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TMI Blog2011 (2) TMI 1595X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Appeals) XXIX [CIT(A)] has erred in: 1. Confirming reassessment proceedings: a) confirming the reassessment proceedings without appreciating that reopening of assessment based on change of opinion and unintelligible reasons are void and invalid and therefore the reassessment proceedings should be quashed. b) Upholding the reassessment proceedings without appreciating that the issue of Lease Equalisation Reserve which was the very basis of initiating reassessment proceedings has been decided in favour of the Appellant. 3. The assessee is a Company and is engaged in the profession of acting as advertising agents and providing equipments on lease. For the assessment year 2000-01, it filed the return of income on 29/11/2000 declaring total income of ₹ 29.49 lacs under section 115JA of the Income Tax Act, 1961 (the Act). The return was processed u/s. 143(1) of the Act. A notice was issued u/s. 154 of the Act dated 16/1/2006 was issued by the A.O to rectify the intimation passed u/s. 143(1) of the Act on the basis that Lease Equalization Reserve (LER) of ₹ 1,75,89,839/- is nothing but a portion of the capital asset and the same should have been capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference in the method of accounting followed for books and for tax purposes has also been recognized by the CBDT vide its Circular No.2/2001, dated 9th February, 2001, which reads as follows: It has come to the notice of the Board that the New Accounting Standard on leases issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act. 5. The Assessee further submitted that though for accounting purposes we have shown lease equalization adjustment under the schedule of fixed assets as an adjustment to fixed assets, for tax purposes we have claimed depreciation only on the actual cost of the asset in accordance with the provisions of Section 43(1) of the Income Tax Act, 1961. The said actual cost on which depreciation has been claimed by us does not include the accounting adjustment on account of lease equalization of ₹ 1,75,89,839/- and it was also pointed out that the stand of the Assessee would be evident from the computation of allowable depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reopening of assessment was done purely on a change of opinion and for a valid reopening of assessment, the AO is only required to form a prima facie belief that income has escaped assessment. 9. Aggrieved by the order of the CIT(A) upholding the validity of initiation of reassessment proceedings, the Assessee in its appeal has raised ground No.1 before the Tribunal. Before us the ld. Counsel for the assessee submitted that the assessee has leased certain assets (eg. Windmill, electric meters, etc.) to various parties. It was in receipt of lease rentals pre-determined in accordance with the terms of the respective agreements entered into with the parties. The assessee has created a LER in its books of accounts in compliance with the Guidance Note on Accounting for Leases(Revised)(guidance Note) issued by the Institute of Chartered Accountants of India. No depreciation has been claimed on the LER in the books of accounts by the assessee as would be evident in the fixed assets schedule annexed to the financial statements for the year ended 31/3/2000. Further no deprecation has been claimed on the LER even for the tax purposes as evident in the tax depreciation schedule annexed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction Not allowed as deduction Not applicable 2004-05 16,737,776 - Not claimed as deduction Not allowed as deduction Not applicable. Total 70,049,903 70,049,903 10. Further it was submitted that the proceedings under section 147 of the Act can be initiated only if the AO has reasons to believe that any income has escaped assessment. Such reason to believe is sine qua non for the initiation of the proceedings. It was argued that in various judicial pronouncements, it has been laid down that the words reason to believe import the cumulative presence of following four elements: - Some material or materials and not merely fancy, imagination, speculation, suspicion. - A nexus between such material and the belief of escapement of income from assessment in the circumstances outlined in section 147. - An application of mind by the AO to such material. - An inference based on reason drawn tentatively by the officer that inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for income tax purposes has not considered the lease equalization reserve and has determined its income without taking into consideration the same. The concept of lease equalization reserve as we have already seen is purely in compliance with the guidance note on accounting for lease issued by the ICAI. The accounting standards prescribed by the ICAI, is to ensure that the net income in respect of finance lease at a constant rate of periodic rate of return on the net investment of the lessor outstanding in the finance lease is recognized. In the initial years lease equalization charges are credited to the P L Account and towards the end of the period of lease they are debited to the P L Account. While filing the return of income for Income Tax purposes, the assessee reduced the profit as per P L Account and whenever LER is credited to the P L account. Whenever the LER is credited to P L Account again the same is added to the profit as per P L Account. Thus as far as income offered for the purpose of tax is concerned there was no effect on account of LER accounted by the assessee in compliance with the guidelines issued by ICAI. This position is quite evident and has been du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on reasons, which are relevant and material. In this context it may also be noted that the Courts have got powers to examine whether the reasons are relevant and have a bearing on the matter, in regard to which, the Assessing Officer is required to entertain the belief, before he issues notice under section 147. Besides, the expression reason to believe does not mean a purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith, it cannot merely be pretence. In addition, suspicion, gossip or rumour would not form the basis for such belief. In this context, the following judgments are relevant. Ganga Saran Sons (P) Ltd. vs. ITO Ors 130 ITR 1(SC). The relevant observations of the Apex Court are as follows: The important words in section 147(a) are has reason to belief and these words are strong than the words is satisfied . The belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons, which are relevant and material. The Court of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ink between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee . and At the same time, we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. 14. We are of the view that on the facts and circumstances of the present case, there was no reason to believe that income of the assessee chargeable to tax has escaped assessment. The debit or credit of LER in the profit and loss account was only in compliance with the requirement under the Companies Act, 1956. Consequently, we hold that the initiation of reassessment proceedings is not valid. Consequently the order under section 147 is annulled. In view of the decision on the validity of initiation of reassessment proceedings the other issues raised by the assessee as well as the revenue in their appeals are not taken up for consideration. ITA No.3634/M/08 4071/M/08:- 15. Ground No.1 raised by the assessee in it s appeal reads as f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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