Appeal details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 1224 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-07-2016
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
12-04-2016
Assessment Year
2011-2012
Appeal Filed On
07-12-2015
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , , BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ./ I.T.A. NO.3391/AHD/2015 ( / ASSESSMENT YEAR : 2011-12) INFIBEAM INCORPORATION LTD. 3 RD FLOOR, A-WING GOPAL PALACE NEHRU NAGAR AHMEDABABAD-380 015 / VS. THE ITO WARD-4(3) AHMEDABAD $ ./ ./ PAN/GIR NO. : AACCI 3501 P ( $& / APPELLANT ) .. ( '($& / RESPONDENT ) $&) / APPELLANT BY : SHRI S.N. SOPARKAR, AR '($&*) / RESPONDENT BY : SHRI R.I. PATEL, CIT-DR +* / DATE OF HEARING 12/04/2016 ,-./* / DATE OF PRONOUNCEMENT 08/07/2016 / O R D E R PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-4, AHMEDABAD [C IT(A) IN SHORT] DATED 14/10/2015 FOR THE ASSESSMENT YEAR 2011-12. 2. FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER:- ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 2 - 2.1. ASSESSEE IS A COMPANY STATED TO CARRYING ON BUSINESS OF PROVIDING E-COMMERCE PLATFORM AND ALSO BUILDING CUSTOMIZED CL IENT PRODUCT REQUIREMENT BY CREATING, DEVELOPING AND MAINTAINING VARIOUS ONLINE PORTALS. ASSESSEE ELECTRONICALLY FILED ITS RETURN O F INCOME FOR AY 2011-12 ON 29.3.2013 (WHICH WAS LATE BY 18 MONTHS) BY DECLA RING LOSS OF RS.20,113/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMENT WAS FRAMED U/S 143(3) OF THE INCOME TAX, 1961 (HERE INAFTER REFERRED TO AS THE ACT) VIDE ORDER DATED 28.3.2014 AND THE TOTAL INCOME UNDER NORMAL PROVISIONS WAS DETERMINED AT LOSS OF RS.20,313/- AN D THE BOOK PROFITS U/S.115JB OF THE ACT WAS DETERMINED AT RS.19,99,79, 887/-. AGGRIEVED BY THE ORDER OF AO, MATTER WAS CARRIED IN APPEAL BEFOR E LD.CIT(A) WHO VIDE ORDER DATED 14.10.2015 (IN APPEAL NO.CIT(A)-4/147/W D-2(2)(2)-14-15) DISMISSED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER (AO) OF ADJUS TING BOOK PROFIT TO INR 19,99,79,887 UNDER SECTION 115JB OF THE ACT ON ACCOUNT OF REVALUATION RESERVE BY ADOPTING APPROACH CONTRARY TO THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (THE AC T). 2. THE LEARNED CIT(A) HAS ERRED ON THE FACTS AND IN LAW IN CONFIRMING LEVY OF INTEREST UNDER SECTION 234A, 234 B, 234C AND 234D OF THE ACT WHEN NO SUCH INTEREST IS LIABLE TO BE PAID. ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 3 - 3. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN L AW IN NOT ADJUDICATING INITIATION OF PENALTY PROCEEDINGS UNDE R SECTION 271(1)(C) OF THE ACT. 3. BEFORE US AT THE OUTSET, LD AR SUBMITTED THA T THE SOLITARY ISSUE TO BE DECIDED IS GROUND NO 1 AND THE OTHER GROUNDS RAISED BY THE ASSESSEE ARE GENERAL/CONSEQUENTIAL IN NATURE AND THEREFORE REQUI RE NO ADJUDICATION. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE COMPANY WAS INCORPORATED ON 30.6.2010 AND DURING THE IMPUGNED ASSESSMENT YEAR, ASSESSEE HAD NOT CARRIED OUT ANY BUSINESS ACTIVITY BUT HAD DECLARED LOSS OF RS.20,113/-. ON F URTHER PERUSING THE BALANCE SHEET, AO NOTICED THAT ASSESSEE WAS HOLDING 10,000 EQUITY SHARES OF RS 10 EACH, I.E. INVESTMENTS WORTH RS.1 L AC IN NSI INFINIUM GLOBAL PVT LTD., ITS SUBSIDIARY COMPANY (WHICH WAS INCORPORATED IN 2002). AO NOTED THAT DURING THE YEAR, ON THE BASIS OF THE REPORT OF CHARTERED ACCOUNTANT, THE SUBSIDIARY COMPANY (I.E. NSI INFINIUM GLOBAL PVT LTD), HAD REVALUED ITS INTANGIBLE BUSINESS/ASSE TS FROM RS 1.05 CRORES TO RS.40.02 CRORES AND HAD THEREBY CREATED REVALUAT ION RESERVE OF RS. 40 CRORES IN ITS BOOKS OF ACCOUNTS. BASED ON THE REVAL UATION OF INTANGIBLES CARRIED OUT BY ASSESSEES SUBSIDIARY (NSI INFINIUM GLOBAL PVT LTD.), ASSESSEE ALSO REVALUED THE VALUE OF ITS INVESTMENT IN THE SUBSIDIARY FROM RS.1 LAC TO RS.20.01 CRORE THEREBY CREATING REVALUA TION RESERVE OF RS 20 CRORE. HE ALSO NOTICED THAT OUT OF THE REVALUATION RESERVE THAT WAS CREATED, RS.19,52,64,900/- WAS UTILIZED BY THE ASSE SSEE FOR ISSUING BONUS ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 4 - SHARES TO THE SHAREHOLDERS [IN THE RATIO OF 361 (TH REE SIXTY ONE) BONUS EQUITY SHARES FOR EVERY 1 (ONE) EQUITY SHARES HELD BY THE SHAREHOLDERS OF THE ASSESSEE] AND THE BALANCE OF RS.47,35,100/- CON TINUED TO BE REFLECTED AS REVALUATION RESERVE IN ITS ACCOUNTS. AO NOTED TH AT THE CREATION OF REVALUATION RESERVE BY REVALUING THE INVESTMENTS WA S NOT IN LINE WITH THE ACCOUNTING STANDARD 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND FURTHER ISSUING BON US SHARES OUT OF REVALUATION RESERVES WAS ALSO NOT IN ACCORDANCE WIT H CIRCULAR NO,9/94 DATED 6.9.1994 ISSUED BY DEPARTMENT OF COMPANY AFFA IRS AND THAT THE AFORESAID FACTS WERE ALSO COMMENTED UPON BY THE STA TUTORY AUDITORS IN THEIR AUDIT REPORT. AO WAS OF THE VIEW THAT THE REV ALUATION RESERVE ARISING OUT OF REVALUATION OF INVESTMENTS SHOULD HAVE BEEN ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT INSTEAD OF DIRECTLY CREDITI NG TO THE RESERVES AND SURPLUS ACCOUNT IN THE BALANCE SHEET. AO ACCORDINGL Y RECASTED THE PROFIT AND LOSS ACCOUNT BY INCLUDING THE REVALUATION RESER VE TO THE PROFITS FOR THE PURPOSE OF DETERMINING BOOK PROFITS U/S.115JB O F THE ACT AND ACCORDINGLY DETERMINED THE BOOKS PROFITS FOR THE PU RPOSE OF 115JB AT RS.19,99,79,887/-. AGGRIEVED BY THE ORDER OF AO, AS SESSEE CARRIED THE MATTER BEFORE LD.CIT(A) WHO VIDE ORDER DATED 14/10/ 2015 (IN APPEAL NO CIT(A)-4/147/WD-2(2)(2)14-15) UPHELD THE ACT OF AO BY HOLDING AS UNDER:- 5. I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS O F THE AO AND THE SUBMISSIONS MADE BEFORE ME BY THE APPELLANT. GROUND NO.1 & 2 ARE AGAINST THE ADDITION OF RS.19,52,64,900/- IN BOOK PROFIT FO R CALCULATING MAT U/S 115JB OF THE ACT. IT IS UNDISPUTED FACT THAT THE AP PELLANT COMPANY HAD ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 5 - REVALUED ITS INVESTMENT WHICH IT HELD IN THE SHARES OF SUBSIDIARY COMPANY NAMELY NSI INFINIUM GLOBAL PVT LTD FROM RS. 1 LAKH TO RS. 20,01,00,000/- AND WHILE INVESTMENT WAS SHOWN AT ENHANCED VALUE AT RS 20,01,00,000/-, THE DIFFERENCE IN VALUATION WAS CARRIED TO CAPITAL RESE RVE DIRECTLY IN THE BALANCE SHEET. WHILE IT IS PERTINENT TO NOTE THAT THE REPOR T OF THE CHARTERED ACCOUNTANT WHO VALUED THE INTANGIBLE ASSETS OF NSI INFINIUM GL OBAL PVT LTD IS DATED 21.08.2010, THE APPELLANT COMPANY PASSED A SPECIAL RESOLUTION ON 10.08.2010 FOR ISSUING FULLY PAID UP BONUS SHARES OUT OF CAPIT AL RESERVE FROM RS. 19,52,64,900/-. 5.1 THE ISSUE THAT ARISE IS THAT, WHEN THE ASSESSEE HAS REVALUED ITS INVESTMENT IN SHARES AND OUT OF SUCH REVALUATION RESERVE HAS A LSO DECLARED AND ISSUED BONUS SHARES, WHETHER SUCH REVALUATION SHOULD HAVE BEEN ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT OR NOT AND WHETHER SUCH REV ALUED AMOUNT IS TO BE ADDED TO THE, BOOK PROFIT UNDER SECTION 115JB OF TH E INCOME TAX ACT ? 