TMI Blog2008 (8) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lease Equalization account. It is noted by the A.O. that the assessee is claiming depreciation on the rolling assets which were leased out to Indian Railways. The A.O. was of the view that the lease in the present case is operating Lease and not finance lease and hence, depreciation as per Income-tax Rules is allowed by him but he disallowed the claim of the assessee for deduction from lease rent on account of Lease Equalization. He added this amount in the income of the assessee in assessment year 1997-98. Similar additions were made in subsequent three years also. The assessee carried the matter in appeal before the Ld. CIT(A), but without success. It is held by Ld. CIT(A) that since the assessee has claimed depreciation as per Companies Act in the Profit and Loss Account and difference between depreciation as per I.T. Act and Companies Act is claimed in the computation, entire lease rent is to be taken as income. Now, the assessee is in further appeal before us in all the four years. 4. It is submitted by Ld. Authorized Representative of the assessee that similar claim was allowed in A.Y. 1996-97 and he submitted a copy of assessment order dated 11.9.1998 of that year alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the matter of laying down accountancy standards. Reliance was also placed on the following judicial pronouncements in support of this contention that Guidance and Accounting Standards (AS) issued by ICAI are to be followed:- a) J.K. Industries Ltd. v. UOI, 297 ITR 176 (SC). b) CIT v. Woodward Governors (P) Ltd. 294 ITR 451 (Del. c) CIT v. South India Corpn., Ltd. 293 ITR 237 (Mad.). d) CIT v. Shri Ram Honda Power Equipment Pvt.Ltd. 289 ITR 475(Del.). 5. Ld. A.R. of the assessee also filed copy of Board Circular No. 2 of 2001 issued on 9.2.2001 as per which, the Board has noted the new A S on Leases issued by ICAI, which requires capitalization of the asset by the lessees in financial lease transaction. It is observed by the Board in this circular that by itself the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act . 6. Ld. A.R. also submitted copy of assessment order dated 28.2.1996 in assessee's own lease for A.Y. 1990-91. It is pointed out that on page 3 of assessment order, the A.O. has noted the letter issued by the CBDT (File No. 225/23/94-ITA-II dated 7.2.1994). It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 60,000/- was given on lease for four years and the residual value at the end of four years was estimated to be 5% of cost i.e., ₹ 3,000/-The present value of lease rental and residual value by considering interest of 14% per annum is worked out at ₹ 59,998/- and since it is almost equal to cost of leased assets, it was held as finance lease. As per another table for the same example, Finance income and Annual lease charge is worked out. As per this working, total lease rental including residual value is ₹ 66,500/- , finance income is ₹ 6493/- and annual lease charges is ₹ 60,000/-. Para. 11 of this Guidance Note give the details of how much deduction is to be allowed against lease rental and how the same should be worked out and accounted for. This Para.11 is reproduced below:- It is appropriate that against the lease rental, a matching lease annual charge is made to the profit and loss account. This annual lease charge should represent recovery of the net investment/fair value of the leased asset over the lease term. The said charge should be calculated by deducting the finance income for the period (as per para 12 below) from the lease ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, we find no reason for not accepting the basis as suggested by ICAI in these guidelines for deciding the character of lease in the present case as finance lease. However, the assessee company has given this chart for opening value of lease assets in the assessment year 1997-98, which is examined by us. Similar chart for assets given on lease during A.Y. 1997-98 and in subsequent years is not furnished to us. Hence, the A.O. should verify those charts and if this condition is satisfied, all those transactions should also be accepted as finance lease transactions. 12. Now, the second question to be decided is that in case of finance lease, deduction on account of Lease Equalization should be allowed or not. In this regard, we find that as per these guidelines issued by ICAI, in case of finance lease, lease rental is to be divided into two parts for each year throughout the lease period, which is 30 years in the present case. One part is finance income, which should be worked out at given rate of interest on the amount of net investment in leased assets. In the present case, rate of interest is stated to be 14.97% p.a. Out of opening balance of ₹ 126,256.43 lacs, lease-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resultant PandL a/c. will appear as under:-. Dr. Rs.in lacs Cr. Rs.In lacs To Depreciation 9,469.23 By lease rental 11,047.43 To Net income being Finance insurance: 8,621.77 By Lease Equalisation charges: 7,043.57 18,091.00 18,091.00 14. From the above, it is seen that in-spite of increase in depreciation and Lease Equalization credit, the net finance income remains the same. In the chart, furnished by the assessee, it is seen that every year, the amount of capital recovery goes on increasing but depreciation