9911796707
TMI Blog2012 (7) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the said claim on the ground that the same was neither a liability nor an allowance nor an expenditure. The same was just a matching entry for the purpose of tallying the accounts with regard to the assets leased out. He was also of the opinion that the said claim was made for the first time during the year and also that the depreciation was provided for the books and the lease income was recognised. Aggrieved by the said order the assessee preferred an appeal before the Commissioner of Income-Tax (Appeals), Bangalore who dismissed the appeal. Aggrieved by the said order the assessee preferred an appeal to the Tribunal. The Tribunal held that this is an appropriation of profit and thus cannot be allowed as a deduction. The assessee admittedly classified all the assets under the category of furniture and fixtures and has claimed 100% depreciation. He has not claimed it as a revenue expenditure but has capitalised the same having shown the item as fixed asset under the head furniture and fixtures and for which the question of following 100% depreciation does not arise. Thus the appeal came to be dismissed. Aggrieved by the said order the assessee is before this Court. 3. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case for interference is made out. 5. From the material on record it is clear that for the assessment year 1998-99 the assessee has received a sum of Rs. 11,84,21,434/- as the lease rentals. The said amount is shown in the profit and loss account. Thereafter they have deducted a sum of Rs. 4,35,89,486/- representing the lease equalisation account. The assessee contends that the lease equalisation account deducted from profit and loss should not be added as income. The assessing authority was of the view that since the assessee is in receipt of the entire lease rentals shown in the profit and loss during the year, the same is taxable income. There is no deduction in such a lease equalisation charges from the taxable income because this is neither the liability nor an allowance nor an expenditure. The income to the aforesaid extent has accrued to the assessee. Hence on both accrual as well as on receipt basis, the total lease rentals received is the real income. The assessee did not follow the system till last year. The claim is being made for the first time during this year which makes a deviation from the accounting method so far followed by the assessee. In the earlier years the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a tax on, the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profits can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised." 7. The Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337, after considering various decisions of the Apex Court, held as under: "An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal." 9. The Delhi High Court in the case of CIT v. Dinesh Kumar Goel [2011] 331 ITR 10/197 Taxman 375 explaining the meaning of the word 'accrued', held as under: "Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. Section 211 of the Companies Act, on the other hand, prescribes the form and contents of balance-sheet and profit and loss account, which are to be maintained by the companies under the said Act. Sub-section (2) casts a duty on a company to give a true and fair view of the profit and loss of a company for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India [2008] 297 ITR 176/[2007] 165 Taxman 323, has explained the 'matching' concept as under: "We may refer to the passage extracted by the Supreme Court from its judgment in the case of J.K. Industries v. Union of India reported in [2007] 13 Scale 204; [2008] 297 ITR 176 in the following terms (page 277 of 297 ITR): "82. Matching concept is based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that 'revenues' of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only with the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years which brings in the concept of deferred tax accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. 83. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery, the difference is debited in the profit and loss account in the form of lease equalization charge, and similarly if for any reason the depreciation claimed is more than capital recovery then, the difference is credited, once again, in the form of lease equalization charge to the profit and loss account. Therefore, the assessee in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not the depreciation claimed is, less or more than the capital recovery. The capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalization charges is a method of re-calibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to a naught, as the debit and credits in the profit and loss account would square off with each other. Hence, the contention of the revenue that it is a claim in the form of a deduction which cannot be allowed, as there is no provision under the I.T. Act is, in our view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting policy so far followed by the assessee. In the earlier years, the assessee did not claim it as a deduction from its taxable income. Therefore, the assessee cannot change its method, which was followed or many years. The Apex Court in the case of CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1/168 Taxman 95 has held that every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method. Therefore, certainly the method adopted by the assessee in maintaining its accounts for the earlier period is an important factor, which the authorities have to keep in mind at the time of framing the assessment orders. But in the instant case, in the Finance Act, 1995 which came into effect from 1.4.1987, the present Section was substituted providing that income chargeable under the head 'profit and gains of business or profit or income from other sources' shall, subject to the provisions of Sub-Section (2) be compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of what is accrual for the purpose of this Act. The accrual refers to the assumption that revenues and costs are accrued that is, recognized, as they are earned and incurred (and not as money is received or paid) and recorded in the financial statements to which period they are related. Admittedly, insofar as the lease equalization charges are concerned, it is not provided in the notified accounting standards by the Department. It is also not in dispute that in the Act what the lease equalization charges is not explained. In the absence of any specific provision in the Act dealing on the subject, when the accounting standard is now made the basis for maintaining the accounts for the purpose of income tax, even if the Central Government has not notified in the Official Gazette the accounting standards, certainly the accounting standards prescribed by the Institute of Chartered Accountants has to be followed. In fact, the Hon'ble Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 has put its seal of approval on adopting the accounting standards while interpreting Section 10(2)(vi), (via), (vib) and Section 10(5) of the Indian Income-Tax Act, 1922, while interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital recovery. It is in this background that when we look at the profit and loss account of the assessee, a sum of Rs. 1,83,43,948/- is shown as the income from the hire charges, whereas, the total receipt from lease rentals is shown as Rs. 11,84,21,434/-. Out of the total receipts under the heading "lease rentals" they have claimed Rs. 4,35,89,486/- representing the lease equalization account, in respect of which they are not liable to pay, as it represents excess capital recovery. Therefore, it is only Rs. 7,48,31,948/- that is the real income which has to be offered for tax. In fact, in the very same Profit and Loss account a sum of Rs. 1,70,80,212/- has been claimed under the heading "transfer to. lease equalization amount" which deduction has been granted by the authorities. It is only in respect of the current lease equalization amount the aforesaid objections are raised on the ground that the said amount also has accrued and received by the assessee. Though the said amount is also accrued and received by the assessee, it does not represent the real income, which represents capital recovery. Therefore, in view of the change in law from 1.4.1998, when the Act was amended pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
