1. This appeal by the assessee is directed against the order of Learned Commissioner (Appeals) XIV, New Delhi, dated 20-3-2002.
2. Ground No. 1 raised by the assessee in this appeal is general seeking no specific decision from us.
3. In ground No. 2, the assessee has challenged the action of the Learned CLT(A) in upholding the order of the assessing officer restricting its claim for depreciation in respect of commercial vehicles given on lease to Rs. 8,51,75,155 (@ 25 per cent) as against Rs. 13,62,80,248 (@ 40 per cent) claimed by the assessee.
4. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue was decided by Hon'ble Delhi High Court in the case of CIT v. Bansal Credits Ltd. (2003) 259 ITR 69 holding that it is the end user of the specified asset which is relevant for determining the rate of depreciation. The matter, therefore, was remanded by the Hon'ble Delhi High Court with a direction that depreciation at higher rate be allowed subject to verification whether the leased out vehicles had been actually used by the lessee in the business of hire. Relying on the said decision of Delhi High Court in the case of Bansal Credits Ltd (supra), IT AT Delhi Benches have restored a similar issue in many cases to the file of the assessing officer for allowing depreciation at higher rate subject to the verification of end user of the leased out vehicles by the lessee.
The Learned Counsel for the assessee however has brought to our notice a recent decision of Delhi High Court in the case of CIT v. M.G.F.(India) Ltd. wherein it has been held that the assessee engaged in the business of leasing out vehicles is entitled to higher depreciation @ 40 per cent on vehicles leased out which are given to third parties under lease agreements and there is no additional requirement to show that the said third parties have used those vehicles for hire. Since this decision rendered by the jurisdictional High Court is later in point of time and the earlier decision in the case of Bansal Credits Ltd. (supra) has been taken into consideration while rendering the same, we respectfully follow the said binding precedent and hold that the assessee company was entitled for depreciation at a higher rate of 40 per cent on vehicles leased out to third parties in the course of its business of leasing out the vehicles. The impugned order of the Learned Commissioner (Appeals) on this issue is therefore set aside and the assessing officer is directed to allow the claim of the assessee for higher depreciation @ 40 per cent on the commercial vehicles given on lease.
5. Ground No. 3 relates to the addition of Rs. 14,70,000 made by the assessing officer and confirmed by the Learned Commissioner (Appeals) on account of disallowance of expenses incurred by the assessee in connection with the issue of equity shares for augmenting its working capital requirement treating the same to be of capital nature.
6. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is squarely covered in favour of the revenue and against the assessee by the decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT : wherein it was held that expenditure incurred in connection with public issue of equity shares constitutes capital expenditure. Relying on this decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra), Hon'ble Calcutta High Court has held in the case of B.S.L. Ltd. v. CIT that in view of the decision of Hon'ble Supreme Court, the question does not remain open any further for consideration and decisions on the basis of as to whether the capital raised is needed as working capital or not.
Respectfully following these judicial pronouncements, we uphold the impugned order of Learned Commissioner (Appeals) confirming the disallowance made on this issue and dismiss ground No. 3' of the assessee's appeal.
7. Ground No. 4 relates to the addition of Rs. 21,19,91,185 made by the assessing officer and confirmed by the Learned Commissioner (Appeals) by way of disallowance of lease equalization charges while computing book profits under Section 115.1 A.8. In the profit and loss account filed along with the return of income for the year under consideration, the assessee. company had deducted the lease equalization charges amounting to Rs. 21,19,91,185 from the lease rental income. In the computation of total income, the said amount had been added back by the assessee company, but the same was not added to the profit as per profit & loss account while computing book profit under Section 115JA. It was submitted on behalf of the assessee company before the assessing officer that the treatment was so given to the lease equalization charges following the guidelines issued by the Institute of Chartered Accountants of India (ICAI) on "Accounting of income, depreciation and other aspects for leasing company". According to the assessing officer, the said guidelines issued by ICAI on creation of lease equalization charge was only recommendatory and not mandatory. He held that the lease equalization was a notional charge on the profits of the company and represented an amount set aside out of profits/surplus to equalize the imbalance between lease rentals and depreciation charges over the period of lease. He, therefore, held that the same was liable to be added back to book profit under Explanation (b) to Section 115JA(2). The matter was carried before the Learned Commissioner (Appeals) and it was submitted on behalf of the assessee company before him that the lease equalization charge was necessitated because of the difference between the principal recovery in each instalment of lease rental and depreciation charged to the profit and loss account. It was pointed out that the lease equalization charge thus brings the value of the assets at the end of the year to the extent of its unrecovered portion of cost and the same was based on the principle of "matching cost with revenue" so that the periodic net income from lease would be true and fair. A detailed note explaining the concept of lease equalization was also submitted on behalf of the assessee company to the Learned Commissioner (Appeals) to support and substantiate its stand that the provision for lease equalization charge not being made for meeting any liability, it could not be added back while computing book profit under Section 115JA. This contention raised on behalf of the assessee company however was not found acceptable by the Learned Commissioner (Appeals) and he proceeded to uphold the adjustment/addition made by the assessing officer on account of lease equalization charge for the purpose of computing book profit under Section 115JA observing that the same was a notional charge.
