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TMI Blog2008 (8) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... om the lease rent on account of Lease Equalization account. It is noted by the A.O. that the assessee is claiming depreciation on the rolling assets which were leased out to Indian Railways. The A.O. was of the view that the lease in the present case is operating Lease and not finance lease and hence, depreciation as per Income-tax Rules is allowed by him but he disallowed the claim of the assessee for deduction from lease rent on account of Lease Equalization. He added this amount in the income of the assessee in assessment year 1997-98. Similar additions were made in subsequent three years also. The assessee carried the matter in appeal before the Ld. CIT(A), but without success. It is held by Ld. CIT(A) that since the assessee has claimed depreciation as per Companies Act in the Profit and Loss Account and difference between depreciation as per I.T. Act and Companies Act is claimed in the computation, entire lease rent is to be taken as income. Now, the assessee is in further appeal before us in all the four years. 4. It is submitted by Ld. Authorized Representative of the assessee that similar claim was allowed in A.Y. 1996-97 and he submitted a copy of assessment order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute is an authoritative body in the matter of laying down accountancy standards. Reliance was also placed on the following judicial pronouncements in support of this contention that Guidance and Accounting Standards (AS) issued by ICAI are to be followed:- a) J.K. Industries Ltd. v. UOI, 297 ITR 176 (SC). b) CIT v. Woodward Governors (P) Ltd. 294 ITR 451 (Del. c) CIT v. South India Corpn., Ltd. 293 ITR 237 (Mad.). d) CIT v. Shri Ram Honda Power Equipment Pvt.Ltd. 289 ITR 475(Del.). 5. Ld. A.R. of the assessee also filed copy of Board Circular No. 2 of 2001 issued on 9.2.2001 as per which, the Board has noted the new A S on Leases issued by ICAI, which requires capitalization of the asset by the lessees in financial lease transaction. It is observed by the Board in this circular that " by itself the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act". 6. Ld. A.R. also submitted copy of assessment order dated 28.2.1996 in assessee's own lease for A.Y. 1990-91. It is pointed out that on page 3 of assessment order, the A.O. has noted the letter issued by the CBDT (File No. 225/23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this illustration, a computer of ₹ 60,000/- was given on lease for four years and the residual value at the end of four years was estimated to be 5% of cost i.e., ₹ 3,000/-The present value of lease rental and residual value by considering interest of 14% per annum is worked out at ₹ 59,998/- and since it is almost equal to cost of leased assets, it was held as finance lease. As per another table for the same example, Finance income and Annual lease charge is worked out. As per this working, total lease rental including residual value is ₹ 66,500/- , finance income is ₹ 6493/- and annual lease charges is ₹ 60,000/-. Para. 11 of this Guidance Note give the details of how much deduction is to be allowed against lease rental and how the same should be worked out and accounted for. This Para.11 is reproduced below:- "It is appropriate that against the lease rental, a matching lease annual charge is made to the profit and loss account. This annual lease charge should represent recovery of the net investment/fair value of the leased asset over the lease term. The said charge should be calculated by deducting the finance income for the period ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements cited by Ld. A.R. of the assessee, we find no reason for not accepting the basis as suggested by ICAI in these guidelines for deciding the character of lease in the present case as finance lease. However, the assessee company has given this chart for opening value of lease assets in the assessment year 1997-98, which is examined by us. Similar chart for assets given on lease during A.Y. 1997-98 and in subsequent years is not furnished to us. Hence, the A.O. should verify those charts and if this condition is satisfied, all those transactions should also be accepted as finance lease transactions. 12. Now, the second question to be decided is that in case of finance lease, deduction on account of Lease Equalization should be allowed or not. In this regard, we find that as per these guidelines issued by ICAI, in case of finance lease, lease rental is to be divided into two parts for each year throughout the lease period, which is 30 years in the present case. One part is finance income, which should be worked out at given rate of interest on the amount of net investment in leased assets. In the present case, rate of interest is stated to be 14.97% p.a. Out of opening balance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and Lease Equalization credit, the net finance income remains the same. In the chart, furnished by the assessee, it is seen that every year, the amount of capital recovery goes on increasing but depreciation remains the same as it is calculated by the assessee on SLM basis and as a result, from 3rd year to 11th year, lease equalization account is in positive means debit to PandL a/c. But again from 12th year to 22nd year, position is reverse and lease equalization is negative, i.e., credit to PandL A/c and again from 23rd year to 30th year, it is positive i.e. debit. But at the end of the full term of lease, i.e., 30 years, the sum total of lease equalization is nil. It shows that lease equalization is not a charge on income , if we consider the full term of lease , i.e. 30 years in this case but it is debit in some years and credit in some years to ensure that correct finance income is reflected in each year throughout the lease period. It is also seen that in effect, capital recovery is actually reduced from the lease rental to ensure that net finance income is reflected in PandL a/c. Debit or credit balance in lease equalization account depends on the amount of depreciation cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y claiming depreciation as per I.T. Rules, the assessee has clearly obtained more deduction than the amount of principal recovered as per its method of accounting. 