When I became a father :

October 2nd 2012 has become special for lifetime , as along with the Father of the Nation’s Birthday it’s a day when I became a father as well . I thought I could share some of my initial experiences of fatherhood and hence is this blog .

Since my childhood , my mom’s favorite phrase when I was not allowed to do something that I liked and use to get upset and angry, was “you will realise this only when you become a father” and now finally I became one.

I still remember way back in February 2012 when the news got confirmed, my first reaction , was age is catching up , you gonna be a father .

But slowly as the days passed , I could feel how blessed is the experience of motherhood as I was seeing my wife Chitra go through it and with each day I use to think and tell my mother that “you would have gone through the same when you had me “ and was seeking forgiveness for my unacceptable behavior . Its amazing to see the love , affection and care with which a mother brings her child to the world and it’s an ongoing process ever after I guess. I have always loved my parents the most , but I don’t take them for granted anymore as now I realise what they would have undergone in parenting.

I could also see that we had some wonderful people around (colleagues / friends and their families ), always giving us advises on what to do , how to do , whom to consult which helped us go through these 9 months without any major issues . Finally on October 1st night wherein I got the call from Kerala where I had dropped her in the 7th Month “ I feel the d day is tomorrow ” and I rushed in and till the moment I reached by her side early morning on 2nd October , I did not know what was happening around and felt more nervous than the professional Exams which has always been nightmarish .

On 2nd October in the evening , when the baby arrived the world had changed there were wishes and happiness all around and its one of the best days in my life and would remain so . When I first saw her outside the labour room , I saw a tiny little angel with her eyes closed may be trying to tell me Dad I have arrived…

Penalty under Service Tax

Penalty should not be imposed for if Assessee Paid service tax along with interest and late fee deposited before issue of Show Cause Notice

Saraswati Engineering v. CCCES (Cestat) – If the assessee has discharged the service tax liability on his own ascertainment or on the basis of ascertainment by the Central Excise officers and inform the Central Excise officer of payment of such service tax then, no notice under sub-section (1) in respect of the amount so paid shall be served. In the instant case, the assessee discharged the tax liability for the period April to September, 2007 in August 2007 and May 2008. Interest amounting to Rs. 10,049/- was paid on 05/05/2008. They had filed the return due on 25/10/2007 by 09/05/2008. They also paid the late fee of Rs. 2,000/- for the delayed filing of the return as per the instructions of the officer who received the return. The above conduct of the assessee make it abundantly clear that there was no wilful misstatement or suppression of fact on the part of the assessee. Therefore, the provisions of sub-section (3) of Section 73 is clearly attracted in the facts of the case and issuance of a show-cause notice for demand of service tax and imposition of penalties was not at all warranted.

CESTAT, MUMBAI BENCH

Saraswati Engineering

v.

Commissioner of Customs, Central Excise & Service Tax, Nagpur

ORDER NO. A/294/11/SMB/C-IV

APPEAL NO. ST/305/2009

JULY 20, 2011

ORDER

1. This appeal is directed against the Order-in-Appeal No: SR/195/NGP/2009 dated 07/09/2009 passed by the Commissioner of Customs & Central Excise (Appeals), Nagpur.

2. Briefly stated the facts of the case are as follows:

2.1 The appellant, K.G.K. Nair, proprietor of M/s. Saraswati Engineering, Gadchandur, Distt. Chandrapur is a small-scale contractor engaged in providing Maintenance and Repair Services and holds Service Tax Registration No. 263/MRS/CND/2003-04. During the period from April to September, 2007 the appellant provided the said services to M/s. Manikgarh Cement, Gadchandur. The value of the taxable service so provided amounted to Rs. 19,11,058/-. The service tax payable thereon amounted to Rs. 1,98,724/-. The appellant collected service tax from the recipient of the service but did not remit the same immediately to the credit of the Revenue. The appellant paid an amount of Rs. 83,820/- towards service tax on 21/08/2007 and paid the balance amount of Rs. 1,14,904/- on 05/05/2008. The appellant also discharged the interest amount of Rs. 10,049/- for the late payment of service tax. The appellant filed the service tax return for the said period on 09/05/2008 after a lapse of about 6 months and was directed to pay the late fee of Rs. 2,000/- for the delayed filing, which was also paid by the appellant.

2.2 The jurisdictional Assistant Commissioner issued a show-cause notice dated 20/10/2008 alleging non-payment of service tax for the said period and also proposing imposition of penalties under Sections 76, 77 and 78 of the Finance Act, 1994. The appellant did not file any reply to the show-cause notice. Therefore, the adjudicating authority passed an ex parte order dated 30/03/2009 wherein he confirmed the service tax amount of Rs. 1,98,724/-, interest on the said amount under Section 75 and imposed an equivalent amount of penalty both under Section 76 and under Section 78 of the Finance Act, 1994 and a further penalty of Rs. 1,000/- under Section 77.

2.3 The appellant-assessee filed an appeal before the Commissioner (Appeals) and submitted before the said authority that they had discharged the service tax liability and interest thereon much before the issue of the show-cause notice and had also filed the service tax return for the relevant period before the issuance of the notice. They also informed that they had also deposited late fee of Rs. 2,000/- for the delayed filing of the return and, therefore, they pleaded that as per the provisions of Section 73 of the Finance Act, 1994, no notice could have been issued against them for demanding service tax and also for imposition of penalties. Therefore, they prayed for setting aside the penalties imposed. However, the learned Commissioner (Appeals) did not consider their pleas and passed the impugned order upholding the confirmation of service tax and imposition of penalties and rejected the appeal completely.