9. The Learned Counsel for the assessee submitted that the amount of lease equalization charges debited by the assessee company in its profit and loss account was added by the assessing officer while computing the book profit under Section 115JA invoking Explanation (b) to Section 115JA(2). He invited our attention to the said Explanation to point out that the same authorizes the assessing officer to make adjustment to the book profit on account of amounts carried to any reserves by whatever name called. He contended that the nature of lease equalization charges therefore needs to be seen so as to ascertain whether die same could be regarded as any reserve as envisaged in Explanation (b) below Sub-section (2) of Section 115JA. In this regard, he invited our attention to the guidance note issued by the Institute of Chartered Accountants of India (ICAI) on "Accounting for leases" and took us through the relevant portion of the said note to explain the nature of lease equalization charges and the purpose for which provision is required to be made for the said charges. As pier the direction of the Bench, he also prepared and furnished a note explaining all the relevant aspects relating to the provision made for lease equalization charges as follows :: 1. Depreciation of Rs. 2708.15 lakhs has been debited to P&L Accountand lease equalization charges of Rs. 2119.91 lakhs has been shown as a deduction for the value of lease rentals. In computation of total incomeunder normal provisions of the Act equalization charges are addedback 2. Company has consistently followed this accountancy policy and debited lease equalization charges to P&L Account in past also. Some of the leases of this year were in existence in the past as well. No addition has been made in the past on this account. Rather in assessment year 1997-98 this issue was examined in detail by the assessing officer and after considering the submissions made by appellant assessing officer accepted the stand. Adjustments of lease equalization charges are tuning differences and if such adjustments are accepted by department in assessment year 1997-98 then no adjustments for the same will be required in assessment year 1998-99 while computing the book profits.
o Guidance note based on the rationale of matching costs with revenues so that the periodic net income form a finance lease is true and fair.
o Depreciation allowance is only permitted to the owners of the assets, in this regard Guidance Note is issued only as an interim measure o A financial lease is defined under the Guidance Note as a lease under which the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.
o In P&L A/c against lease rentals a matching lease annual charge is debited or credited to P & L A/c.
o Annual lease charge should represent recovery of net investments/ fair value of the leased assets over the lease term.
-if annual lease charge depreciation then LEC is debited toP&L A/c.
-if annual lease charge depreciation then LEC is credited toP&L A/c.
o Lease Equalization Account should be transferred every year to the P & L a/c and disclosed separately as a deduction from/ addition to gross value of lease rentals shown under the head "Gross Amount".
o Notes to account (Pg. 70, Para 2 (it)) the difference of capitalrecovery vis-a-vis the depreciation is reduced from "Income fromleases" as lease equalization charges in accordance with the Guidance Note o Balance standing in Lease Adjustment A/c should be adjusted in the net book value of the leased assets.
o This guidance note matches the annual lease charges with depreciation as Lease Rental - Financial Income = Depreciation and any difference is debited or credited to lease equalization charges A/c.
4. The assessee company is a non-banking finance company registered with the Reserve bank of India and that the department of Non-baking Supervision of the Reserve bank of India in its regulatory framework for Non-banking Financial Companies, 1998 clearly states that all NBFCs have to comply with the Guidance Note issued by the Institute of Chartered Accountants of India on accounting for leases etc. and that it is mandatory and incumbent on the part of NBFCs to follow the guidance note. Kindly attention is invited to the Notification No. DFC199/ DG(SPT)-98, dated 31-3-1998 (copy enclosed Pgs. 1 to 19 relevant @ Pg. 7) wherein the Reserve bank of India has directed in Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 where in direction No. 5 is stated as follows: Accounting Standards and Guidance Notes issued by the Institute ofChartered Accountants of India (referred to in these direction as TCAF)shall be followed insofar as they are not inconsistent with any of thesedirections.
5. Section 211 (3 A) of the Companies Act, 1956 clearly states that the profitand loss account and balance sheet of a company shall comply with theaccounting standards. Sub-section (3ca) of Section 211 states thatexpressing "accounting standards" means the standards of accounting asspecified by Institute of Chartered Accountants of India till the time theyare prescribed by the Central Government in consultation with theNational Advisory Committee on Accounting Standards established under Sub-section (1) of Section 210A. 6. The Guidance Notes issued by Institute of Chartered Accountants ofIndia have been considered by the authorities and Courts in the past (refer Challapalli Sugars Ltd 98 ITR 167 (SC) @ Pg. 174).
Whenevercomplex question of accountancy principles arises, then the views of theInstitute of Chartered Accountants of India should be given weightage.
7. The mechanics of the Guidance Notes cannot be doubted. Rather it is no more res Integra. A reliance is also placed upon the judgment of Hon'ble Hyderabad ITAT in the case of JCLT v. Pact Securities and Financial Ltd 86 ITD 115 (Hyd.) where Hon'ble ITAT has held that guidance note on accounting for leases issued by ICAI is not one from which correct profit can't be deducted. This is an internationally accepted method having the sanction of the Institute of Chartered Accountants of India.
