Stryker Global Technology Center Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 149/DEL/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6970 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 08-12-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 08-01-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T M SHIVAKUMAR
• Assessee Lawyers: SHRUTI ARS
• Keywords: Depreciation
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.149/DEL/2013 ASSESSMENT YEAR : 2008-09 STRYKER GLOBAL TECHNOLOGY CENTER PVT. LTD., VATIKA BUSINESS PARK, 8 TH -12 TH FLOOR, SOHNA ROAD, GURGAON. VS. ACIT, CIRCLE- 9(1), NEW DELHI. PAN : AAJCS 9528 D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ROHIT TIWARI & MS. SHRUTI, ARS RESPONDENT BY : SHRI T.M. SHIVAKUMAR, CIT(DR) DATE OF HEARING : 08-12-2016 DATE OF PRONOUNCEMENT : 24-01-2017 O R D E R PER S.V. MEHROTRA, A.M : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 26.10.2012 PASSED BY THE ASSESSING OFFICER U/S 143( 3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) RELATING TO ASSESSMENT YEAR 2008-09 PURSUANT TO THE DIRECTION OF THE DISPUTE RE SOLUTION PANEL-II, NEW DELHI. 2. THIS APPEAL HAS BEEN FIXED AS PER ORDER OF TRIBU NAL IN M.A. NO.54/DEL/2016 DATED 21.10.2016 FOR THE LIMITED PUR POSE OF DISPOSING OF 2 ITA NO.149/DEL/2013 GROUND NO.9 IN THE APPEAL MEMO. ACCORDINGLY, WE PR OCEED TO DISPOSE OF FOLLOWING GROUND NO.9 OF THE APPEAL MEMO :- 9. THE LD. AO HAS GROSSLY ERRED IN ADDING BACK THE AMOUNT OF RENT EQUALISATION RESERVE OF RS.18,45,875/- TO THE BOOK PROFITS OF THE APPELLANT, DECLARED UNDER SECTION 115JB OF THE ACT, ERRONEOUSL Y PROPOSING THAT THE AMOUNT OF RENT EQUALISATION RESERVE CHARGED TO PROFIT AND LOSS ACCOUNT IS COVERED UNDER CLAUSE (B) OR (C) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT, AND THUS NEEDS TO BE ADDED IN BOOK PROFITS. 3. BRIEF FACTS APROPOS THIS ISSUE ARE THAT THE ASSE SSEE HAD DEBITED A SUM OF RS.18,45,875/- IN ITS PROFIT & LOSS ACCOUNT AS R ENT EQUALIZATION RESERVE. AS PER ASSESSEES SUBMISSIONS BEFORE THE ASSESSING OFFICER, THIS RESERVE HAD BEEN CREATED BY THE ASSESSEE UPON STRAIGHT LINING O F THE LEASE RENTALS PAYABLE BY THE ASSESSEE UNDER AN OPERATING LEASE FOR THE PR EMISES OCCUPIED BY IT DURING THE FINANCIAL YEAR UNDER CONSIDERATION AND I N ACCORDANCE WITH THE ACCOUNTING STANDARD 19 (AS19) : ACCOUNTING FOR LEA SES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (ICAI). IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE, IN ITS SUBMIS