P.M. Jagtap, A.M.: ORDER This appeal by assessee is directed against order of learned CIT(A) XIV, New Delhi, dt. 20th March, 2002. 2. Ground No. 1 raised by assessee in this appeal is general seeking no specific decision from us. 3. In ground No. 2, assessee has challenged action of learned CIT(A) in upholding order of AO restricting its claim for depreciation in respect of commercial vehicles given on lease to Rs. 8,51,75,155 (@ 25 per cent) as against Rs. 13,62,80,248 (@ 40 per cent) claimed by assessee. 4 . After considering rival submissions and perusing relevant material on record, it is observed that similar issue was decided by Hon ble Delhi High Court in case of CIT vs. Bansal Credits Ltd. (2003) 179 CTR (Del) 23 : (2003) 259 ITR 69 (Del) holding that it is end user of specified asset which is relevant for determining rate of depreciation. matter, therefore, was remanded by Hon ble Delhi High Court with direction that depreciation at higher rate be allowed subject to verification whether leased out vehicles had been actually used by lessee in business of hire. Relying on said decision of Delhi High Court in case of Bansal Credits Ltd. (supra), Tribunal Delhi Benches have restored similar issue in many cases to file of AO for allowing depreciation at higher rate subject to verification of end user of leased out vehicles by lessee. learned counsel for assessee, however, has brought to our notice recent decision of Delhi High Court in case of CIT vs. M.G.F. (India) Ltd. (2006) 206 CTR (Del) 92 : (2006) 285 ITR 142 (Del) wherein it has been held that assessee engaged in business of leasing out vehicles is entitled to higher depreciation @ 40 per cent on vehicles leased out which are given to third parties under lease agreements and there is no additional requirement to show that said third parties have used those vehicles for hire. Since this decision rendered by jurisdictional High Court is later in point of time and earlier decision in case of Bansal Credits Ltd. (supra) has been taken into consideration while rendering same, we respectfully follow said binding precedent and hold that assessee company was entitled for depreciation at higher rate of 40 per cent on vehicles leased out to third parties in course of its business of leasing out vehicles. impugned order of learned CIT(A) on this issue is therefore set aside and AO is directed to allow claim of assessee for higher depreciation @ 40 per cent on commercial vehicles given on lease. 5. Ground No. 3 relates to addition of Rs. 14,70,000 made by AO and confirmed by learned CIT(A) on account of disallowance of expenses incurred by assessee in connection with issue of equity shares for augmenting its working capital requirement treating same to be of capital nature. 6 . After considering rival submissions and perusing relevant material on record, it is observed that this issue is squarely covered in favour of Revenue and against assessee by decision of Hon ble Supreme Court in case of Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 22 5 ITR 798 (SC) wherein it was held that expenditure incurred in connection with public issue of equity shares constitutes capital expenditure. Relying on this decision of Hon ble Supreme Court in case of Brooke Bond India Ltd. (supra), Hon ble Calcutta High Court has held in case of B.S.L. Ltd. vs. CIT (2004) 191 CTR (Cal) 121 : (2004) 267 ITR 754 (Cal) that in view of decision of Hon ble Supreme Court, question does not remain open any further, for consideration and decisions on basis of as to whether capital raised is needed as working capital or not. Respectfully, following these judicial pronouncements, we uphold impugned order of learned CIT(A) confirming disallowance made on this issue and dismiss ground No. 3 of assessee s appeal. 7 . Ground No. 4 relates to addition of Rs. 21,19,91,185 made by AO and confirmed by learned CIT(A) by way of disallowance of lease equalization charges while computing book profits under s. 115JA. 8 . In P&L a/c filed along with return of income for year under consideration, assessee company had deducted lease equalization charges amounting to Rs. 21,19,91,185 from lease rental income. In computation of total income, said amount had been added back by assessee company, but same was not added to profit as per P&L a/c while computing book profit under s. 115JA. It was submitted on behalf of assessee company before AO that treatment was so given to lease equalization charges following guidelines issued by Institute of Chartered Accountants of India (ICAI) on "Accounting of income, depreciation and other aspects for leasing company". According to AO, said guidelines issued by ICAI on creation of lease equalization charge was only recommendatory and not mandatory. He held that lease equalization was notional charge on profits of company and represented amount set aside out of profits/surplus to equalize imbalance between lease rentals and depreciation charges over period of lease. He, therefore, held that same was liable to be added back to book profit under Expln. (b) to s. 115JA(2). matter was carried before learned CIT(A) and it was submitted on behalf of assessee company before him that lease equalization charge was necessitated because of difference between principal recovery in each instalment of lease rental and depreciation charged to P&L a/c. It was pointed out that lease equalization charge thus brings value of assets at end of year to extent of its unrecovered portion of cost and same was based on principle of "matching cost with revenue" so that periodic net income from lease would be true and fair. detailed note explaining concept of lease equalization was also submitted on behalf of assessee company to learned CIT(A) to support and substantiate its stand that provision for lease equalization charge not being made for meeting any liability, it could not be added back while computing book profit under s. 115JA. This contention raised on behalf of assessee company however was not found acceptable by learned CIT(A) and he proceeded to uphold adjustment/addition made by AO on account of lease equalization charge for purpose of computing book profit under s. 115JA observing that same was notional charge. 