8. Each method is distinct having its own independent characteristics and objectives. To reflect the alternate method of revenue recognition (as per Guidance Notes) an appropriate adjustment/adaptation entry was called for. Lease equalization only embodies the said adjustment/adaptation. It does not lead to creation of any reserve. If this be true will the assessing officer also take cognizance of the addition to the normal case income when made? Will that be an addition to income or a withdrawal from a reserve? The vary nomenclature of 'reserve' thus is a misnomer. In substance it is only another acceptable method of revenue recognition. The method of accounting under the normal provisions of Income-tax Act may differ from that under MAT provisions. This is because Section 115JA(2) makes it mandatory for a company to prepare its profit and loss account in accordance with the provisions of Parts II and HI of Schedule VI of the Companies Act, 1956.
Where a particular amount is not income in a particular year as per the accepted method of accounting, it will not make it a reserve.
For example where some lease rentals pertaining to next financial year are received in advance then they will not be recognized as income but will be disclosed in the balance sheet as assets and will be recognized as income next year.
9. The adjustments on account of lease equalization account whether todebit or credit will not affect the quantum of the overall recognition ofthe lease rentals recognized as an income. This can be demonstratedfrom following chart: Reconciliation Statement between lease rentals recovered and recognized in Books of Account (Kindly note that the figures have been adopted from the illustration given in the Guidance Notes at page 50 of the Paper Book) But in assessee's case assessee is booking depreciation under the Companies Act following the Straight Line Method (SLM).
Assuming we continue with the example at page 50 of the Paper Book by adopting depreciation on SLM Method.
The rental is Rs. 35,000; Rs. 16,000; Rs. 8,000; and Rs. 4,500 respectively in these four years, payable in advance every year. The estimated residual value of the computer at the end of the lease term is 5 per cent of the cost of the asset to the lessor. The lessee has the right to continue the lease at the end of the aforesaid lease term at a nominal rent. Depreciation is provided on SLM basis.
(i) Calculations of the implicit rate of interest in the lease will remain same at 14 per cent as stated at pg. 50PB, para C. (n) Calculations of the Annual Lease Charge will also remain same as stated at pg. 51, top right hand column.
Reconciliation Statement between lease rentals recovered and recognized in Books of Account Thus during the lease tenure in comparison, equal amount of lease rentals received have been recognized as income. The method of revenue recognition specified in the Guidance Notes is an acceptable parallel method of revenue recognition meant for preparation of financial statements for accounting purpose, such as under the Companies Act, 1956 (refer Pg. 45 of PB).
10. As per Explanation to Section 115JA "book profits" means the net profit as shown in the profit & loss account for the relevant previous year prepared under Sub-section (2) as increased by: The amount of lease equalization charges reduced from the lease rentals credited to the profit & loss account cannot be termed as a "reserve" for the following reasons: o The audited profit & loss account certified by the auditors doesn't term lease equalization charges as a reserve.
o Lease equalization charges are not disclosed in the balance sheet of the assessee under- the head "Reserves and surplus".
o 'Reserves' mean profits earned by company and not distributed asdividend to the shareholders but kept back by the directors for anypurpose to which it may be put in future. (Refer CIT v. Century Spinning and Manufacturing Co. Ltd 24 ITR 499 (SC) @ Pg. 504) As the lease equalization account is not shown as a reserve in the annual accounts, but adjusted against the value of fixed assets in the fixed asset schedule clearly indicate that these are not to the distributed as dividends by the company and hence cannot be classified as "reserves".
10. The learned Counsel contended that the provision for lease equalization charges thus is nothing but a sort of parallel method of accounting followed by the assessee for the purpose of revenue recognition of leasing business. He contended that the purpose of making the said provision is to split the lease rental income into financial income in order to match the said income with the corresponding expenses such as depreciation. He contended that the provisions made for lease equalization charges thus is not appropriation of profit so as to treat the same as a reserve as envisaged in Explanation (b) to Section 115JA(2). In support of this contention, he relied on the decision of Apex court in the case of State Bank of Patiala v. CIT . He submitted that a similar treatment given by the assessee by debiting the provision for lease equalization charges to its profit and loss account was accepted by the department in the past including the immediately preceding year Le. Assessment Year 1997-98 wherein no adjustment was made by the assessing officer while computing the book profits under Section 115JA on this count.
11. The Learned Counsel for the assessee also relied on the decision of Delhi "A" Bench of ITAT in the case of Dy. CIT v. SREI International Finance Ltd.(2006) 10 SOT 722 (Delhi) and submitted that a similar issue involved in the said case has been decided by the Tribunal in assessee's favour holding that lease equalization charges where not covered within any of the Clauses (a) to (f) of Explanation to Section 115JA(2). He contended that the assessing officer, therefore was not justified in adding the amount of lease equalization charges while computing the book profits of the assessee under Section 115JA.12. The Learned DR, on the other hand, submitted that its profit and loss account for the year under consideration was not prepared by the assessee company strictly as per Schedule VI of the Companies Act and in any case, the assessing officer was duly authorized to make the adjustment to the profit shown by the assessee-company in its profit and loss account as per Explanation to Section 115JA(2) while computing the book profits. He contended that for determining the nature of lease equalization charges, nomenclature used is not the determining factor and it is necessary to ascertain such nature from the purpose for which the provision was made for the said charges as well as the treatment given by the assessee- company in its books of account. He contended that the adjustment on account of lease equalization charges was made by the assessee-company itself while computing the book profit as per Section 115 JA which was not permissible in law. He contended that the said provision in any case was made by the assessee-company to set apart certain amount from profits of the year under consideration and the same therefore was nothing but clesirly in the nature of reserve as envisaged in Explanation (b) to Section 115JA(2).
13. As regards the decision of Delhi Bench of ITAT in the case of SREI International Finance Ltd. (supra) cited by the Learned Counsel for the assessee, the Learned DR submitted that the argument now being advanced on behalf of the revenue before the Tribunal in the present case submitting that the provision made for lease equalization charges by the assessee-company was nothing but the amount carried to reserve, had not been raised before the Tribunal in the case of SREI International Finance Ltd. (supra). He submitted that since this aspect of the matter is very crucial to decide the issue under consideration and the Tribunal in the case of SREI International Finance Ltd. (supra) had no occasion to consider the same, the issue in question cannot be treated as covered and the same may be considered independently taking into account the said vital aspect of the matter. He also submitted that the guidance note issued by the ICAI in 1988 in this context has been subsequently withdrawn and in any case, such guidance note does not take place of an accounting standard which is mandatory. He contended that lease equalization charges is not a liability so as to treat the amount set apart for the same as a provision and keeping in view the nature of the amount set apart as well as the purpose for setting apart the same, it was actually in the nature of a reserve created by the assessee-company. He also contended that if the assessee-company is receiving extra amount in one year and less amount in other year, the adjustment made to match the same could not be regarded as provision but the same clearly is in the nature of reserve representing amount set apart by the assessee from the profits of the current year.
14. In the rejoinder, the Learned Counsel for the assessee submitted that the guidance note issued by the ICAI in the context of provision for lease equalization charges has been subsequently withdrawn and replaced by Accounting Standard 19 and no adverse inference on the basis of such withdrawal could be drawn against the assessee as sought by the Learned AR. He explained the method of making the provision for lease equalization charges by debiting the same to profit arid loss account as well as the withdrawals made from the said provision by writing back the same in the profit and loss account of the subsequent years with the help of accounting entries passed in the books of account of the assessee while recording the relevant transactions.
15. We have considered the rival submissions and also perused the relevant material on record. It is observed at the outset that a similar issue relating to the adjustment made on account of provision made for leaseequalization charges while computing book profits under Section 115JAhad arisen for consideration before Delhi "A" Bench of ITAT in the case of SREI International Finance Ltd. (supra) cited by the Id, counsel for the assessee. In the said case, a similar adjustment made by the Assessing Officer on account of lease equalization charges while computing book profits under Section 115 JA was directed to be deleted by the Learned Commissioner (Appeals) for the reasons as summarised by the Tribunal in paragraph No. 8 of its order as follows: The Commissioner (Appeal) firstly analysed the provisions of Section 115JA of the Act and the reasons for its introduction. The Commissioner (Appeal) thereafter referred to the provisions of Section 211(2) of the Companies Act, 1956 which provides that every Profit and Loss a/c of a company shall give a true and fair view of the Profit and Loss a/c of the company for the financial year and shall comply with the requirements of Parts II & IE of Schedule VI to the Companies Act.
Sub-section (3A) of Section 211 of the Companies Act, 1956 further provides that every Profit and Loss a/c and Balance Sheet of a company shall comply with the Accounting Standards. Sub-section (3C) of Section 211 defines Accounting Standards to mean the standards of accounting recommended by the IC AI constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under Sub-section (1) of Section 201 A. It was further laid down that the Standards of Accounting specified by the IC AI shall be deemed to be the Accounting Standards until the Accounting Standards are determined by the Central Government under that sub-section. The Commissioner (Appeal) held that though these Accounting Standards were only recommendatory in nature but the assessee being a company would be required to follow the same in view of the provisions of Section 211 (3C) of the Companies Act, 1956. Since the Profit and Loss a/c prepared by the assessee were in accordance with provisions of Parts II & HI of Schedule VI to the Companies Act, the assessing officer could not disturb such profit unless the case fell within the ken of Clauses (a) to (f) of Explanation to Section 115 JA. Thereafter the Commissioner (Appeal) analysed the nature of the lease equalization charges and finally concluded that these equalization charges represent recovery of the fair value of the leased assets over the lease term and is deducted from the lease rentals to bifurcate annual lease with revenue component and capital portion and does not as such fall under any of these categories enumerated under Clauses (a) to (f) of Explanation to Section 115 JA of the Act. The Commissioner (Appeal) has also referred to the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd (supra) and held that the assessing officer could not disturb the book profits which are determined in accordance with the provisions of Parts II & in of Schedule VI to the Companies Act. The conclusion of the assessing officer in adding the lease equalization charges to the book profits was thus directed to be deleted by the Commissioner (Appeal). The revenue is aggrieved by mis order of the Commissioner (Appeal) and has raised the aforesaid ground of appeal.
