Income Tax Appellate Tribunal - Delhi
Dy. Cit vs Srei International Finance Ltd. on 8 September, 2006
ORDER
1. ITA 4881/Del./2003 is an appeal by the revenue and ITA 4643/Del./03 is an appeal by the assessee. Both these appeals are directed against the order dated 8-8-2003 of the Commissioner (Appeals)XII, New Delhi relating to the assessment year 2000-01.
2. First we shall take up ITA 4881/Del./03 the appeal by the revenue. The first ground of appeal by the revenue reads as follows:
On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in directing the assessing officer to allow depreciation at a higher rate of 40% on leased vehicles as against 20% allowed by the assessing officer even though the vehicles were not used by the assessee in the business of running them on hire."
3. The assessee is a company carrying on the business of Non-Banking Finance Company (NBFC), money-changers and investment activities. In the course of assessment proceedings the assessing officer noticed that the assessee had claimed depreciation on heavy vehicles like trucks etc. at 40%. The assessing officer has made a reference to the fact that depreciation on such heavy vehicles is available at 40% only if the same is used in the business of running them on hire. The assessing officer has further referred to the fact that the assessee has given these vehicles on lease to different persons for varying periods of time and the assessee itself not used these vehicles for running them on hire. The assessing officer therefore allowed depreciation only ordinary rate of depreciation, i.e., 20% as per the prescribed rates of depreciation. The assessing officer has also made a reference to the decision of the Hon'ble Calcutta High Court in the case of Soma Finance & Leasing Co. Ltd. v. CIT in support of his conclusions.
4. Before the Commissioner (Appeals) it was submitted on behalf of the assessee that for claiming depreciation at a certain rate it is not necessary for the assessee itself to use the assets concerned in any particular manner. Reference was made to the decisions of the Hon'ble Supreme Court in the case of CIT v. Shaan Finance (P) Ltd. wherein it was held that an assessee engaged in the business of leasing will be entitled to depreciation at the appropriate rate on the assets leased out by it under the assumption that the assets were used by the assessee in its own business.
Reliance was also placed on the decision in the case of CIT v. Maharashtra Apex Corpn. Ltd. wherein the Apex Court had held that when the assessee is engaged in the business of leasing out plant and machinery it would be entitled to both extra shift depreciation allowance as well as investment allowance on the said plant and machinery. The assessee contended that its claim is squarely covered by the judgment of the Hon'ble Madras High Court in the case of CIT v. Madan & Co. , and that on similar facts where the assessee was leasing out trucks owned by it for consideration, the Hon'ble Madras High Court has held that for this purpose there is no qualitative difference between leasing of vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of higher charges. The Hon'ble court further added that, "the word, 'hire' used in this entry is only meant to denote that the use of the vehicle is not by the owner himself for his own purposes but it is given to another for use for a limited period of that other for a consideration."
5. The Commissioner (Appeals) referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. Bansal Credits Ltd. (2003) 259 ITR 69 (Del) wherein the Hon'ble Delhi High Court while dealing with the question whether the assessee who leased out commercial vehicles to third party would be entitled to depreciation under Section 32 of the Act at 40% had held that.
..... the section requires that the asset should be used for the purposes of assessee's business and the entry in the Appendix refers to the user it should be put to. Apart from the fact that the leasing out of the vehicle is by itself tantamount to hire of vehicles, we are unable to read into any of the aforenoted provisions the requirement that the assets are to be used by the assessee for the purposes of his business or profession. Once it is accepted that the leasing out of the vehicles is one of the modes of doing business by the assessee and in fact the income derived from such leasing is treated as business income of the assessee, it would be clearly contradictory in terms to hold that the vehicles in question were not used wholly for the purpose of assessee's business which as noted above is one of the requisites stipulated in Section 32. The Commissioner (Appeals) accordingly directed the assessing officer to allow depreciation at the higher rate of 40%. Aggrieved by the order of Commissioner (Appeals) the revenue has raised the aforesaid ground of appeal."
