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Pr. Commissioner of Income Tax-2 Vadodara v/s Sun Pharmaceutical Industries Ltd.

    Tax Appeal No. 768 of 2015

    Decided On, 01 March 2016

    At, High Court of Gujarat At Ahmedabad

    By, THE HONOURABLE MS. JUSTICE HARSHA DEVANI & THE HONOURABLE MR. JUSTICE G.R. UDHWANI

    For the Appellant: K.M. Parikh, Sr. Standing Counsel. For the Respondent: S.N. Soparkar, Sr. Advocate with B.S. Soparkar, Caveator.



Judgment Text

Harsha Devani, J.

1. The appellant - revenue by this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act") has called in question the order dated 13th March, 2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'D' (hereinafter referred to as "the Tribunal") in ITA No.1400/Ahd/2003 by proposing the following two questions stated to be substantial questions of law:-

(1) "Whether on the facts and circumstances of the case and in law, the ITAT was justified in deleting the addition made on account of lease equalization charges in computing the book profit under explanation to section 115JA of the Act without appreciating that the A.O. correctly invoked the provision of section 115JA, which finds support from the decision of Hon'ble High Court of Karnataka in the case of C.I.T. v. Weizmann Homes Ltd. reported in [2013] 33 taxmann.com 171 (Karnatak) and decision of I.T.A.T. Chennai Bench "A" in the case of Deputy Commissioner of Income tax v. Citi Financial Retails Services India Ltd. In I.T.A. No.1102 & 1103 (MDS) of 2014 A.Y. 1999-2000 and 2000-01, reported in [2014] 52 taxmann.com 68 (Chennai-Trib.)?"

(2) "Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that the gain on Exchange rate fluctuation Rs.11,72,828/- does not form part of 'total turnover' for the purpose of section 80HHC of the Act without appreciating that forex fluctuation gain is not profit derived from export but forms part of total turnover for the purpose of Section 80HHC of the Act, since gain on exchange rate fluctuation is in the nature of other income includible in gross receipts?"

2. The assessment year is 2000-2001 and the relevant accounting period is the previous year 1999-2000. The assessee which is assessed in the status of a company filed its return of income on 30th November, 2000 declaring total income at Rs.15,92,21,260/- under section 115JA of the Act. The return came to be processed under section 143(1) of the Act on 9th March, 2000. Subsequently, the assessee company on 1st June, 2001 filed a revised return of income declaring total income under section 115JA of the Act at Rs.15,92,21,250/-. The assessment came to be framed under section 143(3) of the Act under the normal provision determining the assessed income at Rs.11,84,80,295/- and the income came to be computed under section 115JA of the Act at Rs.17,75,85,674/- after making various additions/ disallowances.

3. In relation to proposed question (1), the Assessing Officer did not accept the assessee's contention that lease equalization/terminal charge should not be added while calculating the book profit under section 115JA of the Act. The Assessing Officer noticed that the assessee had itself added back the lease equalization charge in the computation of income for working total business income as per Chapter IV of the Act, but did not add back the same while calculating the book profit under section 115JA of the Act. According to the Assessing Officer, section 115JA clearly stated that book profit means the net profit as shown in the Profit and Loss Account for the relevant previous year prepared under sub-section (2) clause (b) as increased by the amounts carried to any reserve by whatever name called. The Assessing Officer was of the view that lease equalization charge was nothing but reserve created by the assessee and was necessarily required to be added back while calculating the book profit as per clause (b) of the Explanation to sub-section (2) of section 115JA. He accordingly, while calculating the book profit of the assessee, added Rs.81,99,764/- debited to lease equalization account. The assessee carried the matter in appeal before the Commissioner (Appeals), who, upon appreciating the material on record, noted that the main contention of the assessee was that the lease equalization charge is not a reserve but in fact is a fund which does not satisfy the characteristics of a reserve. The Commissioner (Appeals) did not agree with the submission advanced on behalf of the assessee and observed that as per Explanation (b) to section 115J, "book profit" means the net profits as shown in the P & L Account for the relevant previous year (prepared under sub-section (1A), as increased by:

(b) the amounts carried to any reserve (other than the reserve specified in section 80HHD) (or sub-section (1)A to section 33AC), by whatever name called.

