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TMI Blog2017 (3) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... HROTRA, A.M : This appeal filed by the assessee is directed against the order dated 26.10.2012 passed by the Assessing Officer u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short the Act ) relating to assessment year 2008-09 pursuant to the direction of the Dispute Resolution Panel-II, New Delhi. 2. This appeal has been fixed as per order of Tribunal in M.A. No.54/Del/2016 dated 21.10.2016 for the limited purpose of disposing of ground no.9 in the appeal memo. Accordingly, we proceed to dispose of following ground no.9 of the appeal memo :- 9. The Ld. AO has grossly erred in adding back the amount of Rent equalisation reserve of ₹ 18,45,875/- to the book profits of the Appellant, declared under section 115JB of the Act, erroneously proposing that the amount of rent equalisation reserve charged to profit and loss account is covered under clause (b) or (c) of Explanation 1 to Section 115JB of the Act, and thus needs to be added in Book profits. 3. Brief facts apropos this issue are that the assessee had debited a sum of ₹ 18,45,875/- in its Profit Loss Account as rent equalization reserve. As per assessee s submissions before the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ousand Two Hundred Sixty Two and paise Eighty Five only) at the rate ₹ 35.0 (Rupees Thirty Five only) per square ft. per month of super built-up area, with an option to the Lessee to renew the Lease for another 2 (two) consecutive terms of 3 (three) years each provided that the Lessee shall give the Lessor a duly served notice for renewal in writing at least 3 (Three) months before the expiry of the Initial Term or the first renewal period but its failure to do so would not affect its unilateral right to renew/extend the same. If the option to renew the Lease is exercised by the Lessee as above, then the rate of escalation of rent shall be mutually decided but such rate of escalation shall exceed 15% (Fifteen Percent) of the rent paid in the preceding 3 (three) year term, and a fresh Lease Deed shall be executed on the same terms and conditions as in this Agreement. This is in the interest of the Lessee, as no matter what the current rate of rentals at the time, with an upper cap of 15%, on the previous basic rent the escalation remains restricted to any undue hike in rentals. A fresh Deed of Lease will be executed at the time of each renewal and the same shall be duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 678,286 Month expired till March 31,2008 20 Total Cost till March 31,2008 13,565,714 7. Ld. counsel referred to the definition of lease term as per para 3.6, which is reproduced hereunder :- 3.6 The lease term is the non-cancellable period for which the lessee has agreed to take on lease the asset together with any further periods for which the lessee has the option to continue the lease of the asset, with or without further payment, which option at the inception of the lease it is reasonably certain that the lessee will exercise. 8. With reference to the Lease Deed, ld. counsel pointed out that option to exercise continuation of lease was there and it was reasonably certain that lessee would exercise the option to renew the lease. He, therefore, submitted that rent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al from finance lease and OL. AS-19, in paragraph 23, states the following, in the context of operating lease from the standpoint of the lessee: Lease payments under an operating lease should be recognised as an expense in the statement of profit and loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user's benefit. Paragraph 24 of AS-19 explains the previous paragraph and provides that lease rental will be accounted on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user, even if the payments are not on that basis. (emphasis supplied) 1.6 Paragraphs 23 and 24 relate to payments of lease rental and view the matter from the standpoint of the lessee. The same view is taken in paragraph 40 of AS- 19 when the matter is viewed from the standpoint of the lessor, and the language used therein makes it clear that AS19 is not applicable to lease of immovable property whose use pattern has nothing to do with passage of time. AS-19, in substance, states that expenditure and income, both, resulting from payments and receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have perused the record of the case. The scope of AS 19 does not extend, inter-alia, to lease agreements to use lands. Para 2 of scope reads as under :- 2. This Standard applies to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. On the other hand, this Standard does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other. 11. The classification of leases for the purposes of AS 19 are as under :- Classification of Leases 5. The classification of leases adopted in this Standard is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be represented by the expectation of profitable operation over the economic life of the asset and of gain from appreciation in value or realisation of residual value. 6. A lease i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs 5 to 9 had the changed terms been in effect at the inception of the lease, the revised agreement is considered as a new agreement over its revised term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased asset) or changes in circumstances (for example, default by the lessee), however, do not give rise to a new classification of a lease for accounting purposes. 12. Now, if, we examine various definitions contained in paragraph 3, we find that the same deals primarily with defining of finance lease, operating lease, non-cancellable lease, lease term, fair value of asset, economic life, useful life, residual value, guaranteed residual value of lease assets. It clearly shows that the main object of the AS 19 is to deal with the leases concerning movable assets and it specifically excludes lease agreements to use lands. We find considerable force in the submissions of ld. CIT-DR that AS 19 is not applicable to lease of immovable property. Therefore, the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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