2.4 The appellant is before me against the said order.

3. The learned advocate for the appellant submits that in spite of the submissions made before the lower appellate authority that in view of the provisions of sub-section (3) of Section 73, no notice could have been issued on the appellant and no penalty could have been imposed. The lower appellate authority did not consider this plea and merely confirmed the order of the lower adjudicating authority. When the show-cause notice itself is not maintainable in view of the above provisions of law, the orders of the adjudicating and appellate authorities are bad in law and not sustainable.

4. The learned SDR, on the other hand, reiterates the findings given by the lower authorities. However, he fairly concedes that the appellate authority has not given any finding on the pleas made by the appellant and, therefore, the matter be sent back to the lower appellate authority for reconsideration.

5. I have carefully considered the submissions. From the records it is seen that the appellant had discharged the service tax liability of Rs. 1,98,724/- along with interest thereon well before the issue of show-cause notice. They had also paid the late fee of Rs. 2,000/- for the delayed filing of the service tax return. In spite of this the department has chosen to issue a show-cause notice in October 2008. Sub-section (3) of Section 73 reads as follows:

“(3) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him under sub-section (1) in respect of such service tax, and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub-section (1) in respect of the amount so paid:

Provided that the Central Excise Officer may determine the amount of short payment of service tax or erroneously refunded service tax, if any, which in his opinion has not been paid by such person and, then, the Central Excise Officer shall proceed to recover such amount in the manner specified in this section, and the period of “one year” referred to in sub-section (1) shall be counted from the date of receipt of such information of payment.

Explanation. – (1): For the removal of doubts, it is hereby declared that the interest under section 75 shall be payable on the amount paid by the person under this subsection and also on the amount of short payment of service tax or erroneously refunded service tax, if any, as may be determined by the Central Excise Officer, but for this sub-section.

Explanation - (2) For the removal of doubts, it is hereby declared that no penalty under any of the provisions of this Act or the rules made thereunder shall be imposed in respect of payment of service-tax under this sub-section and interest thereon.”

6. A plain reading of the above provisions makes it abundantly clear that if the assessee has discharged the service tax liability on his own ascertainment or on the basis of ascertainment by the Central Excise officers and inform the Central Excise officer of payment of such service tax then, no notice under sub-section (1) in respect of the amount so paid shall be served. In the instant case, the assessee discharged the tax liability for the period April to September, 2007 in August 2007 and May 2008. Interest amounting to Rs. 10,049/- was paid on 05/05/2008. They had filed the return due on 25/10/2007 by 09/05/2008. They also paid the late fee of Rs. 2,000/- for the delayed filing of the return as per the instructions of the officer who received the return. The above conduct of the assessee make it abundantly clear that there was no wilful misstatement or suppression of fact on the part of the assessee. Therefore, the provisions of sub-section (3) of Section 73 is clearly attracted in the facts of the case and issuance of a show-cause notice for demand of service tax and imposition of penalties was not at all warranted.

7. Learned advocate is only challenging the imposition of penalties and not any other amount paid by his client. In view of the above legal provisions I hold that the imposition of penalties under Sections 76, 77 and 78 in this case was not at all warranted and therefore, I set aside the same. Thus the appeal is allowed with consequential relief, if any.

“Royalty” Still Not Taxable as DTAA prevails over the retro law.

Despite Retro Law By Finance Act 2012, “Royalty” Not Taxable as DTAA prevails

The assessee, a Mauritius company, made payment to Panamsat, USA, for hire of a “transponder satellite”. The AO held that the said hire charges constituted “royalty” and that the assessee ought to have deducted TDS u/s 195 and that as it had not done so, the amount was to be disallowed u/s 40(a)(ia). Before the Tribunal, the department argued that though as per Asia Satellite 332 ITR 340 (Del), the hire charges were not assessable as “royalty”, this verdict was no longer good law in view of the amendment to s. 9(1)(vi) by the Finance Act 2012 w.r.e.f. 1.4.1976 to provide that such hire charges shall be assessable as “royalty”. HELD by the Tribunal:

(i) In Asia Satellite 332 ITR 340 (Del) it was held that in order to constitute “royalty”, the payer must have the right to control the equipment. A payment for a standard service would not constitute “royalty” merely because equipment was used to render that service. A similar view was taken in Skycell Communications 251 ITR 53 (Mad). In De Beers (Kar) & Guy Carpenter (Del) it was held that to “make available” technical knowledge, mere provisions of service was not enough and the payer had to be enabled to perform services himself. The department’s argument that the amendments by the Finance Act, 2012 changes the position is not acceptable because there is no change in the DTAA between India and USA and the DTAA prevails where it is favourable to the assessee;

(ii) Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, s. 195 will not apply as held in Vodafone International Holdings B.V. 341 ITR 1 (SC). As s. 195 did not apply, no disallowance can be made u/s 40(a)(i);

(iii) Further, as prior to the insertion of s. 40(a)(ia) in AY 2004-05, payments to a resident did not require TDS, under the non-discrimination clause in the DTAA, the disallowance u/s 40(a)(i) in the case of non-residents cannot be made as held in Herbalife International 101 ITD 450 (Del), Central Bank of India & Millennium Infocom Technologies 21 SOT 152 (Del).



Interest paid by PE of foreign bank to H.O. is deductible in hands of PE, same interest is not taxable in hands of H.O.