He, accordingly, was of the view that the lease equalization fund which has been taken by the assessee to Schedule 5 of fixed assets in the name of lease terminal adjustment is nothing but a reserve and dismissed the said ground of appeal. The assessee carried the matter in further appeal before the Tribunal, which placed reliance upon the decision of the Delhi High Court in the case of GE Capital Transportation Finance Services Ltd. 113 ITD 22 (Del.), and the Madras High Court in TVS Finance & Services Limited, 318 ITR 435 (Mad.), and allowed the ground of appeal.

4. Mr. K.M. Parikh, learned senior standing counsel for the appellant invited the attention of the court to the facts as recorded by the Assessing Officer to point out that the Assessing Officer has specifically recorded that the assessee while making the computation of the total business income as per the normal provisions in Chapter IV had added together the lease equalization charge whereas the same was not added while calculating the book profit under section 115JA of the Act. It was contended that when lease equalization charge has been added while computing the income under the normal provisions, it cannot be given a different treatment while computing the book profit under the MAT provisions. It was submitted that, therefore, the Assessing Officer was wholly justified in adding back the amount of lease equalization charge while computing the book profit under section 115JA of the Act. It was further submitted that both, the Assessing Officer and the Commissioner (Appeals), have rightly found that the lease equalization charge is in the nature of a reserve and, therefore, in view of the Explanation to sub-section (2) of section 115JA of the Act, while computing the book profit, the amount carried to any reserve by whatever name called is required to be added. In support of his submission, the learned counsel placed reliance upon the decision of the Karnataka High Court in the case of Commissioner of Income-Tax and Another v. Weizmann Homes Ltd., 2013 (357) ITR 74, wherein the court in the context of the provisions of section 115JA of the Act has held that the Explanation to the section states that for the purposes of the section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by, the amount mentioned in the Explanation. One such amount is in sub-clause (c) the amount or amounts set aside to provision made for meeting liabilities, other than ascertained liabilities. The court in the facts of the said case found that Rs.12,30,220/- had been set apart to meet the contingencies but such amount was not included in the book profit. The court held that such amount was an unascertained liability and that the amount was earmarked as provision for diminution in the value of any asset for the purpose of arriving at the book profit for the purpose of section 115JA, which ought to have been included. The court, accordingly, held that the assessing authority was justified in adding the said amount to the book profit. It was submitted that in the facts of the present case, clause (b) of the Explanation to sub-section (2) of section 115JA would be attracted and that the amount of lease equalization fund being in the nature of a reserve, the net profit is required to be increased by such amount. It was submitted that, therefore, the said ground of appeal deserves consideration.

5. Opposing the appeal, Mr. S.N. Soparkar, learned senior advocate appearing with Mr. B.S. Soparkar, learned advocate for the respondent assessee on caveat, submitted that the basic premise namely, that the lease equalization charge is in the nature of a reserve is erroneous, inasmuch as, it is a settled legal position as held by different High Courts that lease equalization fund is not in the nature of a reserve and hence, the provisions of clause (b) of sub-section (2) of section 115JA of the Act would not be attracted in the present case. It was further submitted that the computation of book profit under Chapter IV, that is, the normal provisions and computation of book profit under the MAT provisions is different. It was submitted that an assessee, though he may be entitled to a claim, may not make a claim while computing the book profit under Chapter IV of the Act. It was submitted that in the present case, the assessee is being assessed under the MAT provisions and hence, the only question that arises for consideration is whether for the purposes of section 115JA of the Act, the lease equalization charge is in the nature of a reserve. The attention of the court was invited to the decision of the Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. C.I.T., 2011 (330) ITR 363, for the proposition that "book profit" has been defined and explained in the Explanation to sub-section (2) of section 115JB of the Act. Section 115JB is a self-contained code. It applies notwithstanding other provisions of the Act. There is no scope for any allowances or deductions under any other section from what is deemed to be the total income of the company (assessee). The first step for arriving at the "book profit" is that the net profit as shown in the P & L Account for the relevant previous year prepared under section 115JB(2) has to be increased by the amounts in clauses (a) to (f) if such amount(s) is debited to the P & L Account. Clause (b) refers to the amounts carried to the reserve by whatever name called. Such increase needs to be made only if any amount referred to in clauses (a) to (f) is debited to the P & L Account. It was submitted that the provisions of section 115JA are similar to those as contained in section 115JB. Thus, the book profit in the present case is required to be computed as per the provisions of section 115JA. Accordingly, the net profit as shown in the P & L Account for the relevant previous year prepared under section 115JA(2) has to be increased by the amounts in clauses (a) to (f) if such amount is debited to the P & L Account.

