2008 (8) TMI 932 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of deduction on account of Lease Equalization.
2. Allowability of bond issue expenses.
3. Addition on account of interest on funds raised through FRN 2003 for import of capital goods.
4. Addition to book profit under section 115JA for provision for bad and doubtful debts and diminution in value of investment.

Detailed Analysis:

1. Allowability of Deduction on Account of Lease Equalization:
The first issue pertains to whether the lease in question is a finance lease or an operating lease and the subsequent allowability of Lease Equalization as a deduction. The assessee argued that the lease is a finance lease as per the Guidance Note on Accounting for Leases issued by the ICAI. The Tribunal examined the facts in light of this guidance note and concluded that the lease is indeed a finance lease. The Tribunal found that the lease rental should be divided into finance income and capital recovery, with Lease Equalization ensuring that only finance income is credited to the Profit and Loss Account. The Tribunal accepted the method of accounting suggested by ICAI and allowed the deduction for Lease Equalization, stating that it ensures the correct finance income is reflected each year throughout the lease period.

2. Allowability of Bond Issue Expenses:
The second issue involved the allowability of bond issue expenses. The assessee claimed the entire expense in the year of issue, while the Assessing Officer allocated the expenses over the bond's seven-year period. The Tribunal relied on the judgment of the Delhi High Court in the case of CIT v. Khirani Chemicals Ltd., which allowed the deduction of the entire expense in the year of issue. The Tribunal followed this precedent and allowed the assessee's claim for bond issue expenses in the year of issue.

3. Addition on Account of Interest on Funds Raised through FRN 2003 for Import of Capital Goods:
The third issue was regarding the addition of interest on funds raised through FRN 2003 for the import of capital goods. The assessee did not press this ground as it was not permitted by the Committee on Disputes (COD). Consequently, this ground was rejected by the Tribunal.

4. Addition to Book Profit under Section 115JA for Provision for Bad and Doubtful Debts and Diminution in Value of Investment:
The fourth issue concerned the addition to book profit under section 115JA for provisions for bad and doubtful debts and diminution in the value of investment. The Tribunal referred to the decision in the case of ACIT v. Eicher Ltd., which held that provisions for bad and doubtful debts do not represent liabilities that the assessee may be called upon to pay. The Tribunal extended this reasoning to provisions for diminution in the value of investment, concluding that such provisions cannot be added to book profit under section 115JA as they do not represent liabilities. The Tribunal decided this issue in favor of the assessee, allowing the provisions to be excluded from book profit calculations.

Conclusion:
The Tribunal allowed the appeals of the assessee on the issues of Lease Equalization and bond issue expenses, following established judicial precedents. The ground related to interest on funds raised through FRN 2003 was rejected as it was not pressed. The Tribunal also ruled in favor of the assessee on the issue of additions to book profit under section 115JA for provisions for bad and doubtful debts and diminution in value of investment. The appeals were partly allowed for assessment year 1997-98 and fully allowed for the remaining years.