While interest paid by PE of foreign bank to H.O. is deductible in hands of PE, same interest is not taxable in hands of H.O.

The assessee, a Japanese bank, carrying on business through a PE in India, paid interest of Rs. 5 crores to its H.O. & other branches. The assessee, in computing the profits assessable to tax in India, claimed that while the interest received by the H.O. & other branches from the PE was not chargeable to tax in India on the principle that the PE & H.O. were one & the same entity, the PE was entitled to claim a deduction under Article 7 of the DTAA. The AO held that the PE & the H.O. were deemed to be separate entities and that while the interest received by the H.O. from the PE was taxable under Article 11, deduction for that interest could not be allowed to the PE u/s 40(a)(i) as it had failed to deduct TDS. The CIT (A) followed the verdict of the Special Bench in ABN Amro Bank 98 TTJ 295 (Kol) (partly affirmed in ABN AMRO 198 TM 376) and held that the interest was neither chargeable to tax nor allowable as a deduction. On appeal to the Tribunal, the matter was referred to a 5 Member Special Bench. HELD by the Special Bench:

(i) On the question whether the interest paid by the PE to the H.O. is deductible, while such interest is not deductible under the Act because the payer & payee are the same person, Article 7(2) and 7(3) of the DTAA & its Protocol makes it clear that for the purpose of computing the profits attributable to the PE in India, the PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for, inter alia, interest on moneys lent by the PE of a bank to its H.O.

(ii) On the question of taxability of the interest received by the H.O. from the PE, such interest is not taxable under the Act as both are, under the Act, the same person and not separate entities & one cannot make profit out of himself. The fiction created in Article 7(2) of the DTAA treating the PE as separate and independent entity does not extend to Article 11. Also, the interest paid by the PE is not interest paid in respect of debt claims forming part of the assets of the PE so as to attract Article 11(6). The DTAA, even assuming that it does create a liability, cannot be applied u/s 90(2) as it is contrary to the Act and less favourable to the assessee (Q whether the interest paid by the PE should be netted off against the interest received left open).

Finance Lease – Lease equalization charge is allowable

Finance Lease – Lease equalization charge as per ICAI Guidelines is allowable

CIT vs. Virtual Soft Systems Ltd (Delhi High Court) – 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 re-calibrating 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.

Therefore, for the reasons given hereinabove, in our opinion, the method of accounting followed by the assessee enabled, it to determine the real income, which was offered for tax in the instant case. The assessing officer, by disallowing the deduction has added to the taxable income of the assessee that, which is not, part of its income, but only an adjustment of the amount claimed as depreciation.

HIGH COURT OF DELHI

judgment delivered on: 07.02.2012

ITA Nos. 216/2011. 398/2011.

403/2011. 404/2011 & 680/2011

CIT

Vs

VIRTUAL SOFT SYSTEMS LTD.

ORDER

RAJIV SHAKDHER. J

1. The captioned appeals lay challenge to a common judgment of the Income Tax Appellate Tribunal, Delhi Bench, New Delhi (in short the Tribunal) passed on 19.02.2010. The only point raised in the captioned appeals is: whether an assesse‟s leased rental income could be allowed to be reduced by taking recourse to lease equalization charges.

2. It is relevant to note that before the Tribunal the assessment years (in short AY) in issue were: AYs 1996-97 to 2000-01. Thus, the Tribunal, by virtue of the impugned judgment dealt in all with five (5) appeals being ITA Nos. 117, 118, 119, 120 & 2292/Del/2006&04. In so far as the first appeal was concerned, that is, the one relating to 1996-97, the challenge before the Tribunal was laid vis-a-vis the order dated 26.03.2004, passed by the Commissioner of Income Tax (in short CIT) under Section 263 of the Income Tax Act, 1961 (in short the I.T. Act). The issue on merits was the same as indicated hereinabove by us. As regards the remaining four (4) appeals, what was challenged before the Tribunal was a common order of the Commissioner of Income Tax (Appeals) [in short the CIT(A)] dated 15.09.2003 pertaining to AY 1997-98 to 2000-01. In these appeals as indicated in the judgment of the Tribunal, there were two issues raised. The first issue, pertained to the validity of the re-assessment proceedings carried out in the case, while the second issue, on merits, was the same as indicated above by us.

3. It is in this factual background that the Tribunal, in the first instance, dealt with the issue on merits and, having come to the conclusion that the contention of the assessee had to be sustained, the validity of the order passed in AY 1996-97 under Section 263 of the IT Act or, the validity of the re¬assessment proceedings, in so far as, the remaining four assessment years were concerned, was not examined, as they had become, according to the Tribunal, “of academic interest”.

4. It is in this background that the Revenue has come up in appeal to this court.

ASSESSMENT YEAR 1996-97

4.1 In respect of AY 1996-97, the original assessment was completed, on 30.03.1999, under Section 143(3) of the IT Act. The said assessment was set aside by CIT(A). Consequently, an order under Section 143(3) read with Section 152 of the IT Act was passed on 19.03.2002. This order led to a determination of, a negative income, qua the assessee, which was, pegged at (-) Rs 11,02,255. The said order of assessment dated 19.03.2002, was set aside by the CIT in exercise of its power under Section 263 of the IT Act vide order dated 26.03.2004. By this order the CIT, directed inclusion of a sum of Rs 33,77,830/- in the assessee‟s income, on account of lease rental. Consequent thereto, the assessee was issued a notice under Section 143(2) of the IT Act and, after hearing the representative of the assessee, the total assessable income of the assessee was re-computed, by the order dated 09.03.2005 as follows.