At the time of hearing of this appeal it was brought to our notice by the learned Counsel for the assessee that the Tribunal in ITA 4320/Del./2002 for the assessment year 1995-96 in assessee's own case dealt with similar issue and following the decision of Hon'ble Delhi High Court in the case of Bansal Credits Ltd. (supra) has upheld the order of the Commissioner (Appeals) allowing higher rate of depreciation. Respectfully following the decision of the Tribunal we uphold the order of the Commissioner or Income-tax(A) and dismiss the first ground of appeal of the revenue.
6. The second ground of appeal by the revenue reads as follows:
On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in directing the assessing officer not to add back an amount of Rs. 13,83,84,000 being lease equalization charge for the purpose of computation of book profit under Section 115JA of the Income Tax Act, 1961".
In the Profit and Loss a/c the assessee had debited a sum of Rs. 13,83,84,00,0 under the head' lease equalization charges'. The assessee had filed a NIL return of income after adjusting brought forward unabsorbed business losses and depreciation. In view of the provisions of Section 115JA the assessee worked out book profits as per the provisions of the said section at Rs. 3,12,97,608 and declared the said income for taxation. While working out the book profits under Section 115JA of the Act the assessee had claimed a deduction on account of lease equalization charges. The assessing officer was of the view that even for determination of the book profits, lease equalization charges, which were only notional charge on the profits of the company and which are amounts set aside out of profits to equalize imbalance between lease rentals and depreciation charges over the period of lease should be added back while working out the book profits under Section 115JA of the Income Tax Act, 1961. The assessee submitted that as per the guidelines issued by the Institute of Chartered Accountants of India (ICAI) on accounting of income, depreciation and other aspects for the leasing companies it was mandatory for the assessee to follow the same and in terms of the said guidelines the assessee was entitled to deduct the said amount while arriving at the book profits for the purpose of Section 115JA of the Act. The assessing officer however held that these guidelines of the ICAI are recommendatory in nature. He held that the amount claimed as deduction on account of lease equalization charges was only a notional charges on the profits of the company and he therefore added back the said sum to arrive at the book profits under Section 115JA of the Act.
7. Before the Commissioner (Appeals) it was submitted on behalf of the assessee that Clause 11 of guidelines prescribed by the ICAI on accounting for lease prescribes that a matching lease annual charge representing recovery of the net investment/fair value of the leased asset over the lease terms should be debited to the Profit and Loss a/c. it was further submitted that the book profits under Section 115JA have to be determined in accordance with provisions of Parts II & III of Schedule-VI to the Companies Act, 1956, and the guidelines issued by the ICAI are binding on the assessee while preparing its books of account in accordance with the Provisions of Companies Act, 1956. It was further submitted that the addition made by the assessing officer does 'not fall within any of. the clauses in Explanation to Section 115JA of the Act. Reliance was placed on the decision in the case of Hon'ble Supreme Court Apollo Tyres Ltd v. CIT wherein the Hon'ble Supreme Court has held that while computing the book profits of the company under Section 115JA the assessing officer has only a limited power to examine whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the provisions of the said Act and once Profit and Loss a/c is prepared in accordance with the provisions of Parts II & III of Schedule VI of the Companies Act then the assessing officer, would have no power to disturb the book profits except to the extent stated in Section 115JA of the Act.