5.1. Mr. Soparkar further submitted that since the lease equalization fund is not in the nature of a reserve and does not fall in clauses (a) to (g) of section 115JA of the Act, the question of adding the same to the net profit while computing the book profit does not arise. In support of his submission that the lease equalization charge is not in the nature of a reserve, the learned counsel placed reliance upon the decision of the Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd., 2012 (341) ITR 593, which is the lead decision on the issue and has been subsequently followed by various High Courts. Reliance was also placed upon the decision of the Madras High Court in the case of TVS Finance and Services Ltd., Jayalakshmi Estates v. Joint Commissioner of Income Tax Special Range - XI, 2009 (318) ITR 435, wherein the substantial question which was subject matter of consideration by the High Court was whether the Income Tax Appellate Tribunal was right in holding that Rs.3,99,62,960/- towards lease equalization charge made as per Institute of Chartered Accountants of India's guidance note is contingent in nature and, therefore, includible in computing the "book profit" under section 115JA of the Act. Before the court on behalf of the appellant, it was submitted that the lease equalization charge had been made on the basis of the Reserve Bank Guidelines and on the basis of the opinion of the Directors. The court found that this was in accordance with the Guidance Norms on Accounting for leases. Before the court, the Department conceded that the amount of lease equalization charge over the period of lease is equal to the difference between the quantum of principal recovered and the residual value, but hypothetically justified its treatment as a reserve on the ground that there will be some years when the quantum of provision would be more than necessary. The court held that when the lease equalization charge is debited as per the guidelines and when the Department also admitted the same, it could not appreciate the stand of the Department that it should be treated as a reserve on the ground that there may be some years when the quantum of provision is more than necessary. The court observed that it was clear that in accordance with the guidance note, the appellant had debited the same on account of depreciation and lease equalization 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 interest on the amount financed. The court, accordingly, held that the Assessing Officer could not add back the said provision under clause (c) of the Explanation to section 115JA of the Act. Reliance was also placed upon a decision of the High Court of Hyderabad (For the State of Telangana and the State of Andhra Pradesh) in the case of Commissioner of Income Tax and Ors. v. Pact Securities and Financial Services Ltd. and Ors., 2015 (374) ITR 681, wherein the court agreed with the view adopted by the Delhi High Court in the case of CIT v. Virtual Soft Systems Limited (supra) and held that notwithstanding the fact that the opinion of the Institute of Chartered Accountants of India was expressed in the guidance note, which had not attained a mandatory status, would not, in its view, be a ground to discard the books of account of the assessee or method of accounting for lease followed by the assessee and disallowing the assessee to deduct the lease equalization charges from the lease rental income.

5.2. The decision of the Delhi High Court in the case of Commissioner of Income Tax, Large Taxpayers Unit v. Indian Railway Finance Corporation Ltd., 2014 (362) ITR 548, was also cited wherein the court placed reliance upon its earlier decision in the case of CIT v. Virtual Soft Systems Limited (supra) and held that lease equalization charge represents the difference between the recovery of cost of capital and the depreciation as claimed under the Companies Act. The difference between the two may be negative or positive and is not constant over the period of lease. Thus, the net revenue or tax effect is nil in the entire term. The court observed that this was clear from the net profit declared under column G, and held that the computation was logical, fair and a true reflection of the income earned and reduced the abnormalities. The court was of the view that the lease equalization charge results in debit or credit entry in the profit and loss account and it helps the income getting staggered or matched during the entire period of lease. Reliance was also placed upon the decision of the Karnataka High Court in the case of Prakash Leasing Ltd. v. Deputy Commissioner of Income-tax, Central Circle-III, (2012) 208 Taxmann 464 (Karnataka), wherein the court placed reliance upon the decision of the Delhi High court in the case of C.I.T. v. Virtual Soft Systems Limited (supra) and held that the lease equalization charge is the result of the adjustment which the assessee has to make whenever the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. The assessee may claim depreciation based on the provisions of the Income Tax Act or the Companies Act. The capital recovery thus can be known after deduction of financing charges from the lease rentals. Thus, lease equalization charges is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. As long as the method employed for accounting the income meets with the rudimentary principles of accountancy, one of which includes offering only revenue income for tax, it could not find fault with the assessee debiting lease equalization charges in his profit and loss account. Mr. Soparkar submitted that in view of the consistent view adopted by the High Courts and on which the Tribunal has placed reliance, the assessee had rightly not added the lease equalization charge while computing the book profit under section 115JA and hence, the Tribunal did not commit any error, warranting interference.