SIONS, DATED 28.11.2011, WHICH HAS BEEN REPRODUCED BY ASSESSING OFFICER AT P AGE 2 OF HIS DRAFT ASSESSMENT ORDER, IT HAD BEEN STATED THAT THIS RESE RVE HAD INADVERTENTLY BEEN LEFT OUT FROM BEING ADDED BACK WHILE COMPUTING THE TAXABLE INCOME UNDER THE NORMAL PROVISIONS OF THE ACT DUE TO LACK OF CLA RITY ON ITS ALLOWABILITY UNDER THE NORMAL PROVISIONS OF THE ACT. ACCORDINGL Y, ASSESSEE OFFERED THE AMOUNT DEBITED AS RENT EQUALIZATION RESERVE IN ITS PROFIT & LOSS ACCOUNT 3 ITA NO.149/DEL/2013 DURING THE FINANCIAL YEAR UNDER CONSIDERATION TO BE TAXED UNDER THE NORMAL PROVISIONS OF THE ACT. THE ASSESSING OFFICER NOTIC ED THAT THOUGH THE ASSESSEE HAD OFFERED TO ADD BACK THE RENT EQUALIZAT ION RESERVE IN THE COMPUTATION UNDER THE NORMAL PROVISIONS OF THE ACT, HOWEVER, THE SAME WAS NOT ADDED BACK, WHILE COMPUTING THE TAX LIABILITY, FOR COMPUTING BOOK PROFIT AS PER EXPLANATION 1 OF CLAUSE (B) AND (C) TO SECTI ON 115JB OF THE ACT. HE, THEREFORE, ADDED BACK THIS AMOUNT FOR COMPUTING THE BOOK PROFITS OF THE ASSESSEE. LD. DRP CONFIRMED THE ASSESSING OFFICER S ACTION. ACCORDINGLY, THE ASSESSING OFFICER GAVE EFFECT TO THE DRPS DIRE CTIONS. 4. LD. COUNSEL REFERRED TO PAGE 182 OF PAPER BOOK, WHEREIN, LEASE DEED DATED 06.09.2006 BETWEEN M/S VATIKA LANDBASE PVT. L TD. AND ASSESSEE IS CONTAINED. LD. COUNSEL REFERRED TO PAGE 3 OF LEASE DEED, WHEREIN, COVENANT IN REGARD TO LEASE RENTAL AND OPTION TO RENEW THE L EASE READS AS UNDER :- (I) LEASE-RENTAL AND OPTION TO RENEW THE LEASE: TH E LESSOR AGREES TO LEASE THE DEMISED PREMISES UNTO THE LESSEE AND THE LESSEE AGREES TO TAKE ON LEASE THE DEMISED PREMISES TOGETHER WITH THE RIGHT TO USE THE COMMON FACILITIES IN THE SAID TOWER AND COMPLEX ALONG WITH OTHER OCCUPANTS AND TH E RIGHT TO PARK 22 (TWENTY TWO) CARS FREE OF COST IN THE CAR PARKING SPACES EA RMARKED IN THE BASEMENT(S). THE PERIOD OF THE LEASE IS 3 (THREE) YEARS FROM THE DATE OF COMMENCEMENT OF THE SAME AT A MONTHLY RENT OF RS.6,44,262.85 (RUPEES SI X LAC FORTY FOUR THOUSAND TWO HUNDRED SIXTY TWO AND PAISE EIGHTY FIVE ONLY) A T THE RATE RS. 35.0 (RUPEES THIRTY FIVE ONLY) PER SQUARE FT. PER MONTH OF SUPER BUILT-UP AREA, WITH AN OPTION TO THE LESSEE TO RENEW THE LEASE FOR ANOTHER 2 (TWO ) CONSECUTIVE TERMS OF 3 (THREE) YEARS EACH PROVIDED THAT THE LESSEE SHALL G IVE THE LESSOR A DULY SERVED NOTICE FOR RENEWAL IN WRITING AT LEAST 3 (THREE) MO NTHS BEFORE THE EXPIRY OF THE INITIAL TERM OR THE FIRST RENEWAL PERIOD BUT ITS FA ILURE TO DO SO WOULD NOT AFFECT ITS UNILATERAL RIGHT