DR. O.K. NARAYANAN, VICE-PRESIDENT 
AND S.S. GODARA, JUDICIAL MEMBER

Guru Bhashyam, IRS - Jt. CIT for the Appellant. 
V.S. Jayakumar, Advocate for the Respondent.

ORDER

The order of the Bench was delivered by

S.S. Godara, Judicial Member - These Revenue's appeals for the assessment years 1999-2000 and 2000-2001, emanate from a common order dated January 24, 2014 passed by the Commissioner of Income-tax (Appeals)-II, Chennai in I.T.A. Nos. 380 and 381/2013-14 respectively, in proceedings under section 143(3) read with section 147 of the Income-tax Act 1961 (in short the "Act") deleting additions of Rs. 97,19,760 and Rs.1,69,31,685 towards lease equalisation charges for the purposes of computing book profits under section 115JA of the Act.

2. Since the issue involved in both cases is identical, we take up ITA No.1102/Mds/2014 as the "lead" case.

ITA No. 1102/Mds/2014

3. The assessee is a private limited company. It is engaged in the business of leasing, hire purchase and finance of vehicles. On December 16, 1999, the assessee had filed its "return" admitting income of Rs. 90,22,970 under "normal" computation and Rs. 3,00,76,566 under "MAT" provisions under section 115JA of the Act. The same was "summarily" processed.

4. In scrutiny, the Assessing Officer noticed lease equalisation charges of Rs. 97,19,760 added back to the assessee's profits in normal computation only and not for minimum alternate tax's computation. He was of the view that these charges had arisen in books from collection of lease money more or less than the statutory depreciation allowable on leased assets. As per the Assessing Officer, these lease equalisation charges were a provision to adjust the cost of assets recovered from the concerned lessees with the actual depreciation claimed. So, he formed an opinion that this was only an unascertained liability to be added back to the book profits under section 115JA.

5. Only on being put up to notice, the assessee pleaded to have computed these lease equalisation charges as per the relevant accounting standards and guidance notes issued by the Institute of Chartered Accountants of India for preparing financial statements which could not be added to its book profits. In assessment order dated November 30, 2006 the Assessing Officer observed that since the impugned lease equalisation charges were not as per the Companies Act, they had to be added to book profits. He also held that these charges were a notional figure in the nature of an unascertained liability not payable to anybody in the shape of a provision only. Proceeding on this reasoning, he made the impugned addition in the assessee's book profits under section 115JA.

6. In the assessee's appeal, the Commissioner of Income-tax (Appeals) has accepted its contentions as under :

"5.2 I have carefully considered the facts of the case and the submissions made by the learned authorised representative, I have gone through the decision of the hon'ble High Court of Madras as reported in TVS Finance and Services Ltd. [2009] 318 ITR 435 and find the issue under appeal to be squarely covered in favour of the appellant by the said decision. The relevant extract of business and is reproduced as under (page 451 of 318 ITR) :

'33. This is in accordance with the guidance norms on accounting for leases. The Department concedes that the amount of lease equalisation charges over the period of lease is equal to the difference between the quantum 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 quantum of the provision is more than necessary. When the lease equalisation charges is debited as per the guidelines and when the Department also admits the above, we cannot appreciate the stand of the Department that it should be treated as a reserve which stand that it is taking for the first time on the ground that there may be some years 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 equalisation charges before determining the profits and in this kind of lease, the lessor recovers the entire cost of the leased assets over the period of lease along with the interest on the amount financed.

35. In HCL Comnet Systems' case [2008] 305 ITR 409 (SC) 'to cover the diminution made in the value of the asset' cannot be said to be 'a provision for a liability' and held that 'the Assessing Officer could not add back the said provision under clause (c) of the Explanation to section 115JA of the 1961, Act.' The fourth question in T. C. (A) Nos. 108 and 110 of 2002 are answered in favour of the assessee.'

The said decision of the hon'ble High Court on the provisions of section 115JA would be equally applicable to the provisions of section 115JB also. Respectfully following the decision of the jurisdictional High Court of Madras, I hold that the Assessing Officer was not correct in adding the lease equalisation charges to the income of the appellant for the purposes of section 115JB and direct the Assessing Officer to reduce this amount for the said purpose. The grounds of appeal as they relate to this issue, therefore are allowed. After considering the submission on all grounds of appeal, the appeal in I.T.A. No. 381/2013-14 is partly allowed."

7. Therefore, the Revenue is in appeal.

8. We have heard both sides and gone through the case file. The Revenue refers to section 115JA of Explanation 1(g) of the Act inserted by the Finance (No. 2) Act, 2009 with retrospective effect from April 1, 1998 reading as under :

"the amount or amounts set aside as provision for diminution in the value of any asset."

9. In view thereof, the Revenue contends that this legislation was nowhere an issue in case law TVS Finance & Services Ltd. v. Jt. CIT [2009] 318 ITR 435 (Mad.) nor the same has been considered in the Commissioner of Income-tax (Appeals)'s order. Thereafter, it quotes following case law :

10. Accordingly, the Revenue prays for acceptance of its appeal.

11. In reply, the assessee seeks to justify the Commissioner of Income-tax (Appeals)'s order under challenge. However, on being specifically queried about the aforesaid amendment, it fails to give any specific clarification based on any material to distinguish its lease equalisation charges to be out of the purview of section 115JA of Explanation 1(g). In these circumstances, we observe that after retrospective amendment in the Act by way of the Finance (No. 2) Act, 2009, the assessee's stand is no more sustainable. It is to be seen that the hon'ble High Court in the assessee's case for the assessment year 1997-98 has taken cognizance of the abovestated amendment qua identical lease equalisation charges to observe that this amendment would apply from April 1, 1998. We reiterate that the assessment year involved before us is 1999-2000. Thus, we find that the case law of Weizmann Homes Ltd. (supra) post facto amendment squarely applies in this case. So, we accept the Revenue's grounds and hold that the assessee's lease equalisation charges of Rs. 97,19,760 have to be added to its book profits under section 115JA and leave it open for the Assessing Officer to make necessary computation as per law. The case I.T.A. No. 1102/Mds/2014 is allowed.

12. Same order to follow in I.T.A. No. 1103/Mds/2014.

13. To sum up, both the Revenue's appeals I.T.A. Nos. 1102 and 1103/Mds/2014 are allowed.

The order pronounced in the open court on at the time of hearing on Wednesday, the 2nd of July, 2014 at Chennai.