16. When the aforesaid relief given by the Learned Commissioner (Appeals) was challenged by the revenue in an appeal filed before the Tribunal, the provisions of Section 115JA relevant in this context were referred to by the Tribunal in paragraph No. 10 of its order and after analyzing the same, the purpose behind introducing the said provisions was explained by the Tribunal as follows: The provisions of Section 115 JA of the Act, insofar as the same is relevant for the purpose of deciding the issue in the present appeal, reads as follows: Deemed income relating to certain companies.(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after 1-4-1997 (but before 1-4-2001) hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purpose of this section prepare its profit and loss account for the relevant previous year inaccordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing profit & loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit & loss account laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under die Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
Explanation - For the purposes of this section, 'book profit' means the net profit as shown in the Profit and Loss a/c for the relevant previous year prepared under Sub-section (2), as increased by (a) The amount of income-tax paid or payable, and the provision therefor, or (c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) The amount by way of provision for losses of subsidiary companies; or (f) The amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies.
The purpose behind introduction of provisions to Section 115JA was to tax, "zero tax companies". Section 115 JA enacts deeming provisions of overriding nature. The purpose behind the introduction of Section 115JA was to tax, "zero tax companies". A number of companies with huge profits were avoiding payment of tax by adjusting their profits against various allowances permissible under the Act. It was to circumvent this strategy that Section 115JA was inserted in the Income Tax Act.
Sub-section (1) of Section 115JA takes care of the situation, wherein the case of an assessee, being a company, the total income as computed under the Act is less than 30 per cent of its book profit, then the 30 per cent of the book profit shall be liable to the taxed. In other words, simply if the total income of the company after all the deductions and allowances, is less than 30 per cent of its book profit then the total income chargeable to tax is deemed to be 30 per cent of such book profits. Sub-section (2) of Section 115JA makes it obligatory upon every company assessee to prepare its Profit and Loss a/c for the relevant previous year in accordance with the provisions of Parts II & III to Schedule VI of the Companies Act, 1956 for the purpose of this section. The Explanation to Section 115JA defines 'book profit' for the purpose of this section so as to mean, "the net profit as shown in the Profit and Loss a/c for the relevant previous year prepared under Sub-section (2) of Section 115 JA as increased by amounts mentioned in Clauses (a) to (f) and as reduced by amounts covered by Clauses (z) to (ix) of the said Explanation. Section 115JA begins with a non obstante clause. It is a self-contained code and will apply notwithstanding any other provisions of the Act. Book profit has been clearly defined and explained in the aforesaid Explanation, and there is no scope for any allowance and deduction under any other section from what is deemed to be total income of the company assessee.
17. Thereafter, the requirements of preparing the profit and loss account by the companies in accordance with Parts II & IH of Schedule VI to the Companies Act, 1956 were also discussed by the Tribunal in the light of the provisions of Section 115JA including especially Explanation below Sub-section (2) laying down the permissible adjustments for computing the book profits as well as the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd v. CIT in paragraph Nos. 11 and 12 of its order which read as under: 11. It is not the case of the assessing officer that the Net Profit as shownin the profit and loss a/c in the case of the assessee is not prepared in accordance with Parts II & III of Schedule VI to the Companies Act, 1956.Therefore this profit will be starting point of computation of book profitas laid down in Explanation below Sub-section (2) of Section 115JA of theAct. The Commissioner (Appeal) has clearly referred to the provisions of Section 211(2)(3A)(3C) of the Companies Act, 1956 and has rightly concluded that the assessee while preparing its profit & loss account under the Companies Act, 1956 was bound to follow the Accounting Standards of ICAI. The Accounting Standards of ICAI clearly contemplate a deduction on account of Lease Equalisation charges in the case of leasing companies in respect of "Finance Lease Transactions". The nature of this deduction and the reason why this deduction is claimed has been very well explained by the Commissioner (Appeal).
The very idea of charging tax on book profits is that the profits as per the books of a company will be the basis of charge. When in the books of the company such as deduction is; claimed and profits arrived thereafter, the revenue cannot further tinker with such profits except to the extent provided in Clauses (a) to (f) of Explanation below Section 115JA(2). The nature of the lease equalization charges is recovery of the fair value of leased asset over the term of the lease. It is a deduction against lease rentals to bifurcate the annual lease into revenue component and capital component. They do not fall within the categories enumerated in Clauses (a) to (f) of Explanation to Section 115JA of the Act.
12. In case of Apollo Tyres Ltd (supra) the High Court has explained the scope of the assessing officer's powers under Section 115 J which provisions Learned AR for the assessee akin to Section 115JA of the Act as follows: The assessing officer, while computing the book profits of a company under Section 115 of the Income Tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115. The assessing officer does not have the jurisdiction to go behind the net profits shown in the profit & loss account except to the extent provided in the Explanation. The use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' in Section 115 was made for the limited purpose empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115 does not empower the assessing officer to embark upon afresh enquiry in regard to the entries made in the books of account of the company.