5.2 BEFORE DECIDING THE ISSUE FEW FACTS NEEDS TO BE HIGHLIGHTED. THE ASSESSEE WAS HOLDING 10,000 SHARES OF RS.10/-EACH IN ITS SUB SIDIARY COMPANY NAMELY NSI INFINIUM GLOBAL P. LTD. (HEREINAFTER REFERRED T O AS 'NSI FOR SHORT). NSI REVALUED ITS BUSINESS ASSETS TO RS.40.02 CRORES AS AGAINST RS.1.05 CRORE ON THE BASIS OF CHARTERED ACCOUNTANTS REPORT DATED 21.8.20 10. THE ASSESSEE EVEN PRIOR THERETO REVALUED ITS INVESTMENT IN SHARES OF NSI AND VALUED THE SAME AT RS.20.01 CRORE AGAINST THE COST OF RS.1,00,000/-. O UT OF THE REVALUATION RESERVE, AS PER RESOLUTION DATED 10.8.2010 BONUS SH ARES WERE ISSUED TO THE SHAREHOLDERS OF ASSESSEE COMPANY IN THE RATIO OF 36 1 BONUS SHARES FOR EVERY ONE EQUITY SHARE HELD THEREFORE, THE QUESTION IS TO BE EXAMINED IN LIGHT OF THE ABOVE FACTS. 5.3 SECTION 115 JB READS AS UNDER :- SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COM PANIES 115JB. (1) NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISION OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE. BEING A COMP ANY, THE INCOME-TAX, PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMME NCING ON OR AFTER [THE 1ST DAY OF APRIL, 2010. IS LESS THAN FIFTEEN PER CENT O F ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF TH E ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUCH TOTAL INCOME SHALL BE THE AMOUNT OF INCOME- TAX AT THE RATE OF [FIFTEEN PER CENT. ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 6 - (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVAN T 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 WHI LE 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 CALCULATIN G THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURP OSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 210 OF THE COMPANIES ACT, 1956 (1 OF 1956): PROVIDED FURTHER THAT WHERE THE COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHI CH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THIS ACT: - (I) THE ACCOUNTING POLICIES; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARI NG SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; (III) THE METHOD AND RATES ADOPTED FOR CALCULATIN G THE DEPRECIATION. SHALL CORRESPOND TO THE ACCOUNTING POLICIES, ACCOUN TING STANDARDS AND THE METHOD AND RATES FOR CALCULATING THE DEPRECIATION W HICH HAVE BEEN ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LO SS ACCOUNT FOR SUCH FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLI NG WITHIN THE RELEVANT PREVIOUS YEAR. EXPLANATION 1.FOR THE PURPOSES OF THIS SECTION, 'B OOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVA NT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS INCREASED BY (A) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE, AND THE PROVISION THERE FOR; OR (B) THE AMOUNTS CARRIED LO ANY RESERVES, BY WHATEV ER NAME CALLED , OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33AC; OR ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 7 - (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS M ADE TOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF SU BSIDIARY COMPANIES: OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PROP OSED ; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (38) THEREOF) OR SECTION II OR SECTION 12 APPLY; OR] (G)THE AMOUNT OF DEPRECIATION, (H)THE AMOUNT OF DEFERRED TAX AND THE PROVISION THE RE FOR. (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FO R DIMINUTION IN THE VALUE OF ANY ASSET, IF ANY AMOUNT REFERRED TO IN CLAUSES (A) LO (I) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY, (I) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVIS ION (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL. 1997 O THERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF ANY SUC H AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO AN ASSESSE E IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERVES C REATED 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 RE DUCED FROM THE BOOK PROFIT UNLESS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREA SED BY THOSE RESERVES OR PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WITHDR AWN) UNDER THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO SECTION 11 5JA. AS THE CASE MAY BE; OR] (II) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVI SIONS OF SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (35) THEREOF) OR SECTION 11 OR SECTION 12 APPLY, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFI T AND LOSS ACCOUNT; OR (IIA) THE AMOUNT OF DEPRECIATION DEBITED TO THE PRO FIT AND LOSS ACCOUNT (EXCLUDING THE DEPRECIATION ON ACCOUNT OF REVALUATI ON OF ASSETS); OR (IIB) THE AMOUNT WITHDRAWN FROM REVALUATION RESERVE AND CREDITED TO THE PROFIT AND LOSS ACCOUNT, TO THE EXTENT IT DOES NOT EXCEED THE AMOUNT OF DEPRECIATION ON ACCOUNT OF REVALUATION OF ASSETS RE FERRED TO IN CLAUSE(IIA); OR] ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 8 - (III) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSOR BED DEPRECIATION, WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE, (A) THE LOSS SHALL NOT INCLUDE DEPRECIATION; (B) THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY I F THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION IS NIL; OR] (IV) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U NDER SECTION 80HHC. COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE ( C) OF SUB-SECTION (3) OR SUB-SECTION (3A), AS THE CASE MAY BE, OF THAT SECTI ON, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (V) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UN DER SECTION 80HHE COMPUTED UNDER SUB-SECTION (3) OR SUB-SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFI ED IN THAT SECTION; OR (VI) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U NDER SECTION 80HHF COMPUTED UNDER SUB-SECTION (3) OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (VII) THE AMOUNT OF PROFITS OF SICK INDUSTRIAL COMP ANY FOR THE ASSESSMENT YEAR COMMENCING ON AND FROM THE ASSESSMENT YEAR REL EVANT TO THE PREVIOUS YEAR IN WHICH THE SAID COMPANY HAS BECOME A SICK IN DUSTRIAL COMPANY UNDER SUB-SECTION (1) OF SECTION 17 OF THE SICK IND USTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (1 OF 1986) AND ENDI NG WITH THE ASSESSMENT YEAR DURING WHICH THE ENTIRE NET WORTH OF SUCH COMP ANY BECOMES EQUAL TO OR EXCEEDS THE ACCUMULATED LOSSES. EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, 'N ET WORTH' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (GA) OF SUB-SECTIO N (I) OF SECTION 3 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT. 1985 (I OF 1986); OR (VIII) THE AMOUNT OF DEFERRED TAX. IF ANY SUCH AMOU NT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT.] EXPLANATION 2.FOR THE PURPOSES OF CLAUSE (A) OF EXPLANATION I , THE AMOUNT OF INCOME-TAX SHALL INCLUDE ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 9 - (I) ANY TAX ON DISTRIBUTED PROFITS UNDER SECTION 115-0 OR ON DISTRIBUTED INCOME UNDER SECTION 115R; (II) ANY INTEREST CHARGED UNDER THIS ACT; (III) SURCHARGE, IF ANY, AS LEVIED BY THE CENTRAL ACTS FR OM TIME TO TIME; (IV) EDUCATION CESS ON INCOME-TAX, IF ANY, AS LEVIED BY THE CENTRAL ACTS FROM TIME TO TIME; AND (V) SECONDARY AND HIGHER EDUCATION CESS ON INCOME-LAX, IF ANY, AS LEVIED BY THE CENTRAL ACTS F ROM TIME TO TIME.] (3) NOTHING CONTAINED IN SUB-SECTION (1) SHALL AFFE CT THE DETERMINATION OF THE AMOUNTS IN RELATION TO THE RELEVANT PREVIOUS YE AR TO BE CARRIED FORWARD TO THE SUBSEQUENT YEAR OR YEARS UNDER THE PROVISION S OF SUB-SECTION (2) OF SECTION 32 OR SUB-SECTION (3) OF SECTION 32A OR CLA USE (II) OF SUB-SECTION (1) OF SECTION 72 OR SECTION 73 OR SECTION 74 OR SUB-SECTION (3) OF SECTION 74A. (4) EVERY COMPANY TO WHICH (HIS SECTION APPLIES, SH ALL FURNISH A REPORT IN THE PRESCRIBED FORM- FROM AN ACCOUNTANT AS DEFINED IN THE EXPLANATION BELOW SUB-SECTION (2) OF SECTION 288. CERTIFYING THAT THE BOOK PROFIT HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION ALONG WITH THE RETURN OF INCOME FILED UNDER SUB-SECTION (1) OF SECTION 139 OR ALONG WITH THE RETURN OF INCOME FURNISHED IN RESPONSE TO A NOTICE UNDER CLAUSE (Z) OF SUBSECTION (1) OF SECTION 142. (5) SAVE AS OTHERWISE PROVIDED IN THIS SECTION, ALL OTHER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY ASSESSEE, BEING A COMPANY, MENTIONED IN THIS SECTION.] (6) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY TO THE INCOME ACCRUED OR ARISING ON OR AFTER THE 1ST DAY OF APRIL, 2005 FROM ANY BUSINESS CARRIED ON, OR SERVICES RENDERED, BY AN ENTREPRENEUR OR A DEVEL OPER, IN A UNIT OR SPECIAL ECONOMIC ZONE, AS THE CASE MAY BE.] 5.4 READING THE AFORESAID PROVISION IT IS CLEAR TH AT SECTION 115 JB IS A CODE BY ITSELF AND CONTAINS CHARGING AS WELL AS MACHINER Y PROVISION FOR COMPUTATION OF BOOK PROFIT. SUB-SECTION (2) OF SECT ION 115 JB PROVIDES THAT EVERY ASSESSES BEING A COMPANY SHALL FOR THE PURPOS E OF THIS SECTION PREPARE ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH PROV ISION OF PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. PROVISO TO SUBSECTION (2) PRESCRIBES THAT WHILE PREPARING THE ANNUAL ACCOUNT INCLUDING P ROFIT AND LOSS ACCOUNT, THE ACCOUNTING POLICIES, THE ACCOUNTING STANDARDS AND T HE METHODS AND RATES ADOPTED FOR CALCULATING DEPRECIATION SHALL BE THE S AME AS HAVE BEEN ADOPTED ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 10 - FOR THE PURPOSE OF PREPARING SUCH ACCOUNTS AS LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING. THE DIRECTORS IN THEIR REPO RT TO THE SHARE HOLDERS HAVE CONFIRMED THAT IN PREPARATION OF THE ACCOUNTS, THE APPLICABLE ACCOUNTING STANDARDS HAVE BEEN FOLLOWED. IN SCHEDULE - G TO TH E ANNUAL ACCOUNTS, WHICH ARE 'NOTES FORMING PART OF ACCOUNTS', IT HAS BEEN A CKNOWLEDGED THAT 'NSI INFINIUM GLOBAL P LTD., ONE OF THE SUBSIDIARY COMPA NY HAS REVALUED ITS ASSETS SO THE COMPANY HAS ISSUED BONUS SHARES FROM REVALUA TION RESERVE'. UNDER THE HEADING 'INVESTMENT IN SUCH NOTES, IT IS STATE D 'INVESTMENT IN NSI INFINIUM GLOBAL P. LTD., HAS BEEN REVALUED WHICH IS ONE OF THE SUBSIDIARY OF THE COMPANY' SUB CLAUSE (XII) (A) OF CLAUSE 3 OF PA RT - II OF SCHEDULE - VI TO THE COMPANIES ACT REQUIRES THE PROFITS OR LOSSES ON INVESTMENT TO BE DECLARED IN THE PROFIT AND LOSS ACCOUNT. ACCORDING TO THE AS SESSEE DUE TO REVALUATION IN THE SHARES OF NSI A REVALUATION RESERVE WAS CREATED WHICH IS NOT CONSIDERED AS CAPITAL RESERVE BUT RATHER A FREE RESERVE' OR ' A REVENUE RESERVE' AND OUT OF WHICH BONUS SHARES CAN BE ISSUED. PART - III OF SCH EDULE VI TO THE COMPANIES ACT CONTAINS CERTAIN INTERPRETATION SO FAR AS PART I AND II OF THE SCHEDULE VI REQUIRES. SUB CLAUSE (C) OF CLAUSE 7(1) IN PART III OF SCHEDULE VI STATES AS UNDER: (C) THE EXPRESSION 'CAPITAL RESERVE' SHALL NOT INCL UDE ANY AMOUNT REGARDED AS FREE FOR DISTRIBUTION THROUGH PROFIT AND LOSS ACCOU NT; AND THE EXPRESSION 'REVENUE RESERVE ' SHALL MEAN ANY RESERVE OTHER THA N A CAPITAL RESERVE; 5.5 AS PER BALANCE SHEET OF APPELLANT COMPANY CONTA INING SCHEDULE B RELATING TO 'RESERVE AND SURPLUS' SHOWS 'REVALUATION RESERVE ' SEPARATELY AND NOT UNDER THE HEAD 'CAPITAL RESERVE'. OUT OF SUCH REVAL UATION RESERVE, EVEN BONUS SHARES ARE ISSUED. THUS, ACCORDING TO THE ASSESSEE SUCH REVALUATION RESERVE IS A FREE RESERVE. IN RESPECT OF SUCH ACCOUNTING TREAT MENT AND POLICY THE AUDITOR HAS OPINED AS UNDER. (D) IN OUR OPINION, THE BALANCE SHEET, STATEMENT OF PROFIT AND LOSS OF CASH FLOW STATEMENT DEALT WITH BY THIS REPORT APPLY THAT THE ACCOUNTING STANDARDS REFERRED TO IN SUB-SECTION (3C) OF SECTION 211 OF T HE COMPANIES ACT 1956, EXCEPT THE COMPANY HAD INVESTMENTS VALUED AT RS. 1, 00,000/- IN SUBSIDIARY COMPANY. NSI INFINIUM P LTD. WHICH IT GOT REVALUED AT RS.20,01,00,000/-IN THE MONTH OF SEPTEMBER, 2010 AND CREDITED THE EQUIVALEN T AMOUNT TO THE REVALUATION RESERVE AGAINST WHICH IT ISSUED BONUS S HARES STATED IN PARA 'E' HEREUNDER. THE COMPANY HAS REVALUED ITS INVESTMENTS BASED ON THE REVALUATION OF INTANGIBLE ASSETS/BUSINESS BY NSI IN FINIUM GLOBAL P LTD. DUE TO THIS REASONS INVESTMENT VALUE IS INCREASED BY RS .20,00,000/- IN THE YEAR ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 11 - UNDER CONSIDERATION. REVALUATION OF INVESTMENTS IN THIS MANNER IS NOT IN LINE WITH AS- 13 ISSUED BY THE INSTITUTE OF CHARTERED AC COUNTANTS OF INDIA. (E) THE COMPANY HAS ISSUED BONUS SHARES IN SEPTEMBE R, 2010, FOR RS. 19,52,64,900/-(1,95.26,490 EQUITY SHARES OF RS.10)/ - EACH, FULLY PAID UP) BY CAPITALIZING ITS RE-VALUATION RESERVE. ACCORDINGLY, THE PAID UP CAPITAL OF THE COMPANY STANDS INCREASED BY RS.19,52,64,900/- AND T HE REVALUATION RESERVE STANDS REDUCED BY THAT AMOUNT. THE ISSUE OF BONUS S HARE IS NOT IN ACCORDANCE WITH THE CIRCULAR ISSUED BY THE DEPARTMENT OF COMPA NY AFFAIRS BEARING NO. 9/94 DATED 6-9-1994 AND THE RECOMMENDATION OF THE I NSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 5.6 ACCOUNTING STANDARD 13 RELATING TO 'INVESTMENT' ISSUED BY ICAI IS MANDATORY SO FAR AS ASSESSEE IS CONCERNED. EVEN SUB -SECTION (3A) OF SECTION 211 OF THE COMPANIES ACT 1956 PROVIDES THAT 'EVERY PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS.' PARA 25 OF AS-13 MAKES CERTAIN DISCLOSU RE REQUIREMENTS IN FOLLOWING TERMS:- DISCLOSURE 25. THE FOLLOWING DISCLOSURES IN FINANCIAL STATEMEN TS IN RELATION TO INVESTMENTS ARE APPROPRIATE:- (A) THE ACCOUNTING POLICIES FOR THE DETERMINATION O F CARRYING AMOUNT OF INVESTMENTS; (B) THE AMOUNTS INCLUDED IN PROFIT AND LOSS STATEME NT FOR; (I) INTEREST, DIVIDENDS (SHOWING SEPARATELY DIVIDEN DS FROM SUBSIDIARY COMPANIES), AND RENTALS ON INVESTMENTS SHOWING SEPA RATELY SUCH INCOME FROM LONG TERM AND CURRENT INVESTMENTS. GROSS INCOM E SHOULD HE STATED, THE AMOUNT OF INCOME TAX DEDUCTED AT SOURCE BEING I NCLUDED UNDER ADVANCE TAXES PAID; (II) PROFITS AND LOSSES ON DISPOSAL OF CURRENT INVE STMENTS AND CHANGES IN CARRYING AMOUNT OF SUCH INVESTMENTS; (III) PROFITS AND LOSSES ON DISPOSAL OF LONG TERM I NVESTMENTS AND CHANGES IN THE CARRYING AMOUNT OF SUCH INVESTMENTS; (C) SIGNIFICANT RESTRICTIONS ON THE RIGHT OF OWNERS HIP, REALISABILITY OF INVESTMENTS OR THE REMITTANCE OF INCOME AND PROCEED S OF DISPOSAL; ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 12 - (D) THE AGGREGATE AMOUNT OF QUOTED AND UNQUOTED INV ESTMENTS, GIVING THE AGGREGATE MARKET VALUE OF QUOTED INVESTMENTS; (E) OTHER DISCLOSURES AS SPECIFICALLY REQUIRED BY T HE RELEVANT STATUTE GOVERNING THE ENTERPRISE. 