INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD., MUMBAI V. JT. COMMR. OF INCOME TAX SPL. RG.32, MUMBAI

ITA 1583/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79359 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-07-2014
• Assessment Year: 1998-1999
• Appeal Filed On: 24-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Assessee Lawyers: DILIP V LAKHANI
• Keywords: Depreciation
• Section: 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL I B ENCH, MUMBAI , !', % % % % &' . % . () . % . , !' * BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND DR.S.T.M. PAVALAN, JUDICIAL MEMBER ./ I.T.A. NO.1583/MUM/2011 ( + + + + / ASSESSMENT YEAR :1998-99 M/S. INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD., PLOT NO. C-22, G-BLOCK, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI-400 051 / VS. THE JCIT, SPL RANGE-32, MUMBAI ', ./ -. ./ PAN/GIR NO. : AAACI 0989F ( ,/ / APPELLANT ) .. ( 01,/ / RESPONDENT ) ,/ 2 / APPELLANT BY: SHRI DILIP V. LAKHANI 01,/ 3 2 / RESPONDENT BY: SHRI A.C. TEJPAL 3 4) / DATE OF HEARING :03.07.2014 56+ 3 4) / DATE OF PRONOUNCEMENT :11.07.2014 !7 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. CIT(A)-21, MUMBAI DT.6.12.2010 PERTAINING TO A.Y. 1998-99. 2. THE SOLE GRIEVANCE OF THE ASSESSEE RELATES TO TH E UPHOLDING OF THE DISALLOWANCE OF RS. 49,66,03,405/- BEING THE CLAIM OF THE ASSESSEE REGARDING THE LEASE EQUALIZATION. ITA NO.1583/M/2011 2 3. THE ASSESSEE IS IN THE BUSINESS OF LEASING AND I NVESTMENT BANKING. THE RETURN FOR THE YEAR WAS FILED ON 27.11.1998 DEC LARING NIL INCOME. THE SAID RETURN WAS REVISED ON 22.3.2000 DECLARING INCOME OF RS. 17,43,80,163/- BEING PROFIT U/S. 115JA AND LOSS OF RS. 44,21,05,703/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. 3.1. DURING THE COURSE OF THE ASSESSMENT PROCEEDING S, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED AN AM OUNT OF RS. 49,66,03,405/- ON ACCOUNT OF LEASE EQUALIZATION RES ERVE. THE AO DISALLOWED THE CLAIM OF DEDUCTION ON LEASE EQUALIZA TION RESERVE ON THE BASIS OF FINDING IN ASSESSMENT ORDER OF EARLIER YEA RS. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A). THE LD. CIT(A) FOUND THAT IDENTICAL ISSUES WERE THEREIN FOR A.Y. 1994-95 TO 1998-99. THEREFORE, IN VIEW OF THE ORDERS OF HIS P REDECESSORS, THE LD. CIT(A) WAS OF THE OPINION THAT THE ASSESSEE HAS BEE N ALLOWED OR WILL BE ALLOWED THE ENTIRE COST OF ASSET AS DEDUCTION IN TH E FORM OF DEPRECIATION, THEREFORE, THERE IS NO QUESTION OF ALLOWING SEPARAT E DEDUCTION IN THE FORM OF LEASE EQUALIZATION RESERVE AMOUNT. 4.1. THE LD. CIT(A) FURTHER OBSERVED THAT THE PROVI SIONS OF INCOME TAX ACT OVER RIDES THE ACCOUNTING PRINCIPLES. ANY EXPE NDITURE UNDER THE I.T. ACT IS ALLOWABLE U/S. 30 TO 37 OF THE ACT. THE DED UCTION OF LEASE EQUALIZATION RESERVE AMOUNT IS NOT MENTIONED ANYWHE RE FROM SEC. 30 TO 36 OF THE ACT AND SEC. 37 IS A GENERAL PROVISION AL LOWING ANY EXPENDITURE LAID OUT OR EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE LD. CIT(A) FINALLY CONCLUDED THAT THE AMOUNT OF LEASE EQUALIZATION RESERVES WAS NOT PAY OUT BY THE ASSESSEE AND THEREF ORE, WAS NOT AN EXPENDITURE AND CONFIRMED THE DISALLOWANCE MADE BY THE AO. ITA NO.1583/M/2011 3 5. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY RELIED UPON THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTAN TS OF INDIA FOR LEASES. IT IS THE SAY OF THE LD. COUNSEL THAT THE GUIDANCE NOTE ISSUED BY THE ICAI AND THE ACCOUNTING STANDARDS OF ICAI CANNOT BE BRUS HED ASIDE LIGHTLY. 7. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW. AS OBSERVED BY THE LD. CIT(A), IDENTICAL ISSUES WERE T HEREIN EARLIER ASSESSMENT YEARS ALSO. WE HAVE THE BENEFIT OF GOIN G THROUGH THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YRS 1994- 95 TO 1997-98 IN ITA NO. 2308, 2307, 2309 & 2310/MUM/2011 WHEREIN THE TR IBUNAL HAS CONSIDERED THE FACTS AND THE SUBMISSIONS HELD AS UN DER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE GUIDANCE NOTE ISSUED BY ICAI EXPLAINING THE CONCEPT OF LEASE EQUALIZATION WITH THE ILLUSTRATION. THE SAID GUIDANCE NOTE IS BASICALLY ISSUED FOR THE PURPOSE OF ACCOUNTING AND THE CONCEPT OF LEASE EQUALIZATION, AS MENTIONED THEREIN, IS BASED ON THE RATIONALE OF MATCHING COST WITH REVENUE SO THAT THE PERIODIC NET INCOME FROM THE FINANCE LEASE IS DETERMINED IN A TRUE AND FAIR MANNER. THIS CONSTITUTES THE PARALLEL METHOD OF ACCOUNTING FOLLO WED BY THE ASSESSEE FOR THE PURPOSE OF REVENUE RECOGNITION OF LEASING BUSINESS AND AS PER THIS METHOD, THE LEASE RENTAL IS SPLIT I NTO FINANCE INCOME AND BALANCE AMOUNT WHICH IS CALLED ANNUAL LEASE CHA RGE. THE ANNUAL LEASE CHARGE REPRESENTS RECOVERY OF INVESTME NT MADE IN THE LEASED ASSET OVER THE LEASE TERM AND WHEN THE DEPRE CIATION CLAIMED ON THE LEASED ASSETS IS MORE THAN THE CORRESPONDING LEASE CHARGE, THE DIFFERENCE IS CREDITED TO THE P&L ACCOUNT AS LE ASE EQUALIZATION. SIMILARLY, IF THE DEPRECIATION CLAIMED ON THE LEASE D ASSET IS LESS THAN THE CORRESPONDING ANNUAL LEASE, P&L ACCOUNT IS DEBITED BY LEASE EQUALIZATION CHARGES EQUIVALENT TO THE DIFFER ENCE AMOUNT. CONSEQUENTLY, THE FINANCE CHARGES, WHICH IS THE ACT UAL INCOME FROM ITA NO.1583/M/2011 4 THE LEASED TRANSACTION, IS RECOGNIZED AS REVENUE AN D THE DIFFERENCE BETWEEN THE DEPRECIATION AND ANNUAL LEASE CHARGE IS DEBITED OR CREDITED TO THE P&L ACCOUNT SO AS TO NULLIFY THE EF FECT OF SUCH DIFFERENCE ON THE PROFIT. THE RECOVERY OF INVESTMEN T IN THE LEASED ASSETS MADE IN THE RELEVANT YEAR IS THUS MATCHED WI TH THE CORRESPONDING EXPENSES CLAIMED IN THE FORM OF DEPRE CIATION AND THE EFFECT OF HIGHER OR LOWER CLAIM OF DEPRECIATION , THAN THE CORRESPONDING RECOVERY OF INVESTMENT MADE IN THE LE ASED ASSETS IS NULLIFIED. IN THE BOOKS OF ACCOUNT, THE LEASING CO MPANIES ARE ENTITLED TO CLAIM THE DEPRECIATION BY FOLLOWING ONE OF THE VARIOUS METHODS PRESCRIBED IN THE COMPANIES ACT AND IF SUCH DEPRECIATION CLAIMED IS MORE OR LESS THAN THE CORRESPONDING ANNU AL LEASE CHARGE REPRESENTING RECOVERY OF INVESTMENT IN THE L EASED ASSET OVER THE LEASE TERM, THE DIFFERENCE IS ADJUSTED IN THE F ORM OF LEASE EQUALIZATION BASED ON THE RATIONALE OF MATCHING COS T WITH THE REVENUE SO THAT THE RESULTANT INCOME FROM THE LEASI NG IS TRUE AND FAIR. THE CONCEPT OF LEASE EQUALIZATION THUS IS BA SICALLY AN ACCOUNTING CONCEPT AND THE SAME IS FOLLOWED FOR THE PURPOSE OF REVENUE RECOGNITION OF LEASING INCOME AS PER THE GU IDANCE NOTE ISSUED BY ICAI. IT IS NO DOUBT TRUE THAT THE CONCEPT OF LEASE EQUA LIZATION CAN ALSO BE FOLLOWED FOR THE PURPOSE OF COMPUTING THE T OTAL INCOME UNDER THE INCOME TAX ACT AS HELD IN THE VARIOUS JUD ICIAL PRONOUNCEMENTS CITED BY THE LD. COUNSEL FOR THE ASS ESSEE. HOWEVER THE SAME, IN OUR OPINION, HAS TO BE DONE WITH PROPE R CARE AND CAUTION OTHERWISE IT MAY RESULT IN ABSURDITY AND GI VE MISLEADING RESULT. IN THE CASES LIKE THE ONE IN HAND, WHERE T HE RELEVANT TRANSACTIONS ARE TREATED AS FINANCE LEASE AND THE A SSESSEE IS ALLOWED DEPRECIATION AFTER HAVING FOUND HIM THE OWN ER OF THE LEASED ASSETS, THE DEPRECIATION ALLOWED AS PER THE RATES PRESCRIBED IN THE INCOME TAX ACT COULD BE MORE THAN THE DEPREC IATION CLAIMED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT AT THE RATE PRESCRIBED UNDER THE COMPANIES ACT. FOR EXAMPLE, THE ASSESSEE MAY BE ENTITLED TO CLAIM DEPRECIATION AT 100% ON THE LEASED ASSETS IN THE FIRST YEAR ITSELF UNDER THE INCOME TAX ACT WHEREAS IN THE BOOK S OF ACCOUNT, IT MIGHT HAVE CLAIMED DEPRECIATION ON THE SAID LEASED ASSETS UNDER THE COMPANIES ACT @ 10%. IN SUCH A CASE, IF THE AN NUAL LEASING CHARGE IS EQUIVALENT TO 30% OF THE VALUE OF LEASED ASSETS, THE ASSESSEE WOULD DEBIT ITS P&L ACCOUNT BY LEASE EQUAL IZATION CHARGES TO THE EXTENT OF 20% OF THE VALUE OF ASSET AS PER THE GUIDANCE NOTE ISSUED BY ICAI. IF THE LEASE EQUALIZ ATION CHARGES SO DEBITED ARE ALLOWED AS DEDUCTION WHILE COMPUTING TH E TOTAL INCOME ITA NO.1583/M/2011 5 OF THE ASSESSEE UNDER THE INCOME TAX ACT IN ADDITIO N TO 100% DEPRECIATION ALREADY ALLOWED, THE ASSESSEE WILL GET DEDUCTION OF 120% OF THE VALUE OF ASSET IN THE FIRST YEAR ITSELF AND THE VERY PURPOSE OF ADOPTING THE CONCEPT OF LEASE EQUALIZATI ON BASED ON THE RATIONALE OF MATCHING COST WITH THE REVENUE WOULD B E DEFEATED. THIS WILL RESULT IN ABSURDITY AND GIVE MISLEADING R ESULTS. IN OUR OPINION, IT IS THEREFORE NECESSARY THAT WHILE ALLOW ING DEDUCTION ON ACCOUNT OF LEASE EQUALIZATION CHARGES FOR THE PURPO SE OF COMPUTING TOTAL INCOME UNDER THE INCOME TAX ACT, THE DIFFEREN CE BETWEEN THE ANNUAL LEASE CHARGE OF THE LEASED ASSETS AND DEPREC IATION ALLOWED ON THE SAID LEASED ASSET UNDER THE INCOME TAX ACT S HOULD BE TAKEN INTO CONSIDERATION AND NOT THE DIFFERENCE BETWEEN T HE ANNUAL LEASE CHARGE AND DEPRECIATION CLAIMED BY THE ASSESSEE IN THE BOOKS OF ACCOUNT AS PER THE COMPANIES ACT. WE, THEREFORE, R ESTORE THIS ISSUE TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH. THE ASSESSEE IS DIRECTED TO FURNISH THE WORKING OF LEAS E EQUALIZATION CHARGES BASED ON THE FIGURES OF THE DEPRECIATION ON THE LEASED ASSETS ALLOWED AS PER THE INCOME TAX ACT WHICH THE A.O. SHALL VERIFY AND ALLOW THE CLAIM OF THE ASSESSEE FOR DEDU CTION ON ACCOUNT OF LEASE EQUALIZATION CHARGES BASED ON SUCH VERIFIC ATION IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE DECISION OF THE CO ORDI NATE BENCH IN ASSESSEES OWN CASE, WE RESTORE THIS ISSUE TO THE F ILE OF THE AO FOR DECIDING THE SAME AFRESH IN THE LIGHT OF THE FINDIN GS GIVEN IN A.YRS 1994- 95 TO 1997-98. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH JULY, 2014 !7 3 6+ 8 9!: 11.7.2014 6 3 ; SD/- SD/- (DR. S.T.M. PAVALAN) (N.K. BILLAIYA) !' /JUDICIAL MEMBER !' / ACCOUNTANT MEMBER MUMBAI; 9! DATED 11.7.2014 . . ./ RJ , SR. PS ITA NO.1583/M/2011 6 !7 !7 !7 !7 3 33 3 04 04 04 04 <+4 <+4 <+4 <+4 / COPY OF THE ORDER FORWARDED TO : 1. ,/ / THE APPELLANT 2. 01,/ / THE RESPONDENT. 3. = ( ) / THE CIT(A)- 4. = / CIT 5. >; 04 , , / DR, ITAT, MUMBAI 6. ;& ? / GUARD FILE. !7 !7 !7 !7 / BY ORDER, 14 04 //TRUE COPY// @ @@ @ / A A A A - - - - (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI