S.RAVINDRA BHAT,J. - (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:
(i) whether the lease equalization charges can be deducted while computing book profit; and

(ii) whether the provisions for non-performing assets are liable to be adjusted while computing book profit under Section 115JA of the Act.

(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its letter of 23.03.2001 contended that as it was lease equalization charge, the sum (offered for taxation) should be withdrawn and that this position was based on legal opinion.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:-
"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 charge 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."

This reasoning finds acceptance also in the Karnataka High Court's judgment in Commissioner of Income tax v. Weizmann Finance [2013] 357 ITR 74 (Karn), where it was held as follows:

"9. In the instant case, the assessee is in the business of long term finance. In order to carry on the said business, a debtor, who needs the assistance, has to make an application in writing. To consider the said application before granting loan, the assessee collects processing charges. After the debtor is found to be eligible to grant loan, agreements are entered into and thereafter loan is advanced. The amount has to be repaid with interest within 7 years period for repayment of the loan. The agreement also contains the stipulation that the amounts are not paid periodically as agreed to, the debtor has to pay penal interest. If the debtor chooses to repay the amount and fore close before the agreed period, then not only he has to pay the loan amount plus interest, he has also to pay additional interest, as he is not entitled to the benefit in respect of lower rate of interest, which was spread over the period of 7 years. All these amounts, which are paid by the debtor to the assessee, have a direct nexus with the business, which he is carrying on. All these incomes are derived from the business, which he is carrying on. It is also on record except this long term finance business, the assessee is not carrying on any other business much less any short term finance business. Therefore, all these categories of incomes which the assessee is receiving as a direct nexus with the long term finance and therefore section 36(1)(viii) of the Act is attracted. Therefore, we do not see any merit in these appeals. Accordingly, the first substantial question of law is answered in favour of assessee and against the Revenue."