Indian Railway Finance Corpn Ltd Vs Addl. CIT (ITAT Delhi) – Whether the lease equalization charges which represented the recovery of fair value of leased assets are rightly added to the net income as per the profit and loss account while computing the book profits u/s 115JB – Whether the bond issue charges are revenue in nature – Whether the assessee is entitled to depreciation on the assets which were in its possession and it cannot be denied merely on the ground that the registration formalities were pending – Assessee’s appeal allowed.
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH “B” DELHI ]
BEFORE SHRI R. P. TOLANI, JM & SHRI K. D. RANJAN, AM
I. T. Appeal No. 2594 (Del) of 2005
Assessment year : 2001–02
M/s. Indian Railway Finance Corpn. Ltd. Vs. Addl. Commissioner of Income-tax
O R D E R.
PER K. D. RANJAN, AM :
This appeal by the assessee for assessment year 200 1-02 arises out of order of the ld. CIT Appeals)-XIV, New Delhi.
2. The grounds of appeal raised by the assessee, read as under :-
“ 1. That the ld. CIT (Appeals)–XIV has erred in confirming the addition of Rs.1,42,02,48,221/- to book profit, on account of Lease Equalization Charge (which represents Capital Recovery) debited to Profit and Loss Account as per the mandatory Guidance Note on Accounting for Leases, issued by the Institute of Chartered Accountants of India and ignoring the orders of predecessor CIT (Appeals) in earlier years;
2. That the ld. CIT (Appeals)–XIV has erred in confirming the addition of Rs.1,42,02,48,221/- to total income on account of Lease Equalization Charge (which represents Capital Recovery) debited to Profit and Loss Account as per the mandatory Guidance Note on Accounting for Leases, issued by the Institute of Chartered Accountants of India;
3. That the ld. CIT (Appeals)–XIV has erred in upholding the dis allowance of Bond issue Expenses of Rs.10,09,92,445/- instead of treating the same as Revenue Expenditure, as claimed by the assessee, ignoring the facts and circumstances that the assessee company is engaged in leasing rolling stock, assets to the Ministry of Railways on single client relationship basis and the money raised has been utilized for acquiring rolling stock assets and not for expansion of the undertaking. The ld. CIT (Appeals) –XIV has erred in confirming the addition;
4. That the ld. CIT (Appeals)–XIV has erred in upholding dis allowance of depreciation on office building purchased from NB CC, ignoring the facts and circumstances that the assessee is in occupation of the premises and not recognizing the evidence thereof, on the basis of assumptions. ”
3. The first issue for consideration relates to confirming the addition of Rs.1,42,02,48,221/- to book profit on account of lease equalization charges. The assessee in profit and loss account debited an amount of Rs.1,42,02,48,221/- on account of lease equalization charges. In response to a query it was submitted by the assessee that rolling stock given to railways on lease comes under the scope of finance lease. Accordingly, lease rentals comprised of finance income and net investment in the leased assets. Thus lease equalization charges represent recovery of fair value of the leased assets over the lease term and the same is deducted from lease rentals to bifurcate annual lease rentals into revenue component and capital portion. This treatment as per the assessee was in accordance with the revised guide-lines issued by Institute of Chartered Accountants of India on accounting for lease rentals. This contention of the assessee was rejected by the assessing officer. He was of the opinion that the method of computation of income for Income-tax purposes is not determined by the guide-lines issued by the Institute of Chartered Accountants of India. In the case of assessee the depreciation was claimed on the leased assets and, therefore, there was no reason for reducing the lease rentals by any notional amount i.e. lease equalization on the ground that as per Income-tax Act, no such deduction shall be allowable to the assessee. Accordingly, the AO added the amount of Rs.1,42,02,48,221/- to net income as per profit and loss account while computing book profits u/s 115JB of the Act.
