2016 (7) TMI 1210 - HC - Income Tax

MAT - computation of the book profit under explanation to section 115JA - addition made on account of lease equalization charges - in the nature of reserve or not - Held that - The lease equalization fund is not in the nature of a reserve - the lease equalization charge would not fall within the ambit of clause (b) of the Explanation to sub-section (2) of section 115JA of the Act. Under the circumstances, while computing the book profit under section 115JA of the Act, the question of increasing the net profit by the amount of lease equalization charge would not arise, the same being not in the nature of a reserve. - Decided against the revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of lease equalization charges in computing book profit under section 115JA of the Income Tax Act, 1961.
2. Inclusion of gain on exchange rate fluctuation in 'total turnover' for the purpose of section 80HHC of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Lease Equalization Charges:
The appellant (revenue) challenged the deletion of the addition made on account of lease equalization charges while computing book profit under section 115JA of the Income Tax Act, 1961. The Assessing Officer added Rs. 81,99,764/- debited to the lease equalization account while calculating book profit, treating it as a reserve. The Commissioner (Appeals) upheld this view, but the Tribunal reversed it, relying on precedents from the Delhi High Court and Madras High Court, which held that lease equalization charges are not reserves but adjustments for recalibrating depreciation.

The court agreed with the Tribunal, referencing the Delhi High Court's decision in CIT v. Virtual Soft Systems Ltd., which explained that lease equalization charges adjust the depreciation claimed to reflect true income over the lease period. The court concluded that lease equalization charges are not reserves and hence not includible in book profit under section 115JA.

2. Exchange Rate Fluctuation Gain:
The second issue concerned whether the gain on exchange rate fluctuation should be included in the 'total turnover' for section 80HHC purposes. The Assessing Officer included Rs. 11,72,828/- from exchange rate fluctuation in the total turnover, reducing the deduction under section 80HHC. The Commissioner (Appeals) and Tribunal, however, ruled in favor of the assessee, citing the Gujarat High Court's decision in CIT v. Alps Chemicals P Ltd., which held that exchange rate fluctuation gains directly relate to export earnings and should not be included in total turnover.

The court upheld the Tribunal's decision, noting that the revenue failed to show why the Alps Chemicals P Ltd. decision was inapplicable. The court emphasized that exchange rate fluctuations directly relate to export transactions and should not be part of total turnover for section 80HHC calculations.

Conclusion:
The court dismissed the appeal, affirming that lease equalization charges are not reserves and gains from exchange rate fluctuations should not be included in total turnover for section 80HHC purposes. The Tribunal's reliance on established legal precedents was upheld, and no substantial questions of law were found to warrant interference.