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TMI Blog2014 (6) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In the decision of the Delhi High Court in Virtual Soft Systems Ltd. (supra) from paragraph 9 onwards reference was made to section 145 of the Act and the accountancy standards prescribed by the Institute of Chartered Accountants of India. The accountancy standards prescribed underwent amendment/change from the assessment year 1996-97 in respect of financial leases. Nature and character of lease equalisation charges/funds was examined in paragraph 11 onwards, in paragraph 7.4 of the said judgment, reference was made to the decision of the Tribunal, in the present case, i.e., the impugned decision and referring to these decisions, findings of the Tribunal in the present case was quoted. As we had some doubt whether allowing the lease equalisation charge as a deduction in the profit and loss account under the normal provisions would lead to double deduction and loss of revenue, we had asked, for clarifications as noted in our short order dated October 22, 2013. The learned counsel for the parties were informed on October 23, 2013, and the appeals were listed today for clarification. To understand and appreciate the contentions, certain undisputed facts and the legal posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (3) of section 145 empowers the Assessing Officer to disregard the books of account submitted by the assessee only if he is not satisfied with the correctness or completeness of the accounts of the assessee or the method of accounting employed by the assessee or on account of accounting standards notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the Assessing Officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in section 145 of the Income-tax Act. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issued by the ICAI in that behalf, was disregarded, on what we would term as, a disjointed reading of the provisions of the said Guidance Note. Both the Assessing Officer as well as the Commissioner of Income-tax (Appeals) have adverted to paragraph 2 of the Guidance Note to come to what we consider an erroneous conclusion inasmuch as they have held that in determining as to whether deduction on account of the lease equalisation charges ought to be allowed or not, what has to be b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalisation charges is a method of re-calibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalisation amount being reduced to a naught, as the debits and credits in the profit and loss account would square off with each other. Hence, the contention of the Revenue that it is a claim in the form of a deduction which cannot be allowed as there is no provision under the Income-tax Act is in our view, a complete misappreciation of what constitutes a lease equalisation charge. In our opinion, 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 equalisation charges in the assessment years in issue, in its profit and loss account. This represents true and fair view of the accounts ; a statutory requirement under section 211(2) of the Companies Act. As explained by us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,449 10,437 8 15,000 75,486 9,523 5,477 4,750 727 9,523 3,337 10,936 9 15,000 70,009 8,832 6,168 4,750 1,418 8,832 2,503 11,079 10 15,000 63,842 8,054 6,946 4,750 2,196 8,054 1,877 10,927 11 15,000 56,896 7,178 7,822 4,750 3,072 7,178 1,408 10,520 12 15,000 49,074 6,191 8,809 4,750 459 6,191 1,056 9,885 13 15,000 40,265 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation charge represents the difference between the recovery of cost of capital and the depreciation as claimed under the Companies Act. The difference between the two may be negative or positive and is not constant over the period of the lease. Thus, the net revenue or tax effect is nil in the entire term. This is clear from the net profit as declared under column G. The computation is logical, fair and true reflection of the income earned and reduces abnormalities. The above table indicates that lease equalisation charge results in debit or credit entry in the profit and loss account and it helps the income getting staggered or matched during the entire period of lease. It may be appropriate to also refer to the Reserve Bank of India's Prudential Norms on Income Recognition, Asset Classification and Provisioning-Pertaining to Advances dated 1st September, 2001, to commercial banks. Under the head Income Recognition in paragraph 3.2.3 it has been observed : 3.2.3 Leased assets (i) The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became nonperforming, and remaining unrealised, should be reversed or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or revenue in nature ? The respondent-assessee had incurred expenditure of Rs. 10,09,92,445 towards bond issue expenses of different series during the year in question. The Tribunal referred to their earlier order in the case of the respondentassessee for the assessment years 1997-98 to 2000-01 and held that the expenses incurred were revenue expenditure. Reliance was placed upon decision of the Delhi High Court in the case of CIT v. Thirani Chemicals Ltd. [2007] 290 ITR 196 (Delhi) wherein it has been held that issue of debentures oil rights basis to the existing shareholders was revenue expenditure and it was not mandatory to amortise the said amount under section 35D of the Act in view of the Circular No. 52, dated March 19, 1971, issued by the Central Board of Direct Taxes. While dealing with a similar issue in CIT v. Havells India Ltd. [2013] 352 ITR 376 (Delhi) ; [2012] 208 Taxman 114, it has been held as under (page 392) : It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. Reference in this connection may be made to the leading judgment of the Supreme Court in India Cements Ltd. v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was yet to set up or commence their business. The business, it is accepted, had commenced much earlier and not during the year in question. Issue No. 4 Whether the assessee is entitled to depreciation on office premises at NBCC place, Lodi Road, New Delhi ? The contention of the Revenue raised is that the respondent-assessee was not the owner of the building or in possession in part performance under section 53A of the Transfer of Property Act. Learned senior standing counsel has referred to the observations and the contentions raised by the Revenue in paragraphs 17 and 18 of the impugned order, wherein reference is made to agreements dated April 11, 2002, and November 21, 2002. In the agreement dated November 21, 2002, it stated that NBCC had handed over vacant possession to the respondent-assessee. The respondent-assessee, on the other hand, had relied upon letter dated March 29, 2000, received from NBCC wherein it was clearly mentioned that commercial space measuring 625 square meters was allotted to the respondentassessee, vide letter dated April 28, 1998, and commercial space measuring 285 square meters was initially purchased by MMTC but was sold by them to the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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