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TMI Blog2012 (7) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... t. JUDGMENT N. Kumar, J. As the questions involved in all these three appeals are one and the same they are taken up for consideration and disposed off by this common order. 2. The assessee is the same in all the three appeals. ITA No. 301/2007 pertains to the assessment year 1998-99. ITA No. 302/2007 pertains to the assessment year 1999-2000 and ITA No. 491/2007 pertains to 2000-01. The assessee is a non-banking financial Company. For the assessment year 1998-99 the assessee had entered the amount inter alia under the head 'lease equalisation account' at Rs. 4,35,89,486/-. Under the profit and loss account for the said year the assessee had reduced the aforesaid amount representing the lease equalisation account from the lease rental of Rs. 11,84,21,434/-. The assessing authority disallowed the said claim on the ground that the same was neither a liability nor an allowance nor an expenditure. The same was just a matching entry for the purpose of tallying the accounts with regard to the assets leased out. He was also of the opinion that the said claim was made for the first time during the year and also that the depreciation was provided for the books and the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ualisation charges is to be excluded from the total rental receipts as per the accounting standards which the assessee is bound to follow by virtue of the directions issued by the Reserve Bank of India in its Circular to a non-banking Institution, Therefore the authorities were not justified in refusing to exclude the said amount from liability to tax. 4. Per contra, the learned counsel for the Revenue submitted that as is clear from the accounts, the assessee is claiming depreciation charges. The entire amount received by way of rental charges is taken into the profit and loss account and therefore the question of deducting this lease equalisation charges from the total rental receipts and paying the tax only on financing charges is not correct. Therefore, he submits that no case for interference is made out. 5. From the material on record it is clear that for the assessment year 1998-99 the assessee has received a sum of Rs. 11,84,21,434/- as the lease rentals. The said amount is shown in the profit and loss account. Thereafter they have deducted a sum of Rs. 4,35,89,486/- representing the lease equalisation account. The assessee contends that the lease equalisation accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction from the lease rentals as done by the assessing officer is in order and therefore the addition on this score is held. The appellate Commissioner held that this is a case of appropriation of profit and thus cannot be allowed as a deduction. The assessing officer was of the view that as the total rental received satisfies both the requirements of law namely, the accrual and receipt, it constitutes real income. Merely because, the assessee received the entire lease rent, thus it constitutes the real income so as to attract tax liability on the entire amount. 6. The Apex Court in the case of Poona Electric Supply Co. Ltd. v. CIT AIR 1966 SC 30, had an occasion to consider the meaning of the real income. After reviewing several Judgments, the Apex Court held as under: "Income tax is a tax on, the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profits can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion whether there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal." 9. The Delhi High Court in the case of CIT v. Dinesh Kuma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccurred in paragraphs 1 to 5. Clause (b) whereof spells out the definition of accrual in the following manner: "( b ) 'Accrual' refers to the assumption that revenues and costs are accrued that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate;" From the above, that the term "accrual" relates to revenues earned or cost incurred. Two things follow from this, viz., unless the revenue is earned, it is not accrued. Likewise, the expenses unless are incurred, cost in respect thereof cannot he treated as accrued. Secondly, it recognizes the matching concept, viz., receipts are to be matched income to arrive at the net income, which would then be exigible to tax." 10. The Apex Court in the case of J.K. Industries v. Union of India [2008] 297 ITR 176/[2007] 165 Taxman 323, has explained the 'matching' concept as under: " We may refer to the passage extracted by the Supreme Court from its judgment in the case of J.K. Industries v. Union of India reported in [2007] 13 Scale 204; [2008] 297 ITR 176 in the following terms (page 277 of 297 ITR): "82. Matching conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sum. What the assessee needs to do, while offering for tax income derived from lease is, to separate the financing charge from the amount recovered towards capital, that is, the capital recovery amount. The financing change is determined by applying the IRR to the net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease rental. The fourth element which is the lease equalization charge is the result of the adjustment, which the assessee has to make whenever, the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. The assessee, may claim depreciation based on the provisions of the IT Act or, may even adopt the method of depreciation provided under the Companies Act. In the event, the depreciation claimed is less than the capital recovery, the difference is debited in the profit and loss account in the form of lease equalization charge, and similarly if for any reason the depreciation claimed is more than capital recovery then, the difference is credited, once again, in the form of lease equalization charge to the profit and loss account. Therefore, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n based on the provisions of the IT Act or the Companies Act. The capital recovery thus can be known after deduction of financing charges from the lease rentals. Thus, lease equalization charges is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. As long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in its profit and loss accounts. The authorities firstly refused to give benefit to the assessee on the ground that till the previous year, the assessee did not follow this system, which he has now putforth. The said claim is being made for the first time during the assessment year 1998-99, which makes a deviation from the accounting policy so far followed by the assessee. In the earlier years, the assessee did not claim it as a deduction from its taxable income. Therefore, the assessee cannot change its method, which was followed or many years. The Apex Court in the case of CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1/168 Taxman 95 has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Act. In support of the said contention reliance is placed on the judgment of the Apex Court in Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502. There cannot be any dispute as far as the said proposition of law is concerned. However, when the law, as amended subsequent to the aforesaid judgment of the Apex Court, expressly provided that the Central Government may notify in the Official Gazette from time to time the accounting standards to be followed by any class of assessees or in respect of any class of income, the assessment orders to be passed under the Act by the authorities have to be in conformity with the accounting standards notified by the Central Government. In terms of the aforesaid provisions, the Central Government has notified in the Official Gazette the accounting standards, which explains the meaning of what is accrual for the purpose of this Act. The accrual refers to the assumption that revenues and costs are accrued that is, recognized, as they are earned and incurred (and not as money is received or paid) and recorded in the financial statements to which period they are related. Admittedly, insofar as the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as well as receipt basis total lease rentals received is the real income. The precise question to be decided in this case is "Whether the entire receipt from the lease rentals constitute the real income, which can be taxed under the Act?". It is here one has to bear in mind the concept of lease rentals. As explained in the judgment of the Delhi High Court, the lease rentals is not the real income of the assessee. The lease rental consists of financing charge as well as capital recovery. The amount received towards capital recovery constitute the capital expenditure, whereas, the financing charge represents the revenue receipt, which is the real income. It is as per the accounting standards prescribed by the ICAI. Therefore, the assessee under the Act has to offer to tax only the real income and not the total receipt. He is not liable to pay any tax under the Act on the capital recovery. It is in this background that when we look at the profit and loss account of the assessee, a sum of Rs. 1,83,43,948/- is shown as the income from the hire charges, whereas, the total receipt from lease rentals is shown as Rs. 11,84,21,434/-. Out of the total receipts under the heading "lease renta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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