9 . learned counsel for assessee submitted that amount of lease equalization charges debited by assessee company in its P&L a/c was added by AO while computing book profit under s. 115JA invoking Expln. (b) to s. 115JA(2). He invited our attention to said Explanation to point out that same authorizes AO to make adjustment to book profit on account of amounts carried to any reserves by whatever name called. He contended that nature of lease equalization charges therefore, needs to be seen so as to ascertain whether same could be regarded as any reserve as envisaged in Expln. (b) below sub-s. (2) of s. 115JA. In this regard, he invited our attention to guidance note issued by Institute of Chartered Accountants of India (ICAI) on "Accounting for leases" and took us through relevant portion of said note to explain nature of lease equalization charges and purpose for which provision is required to be made for said charges. As per direction of Bench, he also prepared and furnished note explaining all relevant aspects relating to provision made for lease equalization charges as follows : "1. Depreciation of Rs. 2708.15 lakhs has been debited to P&L a/c and lease equalization charges of Rs. 2119.91 lakhs has been shown as deduction for value of lease rentals. In computation of total income under normal provisions of Act equalization charges are added back......... 2. Company has consistently followed this accountancy policy and debited lease equalization charges to P&L a/c in past also. Some of leases of this year were in existence in past as well. No addition has been made in past on this account. Rather in asst. yr. 1997-98 this issue was examined in detail by AO and after considering submissions made by appellant AO accepted stand. Adjustments of lease equalization charges are timing differences and if such adjustments are accepted by Department in asst. yr. 1997-98 then no adjustments for same will be required in asst. yr. 1998-99 while computing book profits. 3. Guidance note on accounting on lease : Guidance note based on rationale of matching costs with revenues so that periodic net income form finance lease is true and fair. Depreciation allowance is only permitted to owners of assets, in this regard guidance note is issued only as interim measure.... financial lease is defined under guidance note as lease under which present value of minimum lease payments at inception of lease exceeds or is equal to substantially whole of fair value of leased asset. In P&L a/c against lease rentals matching lease annual charge is debited or credited to P&L a/c. Annual lease charge should represent recovery of net investments/fair value of leased assets over lease term. Annual lease charge = lease rentals - finance charges Annual lease charge Depreciation Lease Equalization Charges (LEC) 1. if annual lease charge > depreciation then LEC is debited to P&L a/c. 2. if annual lease charge < depreciation then LEC is credited to P&L a/c. Lease Equalization a/c should be transferred every year to P&L a/c and disclosed separately as deduction from/addition to gross value of lease rentals shown under head "Gross Amount". Notes to account (Pg. 70, Para 2(ii)) difference of capital recovery vis- a-vis depreciation is reduced from "income from leases" as lease equalization charges in accordance with guidance note---- Balance standing in Lease Adjustment a/c should be adjusted in net book value of leased assets. This guidance note matches annual lease charges with depreciation as Lease Rental - Financial Income = Depreciation and any difference is debited or credited to lease equalization charges a/c. 4. assessee company is non-banking finance company registered with Reserve Bank of India and that Department of non-baking supervision of Reserve Bank of India in its regulatory framework for Non- banking Financial Companies, 1998 clearly states that all NBFCs have to comply with guidance note issued by Institute of Chartered Accountants of India on accounting for leases etc. and that it is mandatory and incumbent on part of NBFCs to follow guidance note. Kindly attention is invited to Notification No. DFC 199/DG(SPT)-98, dt. 31st March, 1998 (copy enclosed Pgs. 1 to 19 relevant @ Pg. 7) wherein Reserve Bank of India has directed in Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 where in direction No. 5 is stated as follows : "Accounting standards and guidance notes issued by Institute of Chartered Accountants of India (referred to in these direction as SCAT) shall be followed insofar as they are not inconsistent with any of these directions". 