4. On appeal the ld. CIT (A) relyied on Authority for Advance Ruling in the case of National Hydro Electric Power Corporation Ltd. 2005 (TIOL) – 07 ARA – IT dated 17/12/2004. In this case the assessee reduced the sale price received on account of Advanced Against Depreciation, which was held to be reserved by Authority for Advance Ruling and was required to be added to the book profits while making adjustments under Explanation to section 115-JB of the Act. He, therefore, upheld the addition made by the assessing officer.
5. Before us the ld. AR of the assessee submitted that the ld. CIT (Appeals) has observed that if lease rentals actually include partial reimbursement of capital cost of the leased assets, that portion of lease rentals would amount to capital receipt though in previous year lease income has been held to be taxable as revenue receipt. The decision of Authority for Advance Ruling relied upon by the ld. CIT (A) in the case of NHPC (supra) has been reversed by Hon’ble Supreme Court in NHPC’ s case reported as 320 ITR 374 (SC) wherein it has been held that Advanced Against Depreciation as accounted for by the assessee therein, though in the nature of income received as advance, is not a reserve for the purpose of section 115-JB and, therefore, was an allowable deduction for the purpose of computing book profit. It has further been submitted that though the Revenue preferred appeals on this issue to ITAT in respect of assessment years 1998-99 to 2000-0 1 but the permission to pursue the issue was denied by the COD. Thus the orders of the ld. CIT (A) have attained finality and could not have been disturbed by the current incumbent. He further submitted that this issue is also covered in asses see’s favor by the decision of Hon’ble ITAT, Delhi Bench in the case of G.E. Capital Transportation Financial Services Ltd. Vs. ACIT 301 ITR (AT) 69 (Del). On the other hand, the ld. Sr. DR supported the order of the ld. CIT (Appeals).
6. We have heard both the parties. Explanation 1 to section 1 15-JB(2) defines the book profit and means the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of part II and III of Schedule VI to the Companies Act, 1956 as increased by the amount specified in clause (a) to (i), if any amount referred to in these clauses is debited to profit and loss account. The ld. CIT (Appeals) has upheld the addition relying on the decision of Authority for Advance Ruling in the case of NHPC Ltd. This decision of the NHPC (supra) has been reversed by Hon’ble Supreme Court in the case of NHPC (supra) wherein it has been held that to make an addition under clause (b) of Explanation 1 to section 115-JB(2) of the Income-tax Act providing for the book profits of certain companies, two conditions must be jointly satisfied : (a) there must be a debit of allowance to the profit and loss account; and (b) the amount so debited must be carried to reserve. Further the reserve contemplated by clause (b) of Explanation (1) to section 1 15-JB(2) is required to be carried through profit and loss account. Hon’ble Supreme Court has further held that Advanced Against Depreciation (AAD) was not a reserve nor was it an appropriation of profits. The AAD was an advance against depreciation. The AAD was nothing, but was an adjustment by reducing the normal depreciation includible in future years in such a manner that at the end of the useful life of the plant it would be reduced to NIL. Therefore, the AAD was not treated as reserve.
7. We also find that ITAT, Delhi Bench in the case of G.E. Capital Transportation Financial Services Ltd. (supra) has held that amount of lease utilization was a charge which had been deducted to arrive at the true and correct profit of the leasing business and it was thus neither an appropriation of profit nor allocation of part of profits to any fund so as to call it as a reserve.
The said charge was created as a result of debit to a profit and loss account and not to a debit to appropriation account. Reserves were part of un-distributed profits of the business and, therefore, part of capital of business. The amount of lease equalization charges, however, were neither the portion of earning or profits of an enterprises nor was it appropriated for a general or specific purpose.
8. In view of the above it is apparent that lease equalization charges are not in the nature of reserve to be added under clause (b) of Explanation 1 to section 115-JB(2). Therefore, the ld. CIT (A) was not justified in confirming the dis-allowance of lease equalization charges for the purpose of computation of book profits. The assessing officer is directed to delete the addition.
