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TMI Blog2007 (7) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... been defined in a negative manner and excludes certain amounts as specified. If the nature and character of lease equalization charges as evident from the purpose for which the same is provided as well as the accounting treatment given thereto in the books of account is considered in the light of the meaning of the expression 'reserves' as defined in the context of terms common used in financial statements as well as by the Hon'ble Apex Court in the case of State Bank of Patiala [ 1996 (3) TMI 128 - SUPREME COURT] , we are of the view that the provision made for lease equalization charges cannot be regarded as an amount transferred to reserves as envisaged in Explanation (b) to section 115JA(2) and the same therefore, cannot be excluded while computing book profit u/s 115JA. In that view of the matter, we hold that the adjustment made by the Assessing Officer by adding the amount of lease equalization charges while computing the book profit u/s 115JA was not permissible since the said amount was not covered within any of the clauses of Explanation below section 115JA(2) including clause (b) and the Ld. CIT(A) therefore was not justified in confirming the adjustment s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Assessing Officer and confirmed by the ld. CIT(A) was deleted by the Tribunal holding that the interest charged on interest tax liability was not of penal nature. Respectfully following the said decision of the Tribunal, we set aside the impugned order of the ld. CIT(A) confirming the disallowance made by the Assessing Officer on account of interest charged on interest tax liability and direct the Assessing Officer to delete the same. Ground No. 9 of the assessee s appeal is accordingly allowed. In the result, the appeal of the assessee is partly allowed. - P. N. Parashar Judicial Member And P. M. Jagtap Accountant Member For the Appellant : M. S. Syali and T. D. Singh For the Respondent : K. C. Jain and Purushotam Tripuri ORDER PER P.M. JAGTAP, ACCOUNTANT MEMBER. 1. This appeal by the assessee is directed against the order of ld. CIT(A) XIV, New Delhi, dated 20-3-2002. 2. Ground No. 1 raised by the assessee in this appeal is general seeking no specific decision from us. 3. In ground No. 2, the assessee has challenged the action of the ld. CIT(A) in upholding the order of the Assessing Officer restricting its claim for depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred by the assessee in connection with the issue of equity shares for augmenting its working capital requirement treating the same to be of capital nature. 6. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is squarely covered in favour of the revenue and against the assessee by the decision of Hon ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 wherein it was held that expenditure incurred in connection with public issue of equity shares constitutes capital expenditure. Relying on this decision of Hon ble Supreme Court in the case of Brooke Bond India Ltd. (supra), Hon ble Calcutta High Court has held in the case of B.S.L. Ltd. v. CIT [2004] 267 ITR 754 that in view of the decision of Hon ble Supreme Court, the question does not remain open any further for consideration and decisions on the basis of as to whether the capital raised is needed as working capital or not. Respectfully following these judicial pronouncements, we uphold the impugned order of ld. CIT(A) confirming the disallowance made on this issue and dismiss ground No. 3 of the assessee s appeal. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded back while computing book profit under section 115JA. This contention raised on behalf of the assessee company however was not found acceptable by the ld. CIT(A) and he proceeded to uphold the adjustment/addition made by the Assessing Officer on account of lease equalization charge for the purpose of computing book profit under section 115JA observing that the same was a notional charge. 9. The ld. Counsel for the assessee submitted that the amount of lease equalization charges debited by the assessee company in its profit and loss account was added by the Assessing Officer while computing the book profit under section 115JA invoking Explanation (b ) to section 115JA(2). He invited our attention to the said Explanation to point out that the same authorizes the Assessing Officer to make adjustment to the book profit on account of amounts carried to any reserves by whatever name called. He contended that the nature of lease equalization charges therefore needs to be seen so as to ascertain whether the same could be regarded as any reserve as envisaged in Explanation (b) below sub-section (2) of section 115JA. In this regard, he invited our attention to the guidance note issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depreciation Lease equalization charges (LEC) -if annual lease charge depreciation then LEC is debited to P L A/c. -if annual lease charge depreciation then LEC is credited to P L A/c. Lease Equalization Account should be transferred every year to the P L a/c and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Amount . Notes to account [Pg. 70, Para 2 (ii)] the difference of capital recovery vis-a-vis the depreciation is reduced from Income from leases as lease equalization charges in accordance with the Guidance Note.... Balance standing in Lease Adjustment A/c should be adjusted in the net book value of the leased assets. This guidance note matches the annual lease charges with depreciation as Lease Rental - Financial Income = Depreciation and any difference is debited or credited to lease equalization charges A/c. 4. The assessee company is a non-banking finance company registered with the Reserve Bank of India and that the Department of Non-baking Supervision of the Reserve Bank of India in its regulatory framework for Non-banking Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was called for. Lease equalization only embodies the said adjustment/adaptation. It does not lead to creation of any reserve. If this be true will the Assessing Officer also take cognizance of the addition to the normal case income when made? Will that be an addition to income or a withdrawal from a reserve? The vary nomenclature of reserve thus is a misnomer. In substance it is only another acceptable method