TMI Blog2006 (2) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... ges. The facts with regard to the lease equalization charges claimed as deduction by the assessee, which was disallowed by the revenue authorities are as follows. The assessee is a company which is engaged in the business of leasing and hire-purchase. In respect of the assets which it had granted on lease to the customers, the assessee reflected them as fixed assets in its balance sheet. In other words, the assessee was the owner of the assets which were given on lease. As owner of the assets, the assessee claimed depreciation on the assets. The lease charges received by the assessee was shown as a receipt in the Profit Loss Account. The assessee had, however, deducted from the lease charges certain amounts carried over to lease equalization reserve and only the balance has been credited to the P L account. In the notes to the accounts, the system of deducting lease equalization reserve from the lease charges received has been explained as follows: "Revenue recognition .-Lease Rentals are accounted for as per the terms of the lease agreements. However, in compliance with the Guidance note issued by the Institute of Chartered Accountants of India, the differential between the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al charges 45 ------- Total 145 ------- First year (a) Depreciation 30 (b) 1/3rd of capital cost 33 ------- (c) Lease equalization 3 3 ------- (d) Lease rental (33+ 15) 48 Second year (a) Depreciation 21 (b) 1/3rd of capital cost 33 ------- (c) Lease equalization 12 12 ------- (d) Lease rental (33+ 15) 48 Third year (a) Depreciation 15 (b) 1/3rd of capital cost 34 ------- (c) Lease equalization 19 19 ------- (d) Lease rental (34+ 15) 49 ------- ------- Total 49 145 ------- ------- 5. The revenue authorities have, however, not accepted this claim made by the assessee. The Assessing Officer in the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asset is transferred at a residual value say, Rs. 100 at the expiry of lease, there would appear a profit of Rs. 100 in the books of assessee as the full value of asset has already been written off from the books in the form of depreciation and Lease Equalization Charge. However, the computation of income would remain unaffected because the profit on sale of depreciable asset is not chargeable to tax and the sale consideration, i.e., Rs. 100 would be reduced from the value of Block of assets. From the illustration given above, it is clear that only a part of the lease rent received is recognized as income and credited to the profit and loss account and part of it is carried to the balance sheet. This method of accounting is applicable to the lease transaction in the nature of 'Finance Lease'. This method is based on the presumption that in the case of Finance Lease the entire lease charges received does not constitute the income and part of it is attributable to the recovery of a capital investment. Under this method the total of the accumulated depreciation and accumulated lease equalization charge at the end of the lease period is equal to the cost of the asset i. e., the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset, i.e., the depreciation provided in books was not sufficient to write off the asset during the lease period. Under this method the distribution profits as per books was uneven over the lease period having no regards to the overall implicit rate of return factored in the lease rent. In the initial years, very high profits appear in books and, finally, at the time of transfer of asset, loss appears in the books, i.e., there was over reporting of profits in the initial years and under reporting profits in the last year. According to ICAI, the accounts drawn as per the old method did not represent true and fair picture of profits of lessor. Therefore, the concept of lease equalization charge was introduced as a balancing charge in order to make up for lower rate of depreciation and to give more realistic estimate of profits in the books. In fact, Lease Equalization Charge is nothing but a provision charged in the books to create a reserve for the replacement of asset. Depreciation is also a provision to create reserves out of the profits to replace the asset after the end of its useful life. However, under the income-tax the rate of depreciation are much higher and normally substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as repayment of capital or debt as no debtor/advance are appearing in the balance sheet. It is reduced from the fixed assets, much the same way as depreciation. Under the Income-tax Act, no deduction is allowable for such provision. There is another serious anomaly in the method of accounting prescribed by the Institute of Chartered Accountants of India. These norms are applicable only to lessor and not to the lessee. Lessee would continue to account for the lease charges paid by it as per the existing system of accounting, i.e., it would claim the deduction for the full amount of lease charges paid by it without bifurcating them into two parts, i e., Finance Charges and Capital recovery component, as is done in the case of lessor. As such, expenditure in the hands of one person in not reflected as the income of the other person. It is against the general principle of determination of income of the Income-tax Act. The expenditure in the hands of one person should normally constitute the income in the hands of other person. In the case of a hire-purchase transaction, the situation is totally different. The ownership of the asset passes over to the hiree and the depreciation is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting liabilities, other than ascertained liabilities within the meaning of Explanation to section 115JA of. the Act. This was the basis on which the Assessing Officer and the CIT(A) added the lease equalization charges to the profits as per P L account while arriving at the book profits in accordance with the provisions of the section 115JA of the Act. The issue for consideration in the other two years would be as to whether the revenue authorities were justified in making an addition equivalent to the amount of lease equalization charges which was claimed by the assessee as a deduction in computing its income. 