9. The next issue for consideration relates to dis allowance of lease equalization charges debited to profit and loss account. The assessing officer while computing the total income under normal provisions of the Act added the amount of lease equalization charges at Rs.1,42,02,48,221/-. The ld. CIT (Appeals) following the decision for assessment years 1997-98 to 2000-0 1 upheld the dis allowance.
10. Before us the ld. AR of the assessee submitted that ITAT, Delhi Bench ‘B’ for assessment years 1997-98 to 2000-01 in ITA. No. 699, 359, 3357 and 2109 (Del) of 2004 dated 8/08/2008 has decided the issue in favor of the assessee. On the other hand, the ld. Sr. DR submitted that the issue has not been examined by the assessing officer on the lines of the decision of the ITAT and, therefore, the issue may be set aside to the assessing officer. He, therefore, requested that the issue may be set aside to the assessing officer as has been done by the ITAT for assessment year 1997-98 as the assessee has not furnished chart for deduction on account of depreciation.
11. We have heard both the parties. We find that the issue is squarely covered by the decision of the ITAT. The operating decision is in paragraph 20 which reads as under as under:-
“ 20. In this regard, we find that in the initial years, the assessee may get extra deduction but that is not on account of allowing deduction of lease equalization amount debited in the profit and loss account, but it is on account of depreciation as per Company’s Act debited in books and depreciation as per I. T. Rules allowable because if you consider the total deduction during the full period of lease, which is 30 years in the present case, we find no deduction stand allowed to the assessee on account of lease equalization because there are debits in some years and credit in some other years and the sum total for the entire period of 30 years is NIL. Depreciation allowed to the assessee in the present assessment years as per I. T. Rules is higher as compared to depreciation as per company Act, but the total depreciation allowable to the assessee under I. T. Rules in full lease period of 30 years cannot exceed the cost of the assets and hence, total deduction actually allowed to the assessee will be only depreciation allowable to the assessee as per I. T. Rules. Depreciation is allowed by the assessing officer. Since, sum total of lease equalization in full lease period of 30 years is NIL, there is no case to disallow or alter the lease equalization debited to the profit and loss account. Hence, this ground of assessee is allowed in all four years.“
12.1 Since the issue is covered by the decision of the ITAT in assessee’ s own case for assessment years 1997-98 to 2000-01, respectfully following the precedent, it is held that lease utilization amount debited to the profit and loss account will be allowable as deduction. However, we find that in para 11 of this order the Tribunal have set aside the matter for certain verification. The direction contained in para 11 reads as under:-
“The charge for 30 years of opening balance in the present year i.e. AY 1997-98 is submitted by the ld. AR of the assessee. As per the same, opening balance of the leased assets is Rs.1,26,256.37 lakhs, rate of depreciation as per Company’s Act is 4.75 per cent, and rate of interest is 14.97 per cent. The total for 30 years of depreciation is Rs.126, Rs.256.42 lakhs and finance income is Rs.157,820.46 lakhs. The total of capital recovery is Rs.126,256.37 lakhs and total of lease equalization is NIL. Since in the present case also, as per this chart, even after deduction of finance income at 14.97 per annum, the full value of the cost of assets i.e. Rs.162,256 lakhs is fully covered in lease period of 30 years and hence, it is a case of finance lease as per the guide-lines issued by ICAI. In the light of various judicial pronouncements cited by the ld. AR of the assessee, we find no reason for not accepting the basis as suggested by ICAI in these guide-lines for deciding the character of lease in the present case as finance lease. However, the assessee company has given this chart for opening value of leased assets in AY 1997-98, which is examined by us. Similar chart for assets given on lease during AY 1997-98 and in subsequent years is not furnished to us. Hence, the AO should verify those charts and if this condition is satisfied, all those transactions should also be accepted as finance lease transaction. “
12.2 Since the Tribunal has directed to examine the nature of transactions in assessment year 1997-98 to 2000-0 1 and since similar charts has not been filed for the year under consideration, we set aside the matter to the file of the assessing officer with the direction to examine the transactions as per above directions of the ITAT. We order accordingly.