TO RENEW/EXTEND THE SAME. IF THE O PTION TO RENEW THE LEASE IS EXERCISED BY THE LESSEE AS ABOVE, THEN THE RATE OF ESCALATION OF RENT SHALL BE MUTUALLY DECIDED BUT SUCH RATE OF ESCALATION SHALL EXCEED 15% (FIFTEEN PERCENT) OF THE RENT PAID IN THE PRECEDING 3 (THREE) YEAR TE RM, AND A FRESH LEASE DEED 4 ITA NO.149/DEL/2013 SHALL BE EXECUTED ON THE SAME TERMS AND CONDITIONS AS IN THIS AGREEMENT. THIS IS IN THE INTEREST OF THE LESSEE, AS NO MATTER WHAT TH E CURRENT RATE OF RENTALS AT THE TIME, WITH AN UPPER CAP OF 15%, ON THE PREVIOUS BAS IC RENT THE ESCALATION REMAINS RESTRICTED TO ANY UNDUE HIKE IN RENTALS. A FRESH DEED OF LEASE WILL BE EXECUTED AT THE TIME OF EACH RENEWAL AND THE SAME SHALL BE DULY REGISTERED IN ACCORDANCE WIT H THE PROVISIONS OF THE INDIAN REGISTRATION ACT, 1908 AFTER THE PAYMENT OF THE APP ROPRIATE STAMP DUTY AT THE THEN APPLICABLE RATES AS PER THE INDIAN STAMP ACT, 1899 INCORPORATING THE SAME TERMS AND CONDITIONS AS ARE CONTAINED HEREIN. 5. LD. COUNSEL REFERRED TO PAGE 175 OF PAPER BOOK, WHEREIN, THE ASSESSEES REPLY BEFORE THE ASSESSING OFFICER DATED 29.11.2011 IS CONTAINED IN WHICH, INTER-ALIA, IT WAS EXPLAINED AS UNDER :- GENERALLY, LEASING AGREEMENTS NOWADAYS PROVIDES FO R AN ESCALATION CLAUSE IN THE RENT PAYABLE BY A COMPANY OVER A PERIOD OF TIME . IN THESE CASES, SINCE, THE LESSEE IS DERIVING THE SAME BENEFIT FROM THE RENTED PREMISES (IN PHYSICAL TERMS), FROM ONE YEAR TO ANOTHER, IN ORDER TO PREVENT A HIG HER AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT IN THE LATER YEARS OF THE L EASE, THE AS 19 AND THE EXPERT ADVISORY COUNCIL (EAC) OPINION DATED SEPTEMBER 13, 2007 PROVIDE THAT ANY ESCALATION IN THE RENT EXPENSE NEEDS TO BE RECOGNIZ ED IN THE BOOKS OF ACCOUNTS ON A STRAIGHT LINE BASIS, OVER THE PERIOD OF LEASE. 6. LD. COUNSEL FURTHER REFERRED TO PAGE 181 OF PAPE R BOOK, WHEREIN, THE STATEMENT SHOWING DETAILS OF RENT EQUALIZATION RESE RVE FOR VATIKA TOWERS ARE CONTAINED, WHICH IS REPRODUCED HEREUNDER :- PARTICULARS RENT PER MONTH SIPL SHARE SGTC SHARE SERVICE TAX TOTAL SGTC SHARE NO OF MONTHS AMOUNT (RS.) RENT PAYABLE PER MONTH (1ST YEAR) 644,263 122,732 521,531 64,461 585,992 36 21,095,711 RENT PAYABLE PER MONTH (2ND YEAR) 740,902 141,142 599,760 74,130 673,891 36 24,260,068 RENT PAYABLE PER MONTH (3RD YEAR) 852,038 162,313 689,724 85,250 774,974 36 27,899,078 TOTAL RENT PAYABLE DURING 9 YEARS 108 73,254,858 PER MONTH CHARGE ON STRAIGHT LINE BASIS 678, 286 MONTH EXPIRED TILL MARCH 31,2008 20 TOTAL COST TILL