TaxTMI 
TaxTMI 
2018 (2) TMI 1535
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....ms depreciation. However, while preparing profit and loss account, it does not credit the full amount of lease charges; some amounts are set apart to be carried over to the lease equalization reserve; only the balance amount is credited to the profit and loss account. In the relevant year (AY 1998-99) the assessee credited Rs. 15,38,13,310/- as lease charges. The footnotes below the schedule reflect that this amount is the net of the lease equalization reserve. The total amount carried over to the lease equalization reserve is Rs. 6,24,96,982/-. This was added in its total income while computing its return; however, in the course of assessment proceedings, the assessee, by its letter of 23.03.2001 contended that as it was lease equalization charge, the sum (offered for taxation) should be withdrawn and that this position was based on legal opinion. The Assessing Officer (AO) considered the assessee's submissions and after analyzing the materials reasoned that the Act does not distinguish between a finance lease and operating lease, because the legal ownership of the underlying asset continues unchanged. Therefore, the charges (towards lease) received by the owner should be taxed as....
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....substance, lease equalization 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 equalization amount being reduced to a naught, as the debit 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 which cannot be allowed, as there is no provision under the I.T. Act is, in our view, a complete misappreciation of what constitutes a lease equalization charge. In our opinion, as long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in the AYs in issue, in its profit and loss account. This represents true and fair view of the accounts; a statutory requirement under Section 211 (2) of the Companies Act. As explained by us above, the rationale is that over the entirety of the lease period the said debit would work itself out." Thi....
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....ed by the AO as there was no provision in the Act supporting such deduction. Furthermore, there was no determination by the AO, whether the lease transactions were finance or operating leases. 5. Mr. Chaudhary urged that the claim for deduction of lease equalization charges is an artificially created one and that the true picture in the case of finance lease will emerge only when the lease agreement is over. The assessee's arguments and claims do not show how it would deal with a situation in a case where the lease is suspended without the full term having been completed. It was also submitted that on expiry of the lease period alone the lease assets are transferred and it cannot be said that till such only would it be necessary to have a lease equalization reserve. In this connection, the Revenue submitted that in the event of sale by the assessee on expiry of the lease period, the assessee was entitled to reduce from the blocks and assets the value realized on sale of the assets, and this will ensure the proper deduction that the assessee has to get in accordance with the provisions of the Act. 6. It was next submitted that the reserve created by the assessee is only to cov....
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....tion based on the provisions of the IT Act or, may even adopt the method of depreciation provided under the 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 equalization 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 equalization charge to the profit and loss account. Therefore, the assessee in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not the depreciation claimed is, less or more than the capital recovery." 9. The Court also held that the capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalization 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 equalization amount being reduced to a naught, as the debit and credits in the prof....