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May 2008

S. 115JA : Lease equalisation charges debited not to be added back for book profit

By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 4 mins
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10 (2007) 17 SOT 173 (Delhi)

GE Capital Transportation Financial Services Ltd. v. ACIT

ITA No.2362 (Del.) of 2002

A.Y. 1998-99. Dated : 20-7-2007

S. 115JA of the Income-tax Act, 1961 — Lease equalisation charges debited to Profit & Loss A/c. cannot be added back while computing book profit u/s.115JA.

In the Profit and Loss A/c. filed along with the return of income for the A.Y. 1998-99, the assessee leasing company had deducted the amount of lease equalisation charges from the lease rental income. In the computation of total income, the said amount had been added back; but the same was not added to the profit while computing book profit u/s. 115JA.

The Assessing Officer and the CIT(A) held that lease equalisation charges debited to the Profit & Loss A/c. by the assessee leasing company was a notional charge on the profits of the company and represented an amount set aside out of profits/surplus to equalise the imbalance between lease rental and depreciation charges over the period of lease. The impugned amount was added back to the book profit under Explanation (1) to S. 115JA(2).

The Tribunal, relying on the decision of the Supreme Court in respect of the distinction between a ‘provision’ and a ‘reserve’ in the case of State Bank of Patiala v. CIT, (1996) 219 ITR 706/85 Taxman 416, set aside the orders of the lower authorities.

The Tribunal noted as under :

1. The provision for lease equalisation charges was made following the guidelines issued by the Institute of Chartered Accountants of India (ICAI) on ‘Accounting of income, depreciation and other aspects for leasing company’. The Assessing Officer held that the said guidelines issued by ICAI on creation of lease equalisation charge were only recommendatory and not mandatory.

2. The amount to be transferred to a reserve is debited to Profit and Loss Appropriation A/c. and the purpose of creating the reserve is to enable the firm to tide over a difficult financial period and not to meet any particular contingency. The amount of lease equalisation charges, however, was not debited by the assessee-company to its Profit and Loss Appropriation A/c. and the purpose of the same was not to enable the assessee to tide over a difficult financial period.

3. The amount provided for the lease equalisation charges was not transferred by the assessee-company in its books of account to any reserve account, but the same was adjusted against depreciation/WDV of the relevant fixed assets given on lease.

4. The amount of lease equalisation charge, however, is neither the portion of earnings/profits of an enterprise, nor is the same appropriated for a general or specific purpose. The same is a charge against the profit to arrive at true and correct profits of the leasing business, which by no means can be treated as part of undistributed profits or capital of the business.

5. If the nature and character of lease equalisation charge, as is evident from the purpose for which the same was provided as well as the accounting treatment given thereto in the books of account, was considered in the light of the meaning of the expression ‘reserve’ as defined in the context of terms commonly used in financial statements as well as by the Apex Court in the judicial pronouncement, it was to be held that the provision made for lease equalisation charges could not be regarded as an amount transferred to reserves as envisaged in Explanation (b) to S. 115JA (2).

6. Therefore, the adjustment made by the Assessing Officer by adding the amount of lease equalisation charges while computing the book profit u/s.115JA was not permissible, since the said amount was not covered within any of the clauses of Explanation below S. 115JA(2) including clause (b).

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