MARCH 31,2008 13,565,714 5 ITA NO.149/DEL/2013 LESS: AMOUNT PAYABLE AS PER LEASE AGREEMENT TILL MARCH 31, 2008 644,263 122,732 521,531 64,461 585,992 20 11,719,840 AMOUNT TO BE PROVIDED FOR RENT EQUALIZATION RESERVE UNDER STRAIGHT LINE METHOD 1,845,875 7. LD. COUNSEL REFERRED TO THE DEFINITION OF LEASE TERM AS PER PARA 3.6, WHICH IS REPRODUCED HEREUNDER :- 3.6 THE LEASE TERM IS THE NON-CANCELLABLE PERIOD FOR WHICH THE LESSEE HAS AGREED TO TAKE ON LEASE THE ASSET TOGETHER WITH ANY FURTHER PERIODS FOR WHICH THE LESSEE HAS THE OPTION TO CONTINUE THE LEASE OF THE ASSET, WITH OR WITHOUT FURTHER PAYMENT, WHICH OPTION AT THE INCEPTION OF THE LEASE IT IS REASONABLY CERTAIN THAT THE LESSEE WILL EXERCISE. 8. WITH REFERENCE TO THE LEASE DEED, LD. COUNSEL PO INTED OUT THAT OPTION TO EXERCISE CONTINUATION OF LEASE WAS THERE AND IT WAS REASONABLY CERTAIN THAT LESSEE WOULD EXERCISE THE OPTION TO RENEW THE LEASE . HE, THEREFORE, SUBMITTED THAT RENT EQUALIZATION RESERVE HAD BEEN C REATED ON THE BASIS OF 9 YEARS LEASE TERM AFTER TAKING INTO ACCOUNT THE ESCA LATION OF 15% RENEWAL AT EACH TIME. LD. COUNSEL RELIED ON FOLLOWING DECISIO NS :- (A) APOLLO TYRES LTD. VS. CIT, (2002) 122 TAXMANN.C OM 562 (SC); (B) CIT VS. ICICI VENTURE FUNDS MANAGEMENT CO. LTD ., (2015) 62 TAXMANN.COM 128 (KARNATAKA); AND, (C) GE CAPITAL TRANSPORTATION FINANCIAL SERVICES LT D. VS. ACIT (2008) 113 ITD 22 (DELHI). 9. PER CONTRA , LD. DR SUBMITTED THAT THE LEASE DEED WAS FOR THRE E YEARS AND, THEREFORE, THE RENT EQUALIZATION RESERVE COULD NOT BE CREATED ON THE BASIS OF 9 YEARS LEASE TERM, WHICH COULD MATERIALIZE SUBJ ECT TO RENEWAL OF LEASE. LD. DR SUBMITTED THAT IT IS NOT A CASE OF LEASE COV ERED BY AS 19 SINCE THERE 6 ITA NO.149/DEL/2013 WAS NO CERTAINTY OF CONTINUANCE OF LEASE. HE SUBMI TTED THAT PROPERTY CONSIDERED IN AS 19 IS DIFFERENT. HE POINTED OUT T HAT AS 19 IS NOT APPLICABLE TO LEASE OF IMMOVABLE PROPERTY. LD. DR FURTHER SUBMITTED THAT THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF ICICI VENTURE FUNDS MANAGEMENT CO. LTD. (SUPRA) WAS WITH REFERENC E TO FINANCIAL LEASE AND NOT OPERATIONAL LEASE, WHEREIN, IT WAS, INTER-ALIA, OBSERVED THAT LEASE EQUALIZATION CHARGES WAS NOTHING BUT THE DIFFERENCE BETWEEN THE STATUTORY DEPRECIATION ON RENTALS AND THE RECOVERY OF COST OF CAPITAL, THEREFORE, MERELY BECAUSE THE SAID AMOUNT ENTERED INTO THE PROFIT & L OSS ACCOUNT IN EFFECT, MADE NO DIFFERENCE. HE, THEREFORE, SUBMITTED THAT THIS DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE PARTICU LARLY BECAUSE ASSET INVOLVED THEREIN WAS NOT IMMOVABLE PROPERTY. AS REGARDS THE DECISION OF GE CAPITAL TRANSPORTATION FINANCIAL SERVICES LTD. (SUPRA), LD. DR POINTED OUT THAT THE SAME WAS ALSO NOT WITH REFERENCE TO IMMOVABLE PROPE RTY BUT WITH REFERENCE TO VEHICLES LEASE OUT TO THIRD PARTIES UNDER LEASE AGREEMENT. LD. DR HAS FILED WRITTEN SUBMISSIONS WHICH ARE REPRODUCED HERE UNDER :- SUBMISSIONS STRAIGHT-LINE ACCOUNTING OF LEASE RENTAL ACCOUNTING STANDARD 19 (AS-19) DEALS WITH THE SUBJE CT OF ACCOUNTING FOR LEASE RENTAL FROM THE STANDPOINT OF BOTH, THE LESSOR AND THE LESSEE. HOWEVER, IT IS SUBMITTED THAT THE SAME IS NOT APPLICABLE TO LEASE OF IMMOVEABLE PROPERTY. 7 ITA NO.149/DEL/2013 AS-19 CLASSIFIES LEASES MAINLY INTO TWO CATEGORIES: FINANCE LEASE AND OPERATING LEASE (OL). DIFFERENT ACCOUNTING TREATMENTS ARE PRESCRIBED IN R ESPECT OF RENTAL FROM FINANCE LEASE AND OL. AS-19, IN PARAGRAPH 23, STATES THE FOLLOWING, IN TH E CONTEXT OF OPERATING LEASE FROM THE STANDPOINT OF THE LESSEE: 'LEASE PAYMENTS UNDER AN OPERATING LEASE SHOULD BE RECOGNISED AS AN EXPENSE IN THE STATEMENT OF PROFIT AND LOSS ON A STRAIGHT-LINE BASIS OVER THE LEASE TERM, UNLESS ANOTHER SYSTEMATIC BASIS IS MORE REPRESENTATIVE OF THE TIME PATTERN OF THE USER'S BENEFIT.' PARAGRAPH 24 OF AS-19 EXPLAINS THE PREVIOUS PARAGRA PH AND PROVIDES THAT LEASE RENTAL WILL BE ACCOUNTED ON A STRAIGHT-LINE BASIS, UNLESS ANOTHER SYSTEMATIC BASIS IS MORE REPRESENTATIVE OF THE TIME PATTERN OF THE USER, EVEN IF THE PAYMENTS ARE NOT ON THAT BASIS. (EMPHASIS SUPPLIED) 1.6 PARAGRAPHS 23 AND 24 RELATE TO PAYMENTS OF LEAS E RENTAL AND VIEW THE MATTER FROM THE STANDPOINT OF THE LESSEE. THE SAME VIEW IS TAKEN IN PARAGRAPH 40 OF AS- 19 WHEN THE MATTER IS VIEWED FROM THE STANDPOINT OF THE LESSOR, AND THE LANGUAGE USED THEREIN MAKES IT CLEAR THAT AS19 IS NOT APPLIC ABLE TO LEASE OF IMMOVABLE PROPERTY WHOSE USE PATTERN HAS NOTHING TO DO WITH P ASSAGE OF TIME. AS-19, IN SUBSTANCE, STATES THAT EXPENDITURE AND INCOME, BOTH , RESULTING FROM PAYMENTS AND RECEIPTS UNDER AN OL, SHOULD BE RECOGNISED ON A STR AIGHT-LINE BASIS, UNLESS ANOTHER SYSTEMATIC BASIS IS MORE REPRESENTATIVE OF THE TIME PATTERN OF THE USER'S BENEFIT. PARAGRAPH 40 OF AS-19 MAKES IS CLEAR THAT IT SUPPOSES THE TIME PATTERN TO BE SUCH IN WHICH BENEFIT DERIVED FROM THE USE OF TH E LEASED ASSET IS DIMINISHED. IT IS SUBMITTED THAT AS-19 POSTULATES A SITUATION I N OPERATING LEASES IN WHICH THE BENEFITS DERIVED FROM THE USE OF THE LEASED ASSET A RE DIMINISHED OVER THE PERIOD OF LEASE. THIS IS MADE CLEAR IN PARAGRAPH 40 OF AS-19. THIS PARAGRAPH DEALS WITH ACCOUNTING OF LEASE RENTAL IN AN OL, FROM THE STANDPOINT OF THE LESSOR. 