ACIT, CHENNAI V. Thayer Overseas Finance Ltd., CHENNAI

ITA 1552/CHNY/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7169 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-12-2014
• Assessment Year: 2001-2002
• Appeal Filed On: 05-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: G BASKAR
• Keywords: Depreciation
• Section: 115JB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! # $ , % & BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A.NOS . 1552 & 1553/MDS/2014 & C.O.NOS. 66 & 67/MDS/2014 (IN ITA NOS.1552 & 1553/MDS/2014) ( / ASSESSMENT YEARS: 2001-02 & 2004-05) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-III(2), NEW BLOCK 4 TH FLOOR, 121, MG ROAD, CHENNAI-600 034. VS M/S. THAYER OVERSEAS FINANCE LTD. 2, JAYARAMAN AVENUE, SHASTRI NAGAR, CHENNAI-600 020. PAN: AAACT5591J ( /APPELLANT) ( /RESPONDENT/CROSS OBJECTOR) / APPELLANT BY : MR. A.V. SREEKANTH, JCIT /RESPONDENT BY : MR. G.BASKAR, ADVOCATE / DATE OF HEARING : 2 ND DECEMBER, 2014 /DATE OF PRONOUNCEMENT : 12 TH DECEMBER, 2014 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THESE TWO APPEALS ARE FILED BY THE REVENUE AGAINST THE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS)- III, CHENNAI DATED 25.02.2014 AND 03.03.2014 FOR THE ASSESSMENT YEARS 2001-02 AND 2004-05 RESPECTIVELY. SINCE THE ISSUE IS COMMON IN BOTH THE APPEALS, THEY ARE H EARD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 2. AT THE TIME OF HEARING, COUNSEL FOR THE ASSESSEE SUBMITS THAT CROSS OBJECTIONS FILED BY THE ASSESSEE MAY BE TREATED AS WITHDRAWN. THUS, THE CROSS OBJECTIONS F ILED BY THE ASSESSEE ARE DISMISSED AS WITHDRAWN. 3. THE ONLY GRIEVANCE OF THE REVENUE IN BOTH THE AP PEALS IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE ADDITION OF LEASE EQUALIZATION CHARGES WHILE COMPUTING BOOK PROFITS UNDER SECTION 115JB OF THE A CT. 4. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ISSUE IN APPEALS HAS BEEN DECIDED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF TVS FINANCE & SERVICES LTD. VS. JCIT (3 18 ITR 435). PLACING RELIANCE ON THE ABOVE DECISION, COUNS EL FOR THE ASSESSEE SUBMITS THAT JURISDICTIONAL HIGH COURT HEL D THAT LEASE EQUALIZATION RESERVE PROVIDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IS NOT CONTINGENT IN NATURE AND T HEREFORE SHALL NOT BE INCLUDABLE WHILE COMPUTING BOOK PROFIT S UNDER SECTION 115JB OF THE ACT. COUNSEL SUBMITS THAT COMMISSIONER OF INCOME TAX (APPEALS) FOLLOWING THE SAID 3 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 DECISION OF THE JURISDICTIONAL HIGH COURT ALLOWED T HE CLAIM OF THE ASSESSEE. 5. DEPARTMENTAL REPRESENTATIVE SUPPORTS THE ORDER OF THE ASSESSING OFFICER. 6. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT COMPUTED BOOK PROFITS UND ER SECTION 115JB OF THE ACT BY ADDING BACK LEASE EQUAL IZATION RESERVE OBSERVING THAT IT IS ONLY IN THE NATURE OF RESERVE AND THEREFORE IT SHOULD BE ADDED BACK TO THE BOOK PROFI TS. THE COMMISSIONER OF INCOME TAX (APPEALS) FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF CIT VS. TVS (SUPRA) DELETED THE DISALLOWANCE OBSERVING AS UNDER:- GROUND NOS.2.1 & 2.2 PERTAINS TO LEASE EQUALIZATION CHARGES ADDED TO BOOK PROFIT . AO IN THE ASSESSMENT ORDER STATED THAT THIS IS ONLY A RESERVE DEBITED TO P&L A/C. IN ADDITION TO THE DEPRECIATION WHICH IS A CHARGE ON THE PROFITS OF THE BUSINESS AND ADDED THE SAME TO BOOK PROFIT. HOWEVER THE AR HAS RELIED ON VARIOUS CASE LAWS AND HAS CONTENDED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN THE JUDGEMENT OF MADRAS HIGH COURT IN TVS FINANCE & SERVICES LTD. VS. JCIT 318 ITR 435. AFTER GOING THROUGH THE FACTS OF THE CASE, IT 4 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 IS SEEN THAT RELIANCE COULD BE PLACED ON THE DECISION OF THE HON'BLE HIGH COURT OF MADRAS IN TVS FINANCE & SERVICES LTD . VS . JCIT 318 ITR 435 CITED SUPRA, WHEREIN IT HAS BEEN HELD THAT' ... COMPANY-BOOK PROFIT U/ S . 