8. The Commissioner (Appeals) firstly analysed the provisions of Section 115JA of the Act and the reasons for it's introduction. The Commissioner (Appeals) thereafter referred to the provisions of Section 211(2) of the Companies Act, 1956 which provides that every Profit and Loss a/c of a company shall give a true and fair view of the Profit and Loss a/c of the company for the financial year and shall comply with the requirements of Parts II & III of Schedule VI to the Companies Act. Sub-section (3A) of Section 211 of the Companies Act, 1956 further provides that every Profit and Loss a/c and Balance Sheet of a company shall comply with the Accounting Standards. Sub-section (3C) of Section 211 defines Accounting Standards to mean the standards of accounting recommended by the ICAI constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under Sub-section (1) of Section 201 A. It was further laid down that the Standards of Accounting specified by the ICAI shall be deemed to be the Accounting Standards until the Accounting Standards are determined by the Central Government under that sub-section. The Commissioner (Appeals) held that though these Accounting Standards were only recommendatory in nature but the assessee being a company would be required to follow the same in view of the provisions of Section 211(3C) of the Companies Act, 1956. Since the Profit and Loss a/c prepared by the assessee were in accordance with provisions of Parts II & III of Schedule VI to the Companies Act, the assessing officer could not disturb such profit unless the case fell within the ken of clauses (a) to (f) of Explanation to Section 115JA. Thereafter the Commissioner (Appeals) analysed the nature of the lease equalization charges and finally concluded that these equalization charges represent recovery of the fair value of the leased assets over the lease term and is deducted from the lease rentals to bifurcate annual lease with revenue component and capital portion and does not as such fall under any of these categories enumerated under clauses (a) to (i) of Explanation to Section 115JA of the Act. The Commissioner (Appeals) has also referred to the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) and held that the assessing officer could not disturb the book profits which are determined in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act. The conclusion of the assessing officer in adding the lease equalization charges to the book profits was thus directed to be deleted by the Commissioner (Appeals). The revenue is aggrieved by this order of the Commissioner (Appeals) and has raised the aforesaid ground of appeal.
9. Before us the learned DR relied on the order of the assessing officer. The learned Counsel for the assessee relied on the order of the Commissioner (Appeals). Further reliance was placed on the decision in the case of Jt. CIT v. Pact Securities & Finance Ltd. (2003) 86 ITD 115 (Hyd) wherein in the context of even regular assessments lease equalization charges have been held to be an admissible deduction.
10. We have considered the rival submissions. The provisions of Section 115JA of the Act, insofar as the same is relevant for the purpose of deciding the issue in the present appeal, reads as follows:
Deemed income relating to certain companies.(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1997 (but before the 1-4-2001) hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):
Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956):
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
Explanation : For the purposes of this section, book profit means the net profit as shown in the profit and loss a/c for the relevant previous year prepared under Sub-section (2), as increased by-
(a) the amount of income-tax paid or payable, and the provision therefore; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;"
The purpose behind introduction of provisions of Section 115JA was to tax, "zero tax companies". Section 115JA enacts deeming provisions of overriding nature. The purpose behind the introduction of Section 115JA was to tax, "zero tax companies". A number of companies with huge profits were avoiding payment of tax by adjusting their profits against various allowances permissible under the Act. It was to circumvent this strategy that Section 115JA was inserted in the Income Tax Act. Sub-section (1) of Section 115JA takes care of the situation, wherein the case of an assessee, being a company, the total income as computed under the Act is less than 30% of its book profit, then the 30% of the book profit shall be liable to be taxed. in other words, simply if the total income of the company after all the deductions and allowances, is less than 30% of its book profit then the total income chargeable to tax is deemed to be 3096 of such book profits. Sub-section (2) of Section 115JA makes it obligatory upon every company assessee to prepare its Profit and Loss a/c for the relevant previous year in accordance with the provisions of Parts II & III to Schedule VI to the Companies Act, 1956 for the purpose of this section. The Explanation to Section 115JA defines book profit for the purpose of this section so as to mean, "the net profit as shown in the Profit and Loss a/c for the relevant previous year prepared under Sub-section (2) of Section 115JA as increased by amounts mentioned in clauses (a) to (f) and as reduced by amounts covered by clauses (i) to (ix) of the said Explanation. Section 115JA begins with anon obstante clause. It is a self-contained code and will apply notwithstanding any other provisions of the Act. Book profit has been clearly defined and explained in the aforesaid Explanation, and there is no scope for any allowance and deduction under any other section from what is deemed to be total income of the company assessee.