'LEASE INCOME FROM OPERATING LEASES SHOULD BE RECOG NISED IN THE STATEMENT OF PROFIT AND LOSS ON A STRAIGHT-LINE BASIS OVER THE L EASE TERM, UNLESS ANOTHER SYSTEMATIC BASIS IS MORE REPRESENTATIVE OF THE TIME PATTERN IN WHICH BENEFIT DERIVED FROM THE USE OF THE LEASED ASSET IS DIMINISHED. '(EMPHASIS SUPPLIED) A HARMONIOUS READING OF PARAGRAPH 23, 24 AND 40 SUG GESTS THAT IT DOES NOT VISUALISE A SITUATION OF INCREASING RENTAL OVER THE PERIOD OF LEASE, WHETHER BENEFITS FROM THE USE OF THE LEASED ASSET INCREASING OR DIMI NISHING OR REMAINING CONSTANT. THEREFORE, IN A CASE INVOLVING INCREASING RENTAL, W HICH IN NO CASE CAN REPRESENT A TIME PATTERN IN WHICH BENEFIT DERIVED FROM THE USE OF THE LEASED ASSET IS DIMINISHED, AS19 CANNOT BE APPLICABLE. ONCE IT IS CLEAR THAT PARAGRAPHS 23, ITS EXTENSION IN PARAGRAPH 24 AND PARAGRAPH 40, ALL POSTULATE A POSSIBILITY OF A SITUATION OF D IMINISHING BENEFITS AND DECREASING RETURNS DERIVED FROM THE USE OF THE LEASED ASSET, A ND DO NOT POSTULATE A SITUATION OF INCREASING BENEFITS, THEN IT IS INAPPROPRIATE TO APPLY THESE PARAGRAPHS TO A SITUATION OF ESCALATING RETURNS AS IN THE CASE OF I MMOVEABLE PROPERTY. 3.11 MOREOVER, WHEN RENT OF AN IMMOVABLE PROPERTY I S FIXED, IT ACCOUNTS FOR A LARGE PART THE VALUE OF THE LAND. RENTAL OF A BUILD ING CAN BE SPLIT INTO: RENTAL 8 ITA NO.149/DEL/2013 ATTRIBUTABLE TO THE LAND COMPONENT AND RENTAL ATTRI BUTABLE TO THE SUPERSTRUCTURE. IF THIS IS DONE, THEN AS-19 BECOMES INAPPLICABLE TO TH E RENT ATTRIBUTABLE TO THE LAND. (IT IS PROVIDED IN AS-19 ITSELF THAT IT DOES NOT AP PLY TO LEASE AGREEMENTS FOR USE OF LANDS). SD/- (T.M. SHIVAKUMAR) COMMISSIONER OF INCOME TAX (DR) I(2)- BENCH, ITAT, NEW DELHI. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. THE SCOPE OF AS 19 DOES NOT EX TEND, INTER-ALIA, TO LEASE AGREEMENTS TO USE LANDS. PARA 2 OF SCOPE READS AS UNDER :- 2. THIS STANDARD APPLIES TO AGREEMENTS THAT TRANSF ER THE RIGHT TO USE ASSETS EVEN THOUGH SUBSTANTIAL SERVICES BY THE LESSOR MAY BE CALLED FOR IN CONNECTION WITH THE OPERATION OR MAINTENANCE OF SUCH ASSETS. O N THE OTHER HAND, THIS STANDARD DOES NOT APPLY TO AGREEMENTS THAT ARE CONT RACTS FOR SERVICES THAT DO NOT TRANSFER THE RIGHT TO USE ASSETS FROM ONE CONTRACTI NG PARTY TO THE OTHER. 