5.7 SUB CLAUSE (III) OF CLAUSE (B) OF PARA 25 PROVI DES PROFIT AND LOSS ON DISPOSAL OF LONG TIME INVESTMENT AND CHANGES IN THE CARRYING AMOUNT OF SUCH INVESTMENT SHOULD BE INCLUDED IN THE PROFIT AND LOS S STATEMENT. THUS, READING THE PROVISION OF THE COMPANIES ACT AND THE RELEVANT ACCOUNTING STANDARD IT IS CLEAR THAT WHILE MAKING CHANGES IN THE CARRYING AMO UNT OF SUCH INVESTMENTS, THE ASSESSEE SHOULD HAVE DISCLOSED IN THE PROFIT AN D LOSS ACCOUNT SUCH CHANGES. INSTEAD OF EFFECTING CHANGES THROUGH THE P ROFIT AND LOSS ACCOUNT, THE INCREASED VALUE OF INVESTMENT IS DIRECTLY CREDITED TO REVALUATION RESERVE AND OUT OF WHICH EVEN BONUS SHARES ARE ISSUED AS IF SUC H RESERVE IS A FREE RESERVE THEREFORE, IN VIEW OF THE PROVISION OF THE COMPANIE S ACT, THE CHANGE EFFECTED BY REVALUING ITS INVESTMENT SHOULD HAVE BEEN INCORP ORATED IN THE PROFIT AND LOSS ACCOUNT. 5.8 READING THE PROVISION OF SUB-SECTION (2) OF SEC TION 115 JB IT IS CLEAR THAT THE PROFIT AND LOSS ACCOUNT TO BE PREPARED FOR THE COMPUTATION OF BOOK PROFIT SHOULD BE SUCH WHICH IS IN ACCORDANCE WITH PROVISIO N OF PART II AND III OF SCHEDULE -VI TO THE COMPANIES ACT, NOT ONLY IT SHOU LD BE IN ACCORDANCE WITH PART - II OF SCHEDULE - VI OF THE COMPANIES ACT 195 6 BUT IT SHOULD ALSO BE IN ACCORDANCE WITH THE ACCOUNTING STANDARDS ADOPTED FO R PREPARING SUCH ACCOUNT INCLUDING PROFIT AND LOSS ACCOUNT. IF THE A SSESSEE WHILE PREPARING ITS PROFIT AND LOSS ACCOUNT DOES NOT PREPARE THE SAME I N ACCORDANCE WITH PART - II OF SCHEDULE VI TO THE COMPANIES ACT OR DOES NOT FOL LOW THE ACCOUNTING STANDARDS ADOPTED, THE ASSESSING OFFICER IS NOT ONL Y COMPETENT TO, BUT IS DUTY BOUND TO GIVE EFFECT TO THE ACCOUNTING STANDARDS AS ALSO THE PROVISION OF PART - II AND III OF SCHEDULE VI TO THE COMPANIES ACT. 5.9 IN THE CASE OF CIT V. KHAITAN CHEMICALS & FERTI LIZERS LTD. [2008] 307 ITR 150 (DELHI), THE HON'BLE HIGH COURT OBSERVED THAT W HEN ACCOUNTING STANDARD (AS-5) REQUIRED PRIOR PERIOD EXPENSES/EXTRAORDINARY ITEMS TO BE SHOWN SEPARATELY AND THE ASSESSEE WAS REQUIRED TO PREPARE P&L ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, THE FACT THAT PRIOR PERIOD EXPENSES/ EXTRAORDINARY ITEMS WERE SHOWN SEPARATELY AFTER THE FIGURE OF NET PROFIT HAD BEEN STRUCK DOWN IN THE P&L ACCOUNT DID NOT MEAN THAT THEY WOULD NOT CONSTI TUTE PART OF THE NET PROFIT ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 13 - FROM THE ABOVE DECISION, IT IS, THUS, EVIDENT THAT THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT MAY BE ADJUSTED BY THE ITEM S SHOWN SEPARATELY OR OTHERWISE DISCLOSED IN THE NOTES TO THE ACCOUNTS AS PER REQUIREMENT OF THE COMPANIES ACT, 1956 INASMUCH AS SUCH DISCLOSURE OR INFORMATION GIVEN IN THE NOTES TO THE ACCOUNTS AS PER REQUIREMENT OF THE COM PANIES ACT WOULD FALL WITHIN THE AMBIT OF THE EXPRESSION 'NET PROFIT' AS SHOWN IN THE P&L ACCOUNT. IN OTHER WORDS, IF THE ITEMS REQUIRED TO BE INCORPO RATED IN THE P&L ACCOUNT AS PER PROVISIONS OF COMPANIES ACT ARE NOT SHOWN IN TH E P&L ACCOUNT BEFORE STRIKING OUT NET PROFIT BUT ARE SEPARATELY SHOWN TH EREAFTER OR ARE OTHERWISE DISCLOSED IN THE NOTES TO THE ACCOUNTS AS PER REQUI REMENT OF COMPANIES ACT, THE ITEMS SO SEPARATELY SHOWN OR DISCLOSED IN THE A CCOUNTS WOULD FORM PART OF NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT PRE PARED IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI T O THE COMPANIES ACT, AND THE 'BOOK PROFIT', FOR THE PURPOSE OF SECTION 115JB, SH ALL BE COMPUTED ACCORDINGLY. 5.10 THE VIEW OF HON'BLE SUPREME COURT IN THE CASES OF APOLLO TYRES LTD. (SUPRA) AND HCL COMNET SYSTEMS & SERVICES LTD. (SUP RA ) TO THE EFFECT THAT THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICIT Y OF THE ACCOUNTS MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF PAR T II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT BEING CERTIFIED BY THE AUDITORS AND LAID BEFORE THE COMPANY IN ITS GENERAL MEETING, AND THAT THE ASSESSING OFFICER HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF AC COUNT ARE DULY CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AND WHET HER SUCH BOOKS HAVE BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COM PANIES ACT GIVES AN AMPLE SUPPORT TO THE VIEW OF THE HON'BLE DELHI HIGH COURT THAT THE NET PROFIT AS SHOWN IN THE P&L ACCOUNT WOULD INCLUDE SUCH ITEM S ALSO WHICH ARE SEPARATELY SHOWN OR DISCLOSED IN THE NOTES TO THE A CCOUNTS AS PER REQUIREMENT OF THE COMPANIES ACT OR PARTS II AND III OF SCHEDUL E VI TO THE COMPANIES ACT. IN THE AFORESAID CASES BEFORE HON'BLE DELHI HIGH CO URT, THE ASSESSEE ALL ALONG CONTENDED THAT THE NET PROFIT WAS TO BE COMPU TED ON THE BASIS OF THE P&L ACCOUNT WHICH, IN TURN, WAS REQUIRED TO BE PREP ARED IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI T O THE COMPANIES ACT AND THE FACT THAT THE ITEMS OF CURRENT DEPRECIATION OR PRIO R PERIOD EXPENSES/EXTRAORDINARY ITEMS WERE DISCLOSED OR SHOW N SEPARATELY IN THE ACCOUNTS PREPARED AND LAID BEFORE COMPANY UNDER THE COMPANIES ACT DID NOT MEAN THAT THEY WOULD NOT CONSTITUTE PART OF THE NET PROFIT AS PER COMPANIES ACT FOR THE PURPOSE OF COMPUTING 'BOOK PROFIT' UNDE R SECTION 115 J OR 115 JA OF THE ACT. THE COURT HELD THAT THE INFORMATION DIS CLOSED IN THE NOTES APPENDED TO THE ACCOUNTS OR THE ITEM SHOWN SEPARATE LY AFTER THE NET PROFIT HAD ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 14 - BEEN STRUCK DOWN IN THE P&L ACCOUNT AS PER REQUIREM ENT OF THE PROVISIONS OF COMPANIES ACT WOULD FORM PART OF THE ACCOUNTS OF TH E ASSESSEE-COMPANY AND WOULD COME WITHIN THE AMBIT OF 'NET PROFIT' AS SHOW N IN THE P&L ACCOUNT FOR THE RELEVANT ASSESSMENT YEAR AS NOTES TO THE ACCOUN T FORM PART OF THE P&L ACCOUNT BY VIRTUE OF SUB-SECTION (6) OF SECTION 211 OF THE COMPANIES ACT, READ WITH CLAUSE 3(IV) OF PART II OF SCHEDULE VI TO THE COMPANIES ACT. THUS, FOLLOWING THE ABOVE-REFERRED TWO DECISIONS OF HON'B LE DELHI HIGH COURT, I HOLD THAT THE NET PROFIT SHOWN IN THE PROFIT AND LO SS ACCOUNT MAY BE ADJUSTED BY THE ITEMS, WHICH ARE SEPARATELY DISCLOSED IN THE ACCOUNTS OR IN THE NOTES TO THE ACCOUNTS AS PER REQUIREMENT OF COMPANIES ACT RE AD WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956, FOR THE PURPOSE OF DETERMINING NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT AND, IN TURN, FOR THE PURPOSE OF COMPUTING 'BOOK PROFIT' UNDER SECTION 115JB OF THE ACT. 5.11 THE SUPREME COURT HAS HELD THAT THE ASSESSING OFFICER WHILE COMPUTING THE INCOME UNDER SECTION 115J HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES U NDER THE COMPANIES ACT AS HAVING BEEN PROPERTY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. HOWEVER, IN THE INSTANT CASE OF THE APPELLANT, THE AUDITOR'S HAVE CLEARLY QUALIFIED THE REPORT ON SUCH ACCOUNTS IN PARA 4(D) AND 4(E) STATING THAT UPWARD REVALUATION OF INVESTMENT IN THE SUBSIDIARY COMPANY IS NOT IN LINE WITH THE AS 13 ISSUED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA AND FURTHER ISSUE OF BONUS SHARES OUT OF REVALUATION RE SERVE IS ALSO NOT IN ACCORDANCE WITH THE CIRCULAR ISSUED BY THE DEPARTME NT OF COMPANY AFFAIRS AND THE RECOMMENDATION OF THE INSTITUTE OF CHARTERE D ACCOUNTANTS