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TMI Blog2014 (6) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act ?" This question is also covered by the decision of the Delhi High Court in Virtual Soft Systems Ltd. (supra). In the said decision, nature and character of lease equalisation charges in the case of financial leases was examined and it was observed that the lease equalisation charges or funds have to be set off or included on the expenditure side in the profit and loss account to compute and calculate the profits. The principle of matching, i.e., matching of income with the actual expenditure which is incurred by the assessee to earn the said income applies. In the decision of the Delhi High Court in Virtual Soft Systems Ltd. (supra) from paragraph 9 onwards reference was made to section 145 of the Act and the accountancy standards prescribed by the Institute of Chartered Accountants of India. The accountancy standards prescribed underwent amendment/change from the assessment year 1996-97 in respect of financial leases. Nature and character of lease equalisation charges/funds was examined in paragraph 11 onwards, in paragraph 7.4 of the said judgment, reference was made to the decision of the Tribunal, in the present case, i.e., the impugned decision and referrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 145 of the Income-tax Act. Section 145 of the Income-tax Act adverts to the method of accounting followed by an assessee. Sub-section (1) of section 145 provides that income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying accounting standard in respect of any class of assessee or class of income. Sub-section (3) of section 145 empowers the Assessing Officer to disregard the books of account submitted by the assessee only if he is not satisfied with the correctness or completeness of the accounts of the assessee or the method of accounting employed by the assessee or on account of accounting standards notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the Assessing Officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in section 145 of the Income-tax Act. The fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han the capital recovery, the difference is debited in the profit and loss account in the form of lease equalisation 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 equalisation charge to the profit and loss account. Therefore, the assessee in effect debits or credits its profit and loss account with a lease equalisation 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 equalisation 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 equalisation amount being reduced to a naught, as the debits 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 Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78 14 364 28 1000 2,373 299 701 702 299 11 289 29 1000 1,672 211 789 789 211 8 203 30 1000 883 117 883 883 117 24 93 2,40,000 1,40,000 1,00,000 1,00,000 (0) 1,40,000 1,00,000 1,40,000 The net effect of the aforesaid table shows that the purchase value of the asset which is made subject matter of lease is not taken to the profit and loss account and treated or debited as expenditure. The purchase value or the recovery of capital cost gets distributed/divided over the term of the lease. The acronym IRR stands for Internal Rate of Return, on which there is no dispute. The lease rentals as stated above include recovery of the capital cost. The chart indicates depreciation which an assessee was entitled to claim under the Companies Act. Lease equalisation charge represents the difference between the recovery of cost of capital and the depreciation as claimed under the Companies Act. The difference between the two may be negative or positive and is not constant over the period of the lease. Thus, the net revenue or tax effect is nil in the entire term. This is clear from the net profit as declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the total rolling stock aggregate was Rs. 19,771.35 crores. The depreciation claimed (which may include certain fixed assets also which were not subject matter of finance leases) was Rs. 5,352.57 crores. Clearly, therefore, the purchase value of the leased assets did not find reflection or deduction in the profit and loss account. Legal ratio of Virtual Soft Systems Ltd. (supra) is that as long as the assessee does not indulge in any manipulation of the figures and the capital cost, IRR, etc., are computed in accordance with the accountancy standards and no error or can be found, lease equalisation charge should not be disallowed. In view of the aforesaid position, the second issue has to be decided against the appellant and in favour of the respondent-assessee. Issue No. 3 "Whether the bond issue expenses were capital or revenue in nature ?" The respondent-assessee had incurred expenditure of Rs. 10,09,92,445 towards bond issue expenses of different series during the year in question. The Tribunal referred to their earlier order in the case of the respondentassessee for the assessment years 1997-98 to 2000-01 and held that the expenses incurred were revenue expenditure. Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the judgment of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 (SC) has been noticed, we are inclined to uphold the view taken by the Tribunal that the expenditure is revenue in nature." The respondent-assessee was/is a Government of India undertaking and was engaged in the business of leasing and financing to Indian Railways. It procured funds from various sources and acquired rolling stock which was leased to Indian Railways. The expenditure which was incurred on bonds was for ensuring finance and availability of funds for carrying out the business of finance and leasing. To procure and get funds in the form of bonds etc. some expenditure had to be incurred. These funds, when procured, were used for the business activities to earn income. It is not a case wherein the respondent-assessee was yet to set up or commence their business. The business, it is accepted, had commenced much earlier and not during the year in question. Issue No. 4 "Whether the assessee is entitled to depreciation on office premises at NBCC place, Lodi Road, New Delhi ?" The contention of the Revenue raised is that the respondent-assessee was not the owner of the building or in possession ..... X X X X Extracts X X X X X X X X Extracts X X X X
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