of revenue recognition. The method of accounting under the normal provisions of Income-tax Act may differ from that under MAT provisions. This is because section 115JA(2) makes it mandatory for a company to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. Where a particular amount is not income in a particular year as per the accepted method of accounting, it will not make it a reserve. For example where some lease rentals pertaining to next financial year are received in advance then they will not be recognized as income but will be disclosed in the balance sheet as assets and will be recognized as income next year. 9. The adjustments on account of lease equalization account whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the implicit rate of interest in the lease will remain same at 14 per cent as stated at pg. 50PB, para C. (ii) Calculations of the Annual Lease Charge will also remain same as stated at pg. 51, top right hand column. (i) (ii) (iii) (iv) (v) (vi) (vii) Annual Lease Charge Net Investment in the lease at the end of the year Cost/Net Book value at the beginning Net Statutory depreciation on SLM basis Book Value at the end of the year Lease Equalisation Account Balance of Lease Adjustment A/c at the end of the year Rs. Rs. Rs. Rs. Rs. Rs. Rs. 31,500 28,500 60,000 15,000 45,000 16,500 (Dr.) 16,500 (Cr.) 14,250 14,250 45,000 15,000 30,000 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit loss account certified by the auditors doesn t term lease equalization charges as a reserve. Lease equalization charges are not disclosed in the balance sheet of the assessee under the head Reserves and surplus . Reserves mean profits earned by company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future. (Refer CIT v. Century Spinning and Manufacturing Co. Ltd. 24 ITR 499 (SC) @ Pg. 504) As the lease equalization account is not shown as a reserve in the annual accounts, but adjusted against the value of fixed assets in the fixed asset schedule clearly indicate that these are not to the distributed as dividends by the company and hence cannot be classified as reserves . 10. The learned counsel contended that the provision for lease equalization charges thus is nothing but a sort of parallel method of accounting followed by the assessee for the purpose of revenue recognition of leasing business. He contended that the purpose of making the said provision is to split the lease rental income into financial income in order to match the said income with the corresponding expenses s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t certain amount from profits of the year under consideration and the same therefore was nothing but clearly in the nature of reserve as envisaged in Explanation (b) to section 115JA(2). 13. As regards the decision of Delhi Bench of ITAT in the case of SREI International Finance Ltd. (supra) cited by the ld. Counsel for the assessee, the ld. DR submitted that the argument now being advanced on behalf of the revenue before the Tribunal in the present case submitting that the provision made for lease equalization charges by the assessee-company was nothing but the amount carried to reserve, had not been raised before the Tribunal in the case of SREI International Finance Ltd. (supra). He submitted that since this aspect of the matter is very crucial to decide the issue under consideration and the Tribunal in the case of SREI International Finance Ltd. (supra) had no occasion to consider the same, the issue in question cannot be treated as covered and the same may be considered independently taking into account the said vital aspect of the matter. He also submitted that the guidance note issued by the ICAI in 1988 in this context has been subsequently withdrawn and in any case, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 211(2) of the Companies Act, 1956 which provides that every Profit and Loss a/c of a company shall give a true and fair view of the Profit and Loss a/c of the company for the financial year and shall comply with the requirements of Parts II III of Schedule VI to the Companies Act. Sub-section (3A) of section 211 of the Companies Act, 1956 further provides that every Profit and Loss a/c and Balance Sheet of a company shall comply with the Accounting Standards. Sub-section (3C) of section 211 defines Accounting Standards to mean the standards of accounting recommended by the ICAI constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 201A. It was further laid down that the Standards of Accounting specified by the ICAI shall be deemed to be the Accounting Standards until the Accounting Standards are determined by the Central Government under that sub-section. The Commissioner of Income-tax (A) held that though these Accounting Standards were only recommendatory in nature but the assessee being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (2) Every assessee, being a company, shall, for the purpose of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing profit loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to (f ) and as reduced by amounts covered by clauses (i) to (ix) of the said Explanation. Section 115JA begins with a non obstante clause. It is a self-contained code and will apply notwithstanding any other provisions of the Act. Book profit has been clearly defined and explained in the aforesaid Explanation, and there is no scope for any allowance and deduction under any other section from what is deemed to be total income of the assessee-company. 17. Thereafter, the requirements of preparing the profit and loss account by the companies in accordance with Parts II III of Schedule VI to the Companies Act, 1956 were also discussed by the Tribunal in the light of the provisions of section 115JA including especially Explanation below sub-section (2) laying down the permissible adjustments for computing the book profits as well as the decision of Hon ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 in paragraph Nos. 11 and 12 of its order which read as under:- 11. It is not the case of the Assessing Officer that the Net Profit as shown in the profit and loss a/c in the case of the assessee is not prepared in accordance with Parts II III of Schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115 was made for the limited purpose empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115 does not empower the Assessing Officer to embark upon afresh enquiry in regard to the entries made in the books of account of the company. 