TaxTMI 
TaxTMI 
2007 (7) TMI 343
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....ord, 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), ITAT 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 ld. 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. [2006] 285 ITR 142 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 agreeme....
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.... 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 ad....
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....ed to be made for the said charges. As per 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 Account and lease equalization charges of Rs. 2119.91 lakhs has been shown as a deduction for the value of lease rentals. In computation of total income under normal provisions of the Act equalization charges are added back.... 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 timing 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 com....
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....on the part of NBFCs to follow the guidance note. Kindly attention is invited to the Notification No. DFC 199/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 of Chartered Accountants of India (referred to in these direction as 'ICAI') shall be followed insofar as they are not inconsistent with any of these directions". 5. Section 211(3A) of the Companies Act, 1956 clearly states that the profit and loss account and balance sheet of a company shall comply with the accounting standards. Sub-section (3ca) of section 211 states that expressing "accounting standards" means the standards of accounting as specified by Institute of Chartered Accountants of India till the time they are prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A. 6. The Guidance Notes issued by Institute of Chartered Accountan....
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....ween lease rentals recovered and recognized in Books of Account Year Gross Lease Rentals (Rs.) Amount Dr./(Cr.) as lease eq. res. Amt. Accounted for in books 1985 35,000 7,500 27,500 1986 16,000 (150) 16,150 1987 8,000 (1,515) 9,515 1988 4,500 1,941 2,559 (Residual value) 3,000 3,000 66,500 7,776 58,724 Total gross lease rentals received 66,500 Less: Amt. Accounted for as per books 58,724 Less: Net Amt. Standing in lease eq. res. Adjusted infixed assets account 7,776 (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. Particulars of Lease Lessor's Cost of the Leased Computer Rs. 60,000 Fair Value of the leased computer at the inception Rs. 60,000 Of the lease (1-1-85) Th....
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....net profit as shown in the profit & loss account for the relevant previous year prepared under sub-section (2) as increased by : (a) ** ** ** (b) The amounts carried to any reserves by whatever name called (c) ** ** ** 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 : * The audited profit & loss account certified by the auditors doesn't term lease equalization charges as a reserve. * Lease equalization charges are not disclosed in the balance sheet of the assessee under the head "Reserves and surplus". * 'Reserves' mean profits earned by company and not distributed as dividend to the shareholders but kept back by the directors for any purpose 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 comp....
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....scertain 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 115JA 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 clearly 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 ld. Counsel for the assessee, the ld. 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 ....
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....r adjustment made by the Assessing Officer on account of lease equalization charges while computing book profits under section 115JA was directed to be deleted by the ld. CIT(A) for the reasons as summarised by the Tribunal in paragraph No. 8 of its order as follows :- The Commissioner of Income-tax (A) firstly analysed the provisions of section 115JA of the Act and the reasons for its introduction. The Commissioner of Income-tax (A) 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 & III 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 ICAI constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation ....
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....far 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 in accordance 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 pr....
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....ction (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 115JA as increased by amounts mentioned in clauses (a) to (f ) and as reduced by amounts covered by clauses (i) 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 assessee-company. 17. Thereafter, the requirements of preparing the profit and loss account by the companies in accordance with Parts II & III of Schedule VI to the Companies Act, 1956 were also discussed by the....
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....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....
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....ly 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 ld. CIT(A) 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 i....
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....n accounting for leases issued by the ICAI, it was stated that the same is based on the rationale of matching costs with revenues so that 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 and is calculated 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 a corresponding debit or cred....
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....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 profi....
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.... of which the amount cannot be determined with substantial accuracy is a provision. As per clause 1(1)(b) of Part III 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 defined in a negative manner and excludes certain amounts as specified. 26. If the nature and character 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 vie....
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....es to the disallowance of Rs. 16,79,58,897 made by the Assessing Officer and confirmed by the ld. CIT(A) 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 Martine 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 Explanation to section 115JA and the question as to whether the said liability is ascertained or unascertained does not arise. The ld. 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. [2000] 244 ITR 256 wherein it was held that the provision for doubtful debts was made by the ass....