6. The facts are not in dispute. In the year under consideration, the assessee has been assessed under the MAT provisions namely, under section 115JA of the Act. Section 115JA of the Act provides for "Deemed income relating to certain companies". Sub-section (2) thereof provides that every assessee, being a company, shall, for the purposes of that 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. The said provision further provides for the manner in which the profit and loss account is required to be prepared. The explanation thereto provides that for the purposes of that section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2) as increased inter alia by - (b) the amounts carried to any reserves by whatever name called. Thus, under the provisions of section 115JA, the profit and loss account is required to be prepared under sub-section (2) and the net profit is required to be arrived at, which is required to be increased by the amounts stipulated thereunder, one of which is clause (b) which reads thus: (b) the amounts carried to any reserves by whatever name called. The learned counsel for the appellant has contended that the assessee while making the normal computation of total income has added back the lease equalization charge; however, while computing the book profit under section 115JA, it has not added back the same. In this regard, it may be noted that while computing the book profit under section 115JA, the net profit as shown in the profit and loss account for the relevant previous year under sub-section (2) is required to be increased by the amounts enumerated thereunder, one such being the amounts carried to any reserves by whatever name called. The contention that the assessee has not added the lease equalization charges while computing the book profit under section 115JA while it has added the same under the normal provisions of the Act, deserves to be stated to be rejected, inasmuch as, it is the case of the revenue at all stages that the lease equalization charge being in the nature of a reserve, the net profit is required to be increased while computing the book profit under section 115JA of the Act. The sole question that arises for consideration is as to whether the lease equalization charge is in the nature of a reserve as contemplated under clause (b) of section 115JA of the Act. In this regard, it may be germane to refer to the decision of the Delhi High Court in the case of C.I.T. v. Virtual Soft Systems Limited (supra), wherein the concept of lease equalization fund has been succinctly elucidated as under:-

"14.3 Lease rental in monetary terms is a sum total of: the financing charge and the amount embedded in it in the form of the capital sum. What the assessee needs to do, while offering for tax income derived from lease is, to separate the financing charge from the amount recovered towards capital, that is, the capital recovery amount. The financing change is determined by applying the IRR to the net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease rental. The fourth element which is the lease equalization charge is the result of the adjustment, which the assessee has to make whenever, the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. The assessee, may claim depreciation based on the provisions of the IT Act or, may even adopt the method of depreciation provided under the Companies Act. In the event, the depreciation claimed is less than the capital recovery, the difference is debited in the profit and loss account in the form of lease equalization charge, and similarly if, for any reason the depreciation claimed is more than capital recovery then, the difference is credited, once again, in the form of lease equalization charge to the profit and loss account. Therefore, 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. The capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalization charges is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to a naught, as the debit and credits in the profit and loss account would square off with each other. Hence, the contention of the revenue that it is a claim in the form of a deduction which cannot be allowed, as there is no provision under the I.T. Act is, in our view, a complete misappreciation of what constitutes a lease equalization charge. In our opinion, as long as the method employed for accounting of income meets with the rudimentary principles of accountancy, 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. This represents true and fair view of the accounts; a statutory requirement under Section 211(2) of the Companies Act. As explained by us above, the rationale is that over the entirety of the lease period the said debit would work itself out."

This court is in agreement with the view adopted by the Delhi High Court in the above referred decision namely, that the lease equalization charge is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to a naught, as the debits and credits in the profit and loss account would square off with each other. Under the circumstances, the same is neither in the form of a reserve nor a deduction. The above view finds support in the decision of the Madras High Court in the case of TVS Finance and Services Limited v. Joint Commissioner of Income Tax (supra) wherein the court has held that lease equalization charge is not in the nature of a reserve, inasmuch as, the amount of lease equalization charge over a period of lease is equal to the difference between the quantum of principal recovered and the residual value.

