TMI Blog2010 (2) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... 99, i.e,, residual value. It means that neither any deduction is allowed to the assessee on account of lease equalisation charges in the form of any expenses nor there is any reduction in the lease rental income being included in the income of the assessee because the ultimate total of the lease equalisation charges is Rs. 22,799 only which is of residual value and hence for the lease period as a whole, there is no impact on the income shown by the assessee on account of lease equalisation. . Regarding depreciation, we have already noted that deduction claimed by the assessee on account of depreciation is equivalent to the cost of asset and even if the assessee is allowed depreciation as per Income-tax Rules, then also, it does not have any impact because the depreciation as per companies Act is added back and depreciation as per Income-tax Rules, is reduced from the income of the relevant year. Validity of the order passed under section 263 - Validity of the re-assessment proceedings – Held that:- technical issues regarding validity of section 263 proceedings in assessment year 1996-97 and the validity of reassessment proceedings in the remaining four years are of academic in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [I.T.A. Nos. 699, 359, 4457 and 2109/Delhi/2004, dated 8-8-2008] is also in favour of the assessee and in this case, the Tribunal has decided the issue in favour of the assessee by following the earlier Tribunal decision rendered in the case of Pact Securities and Financial Ltd. (supra). Regarding factual aspect, as to whether the lease in the case of the assessee is finance lease or operating lease as per the guidance notes issued by the ICAI, he submitted a sample of lease rental, financial income, capital recovery etc. during the entire lease period and it was shown that as per the same, total lease rental is covering the finance income worked out for the entire case period and the whole of the fair value of the leased asset (amount financed) after considering the balance amount of Rs. 22,799 being the residual value of the leased asset. It is also pointed out that in the same calculation, the charge on account of depreciation and lease equalisation for each year is also available and from the same, it can be seen that for each year, the total of depreciation and lease equalisation is equal to the capital recovery amount and the sum total for the entire lease period of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notes issued by the ICAI. Regarding two Tribunal decisions cited by the ld. AR of the assessee, it was his submission that these Tribunal decisions are not applicable in the present case because the facts are different. It was his submission that in those cases, the claim was on the basis of regular system of accounting and there was no change in the system of accounting but in the present case, the assessee effected a change in accounting system from assessment year 1996-97 and hence, the same is not allowable. It was also submitted that in those cases, the system of accounting followed with regard to the treatment of lease equalisation amount was different from the one followed by the assessee and for this reason also, these judgments cited by ld. AR of the assessee are not applicable in the present case. 5. In the rejoinder, it was submitted by ld. AR of the assessee that the Tribunal decision cited by ld. DR of the revenue rendered in the case of Goodwill India Ltd. (supra) cannot be considered as a precedence because the same is per incuriam because in this case, the Tribunal decision rendered in the case of Pact Security and Financial Ltd. (supra) was not brought to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fair value of the leased asset." Operating lease:- A lease other than finance lease. 9. As per the guidance notes, operating lease has been defined as lease other than the finance lease. If the entire value of asset was not recovered by the assessee in the case of Goodwill India Ltd. (supra) during the period of lease, it cannot be a finance lease and hence guidance notes of the ICAI cannot be applicable to such an assessee. In the present case, in the sample working submitted before us, it is shown that as against amount financed by the assessee of Rs. 6,77,645, the assessee has recovered Rs. 6,54,944 as depreciation and the balance amount of Rs. 22,799 has been explained as residual value of the leased asset. This is only 3.36 per cent of the amount financed and hence it is reasonable claim that this balance amount is residual value. In the case of Goodwill India Ltd. (supra) relied upon by the learned DR of the revenue, as per example noted by the Tribunal on page 37 of 306 ITR, against cost of the asset of Rs. 100, only Rs. 66 was recovered towards depreciation and the unrecovered amount is 34 per cent. This cannot be said to be residual value. In view of this vita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reproduced below:- "Para 17. The Guidance Note of the Institute of Chartered Accountants of India is drafted by an Expert Committee constituted for the purpose and is issued after due research public debate and on consideration of suggestions and opinions from various quarters. In our considered opinion, as held by the ITAT in the case of Shri Dinesh Mills Ltd (supra), a method of accounting suggested by the ICAI should not be easily upset by the lower authorities. Expertise of the Institute in the method of accounting is well recognized and when the revenue has a view against a particular method it is advisable for the CBDT to take up the issue directly with the Institute of Chartered Accountants of India instead of allowing its field officers to adopt their own methods. This would sale a lot of uncertainty in assessments and anxiety to the assessee. Though the Assessing Officer and the CIT(A) have not come out with an alternative method of accounting which can be said to be correct and a suitable replacement the ld. DR suggested that lease rentals per se should be taken as income against which depreciation and other expenses should be allowed. If this is applied to this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the changes in guidelines revised by ICAI and the same cannot be termed as mala fide. Under this factual position, we feel that this Tribunal decision is applicable in the present case and the objections of the learned counsel of the revenue are not valid. 12. Now, we examine the applicability to the another Tribunal decision rendered in the case of Indian Railways Finance Corpn. Ltd. (supra) in which one of us, i.e., Accountant Member is a party. In this case, the Tribunal has considered the extreme case that even if the rate of depreciation is increased to 15 per cent instead of 4.75 per cent, the finance charges credited to P and L A/c will remain the same because by the amount with which depreciation is increasing, there will be increase in credit on account of lease equalisation charges and the net credit on account of finance charges will remain same. This aspect was also considered by the Tribunal in that case as to what was the impact of increase in depreciation allowable as per Income-tax Act as compared to depreciation allowable as per Companies Act and debited in the books of the assessee. This aspect has been decided by the Tribunal as per para Nos. 15 to 20 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 Income-tax Act, the appellant cannot have the benefit of both the systems. By claiming higher depreciation under the Income-tax 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 Income-tax Act. The Guidance Notes of the ICAI may be relevant for the appellant to find out its actual earning on the lease financing but that does not give the correct picture regarding the income assessable under the Income-tax Act. The Supreme Court in the case of British Paints Ltd. (188 ITR 444) and in the latest decision in the case of United Commercial Bank v. CIT (240 ITR 355), has also emphasized that it is incorrect to say that the treatment given by an assessee in the books of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is unfounded. This apprehension oils based on this premise that lease equalisation 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 than the depreciation claimed in the computation as per depreciation allowable as per Income-tax 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 equalisation amount debited in the P and L A/c but it is on account of depreciation as per Income-tax Rules allowable because if we consider the total deduction during the full period of lease, which is 30 years in the present case, we find that no deduction stand allowed to the assessee on account of lease equalisation because these are debited in some years and credit in some other years and sum total for the entire period of 30 years is nil Depreciation allowed to the assessee in the present years as per Income-tax Rules is higher as compared to depreciation as per Companies Act debited in books but total depreciation allowable to the assessee under Income-tax Rules in full lease peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the accounting system of the assessee for assessment year 1996-97. In this regard, we find that the change in the accounting system of the assessee was said to have been made by the assessee as per revised guidance notes issued by the ICAI and the same has to be accepted as genuine if this changed system is regularly followed by the assessee, in the present year as well as in the subsequent years. The facts of five years are before us and we have noted that the same system is being followed by the assessee in all the five years from assessment years 1996-97 to 2000-01 and nothing has been brought on record by the ld. counsel of the revenue that this method has not been followed by the assessee in the subsequent years. Since the change in accounting system by the assessee from assessment year 1996-97 is a bona fide change as per the revised guidance note issued by the ICAI and since the same method has been followed by the assessee consistently from assessment year 1996-97, we are of the considered opinion that only because of this fact that there is some change in the accounting method being followed by the assessee with effect from 1996-97, it cannot be said that these Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of income on account of lease equalisation charges and in the remaining years, it is positive and in those years it will be decreased from the lease rental income but at the end of the lease period, the sum total of lease equalisation charges is only Rs. 22,799, i.e,, residual value. It means that neither any deduction is allowed to the assessee on account of lease equalisation charges in the form of any expenses nor there is any reduction in the lease rental income being included in the income of the assessee because the ultimate total of the lease equalisation charges is Rs. 22,799 only which is of residual value and hence for the lease period as a whole, there is no impact on the income shown by the assessee on account of lease equalisation. Regarding depreciation, we have already noted that deduction claimed by the assessee on account of depreciation is equivalent to the cost of asset and even if the assessee is allowed depreciation as per Income-tax Rules, then also, it does not have any impact because the depreciation as per companies Act is added back and depreciation as per Income-tax Rules, is reduced from the income of the relevant year. This is by now a settled positio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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