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Issues: (i) Whether lease equalization charges claimed by an NBFC in computing taxable income under the normal provisions of the Income-tax Act, 1961 are deductible; (ii) Whether lease equalization charges could be added back while computing book profits under section 115JA of the Income-tax Act, 1961.
Issue (i): Whether lease equalization charges claimed by an NBFC in computing taxable income under the normal provisions of the Income-tax Act, 1961 are deductible.
Analysis: The computation of taxable income under the Act is governed by the statutory provisions relating to business income and allowable deductions. Although the RBI prudential norms and ICAI guidance govern financial statement presentation for NBFCs, the ICAI guidance itself clarifies that computation of taxable income must conform to taxation law. The lease equalization charge is only an accounting adjustment and not an expenditure actually incurred or a deduction specifically permitted by the Act. The method relied upon by the assessee was therefore held to be inconsistent with the statutory scheme for business income.
Conclusion: The deduction of lease equalization charges in normal computation was disallowed, and this issue was decided against the assessee.
Issue (ii): Whether lease equalization charges could be added back while computing book profits under section 115JA of the Income-tax Act, 1961.
Analysis: For computation of book profits under section 115JA, only the adjustments specifically permitted by the provision can be made. Lease equalization charge was treated as a recognised accounting method for NBFC financial statements and was not regarded as an amount set aside to meet any unascertained liability within the meaning of the Explanation. It did not fall within the specified adjustment clauses for increasing book profits.
Conclusion: The addition of lease equalization charges to book profits under section 115JA was not permissible, and this issue was decided in favour of the assessee.
Final Conclusion: The assessee failed on the normal computation issue but succeeded on the section 115JA adjustment issue, while the revenue's appeals were dismissed.
Ratio Decidendi: A lease equalization charge, being an accounting adjustment and not a statutorily allowable deduction or a permitted MAT adjustment, cannot be deducted in normal income computation, but it cannot be added back to book profits unless it falls within the specific adjustment clauses of the MAT provision.
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