7. In the light of the law laid down in the above decisions that the lease equalization fund is not in the nature of a reserve, with which this court is in complete agreement, it is held that the lease equalization charge would not fall within the ambit of clause (b) of the Explanation to sub-section (2) of section 115JA of the Act. Under the circumstances, while computing the book profit under section 115JA of the Act, the question of increasing the net profit by the amount of lease equalization charge would not arise, the same being not in the nature of a reserve. The Tribunal, therefore, did not commit any error giving rise to any question of law, much less, a substantial question of law warranting interference. The said ground of appeal, therefore, does not merit acceptance.

8. As regards the proposed question 2, the Assessing Officer, on a perusal of the break-up of various expenses debited in the profit and loss account, noticed that the assessee company had reduced Rs.11,72,828/- as income on account of exchange rate difference from miscellaneous expenses which resulted in excess deduction under section 80HHC of the Act. According to the Assessing Officer, the receipt of income on account of exchange rate difference being miscellaneous trading receipt would be part of the total turnover of business and further 90% of the same would be reduced while working eligible profits for deduction under section 80HHC of the Act. He, accordingly, held that the assessee by allocating reduced amount has claimed excess deduction under section 80IA of the Act. The assessee carried the matter in appeal before the Commissioner (Appeals) who held in favour of the assessee and deleted the addition. The Tribunal followed its decision in the earlier years in relation to assessment year 1999-2000 wherein it had followed the decision of the Jurisdictional High Court in the case of Commissioner of Income Tax v. Alps Chemicals P Ltd., 2014 (367) ITR 594, and held in favour of the assessee.

9. Mr. K.M. Parikh, learned senior standing counsel for the appellant submitted that the income earned from fluctuation in foreign exchange rates in EEFC Account is not directly attributable to export earning but it is the gain from the foreign exchange kept in EEFC Account like interest on deposit and hence, should not be allowed for calculating deduction under section 80HHC and 80IA of the Act. It was submitted that the Tribunal has failed to appreciate that the decision of this court in the case of C.I.T. v. Alps Chemicals P Ltd. (supra) would not be applicable to the facts of the present case, inasmuch as, in the said case, there was no issue of reduction of income from foreign exchange fluctuation from miscellaneous expenses.

10. On the other hand, Mr. S.N. Soparkar, learned counsel for the respondent submitted that the decision of this court in the case of C.I.T. v. Alps Ch

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emicals P Ltd. (supra) would be squarely applicable to the facts of the present case wherein the court has held that once export is made, due to a variety of reasons, the remission of export sale consideration may not be made immediately. Under the accounting principles, therefore, the assessee on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account, nevertheless any deviation either positive or negative, must have a direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Primarily and essentially, the receipt would also be on account of the export made. If this is so, any fluctuation thereof also must be on account of the export made. It was submitted that the Tribunal has, therefore, merely applied the decision of the Jurisdictional High Court to the facts of the present case and as such, the impugned order does not give rise to any question of law so as to warrant interference. 11. As can be seen from the impugned order, the Tribunal has merely applied the decision of this court in C.I.T. v. Alps Chemicals P Ltd. (supra) to the facts of this case. On behalf of the revenue, nothing has been pointed out to show as to why the said decision would not be applicable to the facts of the present case. In the opinion of this court, the submission of the learned counsel for the appellant that income earned from fluctuation in foreign exchange rate in EEFC account is directly attributable to foreign exchange accounting and should not be allowed for calculating deduction under section 80HHC and 80IA of the Act, does not merit acceptance, inasmuch as, nothing has been pointed out to indicate that the foreign exchange fluctuation has resulted after the remission of export sale consideration had already been made and that the funds were merely kept in the said account. It is a well-settled position of law that the Tribunal is the final fact finding authority under the Act. In the absence of any perversity in the findings of fact recorded by the Tribunal being pointed out, the Tribunal having merely applied the decision of the Jurisdictional High Court to the facts of the case, the impugned order passed by the Tribunal in relation to this ground of appeal also does not give rise to any question of law so as to warrant interference. 12. In the light of the above discussion, in the absence of any question of law, the appeal fails, and is, accordingly, dismissed.
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