OF INDIA. THUS IT CANNOT BE SAID THAT WHEN THE ACCOUNTING STA NDARD REQUIRED TO BE COMPLIED WITH BY THE APPELLANT COMPANY IS NOT SO CO MPLIED WITH, THE PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT IS STILL IN AC CORDANCE WITH THE COMPANIES ACT. NO DOUBT VARIOUS ADJUSTMENTS AS ENVISAGED IN E XPLANATION-1 TO SECTION 115JB CAN BE MADE TO THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR ARRIVING AT 'BOOK PROFIT', THE ISSUE WHICH IS R ELEVANT IS IF THE VERY STARTING POINT FOR MAKING SUCH ADJUSTMENT VIZ: NET PROFIT IS ARRIVED AT FROM THE PROFIT AND LOSS ACCOUNT WHICH IS NOT PREPARED IN ACCORDANC E WITH THE REQUIREMENTS OF THE COMPANIES ACT, 1956 READ WITH NOTES THEREON AND THE QUALIFICATION OF AUDITOR, WHETHER STILL SUCH NET PROFIT IS THE FINAL FIGURE FOR ARRIVING AT 'BOOK PROFIT' BY MAKING ADJUSTMENTS PRESCRIBED UNDER EXP LANATION-1 TO SECTION 115JB? IN MY OPINION, REGARD MUST THEREFORE BE HAD FIRSTLY TO THE REQUIREMENT OF PREPARATION OF PROFIT AND LOSS ACCOUNT AS PER RE QUIREMENT OF THE COMPANIES ACT, 1956 READ WITH THE ACCOUNTING STANDARDS AND IF THE PROFIT AND LOSS ACCOUNT IS NOT PREPARED IN ACCORDANCE WITH THE COMP ANIES ACT, 1956 AND ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 15 - DOES NOT COMPLY WITH THE ACCOUNTING STANDARDS, THE VERY STARTING POINT FOR MAKING ADJUSTMENT ENVISAGED IN EXPLANATION-1 TO SEC TION 115JB WILL REQUIRE PROPER RELOOKING BY THE AO KEEPING IN VIEW THE PURP OSE OF INTRODUCING THE PROVISIONS OF MAT. IN THE INSTANT CASE, THE APPELLA NT, THOUGH HAVING SHOWN THAT IT HAS BECOME PROSPEROUS AND RICHER BY AN AMOU NT OF RS. 20 CRORES IN TERMS OF VALUE OF INVESTMENT DUE T O INCREASE IN VALUE BETWEEN THE DATE OF INVESTMENT AND THE DATE OF REVALUATION AND HAS ALSO, ON THAT COUNT ISSUED BONUS SHARES TO THE SHAREHOLDERS, BY NOT INC LUDING THE SAID GAIN AS PROFIT WHILE COMPUTING 'BOOK PROFIT' IS DEFEATING T HE PURPOSE OF SECTION 115JB. IT IS TRUE THAT AS FAR AS THE PROVISIONS OF NORMAL INCOME COMPUTATION ARE CONCERNED, IT IS ONLY THE DIFFERENCE BETWEEN RE ALIZED SALES CONSIDERATION AND THE ACTUAL COST WHICH SHALL BE THE CAPITAL GAIN LIABLE TO BE TAXED. HOWEVER, THE PRESENT ISSUE IS NOT ABOUT SUCH ACTUAL GAIN OR PROFIT REALIZED WHILE COMPUTING INCOME UNDER NORMAL PROVISIONS OF T HE ACT BUT THE PROFIT WHICH MUST BE SHOWN WHEN THE TAX IS NOT PAYABLE UND ER NORMAL PROVISIONS. THE APPELLANT NOT MERELY TRANSFERRED THE REVALUATIO N AMOUNT TO CAPITAL RESERVE DIRECTLY BUT THEREAFTER ALSO UTILIZED THE S AID RESERVE FOR DISTRIBUTION AS BONUS SHARES. IT IS SIGNIFICANT TO NOTE IN THIS REG ARD THAT THOUGH THE CONTENTION OF THE APPELLANT IS THAT ACTUAL PROFIT ON REALIZATI ON OR SALE OF INVESTMENT WILL BE DECLARED AND CAN BE TAXED, THE SAME WILL BE RELE VANT ONLY FOR COMPUTING GAIN ON ITS SALE FOR THE PURPOSE OF COMPUTATION OF INCOME UNDER NORMAL PROVISIONS OF THE ACT AND BY NOT SHOWING SUCH GAIN WHILE INCREASING THE VALUE OF INVESTMENT IN THE BOOKS FROM RS. 1 LAKH TO RS. 2 0,01,00,000/- EVEN AT THE TIME OF ACTUAL SALE IN FUTURE, THE APPELLANT WILL S HOW ONLY THE DIFFERENCE BETWEEN THE ACTUAL SALE CONSIDERATION AND THE ENHAN CED VALUE OF RS. 20,01,00,000/- AS PROFIT IN THE PROFIT AND LOSS AC COUNT FOR MAT PURPOSE IN THE YEAR OF SALE BECAUSE THE VALUE OF INVESTMENT IS ALR EADY ENHANCED IN THE BOOKS TO RS. 20,01,00,000/-. THUS THE APPELLANT HAS ADOPT ED A DEVISE OR DUBIOUS METHOD WHEREBY THE APPELLANT HAS SOUGHT TO AVOID TA X UNDER SECTION 115JB FOR THE YEAR UNDER CONSIDERATION AS ALSO FOR THE YE AR IN WHICH THERE WILL BE ACTUAL SALE OF THE INVESTMENT. 5.12 REGARDING THE ARGUMENT OF THE APPELLANT THAT R EVALUATION IS ONLY A NOTIONAL PROFIT AND THE REFERENCE TO THE GUIDANCE N OTE OF ICAI ON AVAILABILITY OF REVALUATION RESERVE FOR ISSUE OF BONUS SHARES, T HE GUIDANCE NOTE IS REGARDING REVALUATION OF FIXED ASSETS AND NOT FOR I NVESTMENTS. EVEN IN THE SAID GUIDANCE NOTE, WHILE IT IS STATED THAT REVALUATION RESERVE IS CREATED AS A RESULT OF BOOK ADJUSTMENT AND IS NOT REALIZED GAIN, IN THE SAME GUIDANCE NOTE, THE ICAI HAS FURTHER CLARIFIED THAT SHARE CAPITAL R EPRESENTS THE AMOUNT OF MONEY OR MONEY'S WORTH RECEIVED FROM THE OWNERS AND THE CAPITALISATION OF ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 16 - EARNED PROFITS OR OTHER GAINS ARISING OUT OF AN ARM 'S LENGTH TRANSACTION AND HENCE BONUS SHARES CANNOT BE ISSUED FROM REVALUATIO N RESERVE. THE APPELLANT IN THE INSTANT CASE CONSIDERED THE REVALUATION RESE RVE AS AVAILABLE FOR ISSUING BONUS SHARES AND IN THAT VIEW OF ITS OWN ACT OF ISS UING BONUS SHARES, IT HAS CONSIDERED THE CAPITALIZED PROFIT FROM REVALUATION RESERVE AS MONEY OR MONEY'S WORTH OR EARNED PROFIT. IF THAT BE SO, THE APPELLANT HAVING ISSUED BONUS SHARES WHICH COULD BE ISSUED FROM PROFITS, TH E APPELLANT CANNOT BE ALLOWED TO TURN AROUND AND HAVE THE BENEFIT OF BOTH THE WORLDS BY CONSIDERING THE AMOUNT OF REVALUATION RESERVE AS NOT REAL PROFI T WHILE COMPUTING BOOK PROFIT AND AT THE SAME TIME, ARGUING THAT AS THE SA ME IS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT, NO ADJUSTMENT WHILE COMPUT ING NET PROFIT (TO ARRIVE AT FURTHER THE FIGURE OF 'BOOK PROFIT) CAN BE MADE. I N MY OPINION, THEREFORE MERE OBSERVATION OF THE AO ABOUT THE REVALUATION AS NOTI ONAL PROFIT DOES NOT DEBAR HIM TO LOOK IN TO THE ASPECT WHETHER THE ACT OF THE APPELLANT IN TREATING THE SAID REVALUATION RESERVE AS AVAILABLE FOR ISSUING B ONUS SHARES PARTICULARLY IN THE SITUATION WHEN THE RESERVE IS ACTUALLY SO UTILI ZED FOR SUCH PURPOSE REQUIRES ADJUSTMENT IN THE NET PROFIT WHICH IS NOT IN ACCORD ANCE WITH THE PROVISIONS OF THE COMPANIES ACT, 1956 READ WITH THE RELEVANT ACCO UNTING STANDARDS. THE ARGUMENT OF THE APPELLANT THAT NON COMPLIANCE WITH REQUIREMENT OF AS 13 WOULD NOT AFFECT COMPUTATION OF BOOK PROFIT U/S 115 JB DOES NOT DESERVE ACCEPTANCE LOOKING AT THE PURPOSE OF INTRODUCTION O F THE PROVISIONS OF SECTION115JB AND MORE PARTICULARLY LOOKING TO THE M ETHOD ADOPTED BY THE APPELLANT TO AVOID TAX UNDER MAT FOR THE YEAR UNDER CONSIDERATION AS ALSO FOR THE YEAR IN WHICH THE SAME MIGHT BE SOLD. 5.13 THE APPELLANT'S RELIANCE ON THE JUDGMENT OF TH E SUPREME COURT IN THE CASE OF INDO RAMA SYNTHETICS (I) LTD 330 ITR 363 IS MISPLACED. THE JUDGMENT ON THE CONTRARY SUPPORTS THE ACTION OF THE AO AS IT HAS BEEN HELD THAT IF THE RESERVES CREATED HAD GONE TO INCREASE THE BOOK PROF ITS IN ANY YEAR WHEN THE PROVISIONS OF SECTION 115JB WERE APPLICABLE, THE AS SESSEE BECAME ENTITLED TO REDUCE THE AMOUNT WITHDRAWN FROM SUCH RESERVES IF S UCH WITHDRAWAL IS CREDITED TO P & L ACCOUNT BUT SINCE IN THE CASE BEF ORE SUPREME COURT THE AMOUNT HAD NEVER GONE TO INCREASE THE BOOK PROFITS IN THE YEAR IN WHICH REVALUATION RESERVE WAS CREATED , THE REDUCTION OF THE AMOUNT FROM THE P & L ACCOUNT WAS HELD NOT PERMISSIBLE. BESIDES THIS POSI TION CLARIFIED BY THE SUPREME COURT, THE ISSUE IN THAT CASE WAS REDUCTION SOUGHT UNDER EXPLANATION TO SECTION 115JB WHICH IS NOT THE CASE OF THE APPEL LANT AS HERE THE APPELLANT HAD ACTUALLY UTILIZED REVALUATION RESERVE FOR ISSUI NG BONUS SHARES DURING THE YEAR AND YET DID NOT INCLUDE THE AMOUNT AS