5. Sec. 211(3A) of Companies Act, 1956 clearly states that P&L a/c and balance sheet of company shall comply with accounting standards. Sub-sec. (3ca) of s. 211 states that expressing "accounting standards" means standards of accounting as specified by Institute of Chartered Accountants of India till time they are prescribed by Central Government in consultation with National Advisory Committee on accounting standards established under sub-s. (1) of s. 210A. 6. guidance notes issued by Institute of Chartered Accountants of India have been considered by authorities and Courts in past (refer Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) @ Pg. 174). Whenever complex question of accountancy principles arises, then v ie w s of Institute of Chartered Accountants of India should be given weightage. 7. mechanics of guidance notes cannot be doubted. Rather it is no more res integra. reliance is also placed upon judgment of Hon ble Hyderabad Tribunal in case of Jt. CIT vs. Pact Securities and Financial Ltd. (2003) 86 ITD 115 (Hyd) where Hon ble Tribunal has held that guidance note on accounting for leases issued by ICAI is not one from which correct profit can t be deducted. This is internationally accepted method having sanction of Institute of Chartered Accountants of India. 8. Each method is distinct having its own independent characteristics and objectives. To reflect alternate method of revenue recognition (as per guidance notes) appropriate adjustment/adaptation entry was called for. Lease equalization only embodies said adjustment/adaptation. It does not lead to creation of any reserve. If this be true will AO also take cognizance of addition to normal case income when made ? Will that be addition to income or withdrawal from reserve ? vary nomenclature of reserve thus is misnomer. In substance it is only another acceptable method of revenue recognition. method of accounting under normal provisions of IT Act may differ from that under MAT provisions. This is because s. 115JA(2) makes it mandatory for company to prepare its P&L a/c in accordance with provisions of parts II and III of Sch. VI of Companies Act, 1956. Where particular amount is not income in particular year as per accepted method of accounting, it will not make it reserve. For example where some lease rentals pertaining to next financial year are received in advance then they will not be recognized as income but will be disclosed in balance sheet as assets and will be recognized as income next year. 9. adjustments on account of lease equalization account whether to debit or credit will not affect quantum of overall recognition of lease rentals recognized as income. This can be demonstrated from following chart : Reconciliation Statement between lease rentals recovered and recognized in books of account Gross Amount Amt. Year Lease Rentals Dr./(Cr.) as lease Accounted for (Rs.) eq. res. in books 1985 35,000 7,500 27,500 1986 16,000 (150) 16,150 1987 8,000 (1,515) 9,515 1988 4,500 1,941 2,559 (Residual 3,000 value) 3,000 66,500 7,776 58,724 Total gross lease rentals received 66,500 Less: Amt. Accounted for as per books 58,724 Less: Net Amt. Standing in lease eq. res. Adjusted infixed assets account 7,776 (Kindly note that figures have been adopted from illustration given in guidance notes at p. 50 of paper book) But in assessee s case assessee is booking depreciation under Companies Act following Straight Line Method (SLM). Assuming we continue with example at p. 50 of paper book by adopting depreciation on SLM Method. Particulars of Lease Lessor s Cost of Leased Computer Rs. 60,000 Fair Value of leased computer at inception Rs. 60,000 Of lease (1st Jan., 1985) lease term is four years. rental is Rs. 35,000, Rs. 16,000, Rs. 8,000, and Rs. 4,500 respectively, in these four years, payable in advance every year. estimated residual value of computer at end of lease term is 5 per cent of cost of asset to lessor. lessee has right to continue lease at end of aforesaid lease term at nominal rent. Depreciation is provided on SLM basis. (i) Calculations of implicit rate of interest in lease will remain same at 14 per cent as stated at p. 50PB, para C. (ii) Calculations of annual lease charge will also remain same as stated at p. 51, top right hand column. (iii) (iv) (v) (vi) (vii) Balance Net Net Book of Lease Annual Investment Cost/Net Statutory Lease Value at Adjustment Lease in lease Book value at depreciation Equalisat end of A/c at Charge at end of beginning on SLM ion Account year end of year basis year 16,500 16,500 31,500 28,500 60,000 15,000 45,000 (Dr.) (Cr.) 750 15,750 14,250 14,250 45,000 15,000 30,000 (Cr.) (Cr.) 7,125 7,875 7,875 7,125 30,000 15,000 15,000 - (Cr.) (Cr.) 7,875 7,125 2,993 15,000 15,000 - - (Cr.) Reconciliation statement between lease rentals recovered and recognized in books of account Gross Amount Amt. Year Lease Rentals Dr./(Cr.) as lease Accounted for (Rs.) e.g. Res. in books 1985 35,000 (16,500) 18,500 1986 16,000 750 16,750 1987 8,000 7,875 15,875 1988 4,500 7,875 15,375 (Residual Value) 3,000 66,500 - 66,500 Total gross lease rentals received 66,500 Less : Amt. accounted for as per books 66,500 Nil Thus, during lease tenure in comparison, equal amount of lease rentals received have been recognized as income. method of revenue recognition specified in guidance notes is acceptable parallel method of revenue recognition meant for preparation of financial statements for accounting purpose, such as under Companies Act, 1956 (refer p. 45 of PB). 