18. It was thus held by the Tribunal that the assessing officer had accepted net profit as per the profit and loss account of the assessee company to be one in accordance with the provisions of Companies Act and there was no basis given even by him to show as to how the lease equalization charges were covered within any of the Clauses (a) to (f) of Explanation below Section 115JA(2) so as to empower him to make any adjustment in respect of the same while computing book profits under Section 115 JA. The Tribunal accordingly found no ground to interfere with the order of the Learned Commissioner (Appeals) directing the assessing officer to delete the adjustment made in respect of lease equalization charges and upheld the same.
19. Before us, the Learned DR has not disputed the position that the issue involved in the case of SREI International Finance Ltd. (supra) decided by the Tribunal is similar to the one involved in the present case. He, however, has contended that the plea now taken by him stating that the provision made for equalization charges was in the nature of reserve and the same accordingly was covered by Clause (b) of Explanation to Section 115 JA(2), had not been raised before the Tribunal and there was thus no occasion for the Tribunal to consider this aspect of the matter in the case of SREI International Finance Ltd. (supra). It is, therefore, relevant to ascertain the exact nature of lease equalization charges debited by the assessee company to its profit and loss account so as to decide as to whether the same was covered within Clause (b) of Explanation below Sub-Section 115JA(2) in the light of submissions made by both the sides as well as material relied upon in support. Before we do so, it would be appropriate to consider and deal with the preliminary objection raised by the learned DR which is relevant in the present context. The Learned DR has contended before us that no provision for lease equalization charges was actually made by the assessee in its profit and loss account and the same was made only while computing book profits under Section 115JA, which is not permissible. In this regard, it is observed that no such allegation was made either by the assessing officer or by the Learned Commissioner (Appeals) in their respective orders. Moreover, a copy of annual accounts filed by the assessee for the year under consideration clearly shows that the lease equalization charges of Rs. 2,119.91 lakhs were reduced by the assessee from income from leases and the said income was declared on net basis under the head 'Income from operations'. Furthermore, in Schedule XV of the annual accounts giving 'significant account policies and notes', it was clearly mentioned that in addition to depreciation on a single shift basis, the principle of recovery of capital was followed to ensure full capital recovery within the tenure of the lease agreement. It was further mentioned that the difference of capital recovery viz-a-viz the depreciation was reduced from income from leases as lease equalization charge in accordance with the guidance note on lease accounting issued by ICAI. As per the "Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions 1998" issued by the Reserve Bank of India vide its Notification No. DFC.119/DG(SPT)-98 dated 31-1-1998, it was mandatory for the assessee to follow all the accounting standards and guidance notes issued by the ICAI insofar as they were not inconsistent with any of the directions so issued. The contention raised by the assessee in this regard stating that the lease equalization charges were not debited by the assessee company to its Profit & Loss Account thus is based on wrong assumption of facts and we reject the same being devoid of any merits.
20. Reverting back to the main issue relating to the nature of lease equalization charges, it is observed that a "guidance note on accounting for leases" issued by the Institute of Chartered Accountants of India (ICAI) is a vital and relevant document in this regard. The Learned DR at the outset has raised an objection by stating that the said guidance note issued by the ICAI in 1988 has been subsequently withdrawn. A perusal of copy of the said guidance note as placed at: page Nos. 45 to 55 of the assessee's paper book however shows that the same has been issued in the year 1995 and as clearly mentioned therein, it was a revised guidance note replacing the earlier guidance note issued by the ICAI in the year 1988. The submission of the Learned DR that the said guidance note issued in 1988 has been subsequently withdrawn is, therefore, factually incorrect inasmuch as there is no such withdrawal and as a matter of fact, the earlier guidance note issued in 1988 has been replaced with a revised guidance note issued by the ICAI in 1995. It has also been clarified in the foreword to the said note itself that such revision has been made in view of Various developments taken place subsequent to its issuance earlier in the year 1988. Further, as stated in paragraph No. 2 of the introduction part of the said note, the matter relating to the issuance of an accounting standard on the subject of accounting for leases was under consideration of the ICAI with a view to establish sound accounting practices. However, recognizing that issuance of such a standard would take some time, the guidance note was issued only as an interim measure. It was also clarified in the foreword itself by the President, ICAI that the said guidance note was meant for preparation of financial statements for accounting purposes only such as under the Companies Act, 1956.
21. In the revised guidance note on accounting for leases issued by the ICAI, it was stated that the same is based on the rationale of matching costs with revenues so the it the periodic net income from a finance lease is true and fair. As explained in the note, such matching is achieved by showing the lease rentals received under finance lease separately under gross income in the profit and loss account of the relevant period and against such lease rental income, a matching lease annual charge is made to the profit and loss account. This annual lease charge represents recovery of the net investment/fair value of the leased asset over the lease term an discalculated by deducting the finance income for the period from the lease rental for that period.