18. It was thus held by the Tribunal that the Assessing Officer had accepted net profit as per the profit and loss account of the assessee company to be one in accordance with the provisions of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts giving significant account policies and notes , it was clearly mentioned that in addition to depreciation on a single shift basis, the principle of recovery of capital was followed to ensure full capital recovery within the tenure of the lease agreement. It was further mentioned that the difference of capital recovery viz-a-viz the depreciation was reduced from income from leases as lease equalization charge in accordance with the guidance note on lease accounting issued by ICAI. As per the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 issued by the Reserve Bank of India vide its Notification No. DFC.119/DG(SPT)-98 dated 31-1-1998, it was mandatory for the assessee to follow all the accounting standards and guidance notes issued by the ICAI insofar as they were not inconsistent with any of the directions so issued. The contention raised by the assessee in this regard stating that the lease equalization charges were not debited by the assessee company to its Profit Loss Account thus is based on wrong assumption of facts and we reject the same being devoid of any merits. 20. Reverting back to the main issue relating to the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt/fair value of the leased asset over the lease term and is calculated by deducting the finance income for the period from the lease rental for that period. Accordingly, where the annual lease charge is more than the minimum statutory depreciation, lease equalization charge account will be debited to that extent whereas when annual lease charge is less than minimum statutory depreciation, a lease equalization would arise. As stated in the note, the following entries/disclosures shall be required to be made in this regard : (a) A separate Lease Equalization Account should be opened with a corresponding debit or credit to Lease Adjournment Account, as the case may be. (b) Lease Equalization Account should be transferred every year to the Profit and Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Income . (c) Statutory depreciation should be shown separately in the profit and loss account. Accumulated statutory depreciation should be deducted from the original cost of the leased asset in the balance sheet of the lessor to arrive at the net book value. (d) Balance standing in Lease Adjournment A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus is credited as a result of a debit to the appropriation account and not to the profit and loss account or other revenue account. In a broad sense, all allocations to reserve represent additions to capital, some of which are intended to meet commitments that are expected to arise in the future and some are made for the purpose of permanently increasing the capital of the concern. The former are revenue reserves and the latter capital reserves. As already discussed the amount of lease equalization, on the other hand, is a charge which has been deducted to arrive at the true and correct profit of the leasing business and it thus neither an appropriation of profit or allocation of part of the profits to any fund so as to call it as a reserve. The said charge thus is created as a result of debit to the profit and loss account and not a debit to the appropriation account. 24. In the guidance note issued by the Institute of Chartered Accountants of India explaining the meaning of different terms used for financial statements, reserve has been defined in para 14.04 as the portion of earnings, receipts or other surplus of an enterprise appropriated by the management for a general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for which the same is provided as well as the accounting treatment given thereto in the books of account is considered in the light of the meaning of the expression reserves as defined in the context of terms common used in financial statements as well as by the Hon ble Apex Court in the judicial pronouncement, we are of the view that the provision made for lease equalization charges cannot be regarded as an amount transferred to reserves as envisaged in Explanation ( b) to section 115JA(2) and the same therefore, cannot be excluded while computing book profit under section 115JA. In that view of the matter, we hold that the adjustment made by the Assessing Officer by adding the amount of lease equalization charges while computing the book profit under section 115JA was not permissible since the said amount was not covered within any of the clauses of Explanation below section 115JA(2) including clause (b) and the Ld. CIT(A) therefore was not justified in confirming the adjustment so made by the Assessing Officer on this count. His impugned order on this issue is therefore, set aside and the Assessing Officer is directed to delete the adjustment/addition made on this issue. Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the provision for bad and doubtful debt is not a provision for liability, but it is a provision for diminution in the value of the assets. It was also held that the said provision thus is not for any liability as contemplated in clause (c) of Explanation to section 115JA and the question as to whether the said liability is ascertained or unascertained does not arise. The ld. DR on the other hand has relied on the decision of Hon ble Madras High Court in the case of Dy. CIT v. Beardsell Ltd. [2000] 244 ITR 256 wherein it was held that the provision for doubtful debts was made by the assessee towards alleged recoverable debt and the same being not an ascertained liability, the provision so made could not be excluded from book profits. In this regard it is observed that the decision of Hon ble Madras High Court in the case of Beardsell Ltd. (supra) has already been considered by the Special Bench of ITAT in the case of Usha Martine Industries Ltd. (supra) and this being so, the judicial proprietary requires that we have to follow the decision of Special Bench. Accordingly, following the decision of Kolkata Special Bench of ITAT in the case of Usha Martine Industries Ltd. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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