Income as per Order u/s 250/143(3)

dated 19-03-2002 (-) 11,02,255/-

Add: Lease Rental 33,77,830/-

Total Assessable income 22,75,575/-

4.2 The asessee‟s income was thus assessed at Rs. 22,75,575/-, interest was also levied under Section 234B and Section 234C of the IT Act; orders were also issued for initiation of penalty proceedings under Section 271(1)(c) of the IT Act.

4.3 The assessee being aggrieved, impugned the substantive order of the CIT dated 26.03.2004 passed under Section 263 of I.T. Act in appeal before the Tribunal, which culminated in the impugned judgment.

ASSESSMENT YEAR 1998-99 TO 2000-01

4.4 In so far as the remaining four assessment years were concerned the assessing officer appears to have passed separate orders of even date, i.e., 28.01 .2005.A perusal of the order would show that a common thread flows through the said assessment orders.

4.5 The assessment‟s were re-opened for the said years, by the assessing officer, after taking recourse to the provisions of section 147/148 of the IT Act. Notices were issued to Show Cause as to why lease equalization charges debited to the profit and loss account should not be disallowed and, thereupon added to the assessee‟s income.

4.6 The assessee, filed his reply and objected to the assessment being re-opened as, according to it, there was no reason to believe that income had escaped assessment. On merits, the assessee had submitted that it had relied upon the Guidance Note dated 20.09.1995 (in short the Guidance Note) issued by the Institute of Chartered Accountants of India (in short ICAI), in respect of, Accounting for Leases. It was also submitted that the Central Government on 25.01.1996, had already issued an Accounting Standard qua Section 145 of the IT Act, which mandated that accounting policy of the assessee should be such so as to represent true and fair view of the affairs of the assessee‟s business.

4.7 The assessing officer, however, rejected the submission of the assessee, and came to the conclusion that the taxable income of the assessee had to be determined as per the IT Act and, that the said Guidance Note of the ICAI only provided guidelines for preparation of financial statements for the purposes of accounting. This apart, the assessing officer relied upon the order of the CIT(A) dated 27.07.2004 passed in the assessee‟s own case, for AY 2001-02. The sum and substance of the order passed by the CIT(A), in AY 2001-02, was that the lease equalization charge, was a notional charge on the profits of an assessee. The said lease equalization charge, represented an amount set aside out of profits of the assessee to equalize the imbalance between lease rental and depreciation created over a period of time. The lease equalization charge was thus, a provision, and not an expense incurred by the lessor, i.e., the assessee. This provision was similar to that made for depreciation. Therefore, a mere provision made for gauging the profitability of a business venture could not be claimed as a deduction under the IT Act. It may be worthwhile to note that eventhough the order of the CIT(A) denied to the assessee the deduction, it recognized the fact that lease equalization charge was a provision for additional depreciation, crafted to reflect true and correct picture of the profitability of the assessee. Relying on the order of the CIT(A), for the AY 2001-02, the assessing officer, disallowed the sum attributed to lease equalization charges, and consequently, added the same to the assessee‟s income. The disallowance, in each of the assessment years is as follows: (i) AY 1997-98 Rs. 67,02,745/-; (ii) AY 1998-99 Rs. 66,50,755/-; (iii) AY 1999- 00 Rs. 1,65,12,077/- and (iv) AY 2000-01 Rs.1 ,14,47,407/-

4.8 The assessment orders were carried in appeal to the CIT(A). The CIT(A) in respect of the aforementioned four assessment years passed a common order dated 15.09.2005. The CIT(A), in so far as re-opening of the assessment proceedings was concerned came to the conclusion that since, in the first instance, no definitive finding with regard to lease equalization charges had been given, it could not be said that there was a change of opinion on the part of the assessing officer. The CIT(A) held, that based on a consideration of the facts, the assessing officer had come to the conclusion that the lease equalization charges had been wrongly claimed as deduction and hence, there was occasion to initiate proceedings under Section 147 read with Section 148 of the IT Act. The CIT(A), was thus of the view, that the assessing officer‟s action of re-assessment had to be sustained.

4.9 On the merits, the CIT(A) followed his own order dated 27.07.2004 passed in the assessee‟s case in AY 2001-02 and sustained the addition. He briefly held that, the Guidance Note issued by the ICAI itself, indicated that income of the assessee had to be determined as per the prevalent tax laws, and that the Guidance Note was evolved only for the purposes of finalization of the accounts of the assessee. As noticed by us above, the assessing officer had followed the order of the CIT(A) for AY 2001-02.

5. The assessee being aggrieved by both the order of the CIT dated 26.03.2004 passed under Section 263 of the IT Act pertaining to AY 1996-97, and the common order passed by the CIT(A) dated 15.09.2003 vis-à-vis AY 1997-98 to 2000-01, preferred appeals to the Tribunal. The Tribunal, by the impugned judgment dated 19.02.2010, allowed the appeals of the assessee, on merits.

6. The revenue being aggrieved, has preferred the captioned appeals before us. In these appeals, the predecessor bench had framed the following common questions of law by an order dated 06.07.2011.

(a) Whether on the facts and circumstances of the case, the ITAT erred in law and on merits in allowing the deduction of lease equalization charges from lease rental income?

(b) Whether the Guidance Note issued by ICAI for presentation of accounts would override the statutory provisions of the Income Tax Act, 1961?