Accordingly, where the annual lease charge is more than the minimum statutory depreciation, lease equalization charge account will be debited to that extent whereas when annual lease charge is less than minimum statutory depreciation, a lease equalization would arise. As stated in the note, the following entries/disclosures shall be required to be made in this regard: (a) A separate Lease Equalization Account should be opened with acorresponding debit or credit to Lease Adjournment Account, as the case may be.
(b) Lease Equalization Account should be transferred every year to theProfit and Loss Account and disclosed separately as a deductionfrom/addition to gross value of lease rentals shown under the head "Gross Income'.
(c) Statutory depreciation should be shown separately in the profit and loss account. Accumulated statutory depreciation should be deducted from the original cost of the leased asset in the balance sheet of the lessor to arrive at the net book value.
(d) Balance standing in Lease Adjournment Account should be adjusted in the net book value of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the Section related to leased assets.
(e) The aggregate amount included under Lease Adjustment Account on account of lease equalization credits should be disclosed separately.
22. Keeping in view the purpose behind making provision for lease equalization charges and the accounting treatment given in the books of account to incorporate the relevant transactions, we can now endeavour to ascertain the nature thereof in order to find out as to whether the same constitutes reserve as envisaged in Explanation (b) below Section 115 JA(2). Reserves or reserve funds mean amounts set aside out of profits as ascertained by the profit and loss account or other surpluses which are not meant to cover any liability, contingency, commitment or depreciation in the value of assets. Reserves or reserve funds thus mean amounts which belong to the proprietors over and above the capital contributed by them. The amount to be transferred to a reserve is debited to profit and loss appropriation account and the purpose of creating the reserves is to enable the firm to tide over a difficult financial period and not to meet any particular contingency.
As discussed above, the amount of lease equalization charges however is neither debited by the assessee company to its profit and loss appropriation account nor the purpose of the same is to enable the assessee to tide over a difficult financial period. The purpose of providing for the lease equalization charges is entirely different as explained in the guidance note is issued by the ICAI and the amount so provided is not transferred by the assessee company in its books of account to any reserve account, but the same is adjusted against depreciation/WDV of the relevant fixed assets given on lease.
23. As explained in the book" Financial & Cost Accounting for Management(6th Edition)" by A.H. Teller and H. Shearing, an essential point to be noted here is that a reserve is not a charge to be deducted before arriving at the profit for the period under review, but it is in appropriation of profit and reserve account represents the fund to which part of the profits has been allocated. The reserve account thus is credited as a result of a debit to the appropriation account and not to the profit and loss account or other revenue account. In a broad sense, all allocations to reserve represent additions to capital, some of which are intended to meet commitments that are expected to arise in the future and some are made for the purpose of permanently increasing the capital of the concern. The former are revenue reserves and the latter capital reserves. As already discussed the amount of lease equalization, on the other hand, is a charge which has been deducted to arrive at the true and correct profit of the leasing business and it thus neither an appropriation of profit or allocation of part of the profits to any fund so as to call it as a reserve. The said charge thus is created as a result of debit to the profit and loss account and not a debit to the appropriation account.
24. In the guidance note issued by the Institute of Chartered Accountants of India explaining the meaning of different terms used for financial statements, "reserve" has been defined in para 14.04 as the portion of earnings, receipts or other surplus of an enterprise appropriated by the management for a general or specific purpose other than a provision for depreciation or diminution in the value of assets or for known liability. In the book of accountancy written by William Pickles (3rd Edition) reserves have been explained as amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of balance sheet. Reserves in effect are thus part of undistributed profits of the business and therefore part of capital of the business. The amount of lease equalization charge however is neither the portion of earnings/ profits of an Enterprise nor the same is appropriated for a general or specific purpose. The same, in 1 act, is a charge against the profit to arrive at true and correct profits of the leasing business which by no means can be treated as part of undistributed profits or capital of the business.
25. In the case of State Bank of Patiala (supra), Hon'ble Supreme Court had an occasion to consider the distinction between a provision and a reserve and it was held by the Hon'ble Apex court in this context that provisions made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the profit and loss account and the balance sheet. On the other hand, reserves are appropriations of profits which are represented by assets being retained to form part of the capital employed in the business. An amount set aside out of profits and other surpluses, not designed to meet a lability, contingency, commitment are diminution in the value of assets known to exist on the date of balance sheet is a reserve whereas an amount set aside out of profits and other surpluses to provide for any liability of which the amount cannot be determined with substantial accuracy is a provision. As per Clause 1(1')(A) of Part HI of Schedule VI of the Companies Act, it is clarified that the expression reserves shall not include any amount written off or retained by way of providing for depreciation, renewals or diminutions in the value of assets or retained by way of providing for any known liability. The expression 'reserve' thus has been denned in a negative manner and excludes certain amounts as specified.