7. We have heard the submissions of the ld. counsel for the assessee and the ld DR. Ld. counsel for the assessee after explaining the manner in which the lease equalization charges were worked out further brought to our notice the guidelines issued by the Institute of Chartered Accountants of India (ICAI) on the manner in which the accounting for leases in the books of lessor have to be made in the case of finance leases. It was highlighted by him that this method would ensure recognition of net income in respect of a finance lease at a constant periodic rate of return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Companies generally, as the case may be. The section also specifies that Non-Banking Financial Companies shall be bound to follow the policies so determined and the directions so issued. The section also makes it clear that such policies have to be in public interest, or to regulate the financial system of the country to its advantage, or to prevent the affairs of any Non-Banking Financial Company being conducted in a manner detrimental to the interest of the deposits or in a manner prejudicial to the interest of the Non-Banking Financial Company. Further, section 45Q of the RBI Act is an overriding clause. This section is contained in Chapter III-B of the RBI Act and it provides that the provisions of Chapter III-B shall have an overriding effect, notwithstanding anything inconsistent therewith contained in any other law, for the time being in force or any instrument having effect by virtue of any such law. The Legislative intent is amply made clear in the said section 45Q. The provisions of Chapter III-B are to have overriding effect. As such, the directions issued by the RBI are to take precedence and the assessee is bound to follow the policy determined by the RBI and the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, it was submitted that the accounting standards of ICAI referred to above, in the light of the NBFCs prudential norms issued by RBI, makes it obligatory for NBFCs to follow the accounting standards issued by ICAI, will have the force of law if read with the provisions of RBI Act. Strong reliance was placed on the decision of Tribunal referred to above in this regard. 10. The ld. DR, however, strongly opposed the plea raised by the ld. counsel for the assessee. His submissions were as follows:- (a) The claim for deduction of lease equalization charges is an artificial created claim. (b) The true picture in the case of finance lease will emerge only when the lease agreement is over. In this regard the ld. DR raised a query as to how the assessee will deal with a situation in a case where the lease is suspended without the full term having been completed. (c) The ld. DR also submitted that on expiry of the lease period alone the lease assets are transferred and it cannot be said till such time there would be any necessary to have a lease equalization reserve. In this connection, ld. DR submitted that in the event of sale by the assessee on expiry of the lease perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. Computation of Taxable Income .-It is clarified that the specific treatments for determining taxable income would have to be in accordance with the provisions of taxation laws; such treatments may differ from the recommendations contained in the Guidance Note." 12. It is thus clear that even the ICAI is of the view that these provisions are meant only for recognizing the net income in respect of a finance lease at constant periodic rate of return on the lessor's net investment outstanding in the lease and are not to be considered while determining taxable income in accordance with the provisions of the Income-tax Act, 1961. In view of the above, we are of the view that the claim made by the assessee cannot be accepted. In this regard, we are of the view that reasons given by the Assessing Officer in the assessment order for assessment year 1998-99 are acceptable. As rightly held by him, such a claim is not recognized under the provisions of the Income-tax Act. The assessee can make its claim within the parameters of deductions allowed under Chapter IV-D of the Income-tax Act, 1961 and the said provisions do not provide for any such deduction. The claim for such deduction in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common issue for consideration in both these appeals is with regard to grant of higher rate of depreciation of leased vehicles and not allowing loss of sale of re-possessed stock. It is not in dispute before us that identical issue had come up for consideration before this Tribunal in assessee's own case in assessment years 1994-95 and 1998-99 in ITA No. 1202/Delhi/97 and ITA No. 2168/Delhi/05. This Tribunal in ITA No. 2168/Delhi/05 after following the decisions of the Hon'ble Delhi High Court in the case of CIT v. Bansal Credits Ltd [2003] 259 ITR 69 was pleased to hold that the lease of the vehicles by the assessee was used by the assessee in the business of leasing and, therefore, the assessee was entitled to claim depreciation at a higher rate of 40 per cent. As far as loss of sale on re-possessed stock of vehicle is concerned, the same was held to be allowable in assessee's own case for assessment years 1993-94 and 1995-96 in ITA Nos. 3232 and 3248/Delhi/98. Respectfully following the orders of the Tribunal referred to above, we dismiss the appeals of the revenue. 15. In the result, ITA No. 2977 /Delhi/02 and ITA No. 2912/Delhi/02 by the assessee are dismissed while ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