13. The next issue for consideration relates to dis allowance of bond issue expenses. The assessee incurred an amount of Rs. 10,09,92,445/- towards bond issue expenses of different series issued during the year and claimed these expenses as deduction. The assessing officer, however, treated the expenditure capital in nature as the amount was incurred for raising capital. On appeal the ld. CIT (Appeals) following his decision for assessment year 1997-98 upheld the dis allowance.
14. Before us the ld. AR of the assessee submitted that ITAT has allowed the appeal in favor of the assessee in assessment years 1997-98 to 2000-01 vide paras 21 to 25. On the other hand, the ld. Sr. DR supported the order of the ld. CIT (Appeals).
15. We have heard both the parties and gone through the material available on record. We find that the issue is covered by the decision of the ITAT for assessment year 1997-98 to 2000- 01 wherein it has been held as under:-
“25. We have heard the submissions of both the parties and perused the material on record and have gone through the orders of the authorities below and the judgements cited by the ld. AR of the assessee. We find that in the case of M/s. Khirani Chemicals Ltd. (supra) the issue before Hon ’ble Delhi High Court was regarding expenses incurred on issue of debentures. In that case also, the assessee claimed deduction of the entire expenses in the year of issue of debentures whereas the assessing officer came to the conclusion that the expenditure would qualify only for amortization under section 35-D of the I. T. Act. Under these facts, it was held by Hon ’ble Delhi High Court that the Tribunal was perfectly justified in holding that the expenditure was a permissible deduction and accordingly deleted the addition made by the assessing officer. Since the facts in the present case are similar, we decide this issue in the present case also in favour of the assessee by following the judgement of Hon’ble Delhi High Court. Ground No. 2 of the assessee ’s appeal in all the four years stand allowed.”
16. Since the issue is squarely covered by the decision of the ITAT in the assessee’ s own case, respectfully following the precedent, it is held that bond issue expenses will be allowable as deduction as revenue expenditure. The assessing officer is directed to delete the addition.
17. The last issue for consideration relates to disallowance of depreciation on company’s office premises at NBCC place, Lodhi Road, New Delhi. The assessee claimed depreciation on office building at the rate of 10 per cent at Rs.1,45,16,016/-. As per notes on account the auditors have noted that office building including parking area has been capitalized from the date of taking possession. However, the sale / transfer deed is pending for execution in favour of the assessee. The auditors have further commented that documentation / registration formalities were pending in respect of office building including parking area valuing Rs.15.17 crores. To a query raised by the assessing officer, it was submitted that the assessee was legal owner of the premises and was occupying the same for the purpose of business. The assessee submitted necessary proof of occupation of the building and agreement for sale evidencing the ownership of the property along with legal opinion. The reference to the auditors’ remark was with reference to technical flaw in the title, which did not hamper the ownership of the company. It was also submitted that the assessee is a Govt. of India Undertaking and had purchased the above office from National Building Construction Corporation Ltd., a Govt. of India Enterprises and had complied with all the formalities and had taken possession of the premises during the year and was occupying the same for its business. This contention of the assessee was rejected by the assessing officer that as per section 53-A of Transfer of Property Act, the contract should be in writing. It should be signed by the transferor or on his behalf. The transferee should have taken the possession of the property. Thus, mere occupation of the building was not sufficient. The legal opinion of the advocate dated 4/03/2003 only clarified that agreement to sell was not compulsorily required to be registered. As per agreement dated 11/04/2002 NBCC provisionally allotted certain space at Upper Ground Floor, Car Parking at Basement and exclusive use of toilets. The building was under construction at that time. Another agreement dated 21/11/2002 NBCC handed over the vacant possession to the assessee. Therefore, from the above agreements, it was clear that upto 21/11/2002, neither the property in question was in existence nor was any written agreement to sell. Even vacant possession of the space was not with the assessee. Mere payment of consideration on 14/06/2009 is not sufficient to prove that the assessee was owner of an immovable property, which was not in existence at that time. He accordingly disallowed the claim of depreciation amounting to Rs.1,45,16,016/-.
