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TMI Blog2006 (2) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... er on account of lease equalization charges. The facts with regard to the lease equalization charges claimed as deduction by the assessee, which was disallowed by the revenue authorities are as follows. The assessee is a company which is engaged in the business of leasing and hire-purchase. In respect of the assets which it had granted on lease to the customers, the assessee reflected them as fixed assets in its balance sheet. In other words, the assessee was the owner of the assets which were given on lease. As owner of the assets, the assessee claimed depreciation on the assets. The lease charges received by the assessee was shown as a receipt in the Profit & Loss Account. The assessee had, however, deducted from the lease charges certain amounts carried over to lease equalization reserve and only the balance has been credited to the P&L account. In the notes to the accounts, the system of deducting lease equalization reserve from the lease charges received has been explained as follows: "Revenue recognition.-Lease Rentals are accounted for as per the terms of the lease agreements. However, in compliance with the Guidance note issued by the Institute of Chartered Accountants of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15) 49 ------- ------- Total 49 145 ------- ------- 5. The revenue authorities have, however, not accepted this claim made by the assessee. The Assessing Officer in the order of assessment for assessment year 1998-99 has explained this system and has given the following reasons for not accepted the same: "The method of accounting is further explained by way of an illustration given below:- (1) Cost of the assets Rs. 1,000 (2) Amount financed Rs. 1,000 (3) Depreciation charged in the books 10% (4) Implicit interest rate 15% (5) Annual lease rent Rs. 350 (6) Duration of lease 4 years" The various accounting entries in the books of the lessor and the computation of income would be as per the table given below:- -------------------------------------------------------------- Year 1st IInd IIIrd IVth Total -------------------------------------------------------------- 1. Capital balance outstanding 1000 800 570 305.5 -------------------------------------------------------------- 2. Lease rent received 350 350 350 350 1400 -------------------------------------------------------------- 3. Finance charges 150 120 85.5 45.825 401.3 ----------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the 'Operating Lease Transaction' and 'Finance Lease Transaction'. In case of lease transaction, the ownership of the asset remains with the lessor and, accordingly, depreciation is also claimed by lessor. Since the ownership of the assets remains with the lessor, the entire amount received by the lessor constitutes its income. For the purpose of income-tax, the method of computation of total income cannot be changed because of the change in method of accounting due to the new guidelines prescribed by the Institute of Chartered Accountants of India. In fact, it has already been clarified in Para 27 of revised guidance note on accounting for leases that specific treatments for determining taxable income would have to be in accordance with provisions of taxation laws; such treatment may differ from the recommendation contained in the guidance note. The above illustration clearly brings out that the new method of accounting results into serious anomalies while computing the total income. In the illustration, the total expenditure made by the lessor on acquisition of capital asset is Rs. 1,000 and the total money received in the form of lease rent is Rs. 1,400 and in addition to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation. Higher is the depreciation, lower is the amount of Lease Equalization Charge. The very basis of calculation of Lease Equalization Charge is linked with the depreciation rates. As mentioned above, the Lease Equalization charge is nothing but a provision similar to depreciation allowance. Therefore, when the book profit, determined after providing Lease Equalization Charge, are further adjusted to give higher allowance of depreciation as per rates provided in Income-tax Rule. It leads to very distorted results, i.e., total computed in this manner does not at all comes anywhere near the real income of the assessee. The obvious reason is that the lease equalization charge is calculated on the basis of depreciation charged in the books but while calculating income depreciation is allowed at a much higher rate. The assessee cannot be allowed both the benefits, to reduce Lease Equalization Charge, calculated on the basis of depreciation as per Company Law, from its lease income and then claim higher depreciation as per Income-tax Rules for computing total income. In any case, as mentioned above, the Income-tax Act does not distinguish between finance lease and operating lease. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and both, the hiree and the hirer, account for such payment on similar basis, i.e., in books of hiree also similar basis, i.e., in books of hiree also full amount of payment made to the hirer is also debited to the profit and loss account but only the part of it is debited and balance is accounted as a capital payment. The method of accounting followed by the assessee, as per the guidance note of ICAI, cannot be adopted for the purpose of computation of total income under the Income-tax Act. It is now a well-established principle that determination of income is not affected by the accounting entries made by the assessee. Another way to look at it is that since it is provision similar in nature to that of depreciation, though having different nomenclature, it should be added to the income alongwith book depreciation while computing total income. Therefore, total amount of lease charges received by the assessee (without reducing the amount of Lease Equalization Charge) shall be considered the income of the assessee. The total amount of Lease Equalization Charge carried over to the balance sheet is Rs. 1,63,01,402 as per the details given below:- Rs. Lease Equalization up to 1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases are a pure leasing transaction. His further submission was that as per the prudential norms issued by the Reserve Bank of India in exercise of its power conferred under the RBI Act, 1934, in the matter of accounting the NBFCs were required to follow the accounting norms to be followed by Non-banking Finance Companies (NBFC) such as the assessee, the assessee was required to follow the accounting standards and guidance notes issued by the ICAI. It was contended by the ld. counsel for the assessee that since the assessee was a non-banking finance company, it had to follow the prudential norms issued by the RBI. Since these guidelines were mandatory and had to be legally followed by the assessee, the said system of accounting should be applied even while computing income under Income-tax Act. In this regard, the ld. counsel for the assessee submitted that in the context of provisions for bad and doubtful debts arising out of non-performing assets, the RBI had under the prudential norms applicable to NBFCs directed that such provisions will have to be claimed as a deduction. Under the income-tax the revenue authorities refused to recognize a claim for deduction on account of non-p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in the RBI Act. As such, the assessee, by overriding statutory mandate, could not have ignored the provisions of Chapter III-B of the RBI Act and the Prudential Norms issued thereunder. This matter has been subject of judicial scrutiny in the case of 'TEDCO Investment & Financial Services (P.) Ltd v. Dy. CIT' (2003) 87 ITD 298 (Delhi). Our above view finds support from the said decision also, which was cited before us by the ld. counsel for the assessee. The ld. Commissioner (Appeals) has clearly erred in not following the decision in 'TEDCO', which was cited and discussed before him. As per the norms and guidelines issued by the RBI, where if any amount falls under the category of bad and doubtful debts, the assessee-company has to account for the same under the head of 'Provision of Non-performing Assets'. The assessee did accordingly. The ld. Commissioner (Appeals) was of the view that the conditions prescribed under section 36(1)(vii) of the Income-tax Act, were not complied with, and that the claim was in the nature of a contingent liability, the debts having not been written off in the accounts and the assessee having merely created a provision. However, in doing so, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntingent liability. According to him such contingent liability cannot be allowed as a deduction. (e) That the provisions of the Income-tax Act alone are relevant for computing income for the purpose of taxation. The guidelines issued by ICAI are only for the purpose of ensuring disclosure of true and fair view of the state of affairs of the assessee. In any event it was submitted that the same will not have any binding force in view of the clause 27 of the very same norms relied upon by the ld. counsel for the assessee. 11. We have considered the rival submissions. The Tribunal in the case of Hindus tan Commercial Investment Trust Ltd. had held that in view of the provisions of the section 45JA of the RBI Act, the RBI has a power to determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition and accounting standards to be followed. It has further been held that in view of the overriding clause in section 45Q of the RBI Act, the said provisions are binding even on the income-tax authorities while computing income for the purpose of taxation. The Tribunal had relied on the decision of the Delhi Bench in the case of TE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee. We have already observed that the method followed by the assessee is not recognized by the Act. Consequently, we uphold the order of the revenue authorities and dismiss the grounds of appeal raised by the assessee in assessment years 1997-98 and 1999-2000. 13. As far as assessment year 1998-99 is concerned, the question revolves around as to whether the lease equalization have to be added as profit as per the P & L account in view of the clause (c) of Explanation to section 115JA of the Act. On this aspect, we find that the Tribunal in the case of MGF India Ltd., ITA No 1143/Delhi/02 while considering a similar claim in the context of section 115JA has held that such an adjustment cannot be made. The Tribunal had referred to the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and has held that such adjustments cannot be made while determining income under section 115J of the Act. Respectfully, following the decisions of the Tribunal referred to above, we allow the appeal of the assessee. We are not convinced with the argument of ld. DR that the amount in question namely the lease equalization charges is an amount set aside t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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