2015 (10) TMI 242 - AT - Income Tax

Addition made towards provision for lease equalization charges while computing the book profit of the assessee for the purpose of determining tax U/s.115 JB - CIT(A) deleted the addition - Held that - Provisions for lease equalization charges cannot be added back to the profit of the assessee company for computing tax under the provisions of section 115JB of the Act and also under the normal provisions of the Act, because the assessee has only rightly recognized its actual lease rental income in its profit and loss account for the relevant assessment year following the Matching Concept and the Accounting Standard-19. Precisely the Book Profit computed by the assessee in such case would be as per the provisions of the Companies Act and in compliance with the Accounting Standards which is mandatory. However, neither from the order of the Ld. Assessing Officer nor from the order of the Ld. CIT (A) these facts are revealed. Therefore with the above observations, we remit back both these cases to the file of Ld. Assessing Officer to verify whether the Provision for lease equalization charges debited in the P&L A/c of the assessee with the corresponding credit to lease equalization reserves are provided in the manner as stated hereinabove by the Ld. A.R and accordingly computed the profit of the assessee as per the normal provisions of the Act, and also for the purpose 115JB of the Act, and if so, delete the addition made on account of Provision for lease equalization charges as directed by the Ld. CIT (A) - Decided in favour of revenue for statistical purposes

Summary

Issues:
Revenue's appeal against deletion of provision for lease equalization charges while computing book profit for tax purposes under section 115JB of the Income Tax Act for assessment years 2006-07 and 2007-08.

Analysis:
The Revenue contested the deletion of provision for lease equalization charges by the Ld. CIT (A) for the assessment years in question, arguing that it should be added back to the book profit for tax computation under section 115JB. The Ld. A.R. for the assessee contended that as per RBI guidelines and Accounting Standard-19, the provision was correctly accounted for and should not be added back. The A.R. explained that the provision accounts for the excess principle portion in lease installments over depreciation, ensuring accurate profit recognition. The Tribunal found merit in the A.R.'s arguments, emphasizing the need to exclude the excess principle portion to reflect actual lease rental income. Referring to Accounting Standard-19, the Tribunal highlighted the systematic allocation of depreciable amount for leased assets. The Tribunal also cited the Apollo Tyres Ltd. case, emphasizing the limited power of Assessing Officers in examining book profits. Consequently, the Tribunal remitted the case to the Assessing Officer for verification and directed deletion of the addition if the provision was accounted for correctly.

This judgment clarifies the treatment of provision for lease equalization charges in computing book profit under section 115JB. It underscores adherence to RBI guidelines and Accounting Standards, ensuring accurate profit recognition. The Tribunal's decision aligns with the principles of matching concept and Accounting Standard-19, emphasizing the systematic allocation of depreciable amounts for leased assets. The judgment also highlights the limited powers of Assessing Officers in examining book profits, emphasizing the need to rely on authentic statements of accounts. The case serves as a precedent for similar disputes involving provision accounting and tax computation, providing guidance on proper accounting practices and statutory compliance.