18. On appeal the ld. CIT (Appeals) observed that as far as the agreement dated 11/04/2002 with the NBCC was concerned, on going through the agreement, the observation made by the assessing officer had been found to be correct. At the same time, the assessee had filed a letter from NBCC dated 29/03/2002 in which it was clearly mentioned that commercial space measuring 625 sq mts. allotted to the assessee vide letter dated 28/04/1998 and commercial space measuring 285 sq. mts. purchased by MMTC and sold to IRFC was handed over to IRFC. In view of the contradictory position and no confirmation being filed that in the agreement it has been wrongly mentioned that the building was under construction and actually the possession had already been handed over to the appellant, no depreciation on part of the office space purchased from NBCC could be allowed. The ld. CIT (A), therefore, upheld the dis allowance in respect of office space purchased from the NBCC.
19. Before us the ld. AR of the assessee submitted that the ITAT in the case of the assessee for assessment year 2002-03 has upheld the contention of the assessee. On the other hand, the ld. Sr. DR supported the order of the ld. CIT (Appeals).
20.1 We have heard both the parties. ITAT in order dated 28/08/2009 for assessment year 2002-03 in ITA. No. 1735 (Del) of 2006 has allowed depreciation on the office space taken from NBCC. ITAT while deciding the issue has observed as under:-
“ 14. We have considered the rival submissions. When the possession was handed over by the NBCC to the assessee, the possession letter noted as under :-
“ Possession of the following commercial space is handed over to Indian Railway Finance Corporation Ltd., New Delhi.
(i) Commercial space measuring 625.0104 sq. m. (approx.), Upper Ground Floor, East Tower of NBCC Place, Pragati Vihar, New Delhi. (Ref. NBCC’s allotment letter No. REM&D:98:854 dt. 28.4.98 and letter No.REM&D:99:836 dated 5.11.1999)
(ii) Commercial space measuring 284.9241 sq. m.
(Purchased by MMTC and sold to IRFC; by MMTC. Ref:IRFC’s letter No.IRFC/O. Accom/NBCC dt. 14.1 .2000 to CE/REM&D, NBCC)
Toilet : Complete
Fire fighting points = 49.
Possession with regard to 30 car parking and 20 scooter parking slots will be handed over shortly. Drawings for the same are being obtained from the NBCC HQ Office. Fire-fighting layout drawing will also be supplied shortly as desired by IRFC.”
In respect of property referred in Para No. 2 of the above referred possession letter the assessee is held to be the owner and was also held to be entitled for depreciation even for assessment year 2001-02. Therefore, there cannot be any dispute about the space allotted to the assessee directly by NBCC which is also confirmed by allotment letter dated 28.4.1998 referred in the possession letter and in respect of which possession was handed over on 29.3.2000. The formalities which are pending are in respect of transfer deed pending for execution but neither the notes on account nor the auditor’s report reveal that the possession was never taken. On the contrary provision was made in the accounts in respect of depreciation on the basis of payment made and possession taken over. We, therefore, hold that the assessee is entitled to depreciation. Merely because registration formalities were pending claim of depreciation cannot be disallowed in view of the decision of Hon ’ble Supreme Court in the case of Mysore Minerals, 239 ITR 775 which has been followed by the Hon ’ble Delhi High Court in the case of CIT Vs. Bharat Aluminium Co. Ltd., 292 ITR 600. “
20.2 Since the issue is covered by the decision of the ITAT in favor of the assessee, respectfully following the precedent it is held that the assessee is entitled for depreciation in respect of office space purchased from NBCC.
21. In the result, the appeal filed by the assessee is decided in terms indicated above.
Order pronounced in the open court today on : 31st January, 2011.