115JA. ADJUSTMENT OF LEASE EQUALIZATION CHARGES - LEASE EQUALIZATION CHARGES OVER THE PERIOD OF LEASE IS EQUAL TO THE DIFFERENCE BETWEEN THE QUANTUM OF PRINCIPAL RECOVERED AND THE RES I DUAL VALUE AND THE PROVISION IS MADE AS PER LCAF'S GUIDANCE NOTE AND TH E REFORE SAME IS NOT CONTINGENT IN NATURE AND THEREFORE NOT INCLUDIBLE I N COMPUTING BOOK PROFIT U/ S . 115JA . .. ' RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HON ' BLE HIGH COURT OF MADRAS, THE AO IS DIRECTED TO DELETE THE ADDITION OF LEASE EQUALIZATION CHARGES MADE TO BOOK PROFIT U/S.115JA. THE GROUND IS ALLOWED. 7. THE JURISDICTIONAL HIGH COURT WHILE HOLDING THAT ASSESSING OFFICER COULD NOT ADD BACK THE PROVISION FOR LEASE EQUALIZATION UNDER CLAUSE (C) OF EXPLANATION TO S ECTION 115JA OF THE ACT OBSERVED AS UNDER:- 30. AS FAR AS LEASE EQUALIZATION CHARGES ARE CONCE RNED, THE ASSESSING OFFICE HELD THAT THE PROVISION FOR LE ASE EQUALIZATION CHARGES WAS TO BE ADDED BACK SINCE THE ACT DOES NOT RECOGNIZE THE CONCEPT OF THESE LEASE EQUALIZATION CHARGE. THE COMMISSIONER OF INCOME-TA X (APPEALS) CONFIRMED THE DECISION OF THE ASSESSING O FFICER WITH REGARD TO LEASE EQUALIZATION CHARGES. THE TRIB UNAL ALSO UPHELD THE CONTENTION OF THE REVENUE. ACCORDIN G TO THE ASSES SEE, THE LEASE RENTALS THAT ACCRUE UNDER FINANCIAL LEASES SHOULD BE DISCLOSED SEPARATELY TO THE CREDIT OF THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PERIOD, AN D A FINANCE LEASE IS ONE WHERE THE LESSOR RECOVERS THE ENTIRE COST OF THE LEASED ASSETS OVER THE PERIOD OF THE LE ASE ALONG WITH A RETURN BY WAY OF INTEREST ON THE AMOUNT 5 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 FINANCED. THEREFORE, THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAD RECOMMENDED THAT EVERY YEA R AS AGAINST THE LEASE RENTALS TAKEN TO THE CREDIT OF TH E PROFIT AND LOSS ACCOUNT, A MATCHING LEASE ANNUAL CHARGE SH ALL BE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THIS CHA RGE SHOULD REPRESENT A RECOVERY OF THE NET INVESTMENT M ADE BY THE LESSOR FOR THE ACQUISITION OF THE LEASED ASS ETS OVER THE LEASE TERM AND THE ANNUAL LEASE RENTALS ARE TO BE CALCULATED BY REDUCING FROM THE LEASE RENTALS THE I NTEREST INCOME EARNED FOR THE YEAR. RELIANCE WAS PLACED ON APOLLO TYRES LTD. V. CIT [2002] 255 ITR 273 (SC) TO SHOW THAT IN DETERMINING THE BOOK PROFITS THE ASSESSING OFFICER IS BOUND BY THE ACCOUNTS ADOPTED FOR THE PURPOSES OF T HE COMPANIES ACT AND THE ONLY ADJUSTMENT THAT HE IS PE R- MITTED TO MAKE ARE THOSE REFERRED TO IN THE VARIOUS CLAUSES OF THE EXPLANATION. HE HAS ALSO REFERRED TO CIT V. HCL COMNET SYSTEMS AND SERVICES LTD. [2008] 305 ITR 409 (SC) AND CONTENDED THAT HAVING REGARD TO THE NATURE OF T HE LEASE EQUALIZATION CHARGE IT CANNOT BE TREATED AS A PROVISION FOR A LIABILITY BUT IT IS REALLY AN AMOUN T DEBITED TO THE PROFIT AND LOSS ACCOUNT TO MATCH THE REVENUES A ND COSTS SO THAT THE TRUE PROFITS CAN BE ACCOUNTED FOR . . 31. ACCORDING TO THE REVENUE, THE AUTHORITIES BELOW DID NOT CONSIDER THE POSSIBILITY THAT IT MAY BE A RESERVE AND HAD ALL ALONG HELD THAT LEASE EQUALIZATION CHA RGES IS A PROVISION FOR LIABILITY OTHER THAN ASCERTAINED LI ABILITY. THE REVENUE ALSO RELIED ON VAZIR SULTAN TOBACCO CO. LTD ., VS. CIT ( 1981) 132 ITR 559 (SC) AND CIT VS. SARAN ENGINEERING CO.LTD., (1986) 161 ITR 741 WHERE THE SUPREME COURT HAD HIGHLIGHTED THE DIFFERENCE BETWEEN A PROV ISION AND A RESERVE. IN PART III OF SCHEDULE VI TO THE CO MPANIES ACT, RULE 7(2) SAYS 'WHERE (A) ANY AMOUNT WRITTEN O FF OR RETAINED BY WAY OF PROVIDING FOR DEPRECIATION, RENE WALS OR DIMINUTION IN VALUE OF ASSETS, NOT BEING AN AMOUNT WRITTEN OFF IN RELATION TO FIXED ASSETS BEFORE THE COMMENCE MENT OF THIS ACT; OR (B) ANY AMOUNT RETAINED BY WAY OF PROV IDING FOR ANY KNOWN LIABILITY IS IN EXCESS OF THE AMOUNT WHIC H IN THE OPINION OF THE DIRECTORS IS REASONABLY NECESSARY FO R THE PURPOSE, THE EXCESS SHALL BE TREATED FOR THE PURPOS ES OF THIS SCHEDULE AS A RESERVE AND NOT AS A PROVISION. 6 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 33. THIS IS IN ACCORDANCE WITH THE GUIDANCE NORMS O N ACCOUNTING FOR LEASES. THE DEPARTMENT CONCEDES THAT THE AMOUNT OF LEASE EQUALIZATION CHARGES OVER THE PERIO D OF LEASE IS EQUAL TO THE DIFFERENCE BETWEEN THE QUANTU M OF PRINCIPAL RECOVERED AND THE RESIDUAL VALUE. BUT HYPOTHETICALLY JUSTIFIES ITS TREATMENT AS A RESERVE ON THE GROUND THAT THERE WILL BE SOME YEARS WHEN THE QUANT UM OF THE PROVISION IS MORE THAN NECESSARY. WHEN THE LEAS E EQUALIZATION CHARGES IS DEBITED AS PER THE GUIDELIN ES AND WHEN THE DEPARTMENT ALSO ADMITS THE ABOVE, WE CANNO T APPRECIATE THE STAND OF THE DEPARTMENT THAT IT SHOU LD BE TREATED AS A RESERVE WHICH STAND THAT IT IS TAKING FOR THE FIRST TIME ON THE GROUND THAT THERE MAY BE SOME YEA RS WHEN THE QUANTUM OF THE PROVISION IS MORE THAN NECESSARY. 34. FROM THIS, IT IS CLEAR THAT IN ACCORDANCE WITH THE GUIDANCE NOTE THE APPELLANT HAD DEBITED THE SAME ON ACCOUNT OF DEPRECIATION AND LEASE EQUALIZATION CHAR GES BEFORE DETERMINING THE PROFITS AND IN THIS KIND OF LEASE, THE LESSOR RECOVERS THE ENTIRE COST OF THE LEASED ASSET S OVER THE PERIOD OF LEASE ALONG WITH THE INTEREST ON THE AMOUNT FINANCED. 35. IN HCL COMNET SYSTEMS' CASE [2008) 305 ITR 409 THE SUPREME COURT HELD THAT A PROVISION MADE 'TO CO VER THE DIMINUTION MADE IN THE VALUE OF THE ASSET' CANN OT BE SAID TO BE 'A PROVISION FOR A LIABILITY' AND HELD T HAT 'THE ASSESSING OFFICER COULD NOT ADD BACK THE SAID PROVI SION UNDER CLAUSE (C) OF THE EXPLANATION TO SECTION 115J A OF THE 1961 ACT.' THE FOURTH QUESTION IN T. C. (A.) NOS. 1 08 AND 110 OF 2002 ARE ANSWERED IN FAVOUR OF THE ASSESSEE. . 8. RESPECTFULLY FOLLOWING THE SAID DECISION, WE UPH OLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) I N 7 ITA NO.1552 & 1553/MDS/2014 & C.O. NOS. 66 & 67/MDS/2014 DELETING THE ADDITION MADE TOWARDS LEASE EQUALIZATI ON CHARGES WHILE COMPUTING BOOK PROFITS UNDER SECTION 115JB OF THE ACT AND REJECT THE GROUNDS RAISED BY THE REVENU E. 9. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A ND CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 12 TH DAY OF DECEMBER, 2014 AT CHENNAI. SD/- SD/- ( . ) ( ' )* ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDRA PRASAD ) , / ACCOUNTANT MEMBER ) , / JUDICIAL MEMBER ) /CHENNAI, . /DATED, 12 TH DECEMBER, 2014 SOMU 12 32 /COPY TO: 1. ASSESSEE 2. ASSESSING OFFICER 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .