalued in the year under consideration and amount, of enhancement in valuation was worked out at Rs. 8,97,35,695 and accordingly, a notional reserve to that extent was created to balance both sides of the balance sheet. Further, depreciation on the figure of enhancement was claimed at Rs. 2,54,09,727 which was included in the claim of total depreciation debited in the profit and loss account. An equal amount of Rs. 2,54,09,727 was transferred out of the reserve of Rs. 8,97,35,695 and credited to the profit and loss appropriation account. It was, thus, claimed that the said amount could not be added to the net profit for computing the book profits as the said reserve…

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