11. THE CLASSIFICATION OF LEASES FOR THE PURPOSES O F AS 19 ARE AS UNDER :- CLASSIFICATION OF LEASES 5. THE CLASSIFICATION OF LEASES ADOPTED IN THIS STA NDARD IS BASED ON THE EXTENT TO WHICH RISKS AND REWARDS INCIDENT TO OWNERSHIP OF A LEASED ASSET LIE WITH THE LESSOR OR THE LESSEE. RISKS INCLUDE THE POSSIBILITI ES OF LOSSES FROM IDLE CAPACITY OR TECHNOLOGICAL OBSOLESCENCE AND OF VARIATIONS IN RET URN DUE TO CHANGING ECONOMIC CONDITIONS. REWARDS MAY BE REPRESENTED BY THE EXPEC TATION OF PROFITABLE OPERATION OVER THE ECONOMIC LIFE OF THE ASSET AND O F GAIN FROM APPRECIATION IN VALUE OR REALISATION OF RESIDUAL VALUE. 6. A LEASE IS CLASSIFIED AS A FINANCE LEASE IF IT T RANSFERS SUBSTANTIALLY ALL THE RISKS AND REWARDS INCIDENT TO OWNERSHIP. TITLE MAY OR MAY NOT EVENTUALLY BE TRANSFERRED. A LEASE IS CLASSIFIED AS AN OPERATING LEASE IF IT DOES NOT TRANSFER SUBSTANTIALLY ALL THE RISKS AND REWARDS INCIDENT TO OWNERSHIP. 7. SINCE THE TRANSACTION BETWEEN A LESSOR AND A LES SEE IS BASED ON A LEASE AGREEMENT COMMON TO BOTH PARTIES, IT IS APPROPRIATE TO USE CONSISTENT DEFINITIONS. THE APPLICATION OF THESE DEFINITIONS TO THE DIFFERI NG CIRCUMSTANCES OF THE TWO PARTIES MAY SOMETIMES RESULT IN THE SAME LEASE BEIN G CLASSIFIED DIFFERENTLY BY THE LESSOR AND THE LESSEE. 8. WHETHER A LEASE IS A FINANCE LEASE OR AN OPERATI NG LEASE DEPENDS ON THE SUBSTANCE OF THE TRANSACTION RATHER THAN ITS FORM. EXAMPLES OF SITUATIONS WHICH WOULD NORMALLY LEAD TO A LEASE BEING CLASSIFIED AS A FINANCE LEASE ARE: 9 ITA NO.149/DEL/2013 (A) THE LEASE TRANSFERS OWNERSHIP OF THE ASSET TO THE LESSEE BY THE END OF THE LEASE TERM; (B) THE LESSEE HAS THE OPTION TO PURCHASE THE ASSE T AT A PRICE WHICH IS EXPECTED TO BE SUFFICIENTLY LOWER THAN THE FAIR VAL UE AT THE DATE THE OPTION BECOMES EXERCISABLE SUCH THAT, AT THE INCEPT ION OF THE LEASE, IT IS REASONABLY CERTAIN THAT THE OPTION WILL BE EX ERCISED; (C) THE LEASE TERM IS FOR THE MAJOR PART OF THE EC ONOMIC LIFE OF THE ASSET EVEN IF TITLE IS NOT TRANSFERRED; (D) AT THE INCEPTION OF THE LEASE THE PRESENT VALU E OF THE MINIMUM LEASE PAYMENTS AMOUNTS TO AT LEAST SUBSTANTIALLY AL L OF THE FAIR VALUE OF THE LEASED ASSET; AND (E) THE LEASED ASSET IS OF A SPECIALISED NATURE SU CH THAT ONLY THE LESSEE CAN USE IT WITHOUT MAJOR MODIFICATIONS BEING MADE. 9. INDICATORS OF SITUATIONS WHICH INDIVIDUALLY OR I N COMBINATION COULD ALSO LEAD TO A LEASE BEING CLASSIFIED AS A FINANCE LEASE ARE: (A) IF THE LESSEE CAN CANCEL THE LEASE, THE LESSOR S LOSSES ASSOCIATED WITH THE CANCELLATION ARE BORNE BY THE LESSEE; (B) GAINS OR