TaxTMI 
TaxTMI 
2014 (6) TMI 224
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....nder the profits and loss account provision of the Income-tax Act ?" This question is also covered by the decision of the Delhi High Court in Virtual Soft Systems Ltd. (supra). In the said decision, nature and character of lease equalisation charges in the case of financial leases was examined and it was observed that the lease equalisation charges or funds have to be set off or included on the expenditure side in the profit and loss account to compute and calculate the profits. The principle of matching, i.e., matching of income with the actual expenditure which is incurred by the assessee to earn the said income applies. In the decision of the Delhi High Court in Virtual Soft Systems Ltd. (supra) from paragraph 9 onwards reference was made to section 145 of the Act and the accountancy standards prescribed by the Institute of Chartered Accountants of India. The accountancy standards prescribed underwent amendment/change from the assessment year 1996-97 in respect of financial leases. Nature and character of lease equalisation charges/funds was examined in paragraph 11 onwards, in paragraph 7.4 of the said judgment, reference was made to the decision of the Tribunal, in the pres....
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....d, we would be required to examine the provisions of section 145 of the Income-tax Act. Section 145 of the Income-tax Act adverts to the method of accounting followed by an assessee. Sub-section (1) of section 145 provides that income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying accounting standard in respect of any class of assessee or class of income. Sub-section (3) of section 145 empowers the Assessing Officer to disregard the books of account submitted by the assessee only if he is not satisfied with the correctness or completeness of the accounts of the assessee or the method of accounting employed by the assessee or on account of accounting standards notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the Assessing Officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provi....
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....he Companies Act. In the event, the depreciation claimed is less than the capital recovery, the difference is debited in the profit and loss account in the form of lease equalisation charge, and similarly if, for any reason the depreciation claimed is more than capital recovery then the difference is credited, once again, in the form of lease equalisation charge to the profit and loss account. Therefore, the assessee in effect debits or credits its profit and loss account with a lease equalisation charge depending on whether or not the depreciation claimed is less or more than the capital recovery. The capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalisation charges is a method of re-calibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalisation amount being reduced to a naught, as the debits and credits in the profit and loss account would square off with each other. Hence, the contention of the Revenue that it is a claim in the form of a deduction wh....
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.... 459 6,191 1,056 9,885 13 15,000 40,265 5,080 9,920 4,750 5,170 5,080 792 9,038 14 15,000 30,345 3,828 11,172 4,750 6,422 3,828 594 7,984 15 15,000 19,173 2,149 12,581 4,750 7,831 2,419 445 6,723 16 1000 6,592 832 168 4,750 (4,582) 832 334 5 27 1000 2,995 378 622 622 378 14 364 28 1000 2,373 299 701 702 299 11 289 29 1000 1,672 211 789 789 211 8 203 30 1000 883 117 883 883 117 24 93 2,40,000 1,40,000 1,00,000 1,00,000 (0) 1,40,000 1,00,000 1,40,000 The net effect of the aforesaid table shows that the purchase value of the asset which is made subject matter of lease is not taken to the profit and loss account and treated or debited as expenditure. The purchase value or the recovery of capital cost gets distributed/divided over the term of the lease. The acronym IRR stands for Internal Rate of Return, on which there is no d....
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....tals of Rs. 2,700.48 crores, from which lease equalisation account of Rs. 142,03 crores was reduced. The paid up capital of the respondent company held by the President of India and his nominees was Rs. 232 crores. The addition of the fixed assets in the said year was Rs. 2,273 crores which is reflective as the addition to the quantum of rolling stock. If the purchase price of the rolling stock stands subjected to revenue deduction, would have its own consequences and lead to abnormal financial results and absurdities. The balance-sheet records that the total rolling stock aggregate was Rs. 19,771.35 crores. The depreciation claimed (which may include certain fixed assets also which were not subject matter of finance leases) was Rs. 5,352.57 crores. Clearly, therefore, the purchase value of the leased assets did not find reflection or deduction in the profit and loss account. Legal ratio of Virtual Soft Systems Ltd. (supra) is that as long as the assessee does not indulge in any manipulation of the figures and the capital cost, IRR, etc., are computed in accordance with the accountancy standards and no error or can be found, lease equalisation charge should not be disallowed. In....
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....i) CIT v. East India Hotels Ltd. [2001] 252 ITR 860 (Cal) ; (ii) CIT v. ITC Hotels Ltd. [2011] 334 ITR 109 (Karn) ; (iii) CIT v. South India Corporation (Agencies) Ltd. [2007] 290 ITR 217 (Mad) ; and (iv) CIT v. First Leasing Co. of India Ltd. [2008] 304 ITR 67 (Mad). In addition to the above judgments, we also have the judgment of the Rajasthan High Court in CIT v. Secure Meters Ltd. [2010] 321 ITR 611 (Raj) against which the special leave petition filed by the Revenue was dismissed. Having regard to the predominant view taken in the above judgments, in which the judgment of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 (SC) has been noticed, we are inclined to uphold the view taken by the Tribunal that the expenditure is revenue in nature." The respondent-assessee was/is a Government of India undertaking and was engaged in the business of leasing and financing to Indian Railways. It procured funds from various sources and acquired rolling stock which was leased to Indian Railways. The expenditure which was incurred on bonds was for ensuring finance and availability of funds for carrying out the business of finance and leasing. To procure and get funds in....