11. It is not the case of the assessing officer that the Net Profit as shown in the Profit and Loss A/c in the case of the assessee is not prepared in accordance with Parts II & III of Schedule VI to the Companies Act, 1956. Therefore this profit will be starting point of computation of book profit as laid down in Explanation below Sub-section (2) of Section 115JA of the Act. The Commissioner (Appeals) has clearly referred to the provisions of Section 211(2)(3A)(3C) of the Companies Act, 1956 and has rightly concluded that the assessee while preparing its profit and loss a/c under the Companies Act, 1956 was bound to follow the Accounting Standards of ICAI. The Accounting Standards of ICAI clearly contemplate a deduction on account of Lease Equalisation charges in the case of leasing companies in respect of "Finance Lease Transactions". The nature of this deduction and the reason why this deduction is claimed has been very well explained by the Commissioner (Appeals). The very idea of charging tax on book profits is that the profits as per the books of a company will be the basis of charge. When in the books of the company such as deduction is claimed and profits arrived thereafter, the revenue cannot further under with such profits except to the extent provided in Clauses (a) to (f) of Explanation below Section 115JA(2). The nature of the lease equalizaton charges is recovery of the fair value of leased asset over the term of the lease. It is a deduction against lease rentals to bifurcate the annual lease into revenue component and capital component. They do not fall within the categories enumerated in clauses (a) to (f) of Explanation to Section 115JA of the Act.
12. In case of Apollo Tyres Ltd. (supra) the Hon'ble Supreme Court has explained the scope of the assessing officers powers under Section 115J which provisions are akin to Section 115JA of the Act as follows:
The assessing officer, while computing the book profits of a company under Section 115 of the Income Tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115. The assessing officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' in Section 115 was made for the limited purpose empowering the assessing officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the assessing officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115 does not empower the assessing officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company."
13. As already observed, the assessing officer has accepted the net profit as per profit & loss account to be one in accordance with the provisions of Companies Act. Even the assessing officer has not spelt out as to how the lease equalization charges fall with the clauses (a) to (f) of Explanation below Section 115JA(2). In such circumstances, we do not find any grounds to interfere with the order of Commissioner (Appeals). The same is confirmed and the second ground of appeal of the revenue is also dismissed.
14. In the result the appeal by the revenue is dismissed.
15. ITA 4643/Del./03 is an appeal by the assessee. The first ground of appeal reads as follows:
That the learned Commissioner (Appeals) misdirected himself in having interpreted the principal business of the assessee by holding that leasing and finance is not a business of money lending as understood in the normal sense of the term, notwithstanding the fact that the admitted principal business of the assessee is of granting loans and advances and hence advance made of Rs. 2 lacs was part of appellant's normal business and subsequent write off of this amount as bad debt is within the ambit of provisions of Section 36(1)(vii) read with Section 37(2)".
16. As already stated the assessee is carrying on the business of NBFC. The assessee in its Profit and Loss a/c had claimed certain amounts as bad debts the details of debt which became bad was furnished to the assessing officer in the course of assessments proceedings and the assessing officer noted that an amount of Rs. 2 lacs which was shown against one R. Revathi under the head of Account "against advances" was claimed to have become bad. The assessing officer held that the debt in question was not in the course of business of the assessee but against advances made to this person and therefore bad debt written off cannot be allowed. Before the Commissioner (Appeals) the assessee had contended that under the provisions of Section 36(2) deduction under Section 36(1)(vii) of the Act has to be allowed if the sum claimed as having become bad represents money lent in the ordinary course of business of banking or money lending carried on by the assessee. The Commissioner (Appeals) however held that the principal business of the assessee was leasing and financing and not money lending as is understood in the normal sense of the term. The Commissioner (Appeals) therefore upheld the finding of the assessing officer that the debt in question was not in the normal course of the assessee and could not be therefore considered as a bad debt. The assessee is in appeal against this order of the Commissioner (Appeals). We have heard the submissions of the learned Counsel for the assessee who brought to our notice that even the assessing officer in the order of assessment has accepted the fact that the assessee was a NBFC and this fact by itself should be enough to allow the deduction claimed by the assessee. The learned Counsel for the assessee submitted that as a Non-Banking Finance Company it was part of it's business to land money and derive interest income therefrom. The learned DR on the other hand submitted that the business of the NFBC cannot be equated with the business of money lending.
