COMMISSIONER OF INCOME TAX Vs. MGF INDIA LTD

JUDGEMENT

(1.) The Revenue's appeal under Section 260A of the Income Tax Act ("the Act") had urged several questions of law. On 12.01.2016, this Court framed the following questions:

(2.) The assessee's commercial activity centers on leasing assets and the resultant income from it. In terms of lease agreements it enters into, ownership of the assets continues to vest with the assessee and the assets are shown in the balance sheet under the head "Fixed Assets". On this account, it claims depreciation. However, while preparing profit and loss account, it does not credit the full amount of lease charges; some amounts are set apart to be carried over to the lease equalization reserve; only the balance amount is credited to the profit and loss account. In the relevant year (AY 1998-99) the assessee credited Rs. 15,38,13,310/- as lease charges. The footnotes below the schedule reflect that this amount is the net of the lease equalization reserve. The total amount carried over to the lease equalization reserve is Rs. 6,24,96,982/-. This was added in its total income while computing its return; however, in the course of assessment proceedings, the assessee, by its letter of 23.03.2001 contended that as it was lease equalization charge, the sum (offered for taxation) should be withdrawn and that this position was based on legal opinion. The Assessing Officer (AO) considered the assessee's submissions and after analyzing the materials reasoned that the Act does not distinguish between a finance lease and operating lease, because the legal ownership of the underlying asset continues unchanged. Therefore, the charges (towards lease) received by the owner should be taxed as a whole and no artificial provision can bifurcate such amounts. It was further held that lease equalization could not fall within any allowable deduction or expense as it was a provision similar to depreciation and that the assessee incurred no liability of any nature. The AO added back the amount. The assessee's appeal was rejected by the CIT(A). In the body of its reasoning, the CIT's observations and findings were accepted by the Income Tax Appellate Tribunal (ITAT); however, it proceeded to note that similar claims had been allowed in the past; relief was accordingly granted on this ground.

(3.) This Court had, in Commissioner of Income Tax v Virtual Soft Systems 2012 (341) ITR explained the concept of lease equalization fund as follows:-