6.1 By a subsequent order passed on 10.01.2012, the second question of law was reformulated with the consent of counsels for the assessee and revenue. The reformulated question of law reads as follows:

(b) Whether in determination of the real income of the assessee recourse can be taken by the assessee to the Guidance Note issued by ICAI.

SUBMISSION OF COUNSEL

7. Before us arguments on behalf of the revenue were advanced by Ms Rashmi Chopra, while on behalf of the assessee submissions were made by Mr S. Krishnan.

7.1 Ms Rashmi Chopra, in her submissions largely relied upon the orders passed by the assessing officer and the order of the CIT(A) dated 15.09.2003. It was Ms Chopra‟s submission that the assessee could not take recourse to the Guidance Note issued by the ICAI qua Accounting for Leases in determination of its income, and therefore in that regard, whether a particular deduction ought to be allowed or disallowed, one would only have to look to the provisions of the IT Act. Ms Chopra contended that, the debit made to the profit and loss account by the assessee in the AYs under consideration towards lease equalization charge was rightly disallowed by the assessing officer as, there was no provision in the IT Act for such a deduction. Ms Chopra, further submitted that, in any event, there had been no determination whatsoever by the assessing officer, as to whether the lease transactions in issue could be categorized as a finance lease. Ms Chopra stated that the issue pertaining to this aspect of the matter was pending in another appeal being ITA No. 142/2007, titled CIT vs Goodwill India. For these reasons, Ms Chopra argued that the view taken by the Tribunal, was erroneous and ought to be reversed.

7.2 On the other hand, Mr Krishnan contended that, regard may be had to the fact that the assessee was entitled to change its accounting policy which it had done, by taking recourse to the provisions of the Guidance Note issued by the ICAI, while accounting for lease transactions. The method of accounting which the assessee had followed was based what has been provided in paragraphs 11 and 22 of the Guidance Note. Mr Krishnan submitted that, the courts had accepted the recommendations issued by the ICAI from time to time, with respect to the manner and mode of reflecting transactions in books of accounts, in a number of judgments, pronounced by both the High Courts‟ as well as the Supreme Court. In this regard he placed reliance on the judgment of this court in the case of CIT vs Woodward Governor India Pvt. Ltd. (2007) 294 ITR 451 (Delhi) and the Judgment of the Supreme Court in the case of Collector of Central Excise Etc. Vs Dai Lchi karkaria Ltd (1999) 156 CTR 172 (SC).

7.3 Mr Krishnan, further submitted that, what is provided in the Guidance Note stands transcended into an Accounting Standard (in short „A.S.‟) issued by the ICAI, in 2001.

7.4 In this regard Mr Krishnan placed reliance on A.S. 19 issued by the ICAI. Mr Krishnan, also placed reliance on two judgments of different benches of the Tribunal in the case of Indian Railways Finance Corporation Ltd. Vs JCIT (Delhi Tribunal) ITA Nos. 699, 359, 3357 & 2109/Del/04 and JCIT vs Pact Securities & Financial Ltd 86 ITD 115 (Hyd.). The latter being extensively referred to in the former judgment of the Tribunal.

7.5 It was Mr Krishnan‟s contention that lease equalization charge was nothing but a method of adjusting the depreciation claimed in the books of accounts to enable the assessee to represent its real income by adopting an accounting methodology which, even though not mandatory, had surely the seal of approval of a professional body, such as, the ICAI. Mr Krishnan submitted that the Tribunal, had rightly come to the conclusion that the lease equalization charge could not be disallowed and hence, could not be added to the assessee‟s income on the ground that there was no provision in the IT Act as, over the entire lease period of the asset, the debits and credits made in the profit and loss account would square off with each other. In other words the ultimate effect of such a charge was reduced to a naught.

7.6 Reliance was also placed by Mr Krishnan, on the provisions of Section 211(3C) of the Companies Act, 1956 (in short Companies Act), to contend that the ICAI was mandated with the task of formulating A.Ss from time to time for acceptance by the Central Government.

REASONS

8. Having heard the learned counsels for the parties and perused the record, what emerges is as follows: However, before we proceed further, we may indicate that, we would be answering the questions of law framed; in the reverse order, in as much as, the second question would be answered first and then, we would take up the other question of law.

8.1. The foremost aspect which, thus arises for consideration in this case is: whether the method of accounting employed by the assessee to determine the real income evidently derived from lease of assets, could be given a go-by. In determining its income and its presentation, the assessee took recourse to the Guidance Note, issued by the ICAI, on Accounting For Leases. The ICAI‟s publication on the subject indicates that the Guidance Note on accounting of leases was issued by it, for the first time, in 1988, which was, then revised in 1995. The hiatus between the date when it was first issued, and its revision, appears to be on account of an interim order granted by the Madras High Court in a case, which was, disposed of on, 14.07.1995. It appears that the case was dismissed as withdrawn.

8.2 We may also note that our discussion is prefaced by the fact that on 01.04.2001, the ICA I did publish A.S. 19 in respect of leases. The said A.S. 19, is applicable, in respect of, assets leased during accounting periods commencing on or after 01.04.2001. The periods, which are under consideration, in the present appeals, are prior to 01 .04.2001.

9. In this background what is required to be considered is whether the books of accounts could be rejected by the assessing officer merely for the reason that recourse to the Guidance Note was taken by the assessee. In this regard, we would be required to examine the provisions of Section 145 of the I.T. Act. Section 145 of the I.T. Act adverts to the method of accounting followed by an assessee. Sub-section (1) of Section 145 provides that income chargeable under the head “profits and gains of business or profession” or “income from other sources” shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying A.S. in respect of any class of assessee or class of income. Sub-section (3) of Section 145, empowers the assessing officers to disregard the books of accounts submitted by the assessee only if he is not satisfied with: the correctness or completeness of the accounts of the assessee or, the method of accounting employed by the assessee or on account of A.S. notified under sub¬section (2), not being particularly followed by the assessee. In this particular case, the assessing officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in Section 145 of the IT Act. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issued by the ICAI in that behalf, was disregarded, on what we would term as, a disjointed reading of the provisions of the said Guidance Note. Both the assessing officer as well as the CIT(A) have adverted to paragraph 2 of the Guidance Note to come to, what we consider an erroneous conclusion in as much as they have held that in determining as to whether deduction on account of lease equalization charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the IT Act. In our view, such an observation in paragraph 2 of the Guidance Note is really saying the obvious. Therefore, even if this Guidance Note was silent on this aspect the provisions of the I.T. Act would undoubtedly still apply. Thus, as to what is the impact of provision of para 2 of the Guidance Note will be considered by us as we progress further with our judgment.

9.1 However, what is important at this stage is to first address ourselves to the aspect as to whether the assessing officer could have disregarded the method of accounting followed by the assessee in respect of lease rentals. In our view, the assessing officer could not have do so, as the method of accounting was based on a guideline commended for adoption by a professional body such as the ICAI. The Guidance Note reflects the best practices adopted by accountants the world over. The fact that, at the relevant point in time, it was not mandatory to adopt the methodology professed by the Guidance Note issued by the ICAI, is irrelevant, for the reason that, as long as there was a disclosure of the change in Accounting Policy in the accounts, which had a backing of a professional body such as the ICAI, it could not be discarded by the assessing officer. This is specially so, since the ICAI is, recognized as the body vested with the authority to recommend A.Ss for ultimate prescription by the Central Government in consultation by the National Advisory Committee of Accounting Standards, for presentation of financial statements. The provisions of section 211(3C) of the Companies Act are quite clear on this aspect. As a matter of fact, the proviso to the said sub¬section, quite clearly specifies that till such time the Central Government prescribes the accounting standards the accounting standards issued by the ICA I, shall be deemed to be the relevant accounting standards. The relevant provision reads as follows:

“211(3C) For the purposes of this section, the expression “accounting standards” means the standards of accounting, recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (30 of 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 201A.

Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section.”

10. In this context it would be important to note that AS1 pertaining to Disclosure of Accounting Policies has already been notified by the ICAI as having attained mandatory status for periods commencing on or after 01.04.1991. It is not, the Assessing Officer‟s case, that the accounting policy with regard to lease rentals was not disclosed by the assessee. The assessing officer seems to have taken umbrage to the change in accounting policy having been brought about only with effect from AY 1996-97. In our view, as long as there was a disclosure of the factum of change in the accounting policy and its effect, in the accounts, no fault could be found with the change in accounting policy merely on account of the fact that it was employed for the first time in AY 1996-97. The change in accounting policy, as noticed by us above, had the imprimatur of a duly recognized professional body, i.e., the ICAI. Therefore, notwithstanding the fact that the opinion of the ICAI was expressed in a Guidance Note which had not attained a mandatory status, would not, in our view, provide a basis to the assessing officer to disregard the books of accounts of the assessee and in effect method of accounting for leases, followed by the assessee.

11. This brings us to the next crucial question as to whether the Tribunal had erred in allowing the deduction on account of lease equalization charges. In order to adjudicate upon this issue, it may be relevant to first understand as to how lease transactions operate in the commercial world. Traditionally, the term lease was confined to an immovable property such as building and/or land. Lease therefore came to be defined as: A conveyance of land or of the use of a building or a part of a building from one person (lessor) to another (lessee) for a specified period of time, in return for rent or other compensation. (See Dictionary for Accountants, Eric L. Kolher 1978, 5th edition). This traditional view, underwent a change over a period of time when, parties and/or entities entered into lease transactions even qua movable assets, such as, plant, machinery and various other assets, which also included vehicles; to name some of them. The Oxford Dictionary of Accounting (New Edition), 1999 represents that change. The definition of lease contained therein, is indicative of the shift. For the sake of convenience the definition of lease as appearing in the said dictionary is also extracted hereinbelow:

“Lease: A contract between the owner of a specific asset, the lessor, and another party, the lessee, allowing the latter to hire the asset. The lessor retains the right of ownership but the lessee acquires the right to use the asset for a specific period of time in return for the payment of specific rentals or payments. Statement of Standard Accounting Practice, 21 Accounting for Leases and Hire Purchase Contracts, classifies leases into operating leases and finance leases with differing accounting treatments.”

12. A perusal of the definition would show that a lease represents an arrangement, which more often than not dons a form of a contract, whereby party „A‟ confers upon party „B‟ the right to use an asset, for a consideration, which ordinarily is labelled as lease rentals.

12.1 Over a period of time, the transactions stood refined, in the sense, a lessor need not necessarily have created or even bought an asset with his own funds. Therefore, you could have a lease transaction where “A” was the lessor of an asset, which was financed by “C”, i.e., a lender, and which, ultimately, was leased to party “B” ,i.e., the lessee. A lease transaction therefore attained several forms, depending on the comfort level of the parties entering into a transaction and, the purpose with which the transaction was entered into, bearing in mind, the nature of the asset and, the risk bearing capacity of the parties. Therefore, you could today execute a finance lease, or an operating lease, or evolve a sale and lease back arrangement, or a leveraged lease, or even, employ a direct leasing arrangement.

12.2 We do not intend to get into the various forms in which, a lease transaction may be executed by parties, but what is important, is that, all these transactions exhibit a facet by which access is provided to an asset, by separating ownership, risk and the provision of finance to achieve this goal. Since, we are concerned in this matter with a lease, which is, ordinarily known as, a finance lease, or even capital lease; an attempt would be made to articulate as to what such a transaction would entail.

13. The Guidance Note of the ICAI defines a finance lease as: “a lease under which the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the lease assets”.

13.1 As the definition would indicate the lease arrangement of a finance lease is one, whereby the lease rentals are so configured that over a period of time they enable the lessor to recover a substantial portion of the fair value of the assets.

13.2 Therefore, generally the attributes of such a lease are: (a) it is a long term lease; which is ordinarily irrevocable and, the minimum present value of the lease rental decided at the commencement of the lease, which is spread over a period of time, facilitates recovery of a substantial part of the fair value of the leased assets. While fixing the lease rentals and the lease period, the economic life of leased asset is borne in mind. The lease period is normally shorter than the economic life of the asset. The other attribute of such a transaction is that the risk of breakdown or technological obsolescence is transferred to the lessee, who therefore ordinarily would bear the cost of maintenance, repairs and insurance of the leased assets. The ownership, however, is retained with the lessor.

14. The Tribunal, in the captioned cases, has returned a finding of fact after examining transaction at hand that it is a finance lease. Being a final fact finding authority we do not intend to disturb this finding; which in any case cannot be disturbed except on the ground of perversity. The learned counsel for the revenue though, did attempt to argue before us, that there is no determination by the assessing officer as to whether the lease transactions in issue were in the nature of a finance lease; we tend to disagree as the Tribunal quite categorically in paragraph 9 of the impugned judgment has come to a conclusion that the transactions in issue were in the nature of a finance lease. The relevant portion is extracted hereinafter for the sake of convenience:

“9. As per the guidance notes, operating lease has been defined as lease other than the finance lease. If the entire value of asset was not recovered by the assessee in the case of Goowi ll India Ltd. (supra) during the period of lease, it cannot be a finance lease and hence guidance notes of the ICA I cannot be applicable to such an assessee. In the present case, in the sample working submitted before us, it is shown that as against amount financed by the assessee of Rs.677,645/-, the assessee has recovered Rs.654,944/- as depreciation and the balance amount of Rs.22,799/- has been explained as residual value of the leased asset. This is only 3.36% of the amount financed and hence it is reasonable claim that this balance amount is residual value. In the case of Goodwill India Ltd. (supra) relied upon by the learned DR of the revenue, as per example noted by the tribunal on page 37 of 306 ITR, against cost of the asset of Rs.100/-, only Rs.66/- was recovered depreciation and the unrecovered amount is 34%. This cannot be said to be residual value. In view of this vital difference in facts, we are of the considered opinion that this Tribunal decision is not applicable in the present case because in the present case, the assessee is recovering full financed amount of the lease asset during the lease period in the form of depreciation and residual value. No defect is pointed out by the learned counsel of the revenue in this chart and it is also not the case of the revenue that the facts of the present case are different than the position depicted in this chart. Since, the facts are different; the Tribunal decision cited by Ld. Counsel of the revenue rendered in the case of Goodwill India Ltd. (supra) is not relevant in the present case. We would also like to point out that in the present case, it is not the case of the revenue that the leases in question are not finance lease as per the guidelines issued by ICAI. The case of the revenue as per the orders of the authorities below and as per written submissions of learned counsel of revenue before us is that the guidelines of ICAI are not decisive and no deduction is allowable as per any provision of Income Tax Act on account of Lease Equalisation charges and still we have obtained sample working from the assessee by refixing the case for clarification to satisfy ourselves that the leases in question in the present case is finance leases and as per the discussion above, we have noted that in the present case, the leases are finance lease whereas in the case of Goodwill India Ltd. (supra), the lease was not finance lease as per the facts noted by the tribunal in that case.”

(emphasis is ours)

14.1 A perusal of the grounds of appeal would show that there is no averment whatsoever that such a finding of fact recorded by the Tribunal, was perverse. Therefore, we would have to accept that the Tribunal examined the record, and came to a correct conclusion.

14.2 The Tribunal having found that the lease in issue is a finance lease we would be required to consider whether the method employed by the assessee with regard to determination of the real income is a correct method. Paragraph 11 and 12 of the Guidance Note of the ICAI read with the appendix attached to it is, quite instructive in this regard. Therefore, paragraph 2 of the Guidance Note on which great stress is laid on behalf of revenue has to be read with paragraphs 11 and 12. We do not wish to burden the judgment with the extract of the said paragraphs, however, it is sufficient to note that the paragraphs adverts to the following four elements, which arise, for consideration for treatment of the amount received as lease rentals by the lessee, in order to bring to tax what is his real income and, present a true and fair view of the transaction in issue. The four elements which are considered are: lease rentals; the implicit rate of return (IRR); depreciation; and lease equalization charge.

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 re-calibrating 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.

15. Therefore, for the reasons given hereinabove, in our opinion, the method of accounting followed by the assessee enabled, it to determine the real income, which was offered for tax in the instant case. The assessing officer, by disallowing the deduction has added to the taxable income of the assessee that, which is not, part of its income, but only an adjustment of the amount claimed as depreciation.

16. Therefore, both questions of law are answered in favour of the assessee and against the revenue. The appeals of the revenue are, accordingly, dismissed.

FEBRUARY 07, 2012

DTAA Vs Domestic Tax Laws

Assessee to whom DTAA applies, the provisions of Income Act shall applied to the extent they are more beneficial to the assessee

Intelsat Corporation Vs. ADIT (International Taxation) - In this case , there is a distinguishable feature namely that the assessee has received payments from persons residents in India. However, the receipts have been taxed u/s 9(1)(vii), Explanation 2, Clause (vi) thereunder. The decision in the case of Asia Satellite Telecommunications Company Limited is to the contrary and in favour of the assessee. It is also a matter of fact on record that the assessee is a tax resident of USA and, therefore, the provisions contained in the DTAA are applicable. However, we are of the view that we need not go into the provisions of the DTAA because of the provision contained in Section 90(2) of the Act. This provision provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall applied to the extent they are more beneficial to that assessee. The assessee is found to have incurred no liability to tax under the Act. Therefore, even if the provisions of the treaty go against the assessee, it has to be granted the benefit of the Act under which no liability to tax can be fastened on the assessee

INCOME TAX APPELLATE TRIBUNAL, DELHI

ITA No.5393/Del/2011 – Assessment Year : 2008-09

M/s Intelsat Corporation

Vs.

Assistant Director of Income Tax, International Taxation

ORDER

PER G.D.AGRAWAL, VP :

This appeal of the assessee is directed against the order of learned Dispute Resolution Panel-1, New Delhi dated 23rd September, 2011.

2. The learned CIT-DR, vide application dated 31st January, 2012, has requested for adjournment of the appeal.

3. The learned counsel for the assessee submitted that the issue involved in this appeal is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for AY 2006-07 and 2007-08 and also of Hon’ble High Court for AY 2007-08. In support of his submission, he has filed copies of the orders of the Tribunal in ITA No.4662/Del/2011 for AY 2006-07 and in ITA No.5443/Del/2010 for AY 2007-08 and of Hon’ble High Court for AY 2007-08 in the form of a paper book.

 

4. We have heard the submissions of the learned counsel for the assessee and perused the material placed before us. In view of the submission of the learned counsel for the assessee that the issue involved is covered in favour of the assessee by the earlier decisions of the Tribunal in assessee’s own case for AY 2006-07 and 2007-08 and also the decision of Hon’ble Jurisdictional High Court for AY 2007-08, we have rejected the application of the learned CIT-DR requesting for adjournment and proceeded to decide the appeal of the assessee exparte qua the Department.

5. We find that the issue involved in this appeal is covered by the aforementioned decisions of the Tribunal. The Tribunal, vide its order dated 4th March, 2011 in ITA No.5443/Del/2010 for AY 2007-08, has held in paragraph 4 as under:-

“4. We have considered the facts of the case and submissions made before us. We have already mentioned that there is a distinguishable feature namely that the assessee has received payments from persons residents in India. However, the receipts have been taxed u/s 9(1)(vii), Explanation 2, Clause (vi) thereunder. The decision in the case of Asia Satellite Telecommunications Company Limited is to the contrary and in favour of the assessee. It is also a matter of fact on record that the assessee is a tax resident of USA and, therefore, the provisions contained in the DTAA are applicable. However, we are of the view that we need not go into the provisions of the DTAA because of the provision contained in Section 90(2) of the Act. This provision provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall applied to the extent they are more beneficial to that assessee. The assessee is found to have incurred no liability to tax under the Act. Therefore, even if the provisions of the treaty go against the assessee, it has to be granted the benefit of the Act under which no liability to tax can be fastened on the assessee. Accordingly, ground Nos.1 to 5 are allowed.”

6. The above order of the Tribunal dated 4th March, 2011 has been followed by the Tribunal in its order dated 16th January, 2012 in ITA No.4662/Del/2011 for AY 2006-07. The learned counsel for the assessee further submitted that the said order of the Tribunal dated 4th March, 2011 was also the subject-matter of appeal by the Department before Hon’ble Delhi High Court. Hon’ble Delhi High Court, vide its order dated 19th August, 2011 in ITA No.977/2011, has dismissed the appeal filed by the Department and confirmed the order of the Tribunal. Copy of the said order of Hon’ble Delhi High Court has also been placed in the paper book filed by the assessee. Their Lordships of Delhi High Court have decided the said issue by holding as under:-

“Learned Counsel for the Revenue could not dispute the position that issues raised in this appeal are directly covered by the judgment of this Court in the case of Asia Satellite Telecommunications Ltd. Vs. Commissioner of Income Tax (ITA 131/2003 decided on 31.01.2011). In that judgment, a categorical view is taken that the income received from the activities undertaken by the respondent/assessee would not be eligible to tax in India. Following that judgment, this appeal is dismissed.”

7. Respectfully following the aforesaid judgment of Hon’ble Delhi High Court and the decisions of the Tribunal for AY 2006-07 & 2007-08 cited supra, we reverse the directions under Section 144C(5) of the IT Act, 1961 passed by the Dispute Resolution Panel and allow the appeal of the assessee.

8. In the result, the appeal filed by the assessee is allowed.

Decision pronounced in the open Court on conclusion of hearing on 2nd February, 2012