Assessing Officer cannot exclude depreciation on revalued assets from book profits despite qualified audit notes.

The appellant-assessee revalued its plant and machinery in 1998.

For the Assessment Year 2004–05, the assessee claimed depreciation on the enhanced value of these revalued assets while computing "book profit" for Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961.

The statutory auditor, in the notes to accounts, qualified that the selective revaluation of assets was not in conformity with Accounting Standard 10 (AS-10), though the accounting per se followed accepted practices.

Based on this audit note, the Assessing Officer and the Income Tax Appellate Tribunal (ITAT) disallowed the depreciation on the revalued portion, reversing the CIT (Appeals)'s decision which had favored the assessee.

The assessee appealed to the High Court.

Whether the Income Tax Appellate Tribunal was right in law in holding that the appellant is not entitled to depreciation for the purpose of computing "book profit" on the enhanced value of assets on their revaluation due to a qualification in the audit report.

Section 115JB of the Income Tax Act, 1961, regarding the computation of "book profit" for MAT.

Apollo Tyres Ltd. v. CIT (255 ITR 273), which held that an Assessing Officer has limited power to examine whether books are certified by authorities under the Companies Act and cannot go behind the net profit shown in the audited P&L account except for specific adjustments provided in the Explanation to the section.

Section 227(2) and Section 211 (Schedule VI) of the Companies Act, 1956, which define the auditor's duty to report whether accounts give a "true and fair view".

The Court reasoned that the ITAT erred in concluding that a qualification note in an audit report automatically meant the book results were not "approved" or did not represent a "true and fair view".

Under Section 227(2) of the Companies Act, once accounts are audited and placed before the AGM, they fulfill the statutory requirement of authenticity.

The Court observed that the ITAT’s attempt to distinguish the present case from earlier years (where the same assessee succeeded) based solely on the auditor's note regarding AS-10 was untenable.

Applying the Apollo Tyres doctrine, the Court emphasized that the Assessing Officer's jurisdiction is restricted; since the accounts were certified and the "true and fair view" was not fundamentalally disqualified, the AO could not recompute the "book profit" by selectively excluding depreciation on revalued assets.

The Court noted that the Revenue had accepted this position for the subsequent Assessment Year 2006–07.

It held that the Tribunal erred in restoring the Assessing Officer's order and that the appellant is entitled to depreciation on the enhanced value of revalued assets for computing "book profit" under the MAT provisions.

The order of the CIT (Appeals) was restored, and the Tax Appeal was allowed.