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).
