2022 (7) TMI 269 - AT - Income Tax

Additions u/s 30 - deduction of Lease Equalization Charges - type of lease undertaken- scope of accounting standards - AO noticed that, assessee has created Rent Equalization Reserve - HELD THAT - The lease equalization charge is bifurcation of lease rentals in order to arrive at real income. The assessee has claimed the deduction of lease equalization charges as per Accounting Standard 19 issued by the ICAI, a recognized body vested with the authority to recommend accounting standards for ultimate prescription by the Central Government in consultation with the National Advisory Committee of Accounting Standards for the presentation of true and fair view of financial statements - the Accounting Standard expressly allows the claim of lease rent on straight line basis over the period of lease term. The deduction on the basis of average rent per year will not affect the tax revenue of the department because of the reason that when actual payment of lease rent is more than the average rent in subsequent years, then excess deduction claimed in the earlier years would net off the difference and consequently at the end, there would be no difference in actual payment and amount of deduction claimed. Besides, the deduction of lease equalization reserve has been allowed by the Hon'ble Supreme Court in its recent judgment in the case of CIT-VI Versus Virtual Soft Systems Ltd. 2018 (4) TMI 1472 - SUPREME COURT allowed the claim of lease equalization charges relying on the Guidance Note issued by the ICAI Accounting for leases . Hon'ble Court has held that the taxpayer can take recourse of Guidance note issued by the ICAI, particularly when there is no express bar in the Act. The ICAI publication i.e. Guidance Note reflects the best practices adopted by the accountants throughout the world. Hon'ble Delhi High Court in their recent decision in case of CIT vs. MGF India Ltd. 2018 (2) TMI 1535 - DELHI HIGH COURT has also held that Lease equalization charges can be deducted while computing book profit. As per provisions of Companies Act, Accounting Standard and Income Tax Act, we hereby direct that the assessee is eligible for the claim of lease equalization charges. In the result, the appeal of the assessee on this ground is allowed. Nature of expenditure - Logo Development Expenses - AO made the disallowance on the ground that payment to the advertising agency was to create a new brand and thus creating an intangible asset for the assessee company which will have enduring benefit whose benefit will be derived over several periods - HELD THAT - In the instant case, the contract for new logo for existing business has been awarded, certain amounts were spent and the project has been shelved midway and abandoned. There was no creation of any asset and there is no existence of new business. The amounts have been spent in connection with the ongoing business operations. Hence, keeping in view the facts of the case and the judgments of the Hon ble High Courts in PRIYA VILLAGE ROADSHOWS LTD. 2009 (8) TMI 765 - DELHI HIGH COURT , INDO RAMA SYNTHETICS INDIA LTD. 2009 (9) TMI 635 - DELHI HIGH COURT , ACL WIRELESS LTD. 2013 (12) TMI 1160 - DELHI HIGH COURT we hereby allow the appeal of the assessee on this ground.

Summary

Issues Involved:
1. Confirmation of total income at Rs. 3,39,51,476/- against the returned loss of Rs. 3,84,00,967.
2. Disallowance of Rs. 8,28,000 on account of lease equalization charges.
3. Disallowance of Rs. 36,21,491 on account of logo development expenses.
4. Rejection of additional evidence filed by the assessee under Rule 46A of the Income-tax rules, 1962.
5. Violation of the principles of audi alteram partem by not granting adequate opportunity of being heard.
6. Reliance on irrelevant judicial decisions by the Ld. CIT(A).

Detailed Analysis:

1. Confirmation of Total Income:
The Ld. CIT(A) confirmed the total income at Rs. 3,39,51,476/- by confirming the disallowance of Rs. 44,49,491 made by the Ld. AO, despite the assessee providing all documents and evidence to support their claim.

2. Lease Equalization Charges:
The assessee made a provision for rent of Rs. 8,28,000/- as lease equalization charges, which was disallowed by the AO and confirmed by the Ld. CIT(A). The AO argued that the provision was not allowable under the Income Tax Act, 1961. The Ld. CIT(A) invoked Section 30 of the Income Tax Act, 1961, stating that no other deduction except as allowed under Section 30 could be claimed.

The tribunal considered the following:
- Accounting Standard 19 (AS 19) issued by ICAI.
- Provisions of Section 145, Section 129, and Section 133 of the Companies Act, 2013.
- Notification issued by the Central Government and rulings of the Hon'ble High Court of Andhra Pradesh & Telangana and the Hon'ble Supreme Court of India.

The tribunal concluded that:
- AS 19 allows the claim of lease rent on a straight-line basis over the lease term.
- The lease equalization charge is a bifurcation of lease rentals to arrive at real income.
- The Hon'ble Supreme Court in CIT-VI Versus Virtual Soft Systems Ltd. allowed the claim of lease equalization charges.
- The Hon'ble Delhi High Court in CIT vs. MGF India Ltd. also held that lease equalization charges can be deducted while computing book profit.

Therefore, the tribunal directed that the assessee is eligible for the claim of lease equalization charges, allowing the appeal on this ground.

3. Logo Development Expenses:
The assessee claimed logo development charges of Rs. 36,21,491/- under advertisement & business promotion. The AO disallowed the claim, treating it as capital expenditure, arguing that it created an intangible asset with enduring benefit.

The tribunal considered the following:
- The contract with the advertising agency was terminated midway, and no new logo was delivered.
- The expenditure was for the same business, which was already carried on by the assessee, and there was no creation of a new asset.
- Various judicial precedents, including Indo Rama Synthetics (I) Ltd., Priya Village Roadshows Ltd., CIT vs. ACL Wireless Ltd., CIT vs. Euro India Ltd., Tamil Nadu Magnesite Ltd. vs. ACIT, CIT vs. Rajesh Khanna, CIT vs. Venus Records & Tapes (P.) Ltd., and CIT vs. Praga Tools Ltd., supported the view that such expenditure should be treated as revenue expenditure if no new asset is created.

The tribunal concluded that since the contract was terminated and no new logo was created, the expenditure should be allowed as revenue expenditure under Section 37(1) or as business loss under Section 28(i) of the Act, allowing the appeal on this ground.

4. Rejection of Additional Evidence:
The Ld. CIT(A) summarily rejected the additional evidence filed by the assessee under Rule 46A of the Income-tax rules, 1962, violating the principle laid down in Rule 46A.

5. Violation of Audi Alteram Partem:
The Ld. CIT(A) did not grant adequate opportunity of being heard to the appellant, thereby violating the principles of audi alteram partem.

6. Reliance on Irrelevant Judicial Decisions:
The Ld. CIT(A) relied upon various judicial decisions against the assessee, which were unconnected and irrelevant to the facts and law of the case.

Conclusion:
The tribunal allowed the appeal of the assessee on the grounds of lease equalization charges and logo development expenses, directing that the assessee is eligible for the claims. The order was pronounced in the open court on 27/06/2022.