Tribunal Upholds Addition of Rent Reserve to Book Profits under Income Tax Act

The Tribunal upheld the addition of Rs. 18,45,875/- as Rent Equalization Reserve to the book profits under Section 115JB of the Income Tax Act, 1961. The appellant's appeal was dismissed as the Tribunal found the appellant's arguments unconvincing and contradictory, affirming the Assessing Officer's decision to add back the reserve to the Profit & Loss Account for computing book profit.

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Issues Involved:
1. Addition of Rent Equalization Reserve to Book Profits under Section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Addition of Rent Equalization Reserve to Book Profits under Section 115JB of the Income Tax Act, 1961

The primary issue in this appeal revolves around the addition of Rs. 18,45,875/- as Rent Equalization Reserve to the book profits of the appellant under Section 115JB of the Income Tax Act, 1961. The appellant had debited this amount in its Profit & Loss Account as rent equalization reserve, created upon straight-lining of the lease rentals payable under an operating lease for the premises occupied during the financial year in accordance with Accounting Standard 19 (AS19).

Appellant's Argument:
The appellant argued that the reserve was inadvertently left out from being added back while computing taxable income under the normal provisions of the Act due to lack of clarity on its allowability. The appellant offered the amount debited as rent equalization reserve to be taxed under the normal provisions of the Act but did not add it back while computing the tax liability for book profit as per Explanation 1 of clause (b) and (c) to Section 115JB.

Assessing Officer's Stand:
The Assessing Officer added back this amount for computing the book profits, noting that the appellant had offered to add back the rent equalization reserve in the computation under the normal provisions of the Act but failed to do so for book profit computation. The Dispute Resolution Panel (DRP) confirmed this action.

Appellant's Further Submissions:
The appellant referred to the Lease Deed dated 06.09.2006, highlighting the lease rental and option to renew the lease, which provided for a 3-year lease term with an option to renew for two consecutive terms of 3 years each with a maximum 15% escalation in rent. The appellant argued that the rent equalization reserve was created based on a 9-year lease term, considering the escalation.

Legal Precedents Cited:
The appellant cited several legal precedents, including:
- Apollo Tyres Ltd. vs. CIT
- CIT vs. ICICI Venture Funds Management Co. Ltd.
- GE Capital Transportation Financial Services Ltd. vs. ACIT

Respondent's Argument:
The respondent argued that the Lease Deed was for three years, and the rent equalization reserve could not be created on a 9-year lease term basis. The respondent contended that AS19 was not applicable to leases of immovable property and that the decision in ICICI Venture Funds Management Co. Ltd. pertained to financial leases, not operational leases. The respondent also pointed out that AS19 does not apply to lease agreements for the use of lands.

Tribunal's Analysis:
The Tribunal examined the scope of AS19, which primarily deals with finance and operating leases but excludes lease agreements to use lands. It noted that AS19 is not applicable to leases of immovable property. The Tribunal found merit in the respondent's argument that AS19 does not apply to the lease of immovable property. Consequently, the Assessing Officer rightly added back the rent equalization reserve to the Profit & Loss Account while computing book profit under Section 115JB. Additionally, the appellant's own action of adding back this reserve for computation under normal provisions indicated a contradictory stand.

Conclusion:
The Tribunal dismissed the appeal, upholding the addition of Rs. 18,45,875/- as Rent Equalization Reserve to the book profits under Section 115JB of the Income Tax Act, 1961, and found the appellant's arguments unconvincing and contradictory.

Order Pronouncement:
The order was pronounced in the open court on 24th January 2017.

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