TMI Blog2018 (2) TMI 1535X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts, which is a statutory requirement under Section 211(2) of the Companies Act. For these reasons, the first question is answered in favour of the assessee and against the Revenue. Whether the provisions for non-performing assets are liable to be adjusted while computing book profit under Section 115JA of the Act? - Held that:- The lease equalization charges are not to be treated as adjustments needing to be added back while computing book profits, under Section 115JA on account of Explanation 1. This Court is in agreement with that view. Accordingly the second question too is answered in favour of the assessee. - ITA 378/2004, ITA 76/2007 - - - Dated:- 21-2-2018 - MR. S. RAVINDRA BHAT AND MR. SANJEEV SACHDEVA, JJ. For The Appellant : Sh. Rahul Chaudhary, Advocate For The Respondent : Sh. Satyen Sethi, Sh. Arta Trana Panda and Ms. Gargi Sethee, Advocates. MR. JUSTICE S. RAVINDRA BHAT 1. The Revenue s appeal under Section 260A of the Income Tax Act ( the Act ) had urged several questions of law. On 12.01.2016, this Court framed the following questions: (i) whether the lease equalization charges can be deducted while computing book profit; and (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows:- 14.3 Lease rental in monetary terms is a sum total of: the financing charge and the amount embedded in it in the form of the capital sum. What the assessee needs to do, while offering for tax income derived from lease is, to separate the financing charge from the amount recovered towards capital, that is, the capital recovery amount. The financing charge is determined by applying the IRR to the net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease 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 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 reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not paid periodically as agreed to, the debtor has to pay penal interest. If the debtor chooses to repay the amount and fore close before the agreed period, then not only he has to pay the loan amount plus interest, he has also to pay additional interest, as he is not entitled to the benefit in respect of lower rate of interest, which was spread over the period of 7 years. All these amounts, which are paid by the debtor to the assessee, have a direct nexus with the business, which he is carrying on. All these incomes are derived from the business, which he is carrying on. It is also on record except this long term finance business, the assessee is not carrying on any other business much less any short term finance business. Therefore, all these categories of incomes which the assessee is receiving as a direct nexus with the long term finance and therefore section 36(1)(viii) of the Act is attracted. Therefore, we do not see any merit in these appeals. Accordingly, the first substantial question of law is answered in favour of assessee and against the Revenue. 4. The Revenue argues through its counsel, Mr. Rahul Chaudhary, that the AO and the CIT(A) justifiably rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 464 (Karn); Commissioner of Income Tax v. Indian Railway Finance Corp. Ltd (2014) 362 ITR 548; Commissioner of Income Tax v. ICICI Ventures Funds Management Co. Ltd 2015 234 Taxman 569 (Karn); Commissioner of Income Tax v. Pact Securities and Financial Services Ltd (2015) 374 ITR 681 (AP T) and Commissioner of Income Tax v. Sun Pharmaceutical Industries Ltd. 2016 (240) Taxman 686 (Guj). Counsel submitted that the amount is nothing but the difference between the statutory depreciation on rentals and the recovery of cost of capital. Therefore, merely because it entered in the P L account, did not make any difference. At any rate, it could not be treated as a reserve. Therefore, ITAT was justified in directing deletion of the said amount. 8. This Court is of the opinion that the consistent view adopted in the various authorities - Virtual Soft Systems (supra) onwards is that in monetary terms, lease rentals are the sum total of financing charges and the amount included in it towards the capital sum. While offering for tax income derived from lease, a taxpayer has to separate the amount received towards capital, from the financing charge. The financing charge is determined by app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond issue is whether the value of NPAs is to be adjusted while determining book profits under Section 115 JA of the Act. The assessee here argues that lease equalization is not a provision for diminution in asset value and is a mere adjustment entry. It was argued that in this case, since lease equalization was to the tune of ₹ 6,24, 96,982/- and debited to the profit and loss account, and since the lease charges shown in the P L Account were the net amount of lease equalization charges, the gross block of fixed assets was simultaneously reduced by an amount of ₹ 9,08,03,993/- which was the accumulated lease adjustment. Therefore, no adjustment was made which could be treated as being adjustment towards diminution in the value of assets. The assessee relies on Commissioner of Income Tax v. Indian Railway Finance Corporation Ltd. 2014 (362) ITR 548. 11. Commissioner of Income Tax v. HCL Comnet Systems and Services Ltd. 2008 (305) ITR 409 (SC) is an authority on the point that provision for diminution of an asset is not provisioning for a liability. This logic was followed in the case of TVS Finance and Services Ltd., Jayalakshmi Estates v. The Joint Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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