remains the same as it is calculated by the assessee on SLM basis and as a result, from 3rd year to 11th year, lease equalization account is in positive means debit to PandL a/c. But again from 12th year to 22nd year, position is reverse and lease equalization is negative, i.e., credit to PandL A/c and again from 23rd year to 30th year, it is positive i.e. deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se also, the assessee was following the Accounting Standard and Guidance Notes issued by the Institute of Chartered Accountants of India (ICAI) and accordingly debited an amount to Lease Terminal Adjustment Account . Though the nomenclature is different, but this account is same as Lease Equalization Account in the present case. In that case, Ld CIT(A) was of the view that method prescribed by ICAI is perfectly alright as long as depreciation is claimed as per Companies Act but as per I.T. Act, the assessee cannot have the benefit of both the systems. It was also observed by Ld CIT(A) in that case that by claiming depreciation as per I.T. Rules, the assessee has clearly obtained more deduction than the amount of principal recovered as per its method of accounting. 18. Under these facts, it was held by the Tribunal in that case that there is prejudice against the higher rates of depreciation provided under Income Tax Act,1961 rather than the methods of accounting followed by the assessee. It was observed by the Tribunal in para 16 of this judgment that it is not understood as to how a higher rate of depreciation upsets a method of accounting. This para No. 16 is being reproduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f depreciation. The depreciation whether arrived at by applying the rates provided in the Companies Actor arrived at by rates provided under the Income Tax Act,1961, does, when a particular rate of depreciation is applied or when a particular rate of I.R.R. is applied would result in invalidating a particular method of accounting is highly incorrect. The method of accounting suggested in the Guidance Note is not rate specific or Act specific. Thus the conclusion of the Ld Commissioner (Appeals) that a higher rate of depreciation provided in the Income Tax Act, if availed by the assessee disentitles him to adopt the method of accounting suggested by the Institute of Chartered Accountants of India, is totally incorrect. 19. On this basis, the Tribunal allowed the appeal in that case. Respectfully following this Tribunal decision in the present case also, we are of the considered opinion that Lease Equalization amount debited by the assessee in PandL A/c cannot be disallowed or reduced. We would like to point out that the apprehension of the Ld DR that assessee will get double deduction or extra deduction is unfounded. This apprehension is based on this premise that Lease Equaliza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f issue. The total expenses debited include management fees/discount, brokerage, and also interest up to the date of allotment. The Assessing Officer was of the view that as the bonds were for seven years, the expenses relating to the same should also be allocated to seven years and during the year of issue, only 1/7th of the total expenses should be allowed. Accordingly, it was held by the Assessing Officer that these expenses were covered under section 35D of the IT Act and were allowable at 1/10th in the year of issue and succeeding nine years. The assessee carried the matter in appeal before the Ld CIT(A) in all the four years on this issue but without success and now the assessee is in further appeal before us. 23. It is submitted by Ld AR of the assessee before us that this issue is now covered in favour of the assessee by the judgment of Hon'ble jurisdictional High Court rendered in the case of CIT v. Khirani Chemicals Ltd. as reported in 290 ITR 196 (Del.). Reliance was also placed on the judgment of the Hon'ble Madras High Court rendered in the case of CIT v. South India Corporation as reported in 290 ITR 217. It was submitted that in this case, Hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of provision for diminution in value of investment. No such issue is raised in assessment year 1998-99. Similar issue is raised by the assessee in assessment year 1999-2000 as per ground No. 3. In this year, the Assessing Officer has made addition of ₹ 83,189,10/- in respect of provision for diminution in the value of investment while working out book profit under section 115JA. In assessment year 2000-01 no such ground is raised by the assessee. 29. It is submitted by Ld AR of the assessee that the issue regarding provision for bad and doubtful debts is covered in favour of the assessee by the Tribunal decision rendered in the case of ACIT v. Eicher Ltd. as reported in 101 TTJ (Del.) 369, it is also submitted that this judgment is confirmed by the Hon'ble Delhi High Court as per the judgment reported in 267 ITR 107 (Del). Reliance was also placed on the Tribunal decision rendered in the case of ACIT v. JG Vacumum Flasks (P) Ltd. 83 ITD 243 (Pune). It was also submitted that under similar logic, the addition made by the Assessing Officer on account of diminution in the value of investment is also covered in favour of the assessee by the same judgment. 30. As a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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