TaxTMI 
TaxTMI 
2010 (2) TMI 865
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....ntal income by way of lease equalisation charges. In the remaining four years also, there are two issues involved. One issue is regarding validity of the re-assessment proceedings and the second issue is on merit which is same as in assessment year 1996-97, ie., regarding allowability of reduction from lease rental income on account of lease equalisation charges. Before deciding the validity of the revision order passed by ld. CIT(A) under section 263 in assessment year 1996-97 and validity of re-assessment proceedings in the remaining four years, we first decide the issue on merit i.e., regarding allowability of reduction from lease rental income on account of lease equalisation charges. 3. Regarding the issue involved on merit, it was submitted by ld. AR of the assessee that the same is as per guidance notes issued by Institute of Chartered Accountants of India (ICAI). He submitted a copy of the relevant guidance notes issued by the ICAI being the guidance notes on accounting for lease issued on 20-9-1995. It is also submitted that this issue is covered in favour of the assessee by the Tribunal decision rendered in the case of Jt. CIT v. Pact Securities and Financial Lt....
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....lease period is in fact equal to the amount of capital recovery, the same is in line with this principle that capital recovery is to be excluded from lease rental income. Regarding difference in depreciation as per books and depreciation as per Income-tax Rules, it was submitted that the same is allowable as per law and as per income-tax also, for the entire lease period in question, depreciation allowed does not exceed the amount of cost of asset and hence for this reason also, the objection of the Department is not justified. 4. As against this, ld counsel of the Revenue raised several objections. It was his first submission that the issue in the present case is covered against the assessee by the Tribunal decision of Delhi Bench of the Tribunal rendered in the case of Goodwill India Ltd. v. Dy. CIT [2008] 114 ITD 665 (Delhi). It is also his submission that the deduction claimed by the assessee on account of lease equalisation charges is not an expense allowable under any of the sections 28 to 43D of the Income-tax Act, 1961 because this deduction does not fall under any of the aforesaid sections and the assessee has not brought out any specific provision of the Income-....
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....ce value as per various decisions cited by him. 7. It is also submitted that on facts also, this Tribunal decision cited by ld. counsel of the revenue is distinguishable and hence not relevant in the present case. 8. We have heard the rival submissions and have gone through the material available on record. We first decide the issue on merit, i.e., regarding allowability of reduction in lease rental income on account of lease equalisation charges. On this issue, ld. DR of the revenue has cited Tribunal decision rendered in the case of Goodwill India Ltd. (supra). We find that in this case, the facts are different and hence this Tribunal decision is not applicable in the present case. In that case, the facts are noted by the Tribunal on page No. 37 of the report, i.e., 306 ITR (AT). It is noted by the Tribunal that the assessee has also claimed depreciation as per Income-tax Act but at the end of the lease period, the assessee does not recover the full cost of the asset in the form of depreciation. If the assessee does not recover the full cost of asset during the lease period, it cannot be a case of finance lease. Finance lease has been defined by the ICAI in th....
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....efore us is that the guidelines of ICAI are not decisive and no deduction is allowable as per any provision of Income-tax Act on account of Lease Equalisation Charges and still we have obtained sample working from the assessee by refixing the case for clarification to satisfy ourselves that the leases in question in the present case is finance leases and as per the discussion above, we have noted that in the present case, the leases are finance lease whereas in the case of Goodwill India Ltd. (supra), the lease was not finance lease as per the facts noted by the Tribunal in that case. 10. Now, we consider the applicability of other two Tribunal decisions cited by the ld. counsel of the assessee. The first decision is the Tribunal decision rendered in the case of Pact Securities and Financial Ltd. (supra). In this case, it was held by the Tribunal that guidance notes of the ICAI is drafted by an Expert Committee constituted for the purpose and is issued after due research and public debate and on consideration of suggestions and options from various quarters. The Tribunal has referred to another Tribunal decision rendered in the case of Shri Dinesh Mills Ltd. v. Asstt. CIT....
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....145 of the Act as it cannot be said that proper income cannot be deducted therefrom. This is an acceptable basis for arriving at income and it is the choice of the assessee, which the Assessing Officer should accept. This is not a case of a mere disallowance of claim. Moreover, the judgment of the jurisdictional High Court in the case of Margadarsi Chit Funds (supra) the decision of the Tribunal in the case of Shri Dinesh Mills Ltd. (supra), of the Bombay High Court in the case of Indo Nippon Chemical Co. Ltd. (supra) and those of the Hyderabad Bench of the Tribunal in the cases of Nagarjuna Finance Ltd (supra) and Nagarjuna Investment Trust Ltd. (supra) are in favour of the assessee." 11. We find that this Tribunal decision is squarely applicable in the present case. Regarding the objections of the learned counsel of the revenue, we find that the same are not valid. The first objection is that there is change effected by the present assessee in the method of accounting from assessment year 1996-97. This objection can be valid if the change is not found to be bona fide. The assessee has regularly followed the changed system of accounting regularly as four subsequent years....
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....deduction is to be allowed on account of lease equalisation, the amount be re-worked by considering the depreciation as per Income-tax Rules. 17. At this juncture, we consider the Tribunal decision rendered in the case of Pact Securities (supra). As per the facts noted by the Tribunal in that case, there was finance lease in that case also. In that case also, the assessee was following the Accounting Standard and Guidance Notes issued by the ICAI and accordingly debited an amount to "Lease Terminal Adjustment Account". Though the nomenclature is different, but this account is same as "Lease Equalisation Account" in the present case. In that case, ld. CIT(A) was of the view that method prescribed by ICAI is perfectly alright as long as depreciation is claimed as per Companies Act but as per Income-tax Act, the assessee cannot have the benefit of both the systems. It was also observed by ld. CIT(A) in that case that by claiming depreciation as per Income-tax Rules, the assessee has clearly obtained more deduction than the amount of principal recovered as per its method of accounting. 18. Under these facts, it was held by the Tribunal in that case that there is pre....
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....entals, (ii) Implicit rate of return, (iii) Depreciation, and (iv) Lease Equalisation. While three are known factors, i.e., lease rentals, IRR and Depreciation the fourth one is obviously arrived at by balancing the other three. Thus, the quantum of depreciation that is allowed does not invalidate the method of accounting as lease equalisation varies directly in proportion to the quantum of depreciation. The depreciation whether arrived at by applying the rates provided in the Companies Act or arrived at by rates provided under the Income-tax Act, 1961 does, when a particular rate of IRR is applied would result in validating a particular method of accounting is highly incorrect. The method of accounting suggested in the result, the appeal filed by the assessee is allowed. The Guidance Note is not rate specific or Act specific. Thus the conclusion of the Ld. CIT(A) that a higher rate of depreciation provided in the Income-tax Act, if availed by the assessee disentitles him to adopt the method of accounting suggested by the ICAI is totally incorrect. 19. On this basis, the Tribunal allowed the appeal in that case. Respectfully followi....
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....ire amount of cost of asset being the amount financed minus residual value is being recovered during the lease period in addition to the finance charges. Hence, in the present case, the lease in question is financial lease and hence the guidance notes issued by the ICAI is applicable and the assessee has followed the same in reporting in income for tax purposes. 14. Now, we discuss regarding various specific objections of ld. counsel of the revenue. As per his written submissions filed before us, one of his objections is that although accounting standard issued by the ICAI is binding but guidance notes are not binding. In this regard, we have already noted that this aspect was very much considered by the Tribunal in the case of Pact Securities Ltd. (supra) and it was held that guidance notes issued by ICAI should not be easily upset by the lower authorities as per para No. 17 of the Tribunal decision which is reproduced by us above. Hence, this objection of Ld. counsel of the revenue is not valid. The second objection raised by him is that Tribunal decisions rendered in the case of Pact Securities Ltd. (supra) and in the case of Indian Railways Finance Corpn. (supra) are ....
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.... to work out the finance income of the second year and so on. The assessee has declared finance income of Rs. 63,529 in the first year for 9 months, Rs. 84,706 in 2nd and 3rd year and Rs. 21,176 in 4th year for 3 months. This shows that the assessee has in fact declared higher finance income and hence the revenue cannot have any grievance for the same and it cannot be a basis to hold that the assessee should not get deduction of lease equalisation charges because had the assessee declared lesser finance income as per correct computation of finance income after reducing capital recovery from financed amount, the claim of lease equalisation would have been higher. The idea or the basis of ICAI guideline is not that in all the years for the lease period, income should be same. The idea is that in each of the year of the lease period, the finance income should be considered as income on the basis of same rate of interest on the value of investment at the beginning of the year. The same is adjusted by following this method because when depreciation is higher than the required capital recovery, lease equalisation charges has to be added to income and when depreciation is less than the de....