LOSSES FROM THE FLUCTUATION IN THE FA IR VALUE OF THE RESIDUAL FALL TO THE LESSEE (FOR EXAMPLE IN THE FORM OF A RE NT REBATE EQUALLING MOST OF THE SALES PROCEEDS AT THE END OF THE LEASE); AND (C) THE LESSEE CAN CONTINUE THE LEASE FOR A SECOND ARY PERIOD AT A RENT WHICH IS SUBSTANTIALLY LOWER THAN MARKET RENT. 10. LEASE CLASSIFICATION IS MADE AT THE INCEPTION O F THE LEASE. IF AT ANY TIME THE LESSEE AND THE LESSOR AGREE TO CHANGE THE PROVISION S OF THE LEASE, OTHER THAN BY RENEWING THE LEASE, IN A MANNER THAT WOULD HAVE RES ULTED IN A DIFFERENT CLASSIFICATION OF THE LEASE UNDER THE CRITERIA IN P ARAGRAPHS 5 TO 9 HAD THE CHANGED TERMS BEEN IN EFFECT AT THE INCEPTION OF THE LEASE, THE REVISED AGREEMENT IS CONSIDERED AS A NEW AGREEMENT OVER ITS REVISED TERM . CHANGES IN ESTIMATES (FOR EXAMPLE, CHANGES IN ESTIMATES OF THE ECONOMIC LIFE OR OF THE RESIDUAL VALUE OF THE LEASED ASSET) OR CHANGES IN CIRCUMSTANCES (FOR EXAM PLE, DEFAULT BY THE LESSEE), HOWEVER, DO NOT GIVE RISE TO A NEW CLASSIFICATION O F A LEASE FOR ACCOUNTING PURPOSES. 12. NOW, IF, WE EXAMINE VARIOUS DEFINITIONS CONTAIN ED IN PARAGRAPH 3, WE FIND THAT THE SAME DEALS PRIMARILY WITH DEFINING OF FINANCE LEASE, OPERATING LEASE, NON-CANCELLABLE LEASE, LEASE TERM, FAIR VALU E OF ASSET, ECONOMIC LIFE, USEFUL LIFE, RESIDUAL VALUE, GUARANTEED RESIDUAL VA LUE OF LEASE ASSETS. IT CLEARLY SHOWS THAT THE MAIN OBJECT OF THE AS 19 IS TO DEAL WITH THE LEASES 10 ITA NO.149/DEL/2013 CONCERNING MOVABLE ASSETS AND IT SPECIFICALLY EXCLU DES LEASE AGREEMENTS TO USE LANDS. WE FIND CONSIDERABLE FORCE IN THE SUBMI SSIONS OF LD. CIT-DR THAT AS 19 IS NOT APPLICABLE TO LEASE OF IMMOVABLE PROPE RTY. THEREFORE, THE ASSESSING OFFICER RIGHTLY ADDED BACK THE RENT EQUAL IZATION RESERVE DEBITED TO PROFIT & LOSS ACCOUNT WHILE COMPUTING THE BOOK PROF IT FOR THE PURPOSES OF SECTION 115JB OF THE ACT. MOREOVER, THE ASSESSEE I TSELF HAS ADDED BACK THIS RESERVE FOR THE PURPOSES OF COMPUTATION OF TOTAL IN COME UNDER THE NORMAL PROVISIONS OF THE ACT. THEREFORE, IN ANY VIEW OF T HE MATTER, THE STAND OF THE ASSESSEE IS CONTRADICTORY. ACCORDINGLY, THIS GROUN D IS DISMISSED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF JANUARY, 2017. SD/- SD/- (KULDIP SINGH) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUN TANT MEMBER DATED : 24-01-2017. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT; 2) THE RESPONDENT; 3) THE DRP-II, NEW DELHI; 4) THE DR, I.T.A.T., NEW DELHI; BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI