2014 (6) TMI 224 - HC - Income Tax

Reduction of lease equalization charges Calculation of profits under P&L A/c Held that - Following Commissioner of Income-tax Versus Virtual Soft Systems Ltd. 2012 (2) TMI 120 - DELHI HIGH COURT - the lease equalisation charges or funds have to be set off or included on the expenditure side in the profit and loss account to compute and calculate the profits. The principle of matching, i.e., matching of income with the actual expenditure which is incurred by the assessee to earn the income applies - the AO has not based the addition on the finding that there was incorrectness or incompleteness in the account or the accounting standard employed by the assessee were contrary to the accounting standard notified by the Government u/s 145(2) of the Act. The assessee had received lease rentals from which lease equalisation account was reduced - The addition of the fixed assets is reflective as the addition to the quantum of rolling stock - If the purchase price of the rolling stock stands subjected to revenue deduction, would have its own consequences and lead to abnormal financial results and absurdities - the purchase value of the leased assets did not find reflection or deduction in the profit and loss account - as long as the assessee does not indulge in any manipulation of the figures and the capital cost, IRR, etc., are computed in accordance with the accountancy standards and no error or can be found, lease equalisation charge should not be disallowed Decided against Revenue. Bond issue expenses Revenue or capital Held that - Following CIT v. Thirani Chemicals Ltd. 2005 (12) TMI 86 - DELHI High Court - issue of debentures oil rights basis to the existing shareholders was revenue expenditure and it was not mandatory to amortise the amount u/s 35D of the Act in view of the Circular No. 52, dated March 19, 1971, issued by the Central Board of Direct Taxes - assessee was/is a Government of India undertaking and was engaged in the business of leasing and financing to Indian Railways - It procured funds from various sources and acquired rolling stock which was leased to Indian Railways - The expenditure which was incurred on bonds was for ensuring finance and availability of funds for carrying out the business of finance and leasing - To procure and get funds in the form of bonds etc. some expenditure had to be incurred - The funds were used for the business activities to earn income - The business had commenced much earlier and not during the year. - expenditure is revenue in nature. - Decided against the revenue. Entitlement for depreciation on office premises Held that - The findings are findings of fact - The Tribunal has taken into account and relied upon the possession letter dated April 28, 1998, in which NBCC had accepted that the possession of the space measuring 625 square meters and 285 square meters was handed over to the assessee on September 23, 2000 - NBCC was/is a Government of India undertaking and it is difficult to accept the contention of the Revenue that they would have fudged or manipulated the date of possession Decided against Revenue.

Summary

Issues Involved:
1. Lease equalisation charges and their treatment under section 115JB of the Income-tax Act, 1961.
2. Lease equalisation charges and their consideration in calculating profits under the Income-tax Act.
3. Nature of bond issue expenses: capital or revenue.
4. Entitlement to depreciation on office premises.

Issue-wise Detailed Analysis:

Issue No. 1:
"Whether the lease equalisation charges can be disallowed/deleted from the profit and loss account for the purposes of computing book profits under section 115JB of the Income-tax Act, 1961?"

This issue was resolved in favor of the assessee based on the precedent set by the Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593 (Delhi).

Issue No. 2:
"Whether the lease equalisation charges can be reduced/taken into consideration while calculating the profits under the profits and loss account provision of the Income-tax Act?"

This issue was also covered by the decision in Virtual Soft Systems Ltd. The court examined the nature and character of lease equalisation charges in financial leases, concluding that these charges must be included on the expenditure side in the profit and loss account. This principle aligns with the matching concept of accounting, which matches income with the actual expenditure incurred to earn that income. The court referenced section 145 of the Income-tax Act and the accountancy standards prescribed by the Institute of Chartered Accountants of India (ICAI). The court noted that the Assessing Officer did not find any incorrectness or incompleteness in the accounts or deviation from the accounting standards notified under section 145(2). The court also highlighted that the lease equalisation charge is a method of recalibrating the depreciation claimed by the assessee, ensuring that the income is fairly represented over the lease period.

Issue No. 3:
"Whether the bond issue expenses were capital or revenue in nature?"

The respondent-assessee incurred bond issue expenses amounting to Rs. 10,09,92,445. The Tribunal, referring to earlier decisions and the Delhi High Court ruling in CIT v. Thirani Chemicals Ltd. [2007] 290 ITR 196 (Delhi), concluded that these expenses were revenue in nature. The court cited the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), which established that expenditure incurred in connection with obtaining loans or issuing debentures is revenue expenditure. The court also referenced other judgments supporting this view and noted that the respondent-assessee, a Government of India undertaking, used the bond funds for its business activities, thus classifying the bond issue expenses as revenue expenditure.

Issue No. 4:
"Whether the assessee is entitled to depreciation on office premises at NBCC place, Lodi Road, New Delhi?"

The Revenue contended that the respondent-assessee was neither the owner of the building nor in possession under section 53A of the Transfer of Property Act. However, the Tribunal found that the respondent-assessee had taken possession before the end of the financial year ending March 31, 2000, based on a letter from NBCC dated March 29, 2000. The Tribunal concluded that the respondent-assessee was entitled to the benefits under section 53A and thus eligible for depreciation, referencing the Supreme Court's decision in Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC). The court upheld these factual findings, dismissing the Revenue's appeal.

Conclusion:
The High Court dismissed the appeal, deciding all issues in favor of the respondent-assessee. The court upheld the Tribunal's findings on lease equalisation charges, bond issue expenses, and entitlement to depreciation, aligning with established legal precedents and accounting standards.