TMI Blog2016 (7) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to as the Act ) has called in question the order dated 13th March, 2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench D (hereinafter referred to as the Tribunal ) in ITA No.1400/Ahd/2003 by proposing the following two questions stated to be substantial questions of law:- (1) Whether on the facts and circumstances of the case and in law, the ITAT was justified in deleting the addition made on account of lease equalization charges in computing the book profit under explanation to section 115JA of the Act without appreciating that the A.O. correctly invoked the provision of section 115JA, which finds support from the decision of Hon ble High Court of Karnataka in the case of C.I.T. v/s. Weizmann Homes Ltd. reported in [2013] 33 taxmann.com 171 (Karnatak) and decision of I.T.A.T. Chennai Bench A in the case of Deputy Commissioner of Income tax vs. Citi Financial Retails Services India Ltd. In I.T.A. No.1102 1103 (MDS) of 2014 A.Y. 1999-2000 and 2000-01, reported in [2014] 52 taxmann.com 68 (Chennai-Trib.)? (2) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that the gain on Exchange rate fluc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o lease equalization account. The assessee carried the matter in appeal before the Commissioner (Appeals), who, upon appreciating the material on record, noted that the main contention of the assessee was that the lease equalization charge is not a reserve but in fact is a fund which does not satisfy the characteristics of a reserve. The Commissioner (Appeals) did not agree with the submission advanced on behalf of the assessee and observed that as per Explanation (b) to section 115J, book profit means the net profits as shown in the P L Account for the relevant previous year (prepared under sub-section (1A), as increased by: (b) the amounts carried to any reserve (other than the reserve specified in section 80HHD) (or sub-section (1)A to section 33AC), by whatever name called. He, accordingly, was of the view that the lease equalization fund which has been taken by the assessee to Schedule 5 of fixed assets in the name of lease terminal adjustment is nothing but a reserve and dismissed the said ground of appeal. The assessee carried the matter in further appeal before the Tribunal, which placed reliance upon the decision of the Delhi High Court in the case of GE Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an unascertained liability and that the amount was earmarked as provision for diminution in the value of any asset for the purpose of arriving at the book profit for the purpose of section 115JA, which ought to have been included. The court, accordingly, held that the assessing authority was justified in adding the said amount to the book profit. It was submitted that in the facts of the present case, clause (b) of the Explanation to sub-section (2) of section 115JA would be attracted and that the amount of lease equalization fund being in the nature of a reserve, the net profit is required to be increased by such amount. It was submitted that, therefore, the said ground of appeal deserves consideration. 5. Opposing the appeal, Mr. S.N. Soparkar, learned senior advocate appearing with Mr. B.S. Soparkar, learned advocate for the respondent assessee on caveat, submitted that the basic premise namely, that the lease equalization charge is in the nature of a reserve is erroneous, inasmuch as, it is a settled legal position as held by different High Courts that lease equalization fund is not in the nature of a reserve and hence, the provisions of clause (b) of sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise. In support of his submission that the lease equalization charge is not in the nature of a reserve, the learned counsel placed reliance upon the decision of the Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd., 2012 (341) ITR 593, which is the lead decision on the issue and has been subsequently followed by various High Courts. Reliance was also placed upon the decision of the Madras High Court in the case of TVS Finance and Services Ltd., Jayalakshmi Estates v. Joint Commissioner of Income Tax Special Range - XI, 2009 (318) ITR 435, wherein the substantial question which was subject matter of consideration by the High Court was whether the Income Tax Appellate Tribunal was right in holding that ₹ 3,99,62,960/- towards lease equalization charge made as per Institute of Chartered Accountants of India s guidance note is contingent in nature and, therefore, includible in computing the book profit under section 115JA of the Act. Before the court on behalf of the appellant, it was submitted that the lease equalization charge had been made on the basis of the Reserve Bank Guidelines and on the basis of the opinion of the Directors. The court foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft Systems Limited (supra) and held that lease equalization 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 lease. Thus, the net revenue or tax effect is nil in the entire term. The court observed that this was clear from the net profit declared under column G, and held that the computation was logical, fair and a true reflection of the income earned and reduced the abnormalities. The court was of the view that the lease equalization charge results in debit or credit entry in the profit and loss account and it helps the income getting staggered or matched during the entire period of lease. Reliance was also placed upon the decision of the Karnataka High Court in the case of Prakash Leasing Ltd. v. Deputy Commissioner of Income-tax, Central Circle-III, (2012) 208 Taxmann 464 (Karnataka), wherein the court placed reliance upon the decision of the Delhi High court in the case of C.I.T. v. Virtual Soft Systems Limited (supra) and held that the lease equalization charge is the result of the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the appellant has contended that the assessee while making the normal computation of total income has added back the lease equalization charge; however, while computing the book profit under section 115JA, it has not added back the same. In this regard, it may be noted that while computing the book profit under section 115JA, the net profit as shown in the profit and loss account for the relevant previous year under sub-section (2) is required to be increased by the amounts enumerated thereunder, one such being the amounts carried to any reserves by whatever name called. The contention that the assessee has not added the lease equalization charges while computing the book profit under section 115JA while it has added the same under the normal provisions of the Act, deserves to be stated to be rejected, inasmuch as, it is the case of the revenue at all stages that the lease equalization charge being in the nature of a reserve, the net profit is required to be increased while computing the book profit under section 115JA of the Act. The sole question that arises for consideration is as to whether the lease equalization charge is in the nature of a reserve as contemplate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which cannot be allowed, as there is no provision under the I.T. Act is, in our view, a complete misappreciation of what constitutes a lease equalization charge. In our opinion, as long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in the AYs in issue, in its profit and loss account. This represents true and fair view of the accounts; a statutory requirement under Section 211(2) of the Companies Act. As explained by us above, the rationale is that over the entirety of the lease period the said debit would work itself out. This court is in agreement with the view adopted by the Delhi High Court in the above referred decision namely, that the lease equalization charge is a method of recalibrating 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 debits and credits in the profit and loss account would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Jurisdictional High Court in the case of Commissioner of Income Tax v. Alps Chemicals P Ltd., 2014 (367) ITR 594, and held in favour of the assessee. 9. Mr. K.M. Parikh, learned senior standing counsel for the appellant submitted that the income earned from fluctuation in foreign exchange rates in EEFC Account is not directly attributable to export earning but it is the gain from the foreign exchange kept in EEFC Account like interest on deposit and hence, should not be allowed for calculating deduction under section 80HHC and 80IA of the Act. It was submitted that the Tribunal has failed to appreciate that the decision of this court in the case of C.I.T. v. Alps Chemicals P Ltd. (supra) would not be applicable to the facts of the present case, inasmuch as, in the said case, there was no issue of reduction of income from foreign exchange fluctuation from miscellaneous expenses. 10. On the other hand, Mr. S.N. Soparkar, learned counsel for the respondent submitted that the decision of this court in the case of C.I.T. v. Alps Chemicals P Ltd . (supra) would be squarely applicable to the facts of the present case wherein the court has held that once expor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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