18. Under these facts, it was held by the Tribunal in that case that there is prejudice against the higher rates of depreciation provided under Income Tax Act,1961 rather than the methods of accounting followed by the assessee. It was observed by the Tribunal in para 16 of this judgment that it is not understood as to how a higher rate of depreciation upsets a method of accounting. This para No. 16 is being reproduced below:- "Coming to the order of the CIT(A), his observations in page 5 para 3 of the his order, viz. This method prescribed by the ICAI is perfectly alright as long as the depreciation is claimed as per the Companies Act but as per the IT Act, the appellant cannot have the benefit of both the systems. By claiming higher depreciation under the IT Act, the appellant had already obtained more deduction than the amount of principal recovered as per its method of accounting. Hence such method of accounting is not acceptable for the purpose of computation of income from lease financing under the IT Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting suggested by the Institute of Chartered Accountants of India, is totally incorrect." 19. On this basis, the Tribunal allowed the appeal in that case. Respectfully following this Tribunal decision in the present case also, we are of the considered opinion that Lease Equalization amount debited by the assessee in PandL A/c cannot be disallowed or reduced. We would like to point out that the apprehension of the Ld DR that assessee will get double deduction or extra deduction is unfounded. This apprehension is based on this premise that Lease Equalization amount debited in the relevant four years is worked out on the basis of depreciation as per Companies Act on SLM Basis, which is much lower then the depreciation claimed in the computation as per depreciation allowable as per IT Rules, which is much higher. 20. In this regard, we find that in the initial years, the assessee may get extra deduction but that is not on account of allowing deduction of Lease Equalization amount debited in the PandL Account but it is on account of depreciation as per Companies Act debited in books and depreciation as per IT Rules allowable because if we consider the total deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e four years on this issue but without success and now the assessee is in further appeal before us. 23. It is submitted by Ld AR of the assessee before us that this issue is now covered in favour of the assessee by the judgment of Hon'ble jurisdictional High Court rendered in the case of CIT v. Khirani Chemicals Ltd. as reported in 290 ITR 196 (Del.). Reliance was also placed on the judgment of the Hon'ble Madras High Court rendered in the case of CIT v. South India Corporation as reported in 290 ITR 217. It was submitted that in this case, Hon'ble Delhi High Court has decided similar issue in favour of the assessee after considering CBDT Circular No. 56 dated 19.3.1971. 24. Ld DR of the revenue supported the orders of the authorities below. 25. We have heard the submissions of both the parties and perused the material available on record and have gone through the orders of the authorities below and the judgments cited by Ld AR of the assessee. We find that in the case of M/s Khirani Chemicals Ltd. (supra), the issue before Hon'ble Delhi High Court was regarding expenses incurred on issue of debentures, in that case also, the assessee claimed deduction of the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n rendered in the case of ACIT v. Eicher Ltd. as reported in 101 TTJ (Del.) 369, it is also submitted that this judgment is confirmed by the Hon'ble Delhi High Court as per the judgment reported in 267 ITR 107 (Del). Reliance was also placed on the Tribunal decision rendered in the case of ACIT v. JG Vacumum Flasks (P) Ltd. 83 ITD 243 (Pune). It was also submitted that under similar logic, the addition made by the Assessing Officer on account of diminution in the value of investment is also covered in favour of the assessee by the same judgment. 30. As against this, the Ld DR of the revenue supported the orders of the authorities below. 31. We have heard the submissions of both the parties and perused the material available on record and have gone through the orders of the authorities below and the judgments cited by the Ld AR of the assessee. We find that the Tribunal decision rendered in the case of CIT v. Eicher Ltd. (supra) has been confirmed by the Hon'ble Delhi High Court as per the judgment reported in 287 ITR 107 (Del.), in the case of Eicher Ltd. (supra), it is held by the Tribunal that by making a provision for bad and doubtful debts, the assessee is not guardin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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