The Delhi High Court in the case of Commissioner of Income Tax, Delhi versus M/S. MGF India Ltd wherein dismissed the revenues appeal and held that lease equalization charges can be deducted while computing book profit.
In instant case Assessee engaged in the business of leasing assets and derives income from it where the ownership vested with the assessee were shown in the balance sheet under the head ‘Fixed Asset’.
While preparing P&L account only a part of lease charges credited and the rest carried over to lease equalization reserve and the same was added to the income of Assessee and offered for tax. The Assessee’s appeal was rejected by CIT (A) .The CIT’s observation and findings were accepted by the ITAT however it is came into notice that similar claims had been allowed in the past; relief was accordingly granted on this ground.
The Court relied on the Karnataka High Court’s judgment in Commissioner of Income tax v. Weizmann Finance wherein ruled that all categories of incomes received by Assessee as a direct nexus with the long term finance and therefore Section 36(1)(viii) of the Income Tax Act is attracted.
Rahul Chaudhary appeared for Revenue argued that AO and CIT (A) rejected the arguments raised by Assessee and the Assessee couldn’t rely only on the guidance note issued by ICAI with respect to decision of Income deriving under lease agreement.
The next submission of revenue was that assessee created such amount to cover the loss which may or may not occur in the future therefore, has to be considered only as a contingent liability. Accordingly such liability cannot be allowed as deduction.
Satyen Sethi, learned counsel for the assessee relied on various court’s decision to press their contention. The court including Justice S. Ravindra Bhat and Justice Sanjeev Sachdeva had a considered opinion that the assessee in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not the depreciation claimed is, less or more than the capital recovery.
Finally the court ruled that “as long as the method of accounting follows some established principles, one of which includes offering only Revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in the AYs in issue, in its profit and loss account. It represents a true and fair view of the accounts, which is a statutory requirement under Section 211(2) of the Companies Act”.
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