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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND Dr. M.L. MEENA
आदेश /O R D E R PER BENCH:
This appeal by the assessee is arising out of the order of Learned Commissioner of Income Tax (Appeals)-9, Chennai in dated 12.01.2018. The assessment was framed by the ACIT, Company Circle II(3), Chennai for the assessment year 2004-05 u/s. 143(3) r.w.s. 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order dated 30.12.2009.
2 2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the AO in making addition of leased equalization charges amounting to Rs.68,51,969/-.
Brief facts are that the AO during the set aside assessment proceedings i.e., under revision order passed by PCIT u/s.263 of the Act, the AO noted that the assessee has not credited the lease equalization reserve of Rs.67,15,093/- to the profit & loss account but the same has been adjusted against depreciation as per the books in the computation statement. He noted that the assessee has added the lease rentals amounting to Rs.1,08,25,124/- in the computation of income whereas sum of Rs.1,09,62,000/- has been reduced from the leased rentals under schedule 10 i.e., ‘income from operations’ in the profit and loss account. When a query was put to assessee, the assessee filed letter dated 24.12.2019 stated that the amount of Rs.1,09,62,000/- was deducted from lease rental, which is net of Rs.67,15,093/- being credited on that account i.e., lease equalization reserve. The assessee stated that this accounting treatment has been given in view of guidance given in view of guidance note of Institute of Chartered Accountants of India in regard to lease equalization charges accounting system. Accordingly lease equalization charges is debited and lease
3 equalization adjustment account is credited with regard to leased assets. It was explained that whenever leased assets is closed or pre-closed, the assessee has to reverse the provision for depreciation by debiting the depreciating account and crediting the assets account and also reverse the provision for lease equalization charges by debiting lease equalization adjustment account and crediting lease equalization charges account. The AO was not convinced with the reply and noted that the lease equalization charges account have not been credited though the credit appears in the lease equalization adjustment account. He hold that this being the case, the assessee’s statement that an amount of Rs.1,09,62,000/- debited towards lease equalization charges is after the credit of Rs.67,15,093/- cannot be correct. According to him, there should only be net credit in lease equalization account with corresponding debit in lease equalization adjustment account. Accordingly, he added the amount credited against the lease equalization reserve of Rs.67,15,093/-. Aggrieved, assessee preferred appeal before CIT(A).
4. The CIT(A) without passing a speaking order after reproducing the submissions of assessee and the findings given by AO as well as 4 PCIT i.e., revision order passed u/s.263 of the Act, confirmed the action of AO by observing in para 8 as under:- “8. The appellant’s contentions are not correct. Due to wrong entry, the depreciation as per books has been reduced and this reduced amount has been added back in computation of income, and hence, the income so computed finally is lesser by that amount and correct tax has been avoided.”
Aggrieved, now assessee is in appeal before the Tribunal.
Before us, ld. Counsel for the assessee explained that neither the AO nor CIT(A) has understood the issue and he explained the actual fact that this amount of Rs.1,09,62,000/- represents lease equalization charges being the amount to be added in addition to depreciation so that cost of asset is written off over the period of lease. He explained that this additional expenditure is to be written off every year and accordingly, reduced from lease rentals. Apart from lease equalization charges, which is written off over the period of lease agreements which are live, in cases where leases are foreclosed or terminated, balance amount of WDV (Written Down Value) of the assets as adjusted by the lease equalization charges already charged and reduced by any sale realization is to be adjusted. The ld.counsel for the assessee detailed out the fact in the note submitted and the details are as under:- “The Amount Rs.6710593 is represents adjustment in the case of lease assets foreclosed. It is reversal of lease terminal charges to adjust the WDV
5 (Written Down Value) with the amount written off earlier on that foreclosed leased assets. Also cost of the asset reversed on foreclosure. For the year the net adjustment of Rs.67,15,093/- negative and hence this amount has been reduced from the total depreciation for Rs.28098205 for the year and only the net depreciation of Rs.21383112 was claimed as deduction in the P&L. Thus Lease equalization charges of Rs.1,09,62,000/- is additional charge over the depreciation amount and should be reduced from Profits. The net effect of lease termination charges is negative and will go increase the profits by way of reduction of WDV.”
5.1 In view of the above, the ld.counsel stated that this accounting treatment is given in view of the accounting standard i.e., AS-19 as introduced w.e.f. 01.04.2001 and qua that he referred to CBDT circular No.2 of 2001 dated 09.02.2001 and the relevant circular reads as under:- DEPRECIATION SECTION 32, Under the Income-tax Act, in all leasing transactions, the owner of the asset is entitled to the depreciation if the same is used in the business, under section 32 of the Income-tax Act. The ownership of the asset is determined by the terms of contract between the lessor and the lessee.
The Central Board of Direct Taxes vide Instruction No. 1978, dated 31st December, 1999 (F.No. 225/190/98/ITA.II) has laid down the line of investigation in such cases. in cases where assets are factually non- existent, having been created by hawala transaction, the question of allowance of depreciation does not arise. In cases of sale and lease-back of assets without any alternation in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowel & Co. Ltd. (1985) 47 CTR (SC) 26 : (1985) 154 ITR 148 (SC).
6 3. It has come to the notice of the Board that the new Accounting Standard on 'Leases’ issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act.
The contents of this Circular may be brought to the notice of all concerned. [F.No. 225/86/2000/ITA-II—From Central Board of Direct Taxes] 5.2 In view of this, the ld.counsel stated that actually the principal operation of lease rental is added as income and lease equalization charges and depreciation note of lease terminal adjustment is reduced from the profit. The ld.counsel stated that neither the AO nor CIT(A) has understood the issue of lease terminal adjustment and addition to lease equalization charges because both authorities below have ignored that it is already added to income by way of reduction in claim of depreciation.
When the above facts were confronted to ld. Senior DR, he stated that the matter can be referred back to the file of the AO, who will go into the details submitted by the assessee as well as accounting treatment in view of CBDT Circular No.2 of 2001, as reproduced above, and will decide the issue afresh.
7 7. After hearing both the sides, we are of the view that facts now stated by assessee in its note, as reproduced above, are to be verified whether the assessee has already added the same to income by way of reduction in the claim of depreciation or not. The AO will verify the same and accordingly, decide the issue. Therefore, the orders of lower authorities are set aside and the matter is remanded back to the file of the AO for fresh adjudication.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the court on 15th March, 2022 at Chennai.