17. We have considered the rival submissions. In our view the stand taken by the revenue cannot be sustained. There is no qualification in Section 36(2) that the business of money lending should be understood only in a traditional sense. The business of NBFC apart from leasing definitely involves lending of money. We fail to understand as to how this activity of money lending and deriving income therefrom in the form of interest could not be the business of money lending. We therefore direct that the deduction claimed by the assessee should be allowed.
18. The second ground of appeal of the assessee reads as follows That the learned Commissioner (Appeals) further erred in having confirmed the estimate of notional expenses of Rs. 1,13,812 which is @ 5% of the gross dividend income and disallowance thereof under Section 14A notwithstanding the fact that the dividend income received by the appellant was net of tax already paid by the dividend declaring company under Section 115-O."
19. The assessee had received a dividend income of Rs. 22,76,250. This dividend income is not includible in the total income in view of the provisions of Section 10(33) of the Act. In view of the provisions of Section 14A of the Income Tax Act which lays down that while computing total income under Chapter IV of the Act no deduction should be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, the assessing officer was of the view that expenses related to tax free income should be disallowed. Admittedly there was no identification of the expenses which related to the earning of the dividend income. The assessing officer on an estimate basis held that 5% of the dividend income should be considered as expenditure incurred in earning the dividend income and he disallowed Rs. 1,13,812 under Section 14A of the Act and added the same to the total income of the assessee.
20. On appeal by the assessee the Commissioner (Appeals) confirmed the order of the assessing officer. Before the Commissioner (Appeals) one of the contention of the assessee was that the dividend declared by the company had already suffered tax in the hands of the company. The Commissioner (Appeals) however held that the incidence of tax in the hands of the recipient was alone relevant. Another contention of the assessee before the Commissioner (Appeals) was that provisions of Section 14A do not permit making a notional disallowance and the assessing officer has to specifically identify the expenses incurred in connection with earning the income. This argument was also rejected by the Commissioner (Appeals).
21. Before us the learned Counsel for the assessee reiterated the same arguments as were put forth before the Commissioner (Appeals). Reliance was placed on the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. wherein it was held that the expenditure incurred in earning exempt income under Section 80M is to be deducted only in respect of the actual expenditure incurred by an assessee in earning such income and there was no scope for any estimate of such expenditure or notional expenditure being allocated for the purpose of earning income. It was further pointed out by the learned Counsel for the assessee that the provisions of Section 14A as it stood after the introduction of Sub-section (2) thereto by the Finance Act, 2000 with effect from 1-4-2007, the assessing officer has been specifically empowered to make an estimate. By implication, such a power did not exist with the assessing officer prior to 1-4-2006. The learned DR on the other hand relied on the order of the Commissioner (Appeals) and submitted that the newly introduced Sub-section (2) of Section 14A was only cflarificatory in nature. He submitted that at best the matter should go back to the assessing officer to make the disallowance on a reasonable basis. The learned Counsel for the assessee objected to the prayer for remand on the ground that the assessing officer should not be given another opportunity.
22. We have considered the rival submissions. In the light of the clear provisions of Section 14A of the Act, even in case it is not possible to identify the expenses incurred in earning the income which does not form part of the total income, disallowance has to be made on some basis. In the present case the assessing officer has made the impugned disallowance without giving any basis and has adopted 5% of the dividend income as the likely expenses for earning the dividend income. This was not proper. We are however of the view that the matter should be remanded to the assessing officer for making appropriate disallowance on an appropriate basis. This ground of appeal of the assessee is treated as allowed for statistical purposes.
23. In the result the appeal by the revenue is dismissed and the appeal by the assessee is allowed to the extent appeal by the assessee is allowed to the extent stated above.