PART OF ITS PROFIT. THE APPELLANT'S FURTHER CONTENTION THAT EVEN IF COMPLETE EFFECT OF AS 13 IS GIVEN, THE RESULTANT ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 17 - PROFIT / LOSS REMAINS UNCHANGED AND THEREFORE NO AD JUSTMENT IN 'BOOK PROFIT' SHOULD BE MADE, CANNOT BE ACCEPTED SINCE IN THAT SI TUATION, THERE WOULD BE NO UPWARD VALUATION OF INVESTMENT AND NO REVALUATION R ESERVE ENABLING ISSUE OF BONUS SHARES AS THE APPELLANT HAS DONE. REGARDING J UDGMENT OF THE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD VS CIT 255 IT R 273, AGAIN SAID JUDGMENT IS ON DIFFERENT FACTS AS IN THE SAID CASE, THE PROFIT AND LOSS ACCOUNT WAS PREPARED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT, 1956 READ WITH THE ACCOUNTING STANDARDS AND THERE W AS NO QUESTION OF ISSUANCE OF BONUS SHARES FROM RESERVE CREATED DUE T O REVALUATION OF INVESTMENT. THE CONTENTION OF THE APPELLANT THAT TH E APPELLANT HAD COMPLIED WITH THE REQUIREMENTS OF THE COMPANIES ACT, 1956 RE AD WITH NOTIFIED ACCOUNTING STANDARDS IS THEREFORE NOT CORRECT IN VI EW OF THE FACT THAT THE AS 13 WAS NOT COMPLIED WITH AS REPORTED BY THE AUDITOR S. SUPREME COURT IN THE CASE OF APOLLO TYRES HAS HELD THAT THE A.O. HAS TO SATISFY HIMSELF AS TO WHETHER, THE AUDITORS HAVE CERTIFIED THAT PROFIT AN D LOSS ACCOUNT IS IN ACCORDANCE WITH PART II AND III OF THE SCHEDULE VI. SUCH EXERCISE OF THE A.O. HAS TO BE WITH A DEFINITE PURPOSE AND THE A.O. HAS TO SEE WHETHER THE AUDITORS HAVE REALLY MADE UN-CONDITIONAL CERTIFICATION OR WH ETHER SUCH CERTIFICATION IS SUBJECT TO SOME QUALIFICATIONS. IF THERE IS UN-COND ITIONAL CERTIFICATION THEN ONLY THE A.O HAS NO POWER TO MAKE ADJUSTMENT. 5.14 SO FAR AS THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF J.K. INDUSTRIES LTD VS UNION OF INDIA (2007) 80 SCL 283 (SC) [297 ITR 176] IS CONCERNED, THE SAID JUDGMENT DEALT WITH THE QUESTIO N WHETHER AS-22 REGARDING DEFERRED TAX PROVISION IS INCONSISTENT AN D ULTRA VIRES WITH THE PROVISIONS OF THE COMPANIES ACT, 1956 AND HENCE THE SAME IS NOT RELEVANT FOR DECIDING THE ISSUE WHETHER REVALUATION RESERVE ACTU ALLY UTILIZED FOR ISSUE OF BONUS SHARES IS PART OF THE BOOK PROFIT OR NOT. BES IDES THIS FACTUAL DIFFERENCE, THE SUPREME COURT HAS LAID DOWN IN THE SAID CASE TH AT MEASUREMENT AND RECOGNITION METHODS ARE NOT THE ITEMS UNDER THE COM PANIES ACT AND THE METHODS OF RECOGNITION AND MEASUREMENTS ARE TALKED ABOUT BY THE PROVISIONS OF THE COMPANIES ACT BUT RECOGNITION AND MEASUREMEN T OF VARIOUS ITEMS OF REVENUE EXPENSES, ETC., STAND COVERED ONLY BY THE A CCOUNTING STANDARDS. THE COURT HELD THAT IT CANNOT BE SAID THAT THE SAID STA NDARDS ARE CONTRARY TO THE PROVISIONS OF THE COMPANIES ACT. THE CONTENTION IN THIS REGARD THAT MERE VALUATION OF ANY ASSET DOES NOT RESULT IN TO ANY GA IN UNTIL IT IS DISPOSED OFF IS VALID SO FAR AS THE NORMAL COMPUTATION OF INCOME UN DER THE ACT IS CONCERNED BUT THE SAME IS NOT A VALID CONTENTION WHEN THE APP ELLANT HAS UTILIZED THE SAIS GAIN IN ISSUE OF BONUS SHARES AND IN THE BALANCE SH EET THE VALUE OF INVESTMENT IS ENHANCED. THE QUESTION OF ADJUSTMENT PRESCRIBED UNDER EXPLANATION-1 TO ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 18 - SECTION 115JB(2) WILL ARISE ONLY AFTER THE TRUE NET PROFIT IS COMPUTED KEEPING IN VIEW THE BASIC PURPOSE OF INTRODUCING THE PROVIS IONS OF SECTION 115JB WHICH IS QUITE DIFFERENT THAN THE PURPOSE OF TAXING INCOME UNDER NORMAL COMPUTATION. 5.15 REGARDING RELIANCE PLACED BY THE APPELLANT ON AS-10, THE SAID ACCOUNTING STANDARD DEAL WITH FIXED ASSETS AND NOT THE INVESTMENT AND HENCE CANNOT BE APPLIED TO THE FACTS OF THE APPELLANT PAR TICULARLY WHEN THE REVALUATION RESERVE IS UTILIZED FOR ISSUING BONUS S HARES IN THE YEAR OF ITS CREATION. 5.16 REGARDING THE JUDGMENT IN THE CASE OF N.J.JOSE & CO VS. ACIT 321 ITR 132 (KER) AND DECISION IN THE CASE OF RAIN COMMODIT IES LTD VS. DCIT, THEY MERELY HOLD THAT THE CAPITAL GAIN EVEN IF EXEMPT UN DER NORMAL PROVISIONS U/S 54E OR SECTION 47(IV), THEY CANNOT BE EXCLUDED WHIL E COMPUTING BOOK PROFIT AND HENCE ARE NOT RELEVANT DECISIONS FOR THE ISSUE IN THE PRESENT APPEAL. I HAVE ALSO CONSIDERED THE VARIOUS OTHER DECISIONS RE LIED UPON BY THE APPELLANT. HOWEVER, IN ALL SUCH DECISIONS, THE ACCOUNTS WERE C ERTIFIED BY THE AUDITORS TO BE IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANI ES ACT, 1956 UNLIKE THE CASE IN HAND WHERE THE AUDITORS HAVE QUALIFIED THE ACCOUNTS AND THE REVALUATION RESERVE CREATED OUT OF ENHANCED VALUE O F INVESTMENT IS ACTUALLY UTILIZED FOR ISSUING THE BONUS SHARES AND HENCE THO SE DECISIONS ARE NOT RELEVANT TO THE FACTS OF THE APPELLANT'S CASE. 5.17 AS REGARDS ACCEPTANCE OF THE ACCOUNTS AT THE A GM, IT IS AGAIN PERTINENT TO NOTE THAT AS DISCUSSED BY THE AO, THE MAJOR SHAR EHOLDERS OF THE APPELLANT COMPANY ARE FAMILY MEMBERS AND GROUP COMPANIES AND DESPITE ADVERSE REMARK OF THE AUDITORS, THE BONUS SHARES HAVE BEEN ISSUED UTILIZING THE REVALUATION RESERVE. THE RESOLUTION PASSED BY THE A PPELLANT COMPANY FOR ISSUANCE OF BONUS SHARES EVEN PRIOR TO THE DATE OF REVALUATION REPORT IN THE CASE OF SUBSIDIARY COMPANY NAMELY NSI INFINIUM GLOB AL PVT LTD SHOWS THAT THE APPELLANT DESIGNED THE WHOLE SCHEME OF UTILIZIN G THE ENHANCED VALUE OF INVESTMENT BY WAY OF DISTRIBUTING THE RESERVE FOR B ENEFIT OF SUCH SHAREHOLDERS WHO ARE IN THE CLOSE RELATION. THE SUPREME COURT IN THE CASE OF JUGGILAL KAMLAPAT VS CIT 73 ITR 702 HAS HELD THAT INCOME-TA X AUTHORITIES ARE ENTITLED TO PIERCE THE VEIL OF CORPORATE ENTITY AND LOOK AT THE REALITY OF THE TRANSACTION. THE COURT HELD THAT WHILE IT IS TRUE THAT FROM JURI STIC POINT OF VIEW THE COMPANY IS A LEGAL PERSONALITY ENTIRELY DISTINCT FR OM ITS MEMBERS AND THE COMPANY IS CAPABLE OF ENJOYING RIGHTS AND BEING SUB JECTED TO DUTIES WHICH ARE NOT THE SAME AS THOSE ENJOYED OR BORNE BY ITS MEMBE RS, BUT IN CERTAIN ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 19 - EXCEPTIONAL CASES THE COURT IS ENTITLED TO LIFT THE VEIL OF CORPORATE ENTITY AND TO PAY REGARD TO THE ECONOMIC REALITIES BEHIND THE LEG AL FACADE. IT WAS HELD THAT THE COURT HAS POWER TO DISREGARD THE CORPORATE ENTI TY IF IT IS USED FOR TAX EVASION OR TO CIRCUMVENT TAX OBLIGATION. AS DISCUSS ED ABOVE, THE APPELLANT HAS ADOPTED THE DEVICE OF AVOIDING TAX UNDER THE PROVIS IONS OF SECTION 115JB PERMANENTLY ON THE GROUND THAT REVALUATION IS NOT R EAL PROFIT BUT AT THE SAME TIME, UTILIZING THE SAME FOR ISSUANCE OF BONUS SHAR ES. NO CONSENT TO SUCH A METHOD CAN BE SANCTIONED IN LAW IN VIEW OF THE FACT THAT THE ACCOUNTS ARE NOT PREPARED BY FOLLOWING THE ACCOUNTING STANDARD AND B ONUS SHARES HAVE ALREADY BEEN ISSUED FROM THE REVALUATION RESERVE ON REVALUATION OF INVESTMENT. 5.18 CONSIDERING THE TOTALITY OF THE FACTS AND LEGA L POSITION AS DISCUSSED ABOVE, PARTICULARLY THE FACT THAT THE ACCOUNTS WERE PREPARED IN VIOLATION OF THE ACCOUNTING STANDARDS AND THE PROFIT ON REVALUATION OF INVESTMENT THOUGH STATED TO BE 'NOTIONAL PROFIT', WAS ACTUALLY UTILIZ ED FOR ISSUING BONUS SHARES TO THE SHAREHOLDERS WHO ARE THE GROUP OF FAMILY MEMBER S WHICH SUGGEST THAT THE APPELLANT ITSELF CONSIDERED THE SAID PROFIT OR GAIN AS AVAILABLE FOR DISTRIBUTION BY WAY OF ISSUANCE OF BONUS SHARES, THE ACTION OF T HE AO IN MAKING THE ADDITION OF THE AMOUNT IN THE NET PROFIT FOR THE PU RPOSE OF ARRIVING AT THE BOOK PROFIT BEFORE STARTING ADJUSTMENTS PRESCRIBED IN EX PLANATION-1 TO SECTION 115JB(2) IS AFFIRMED. THE ADDITION OF RS. 19,99,79, 887/- AS COMPUTED BOOK PROFIT U/S 115JB IS SUSTAINED. THIS GROUND OF APPEA L IS DISMISSED. 5. BEFORE US, LD.AR REITERATED THE SUBMISSIONS MA DE BEFORE AO AND LD.CIT(A) AND FURTHER SUBMITTED THAT IT IS A FACT T HAT ASSESSEE HAD REVALUED THE INVESTMENTS AND THE REVALUATION RESERV E CREATED ON THE REVALUATION OF INVESTMENTS WAS CREDITED DIRECTLY TH E RESERVES AND SURPLUS ACCOUNT IN THE BALANCE SHEET WITHOUT ROUTING IT TO THE PROFIT AND LOSS ACCOUNT. HE FURTHER SUBMITTED THAT ASSESSEE HAS COM PLIED WITH ALL THE REQUIREMENT OF PARA II AND III OF SCHEDULE VI OF TH E COMPANIES ACT 1956 AS WELL AS ACCOUNTING STANDARDS AND IN SUCH A SITUA TION THE AO HAS NO AUTHORITY TO MAKE ADJUSTMENTS TO THE PROFITS DECLAR ED IN THE PROFIT AND ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 20 - LOSS ACCOUNT. HE FURTHER SUBMITTED THAT THE ADJUSTM ENT MADE BY THE AO TO THE PROFIT AND LOSS ACCOUNT IS NEITHER PERMISSIBLE UNDER EXPLANATION-1 TO S. 115JB(2) OF THE ACT NOR RECASTING OF THE PROFIT AND LOSS ACCOUNT IS PERMITTED. HE FURTHER SUBMITTED THAT EVEN ASSUMING BUT THOUGH NOT ADMITTING, THAT AO HAS POWER TO MAKE ADJUSTMENT TO THE PROFIT AND LOSS ACCOUNT, THEN ALSO BY REVALUING THE INVESTMENTS NO REAL PROFIT/INCOME HAS BEEN EARNED BY THE ASSESSEE. FOR THE PURPOSE OF COM PUTING BOOK PROFITS WITHIN THE MEANING OF S. 115JB OF THE ACT ONLY REAL PROFITS AND REALIZED GAINS CAN BE CONSIDERED. HE FURTHER SUBMITTED THAT THE ISSUE AS TO WHETHER THE REVALUATION RESERVE TAKEN TO THE BALANCE SHEET COULD BE MADE PART OF BOOK PROFIT HAS BEEN SETTLED IN FAVOUR OF THE ASS ESSEE BY THE DECISION OF HONBLE BOMBAY TRIBUNAL IN THE CASE OF ITO VS. G ALAXY SAWS P LTD (2011) 13 TAXMANN.COM 179 (MUM). HE FURTHER SUBMITT ED THAT IN THE YEAR UNDER CONSIDERATION THE INVESTMENTS HAVE NOT BEEN S OLD AND THEREFORE THERE IS NO TAX LIABILITY AND IF AT ALL ANY TAX LIA BILITY UNDER CLAUSE (J) OF EXPLANATION (1) TO S. 115JB OF THE ACT WILL ARISE, IT WOULD BE ONLY IN THE YEAR OF RETIREMENT OR DISPOSAL OF ASSET. HE SUBMITT ED THAT SINCE DURING THE YEAR, THERE IS NO DISPOSAL OF SHARES WHICH ARE HELD BY THE ASSESSEE AS INVESTMENTS, NO ADJUSTMENTS COULD HAVE BEEN MADE UN DER CLAUSE (J) OF EXPLANATION (1) TO S. 115JB OF THE ACT. HE FURTHER PLACED RELIANCE ON THE FOLLOWING DECISIONS: 1. ITO VS MAXWELL DYES & CHEMICALS P LTD (2005) 2 SOT 461 (MUM). 2. ITO VS ORSON TRADING P LTD (2005) 2 SOT 503 (MUM ). ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 21 - 3. SUTLEJ COTTON MILLS LTD VS ACIT (1993) 45 ITD 22 (CAL) (SB). 5.1. HE THEREFORE REITERATED AND SUBMITTED AND IN T HE ABSENCE OF ANY TAXABLE INCOME ARISING ON ACCOUNT OF REVALUATION, N O ADJUSTMENT COULD BE MADE TO THE PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF BOOK PROFITS U/S 115JB OF THE ACT. HE THEREFORE SUBMITTED THAT THE A DDITION MADE BY THE AO AND CONFIRMED BY THE LD.CIT(A) BE SET ASIDE. 5.2. LD DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND LD.CIT(A) AND FURTHER SUBMITTED THAT IN THE PRESENT CASE, THE SUBSIDIARY COMPANY HAD REVALUED ITS ASSETS, AND ON THE BASIS O F REVALUATION EXERCISE CARRIED OUT BY THE SUBSIDIARY, THE ASSESSEE ALSO PR OCEEDED TO REVALUE ITS INVESTMENT. HE FURTHER SUBMITTED THAT ASSESSEE DID NOT STOP AT JUST REVALUATION OF INVESTMENTS BUT PROCEEDED TO DECLARE BONUS SHARES TO ITS SHAREHOLDERS AND THEREAFTER ASSESSEE ALSO CAME OUT WITH A PUBLIC ISSUE OF SHARES AT A HUGE PREMIUM AND COLLECTED THE AMOUNT F ROM THE GENERAL PUBLIC. HE SUBMITTED THAT BY REVALUING THE INVESTME NTS AND BY ISSUING BONUS SHARES, THE ASSESSEE HAS BENEFITTED ITS SHARE HOLDERS AND THUS IT WAS A CASE OF INDIRECT DISPOSAL OF INVESTMENT BY ISSUIN G BONUS SHARES. HE FURTHER SUBMITTED THAT A COMPANY CAN ONLY ISSUE BON US SHARES OUT OF THE FREE OR DISTRIBUTABLE RESERVE AND THE RESERVE CREAT ED OUT OF REVALUATION OF ASSETS IS NOT A RESERVE WHICH COULD HAVE BEEN DISTR IBUTED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ACT OF REVALUING THE INVESTMENTS AND ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 22 - APPROPRIATING THE RESERVE SO CREATED BY ISSUE OF BO NUS SHARES IS ALSO NOT IN ACCORDANCE WITH THE ACCOUNTING STANDARDS PRESCRI BED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND THE COMPANIES ACT AND THAT THERE IS ALSO A QUALIFICATION TO THAT EFFECT BY THE STATU TORY AUDITORS OF THE COMPANY. HE FURTHER SUBMITTED THAT THE ASSESSEE SHO ULD HAVE ROUTED THE REVALUATION RESERVE THROUGH THE PROFIT AND LOSS ACC OUNT. HE THUS STRONGLY SUPPORTED THE ORDER OF AO AND LD.CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS A FACT THAT DURING THE YEAR THE ASSESSEE WAS HAVING INVESTMENT OF RS 1,00,000 (10,000 EQUITY SHARES OF RS 10 EACH) IN TH E EQUITY SHARES OF NSI INFINIUM GLOBAL P LTD, ITS 100% SUBSIDIARY. DURING THE YEAR, NSI INFINIUM GLOBAL P LTD, ON THE BASIS OF VALUATION RE PORT OF PANKAJ K SHAH ASSOCIATES, CHARTERED ACCOUNTANTS, (REPORT DATED 21 .08.2010) ESTIMATED THE BUSINESS OF THE COMPANY AT RS 42.20 CRORES. BAS ED ON THE AFORESAID VALUATION REPORT, NSI INFINIUM GLOBAL P LTD, THE SU BSIDIARY OF THE ASSESSEE COMPANY, REVALUED THE ASSETS AS ON 31 ST MARCH 2011. AT THIS MOMENT IT WILL BE RELEVANT TO CONSIDER THE AUDITED FINANCIALS RESULTS OF NSI INFINIUM GLOBAL P LTD, WHICH ARE PLACED AT PAGE 32 TO 48 OF THE PAPER BOOK AND FROM WHICH THE FOLLOWING KEY FIGURES ARE EXTRACTED. ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 23 - AS AT 31 ST MARCH 2011 AS AT 31 ST MARCH 2010 SHARE CAPITAL 1,00,000 1,00,000 RESERVES & SURPLUS BEING REVALUATION RESERVE 35,35,34,247 0 UNSECURED LOANS 8,31,32,878 5,25,69,449 TOTAL FUNDS EMPLOYED 43,67,67,125 5,26,69,449 APPLICATION OF FUNDS NET FIXED ASSETS 36,53,16,948 1,25,25,156 INVESTMENTS 9,00,000 9,00,000 CURRENT ASSETS, LOANS & ADVANCES 7,19,09,835 3,88,32,965 LESS: CURRENT LIABILITIES & PROVISIONS 1,98,77,336 77,92,052 NET CURRENT ASSETS 5,20,32,499 3,10,40,913 MISC EXPS NOT WRITTEN OFF 1,98,400 2,97,600 PROFIT & LOSS ACCOUNT 1,83,19,278 79,05,780 TOTAL ASSETS (NET) 4,36,76,77,123 5,26,69,449 6.1. KEY FIGURES OF AUDITED PROFIT AND LOSS ACCOU NT OF NSI INFINIUM GLOBAL P LTD ARE AS UNDER:- ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 24 - 31 ST MARCH 2011 31 ST MARCH 2010 SALES 40,60,38,796 23,82,20,023 DEPRECIATION 28,66,296 5,07,304 NET LOSS 1,04,13,498 24,95,698 6.2. THE KEY OBSERVATIONS ON THE ANALYSIS OF THE ABOVE FINANCIAL RESULTS OF NSI INFINIUM GLOBAL P LTD ARE AS UNDER:- (I) COMPANY HAS INCURRED CASH LOSSES IN YEAR ENDING 31 ST MARCH 2010 AND 2011. (II) COMPARATIVE FIGURES FOR THE TWO YEARS I.E. 31 ST MARCH 2011 AND 31 ST MARCH 2010 SHOWS THAT THE LOSSES FOR THE YEAR ENDE D 31 ST MARCH 2011 HAVE INCREASED WITH THE INCREASE IN TURN OVER. (III) THE NET WORTH OF THE COMPANY (I.E. SHARE CAPITAL + RESERVES & SURPLUS DEBIT BALANCE OF PROFIT AND LOSS ACCOUNT) WAS NEGATIVE AS ON 31 ST MARCH 2010. (IV) THE NET WORTH OF THE COMPANY AS ON 31 ST MARCH 2011 IS POSITIVE ONLY DUE TO REVALUATION RESERVE OF THE INTANGIBLES/ ASSETS WHICH HAVE BEEN CONSIDERED ON THE BASIS OF VALUER REPORT OF 21.08.2010. IF THE REVALUATION RESERVE IS EXCLUDED, THE NET WORTH OF THE COMPANY AS ON 31 ST MARCH 2011 CONTINUES TO BE NEGATIVE. 6.3 AS FAR AS THE ASSESSEE IS CONCERNED, IT IS SIG NIFICANT TO NOTE THE FOLLOWING:- (I) THE ASSESSEE COMPANY IS A CLOSELY HELD PUBLIC LIMIT ED COMPANY AND THE ENTIRE SHAREHOLDING IS HELD BY INDIVIDUAL SHAREHOLDERS/ASSOCIATES AND FAMILY MEMBERS. ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 25 - (II) THE INVESTMENT OF THE ASSESSEE IN ITS SUBSIDIARY (N SI INFINIUM GLOBAL P LTD) PRIOR TO THE REVALUATION WAS REFLECTE D AT RS 1 LAC. (III) POST REVALUATION, THE INVESTMENTS IN THE SHARES OF NSI INFINIUM GLOBAL P LTD WAS REFLECTED AT RS 20.01 CRORES. (IV) AFTER THE REVALUATION OF INVESTMENTS, THE SUBSTANTI AL PORTION OF THE REVALUATION RESERVE THAT WAS CREATED, WAS USED FOR ISSUING BONUS SHARES TO THE SHAREHOLDERS OF THE ASSESSEE CO MPANY IN THE RATIO OF 361 FULLY PAID EQUITY SHARES FOR EVERY 1 S HARE HELD BY THE SHAREHOLDERS OF THE ASSESSEE COMPANY. (V) LD. CIT(A) HAS NOTED THAT THE REPORT OF CHARTERED A CCOUNTANT (THE BASIS OF WHICH THE REVALUATION OF ASSETS WAS U NDERTAKEN) WHO VALUED THE ASSETS OF NSI INFINIUM GLOBAL PVT LT D WAS DATED 21.08.2010 BUT HOWEVER THE ASSESSEE PASSED A SPECIAL RESOLUTION ON 10.8.2010 FOR ISSUING FULLY PAID BONU S SHARES IN THE RATIO OF 361 FULLY PAID EQUITY SHARES FOR EVERY 1 SHARE HELD BY THE SHAREHOLDERS OF THE ASSESSEE COMPANY. IT CAN THUS BE SEEN THAT THE RESOLUTION FOR ISSUING BONUS SHARES T O THE SHAREHOLDERS BY THE ASSESSEE COMPANY WAS PASSED EVE N BEFORE THE REPORT OF THE CHARTERED ACCOUNTANT WAS R ECEIVED BY THE SUBSIDIARY COMPANY AND WHICH WAS THE BASIS F OR THE REVALUATION OF THE INVESTMENTS. (VI) BY ISSUING THE BONUS SHARES OUT OF REVALUATION RESE RVE, THE ASSESSEE HAS VIRTUALLY TREATED THE REVALUATION RESE RVE AS A FREE RESERVE THOUGH IN REALITY IT IS NOT A FREE RESERVE AVAILABLE FOR DISTRIBUTION AS HELD BY THE CIRCULAR ISSUED BY DEP ARTMENT OF COMPANY AFFAIRS WHICH READS AS UNDER: CIRCULAR NO 9/94 DATED 6.9.1994 ISSUED BY THE DEPAR TMENT OF COMPANY AFFAIRS, MINISTRY OF LAW, JUSTICE AND COMPA NY AFFAIRS, GOVERNMENT OF INDIA. ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 26 - 1. I AM DIRECTED TO SAY THAT IT HAS COME TO THE NOTICE OF THE DEPARTMENT THAT A NUMBER OF UNLISTED COMPANIES (EXI STING PRIVATE/CLOSELY HELD PUBLIC COMPANIES) ARE RESORTIN G TO REVALUATION OF THEIR ASSETS AND ISSUING BONUS SHARE S THEREFROM. THE LATEST SEBIS GUIDELINES ON BONUS SH ARES DATED 13.4.1994, INTER ALIA, STIPULATE THAT THE BON US ISSUE HAS TO BE MADE OUT OF FREE RESERVES BUILT OUT OF GE NUINE PROFITS OR SHARE PREMIUM COLLECTED IN CASH ONLY AND RESERVES CREATED BY REVALUATION OF FIXED ASSETS CANNOT BE CA PITALIZED FOR THIS PURPOSE. THESE GUIDELINES ARE APPLICABLE O NLY TO LISTED COMPANIES. 2. THE MATTER HAS BEEN CONSIDERED IN THE DEPARTMENT AN D THE EXISTING PRIVATE/CLOSELY HELD AND UNLISTED COMPANIE S ARE HEREBY ADVISED NOT TO ISSUE BONUS SHARES OUT OF THE RESERVES CREATED BY THE REVALUATION OF FIXED ASSETS . (EMPHASIS SUPPLIED) (VII) THE GUIDANCE NOTE ON AVAILABILITY OF REVALUATION RE SERVE FOR ISSUE OF BONUS SHARES, ISSUED BY THE INSTITUTE OF C HARTERED ACCOUNTANTS OF INDIA, AT PARA 4 STATES THAT THE REV ALUATION RESERVE DOES NOT REPRESENT A REALIZED GAIN. FOR REA DY REFERENCE CLAUSE 4 IS REPRODUCED AND IT READS AS UNDER: 4.IT MAY BE NOTED THAT THE EXCESS OF THE REVALUED AMOUNT OVER THE NET BOOK VALUE OF THE FIXED ASSETS, WHICH IS CR EDITED TO REVALUATION RESERVE, IS CREATED AS A RESULT OF BOOK ADJUSTMENT ONLY. THE REVALUATION RESERVE DOES NOT RESULT FROM AN ARMS LENGTH TRANSACTION; IT REPRESENTS AN EXPERTS PERCE PTION OF VALUE. THE REVALUATION RESERVE THUS DOES NOT REPRES ENT A REALIZED GAIN. (EMPHASIS SUPPLIED) 5. SHARE CAPITAL REPRESENTS THE AMOUNT OF MONEY OR MONEYS WORTH RECEIVED BY THE OWNERS AND THE CAPITALIZATION OF EARNED ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 27 - PROFITS OR OTHER GAINS ARISING OUT OF AN ARMS LENG TH TRANSACTION. IT HAS, THEREFORE, BEEN A CARDINAL PRI NCIPLE THAT ONLY SUCH PROFITS AS ARE EARNED OR THE RELEVANT CAP ITAL RECEIPTS (E.G. SHARE PREMIUM) AS ARE REALIZED, CAN BE CAPITA LIZED. (VIII) IT IS ALSO A FACT THAT AFTER THE ISSUE OF BONUS SHA RES TO THE SHAREHOLDERS OF THE ASSESSEE COMPANY, THE ASSESSEE COMPANY CAME OUT WITH A PUBLIC ISSUE OF SHARES, WHEREBY IT OFFERED THE SHARES TO THE PUBLIC AT LARGE AT A HUGE PREMIUM. 7. AT THE INITIAL STAGE, THE ARGUMENTS OF THE LD AR THAT THE ONLY REAL GAINS AND ONLY REALIZED GAINS CAN BE CONSIDERED FOR THE PURPOSE OF TAXATION SEEMS TO BE ATTRACTIVE, BUT THE SAME CANNO T BE ACCEPTED IN THE LIGHT OF THE TOTALITY OF THE FACTS LISTED HEREINABO VE AND IN THE LIGHT OF THE DETAILED ORDER OF LD CIT(A) AND MORE SO WHEN THE AS SESSEE IN THE GARB OF ISSUE OF BONUS SHARES HAS DISTRIBUTED THE UNRELAISE D GAINS. FURTHER, BEFORE US ASSESSEE HAS ALSO NOT PLACED ANY MATERIAL ON REC ORD TO DEMONSTRATE THAT THE FINDING OF THE LD CIT(A) ARE FACTUALLY INC ORRECT WITH RESPECT TO ASSESSEES GOING AHEAD WITH THE PASSING OF RESOLUTI ON FOR ISSUE OF BONUS SHARES EVEN BEFORE THE RECEIPT OF THE REPORT OF CHA RTERED ACCOUNTANT, WHICH THE BASIS OF THE REVALUATION, ISSUANCE OF BON US SHARES TO ITS SHAREHOLDERS EVEN THOUGH IT WAS NOT PERMISSIBLE AS PER THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND THE CIRCULAR ISSUED BY DEPARTMENT OF COMPANY AFFAIRS, MINISTRY O F LAW, JUSTICE AND COMPANY AFFAIRS. FURTHER, IT IS ALSO NOT THE CASE O F THE ASSESSEE THAT THE REVALUATION RESERVE WHICH HAS BEEN CREATED IS NOT A MERE BOOK ADJUSTMENT ITA NO.3391/AHD /2015 INFIBEAM INCORPORATION LTD. VS. ITO ASST.YEAR 2011-12 - 28 - ENTRY BUT ON THE CONTRARY HAS RESULTED INTO ACTUAL CASH INFLOW AND THAT IT REPRESENTS REALIZED GAINS. BEFORE US, IN SUPPORT O F ITS CLAIM, LD AR HAD RELIED ON VARIOUS DECISIONS BUT HOWEVER WE FIND THA T THE RATIO OF DECISIONS RELIED UPON BY THE ASSESSEE IN ITS SUPPOR T ARE NOT APPLICABLE TO THE PRESENT FACTS OF THE CASE BECAUSE IN NONE OF TH E CASES RELIED UPON BY THE LD AR, THE REVALUATION RESERVE WAS USED FOR THE PURPOSE OF ISSUING BONUS SHARES. IN VIEW OF THE AFORESAID FACTS, WE FI ND NO REASON TO INTERFERE WITH THE ORDER OF LD CIT(A) AND WE THEREF ORE DISMISS THE GROUND OF ASSESSEE. 8. IN THE RESULT, THE APPEAL OF ASSESSEE IS DISMI SSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 08 /07/2016 SD/- SD/- () () (RAJPAL YADAV) ( ANIL CHATURVEDI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 08/ 07 /2016 3..,.../ T.C. NAIR, SR. PS !'#$%$' / COPY OF THE ORDER FORWARDED TO : 1. $& / THE APPELLANT 2. '($& / THE RESPONDENT. 3. 456 7 / CONCERNED CIT 4. 7 ( ) / THE LD.CIT(A)-4, AHMEDABAD 5. 89:'56 , 56/ , 4 / DR, ITAT, AHMEDABAD 6. :<=+ / GUARD FILE. / BY ORDER, (8' //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD
Mehul