26. If the nature and character1 of lease equalization charges as evident from the purpose for which the same is provided as well as the accounting treatment given thereto in the books of account is considered in the light of the meaning of the expression 'reserves' as defined in the context of terms common used in financial statements as well as by the Hon'ble Apex Court in the judicial pronouncement, we are of the view that the provision made for lease equalization charges cannot be regarded as an amount transferred to reserves as envisaged in Explanation(b) to Section 115JA(2) and the same therefore, cannot be excluded while computing book profit under Section 115JA. In that view of the matter, we hold that the adjustment made by the assessing officer by adding the amount of lease equalization charges while computing the book profit under Section 115J A was not permissible since the said amount was not covered within any of the clauses of Explanation below Section 115 J A(2) including Clause (b) and the Ld.
Commissioner (Appeals) therefore was not justified in confirming the adjustment so made by the assessing officer on this count. His impugned order on this issue is therefore, set aside and the assessing officer is directed to delete the adjustment/addition made on this issue.
Ground No. 4 of the assessee's appeal is accordingly allowed.
27. As regards ground Nos. 5 and 6 relating to the additions of Rs. 2,46,792and Rs. 1,24,350 made by the assessing officer and confirmed by the learned Commissioner (Appeals) by disallowance of fees paid to RoC and expenditure treated as capital in nature is respectively while computing book profits under Section 115 JA, the ld. Counsel for the assessee has submitted before us that these additions made by the assessing officer were beyond the scope of permissible additions specified in the provisions of Section 115JA and the Learned Commissioner (Appeals), therefore, was not justified in confirming the same. In support of this contention, he has relied on the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd (supra). Since the ld. DR has not been able to raise any material contention in this regard to point out as to how the adjustments in question made by the assessing officer while computing the book profits of the assessee were permissible under Section 115JA, we hold, respectfully following the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra), that the said additions made by the assessing officer while computing the book profits of the assessee were beyond the scope of adjustments permissible under Section 115JA and the ld. Commissioner (Appeals) was not justified in confirming the same. The impugned order, of the Learned Commissioner (Appeals) on these issues is, therefore, reversed and the Assessing Officer is directed to delete the adjustments made on these counts while computing the book profits under Section 115JA.Ground No. 7 raised by the assessee in this appeal has not been pressed by the ld. Counsel for the assessee at the time of hearing before us.
The same is accordingly, dismissed as not pressed.
Ground No. 8 relates to the disallowance of Rs. 16,79,58,897 made by the assessing officer and confirmed by the ld. Commissioner (Appeals) on account of provision for bad and doubtful debts while computing profits under Section 115JA.30. We have heard the arguments of both the sides and also perused the relevant material on record. The ld. Counsel for the assessee has submitted that the issue involved in this appeal is squarely covered in favour of the assessee and against the revenue by the decision of Kolkata Special Bench of ITAT in the case of Jt. CIT v. Usha Marline Industries Ltd (2007)104 ITD 249 wherein it was held that the provision for bad and doubtful debt is not a provision for liability, but it is a provision for diminution in the value of the assets. It was also held that the said provision thus is not for any liability as contemplated in Clause (c) of Explanations Section 115JA and the question as to whether the said liability is ascertained or unascertained does not arise. The Learned DR on the other hand has relied on the decision of Hon'ble Madras High Court in the case of Dy. CIT v. Beardsell Ltd wherein it was held that the provision for doubtful debts was made by the assessee towards alleged recoverable debt and the same being not an ascertained liability, the provision so made could not be excluded from book profits. In this regard it is observed that the decision of Hon'ble Madras High Court in the case of Beardsell Ltd (supra) has already been considered by the Special Bench of ITAT in the case of Usha Martine Industries Ltd (supra) and this being so, the judicial proprietary requires that we have to follow the decision of Special Bench. Accordingly, following the decision of Kolkata Special Bench of ITAT in the case of Usha Martine Industries Ltd. (supra), we hold that the Learned Commissioner (Appeals) was not justified in confirming the disallowance made by the assessing officer on account of provision for bad and doubtful debts while computing book profits under Section 115 JA and setting aside his impugned order on this issue, we direct the assessing officer to delete the said disallowance.
31. As regards ground No. 9, the Learned Counsel for the assessee has submitted before us that the issue raised therein relating to the disallowance made by the assessing officer and confirmed by the Learned Commissioner (Appeals) on account of interest paid on interest tax liability is squarely covered in favour of the assessee by the decision of Delhi "C" Bench of ITAT rendered in the case of GE Capital Services India v. Dy. CIT for assessment years 1995-96, 1996-97 and 1997-98 vide its common order dated 25-8-2006 in ITA No. 2038/Delhi/2002 and others.
A copy of the said order is also filed by him in the paper book at page Nos. 35 to 57 and a perusal of the same reveals that a similar disallowance made; by the assessing officer and confirmed by the Learned Commissioner (Appeals) was deleted by the Tribunal holding that the interest charged on interest tax liability was not of penal nature.
Respectfully following the said decision of the Tribunal, we set aside the impugned order of the Learned Commissioner (Appeals) confirming the disallowance made by the assessing officer on account of interest charged on interest tax liability and direct the assessing officer to delete the same. Ground No. 9 of the assessee's appeal is accordingly allowed.