2015 (1) TMI 1504 - HC - Income Tax

Computation of book profit - lease equalization charges - Tribunal held that the adjustment made by the Assessing Authority by adding the amount of lease equalization charges to compute the Book Profits under Section 115JA was not permissible since the said amount was not covered within any of the clauses to Explanation below Section 115JA(2) including clause (b) Whether the Appellate Authorities were correct in reversing the finding of the Assessing Officer that a sum lease equalization account is in the nature of a reserve and the same had to be added back when computing the Book Profits as per Explanation u/s 115JA(2) of the Act.? HELD THAT - The lease equalization charges is not one of the amounts which is covered under any of the clauses to Explanation to Section 115JA(2). It cannot be treated as a reserve. As the name suggest, this lease equalization charges is nothing but the difference between the statutory depreciation on rentals and the recovery of cost of capital. Therefore, merely because the said amount entered in the P L account, in effect, makes no difference. At any rate, it cannot be treated as a reserve. Therefore, both the Appellate Authorities were justified in directing deletion of the said amount. Decided in favour of the assessee.

Summary

Issues:
1. Whether 'lease equalization charges' can be considered as an amount transferred to reserve as investment in Explanation (b) to Section 115JA(2)?

Analysis:
The judgment involved an appeal by the Revenue against the Tribunal's decision upholding the First Appellate Authority's ruling regarding the treatment of 'lease equalization charges' for an asset management company. The assessee had initially declared income under Section 115JA and the Regular provisions of the Income Tax Act, with a subsequent adjustment leading to a higher tax payable under Section 115JA. The dispute arose when the Assessing Authority added back the 'lease equalization charges' while computing Book Profits under Section 115JA, considering it as a reserve. The Commissioner of Income Tax (Appeals) disagreed, stating that these charges did not qualify as an amount transferred to reserve as per Explanation (b) to Section 115JA(2).

Subsequently, the Tribunal concurred with the Commissioner's decision, citing a precedent (G.E. CAPITAL TRANSPORTATION case) and a supporting judgment from the Delhi High Court. The Tribunal emphasized that the 'lease equalization charges' did not fall under any clause of the Explanation to Section 115JA(2), including clause (b). The Tribunal's decision was based on the understanding that these charges represented the difference between statutory depreciation on rentals and the recovery of the cost of capital, and thus, did not meet the criteria to be treated as a reserve.

The appeal at the High Court centered on the substantial question of law regarding the nature of the 'lease equalization account.' The Revenue contended that this amount should be added back to compute Book Profits as per the Explanation under Section 115JA(2), arguing that it represented a reserve. In contrast, the assessee's counsel supported the lower authorities' decision to delete the addition, maintaining that 'lease equalization charges' did not qualify as a reserve. The High Court concurred with the assessee's argument, emphasizing that these charges did not fit the criteria to be considered a reserve as per the provisions of Section 115JA(2). Therefore, the substantial question of law was answered in favor of the assessee, leading to the dismissal of the appeal by the Revenue.

Overall, the judgment clarified the treatment of 'lease equalization charges' for tax purposes, highlighting the distinction between reserves and specific charges related to asset management operations. The decision provided clarity on the interpretation of relevant tax provisions and upheld the lower authorities' ruling in favor of the assessee.