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2016 (7) TMI 1210 - GUJARAT HIGH COURT

2016 (7) TMI 1210 - GUJARAT HIGH COURT - TMI - MAT - computation of the book profit under explanation to section 115JA - addition made on account of lease equalization charges - in the nature of reserve or not - Held that:- The lease equalization fund is not in the nature of a reserve - the lease equalization charge would not fall within the ambit of clause (b) of the Explanation to sub-section (2) of section 115JA of the Act. Under the circumstances, while computing the book profit under sectio .....

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revenue by this appeal under section 260A of the Income Tax Act, 1961 (hereinafter 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 o .....

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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 fluctuation ₹ 11,72,828/- does not form part of total turnover for the purpose of section 80HHC of the Act without appreciating that forex fluctuation gain is not profit derived from export but forms part of total turnover for the .....

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th March, 2000. Subsequently, the assessee company on 1st June, 2001 filed a revised return of income declaring total income under section 115JA of the Act at ₹ 15,92,21,250/-. The assessment came to be framed under section 143(3) of the Act under the normal provision determining the assessed income at ₹ 11,84,80,295/- and the income came to be computed under section 115JA of the Act at ₹ 17,75,85,674/- after making various additions/ disallowances. 3. In relation to proposed q .....

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to the Assessing Officer, section 115JA clearly stated that book profit means the net profit as shown in the Profit and Loss Account for the relevant previous year prepared under sub-section (2) clause (b) as increased by the amounts carried to any reserve by whatever name called. The Assessing Officer was of the view that lease equalization charge was nothing but reserve created by the assessee and was necessarily required to be added back while calculating the book profit as per clause (b) of .....

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issioner (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 e .....

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owed the ground of appeal. 4. Mr. K.M. Parikh, learned senior standing counsel for the appellant invited the attention of the court to the facts as recorded by the Assessing Officer to point out that the Assessing Officer has specifically recorded that the assessee while making the computation of the total business income as per the normal provisions in Chapter IV had added together the lease equalization charge whereas the same was not added while calculating the book profit under section 115JA .....

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mmissioner (Appeals), have rightly found that the lease equalization charge is in the nature of a reserve and, therefore, in view of the Explanation to sub-section (2) of section 115JA of the Act, while computing the book profit, the amount carried to any reserve by whatever name called is required to be added. In support of his submission, the learned counsel placed reliance upon the decision of the Karnataka High Court in the case of Commissioner of Income-Tax and Another v. Weizmann Homes Ltd .....

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er than ascertained liabilities. The court in the facts of the said case found that ₹ 12,30,220/- had been set apart to meet the contingencies but such amount was not included in the book profit. The court held that such amount 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 th .....

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ed 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 section 115JA of the Act would not be attracted in the present case. .....

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her for the purposes of section 115JA of the Act, the lease equalization charge is in the nature of a reserve. The attention of the court was invited to the decision of the Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. C.I.T., 2011 (330) ITR 363, for the proposition that book profit has been defined and explained in the Explanation to sub-section (2) of section 115JB of the Act. Section 115JB is a self-contained code. It applies notwithstanding other provisions of the Act. There .....

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uch increase needs to be made only if any amount referred to in clauses (a) to (f) is debited to the P & L Account. It was submitted that the provisions of section 115JA are similar to those as contained in section 115JB. Thus, the book profit in the present case is required to be computed as per the provisions of section 115JA. Accordingly, the net profit as shown in the P & L Account for the relevant previous year prepared under section 115JA(2) has to be increased by the amounts in cl .....

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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 whet .....

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rectors. The court found that this was in accordance with the Guidance Norms on Accounting for leases. Before the court, the Department conceded that the amount of lease equalization charge over the period of lease is equal to the difference between the quantum of principal recovered and the residual value, but hypothetically justified its treatment as a reserve on the ground that there will be some years when the quantum of provision would be more than necessary. The court held that when the le .....

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in this kind of lease, the lessor recovers the entire cost of the leased assets over the period of lease along with interest on the amount financed. The court, accordingly, held that the Assessing Officer could not add back the said provision under clause (c) of the Explanation to section 115JA of the Act. Reliance was also placed upon a decision of the High Court of Hyderabad (For the State of Telangana and the State of Andhra Pradesh) in the case of Commissioner of Income Tax and Ors. v. Pact .....

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ase followed by the assessee and disallowing the assessee to deduct the lease equalization charges from the lease rental income. 5.2 The decision of the Delhi High Court in the case of Commissioner of Income Tax, Large Taxpayers Unit v. Indian Railway Finance Corporation Ltd., 2014 (362) ITR 548, was also cited wherein the court placed reliance upon its earlier decision in the case of CIT v. Virtual Soft Systems Limited (supra) and held that lease equalization charge represents the difference be .....

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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 Sys .....

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calibrating the depreciation claimed by the assessee in a given accounting period. As long as the method employed for accounting the income meets with the rudimentary principles of accountancy, one of which includes offering only revenue income for tax, it could not find fault with the assessee debiting lease equalization charges in his profit and loss account. Mr. Soparkar submitted that in view of the consistent view adopted by the High Courts and on which the Tribunal has placed reliance, the .....

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pany, shall, for the purposes of that section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The said provision further provides for the manner in which the profit and loss account is required to be prepared. The explanation thereto provides that for the purposes of that section, book profit means the net profit as shown in the profit and loss account for the relevant previous ye .....

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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 thereu .....

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ng 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 contemplated under clause (b) of section 115JA of the Act. In this regard, it may be germane to refer to the decision of the Delhi High Court in the case of C.I.T. v. Virtual Soft Systems Limited (supra), wherein the concept of lease equalization fund has been succinctly elucidated as under:- 14.3 Lease rental in moneta .....

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rental. The fourth element which is the lease equalization charge is the result of the adjustment, which the assessee has to make whenever, the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. The assessee, may claim depreciation based on the provisions of the IT Act or, may even adopt the method of depreciation provided under the Companies Act. In the event, the depreciation claimed is less than the capital recovery, the difference is deb .....

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apital 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 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 debit and credits in the profit and loss account would square off with each other .....

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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 cl .....

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Limited v. Joint Commissioner of Income Tax (supra) wherein the court has held that lease equalization charge is not in the nature of a reserve, inasmuch as, the amount of lease equalization charge over a period of lease is equal to the difference between the quantum of principal recovered and the residual value. 7. In the light of the law laid down in the above decisions that the lease equalization fund is not in the nature of a reserve, with which this court is in complete agreement, it is hel .....

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uestion of law warranting interference. The said ground of appeal, therefore, does not merit acceptance. 8. As regards the proposed question 2, the Assessing Officer, on a perusal of the break-up of various expenses debited in the profit and loss account, noticed that the assessee company had reduced ₹ 11,72,828/- as income on account of exchange rate difference from miscellaneous expenses which resulted in excess deduction under section 80HHC of the Act. According to the Assessing Officer .....

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assessee and deleted the addition. The Tribunal followed its decision in the earlier years in relation to assessment year 1999-2000 wherein it had followed the decision 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 direc .....

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ome 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 export is made, due to a variety of reasons, the remission of export sale consideration may not be made immediately. Under the accounting principles, therefore, .....

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exchange fluctuation account, nevertheless any deviation either positive or negative, must have a direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Primarily and essentially, the receipt would also be on account of the export made. If this is so, any fluctuation thereof also must be on account of the export made. It was submitted that the Tribunal has, therefore, merely applied the decision of the Jurisdictional High Court to th .....

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