10. As per Explanation to s. 115JA book profits means net profit as shown in P&L a/c for relevant previous year prepared under sub-s. (2) as increased by : (a) ** ** ** (b) amounts carried to any reserves by whatever name called (c) ** ** ** amount of lease equalization charges reduced from lease rentals credited to P&L a/c cannot be termed as reserve for following reasons : audited P&L a/c certified by auditors doesn t term lease equalization charges as reserve. Lease equalization charges are not disclosed in balance sheet of assessee under head Reserves and surplus . Reserves mean profits earned by company and not distributed as dividend to shareholders but kept back by directors for any purpose to which it may be put in future. (Refer CIT vs. Century Spinning and Manufacturing Co. Ltd. (1953) 24 ITR 499 (SC) @ p. 504) As lease equalization account is not shown as reserve in annual accounts, but adjusted against value of fixed assets in fixed asset schedule clearly indicate that these are not to distributed as dividends by company and hence cannot be classified as reserves ." 10. learned counsel contended that provision for lease equalization charges thus is nothing but sort of parallel method of accounting followed by assessee for purpose of revenue recognition of leasing business. He contended that purpose of making said provision is to split lease rental income into financial income in order to match said income with corresponding expenses such as depreciation. He contended that provisions made for lease equalization charges thus is not appropriation of profit so as to treat same as reserve as envisaged in Expln. (b) to s. 115JA(2). In support of this contention, he relied on decision of apex Court in case of State Bank of Patiala vs. CIT (1996) 132 CTR (SC) 273 : (1996) 219 ITR 706 (SC). He submitted that similar treatment given by assessee by debiting provision for lease equalization charges to its P&L a/c was accepted by Department in past including immediately preceding year i.e. asst. yr. 1997-98 wherein no adjustment was made by AO while computing book profits under s. 115JA on this count. 11. learned counsel for assessee also relied on decision of Delhi Bench of Tribunal in case of Dy. CIT vs. SREI International Finance Ltd. (2006) 10 SOT 7 22 (Del) and submitted that similar issue involved in said case has been decided by Tribunal in assessee s favour holding that lease equalization charges where not covered within any of cls. (a) to (f) of Explanation to s. 115JA(2). He contended that AO, therefore, was not justified in adding amount of lease equalization charges while computing book profits of assessee under s. 115JA. 1 2 . learned Departmental Representative, on other hand, submitted that its P&L a/c for year under consideration was not prepared by assessee company strictly as per Sch. VI of Companies Act and in any case, AO was duly authorized to make adjustment to profit shown by assessee company in its P&L a/c as per Explanation to s. 115JA(2) while computing book profits. He contended that for determining nature of lease equalization charges, nomenclature used is not determining factor and it is necessary to ascertain such nature from purpose for which provision was made for said charges as well as treatment given by assessee company in its books of account. He contended that adjustment on account of lease equalization charges was made by assessee company itself while computing book profit as per s. 115JA which was not permissible in law. He contended that said provision in any case was made by assessee company to set apart certain amount from profits of year under consideration and same therefore was nothing but clearly in nature of reserve as envisaged in Expln. (b) to s. 115JA(2). 13. As regards decision of Delhi Bench of Tribunal in case of SREI International Finance Ltd. (supra) cited by learned counsel for assessee, learned Departmental Representative submitted that argument now being advanced on behalf of Revenue before Tribunal in present case submitting that provision made for lease equalization charges by assessee company was nothing but amount carried to reserve, had not been raised before Tribunal in case of SREI International Finance Ltd. (supra). He submitted that since this aspect of matter is very crucial to decide issue under consideration and Tribunal in case of SREI International Finance Ltd. (supra) had no occasion to consider same, issue in question cannot be treated as covered and same may be considered independently taking into account said vital aspect of matter. He also submitted that guidance note issued by ICAI in 1988 in this context has been subsequently withdrawn and in any case, such guidance note does not take place of accounting standard which is mandatory. He contended that lease equalization charges is not liability so as to treat amount set apart for same as provision and keeping in view nature of amount set apart as well as purpose for setting apart same, it was actually in nature of reserve created by assessee company. He also contended that if assessee company is receiving extra amount in one year and less amount in other year, adjustment made to match same could not be regarded as provision but same clearly is in nature of reserve representing amount set apart by assessee from profits of current year. 14. In rejoinder, learned counsel for assessee submitted that guidance note issued by ICAI in context of provision for lease equalization charges has been, subsequently, withdrawn and replaced by AS 19 n d no adverse inference on basis of such withdrawal could be drawn against assessee as sought by learned Authorised Representative. He explained method of making provision for lease equalization charges by debiting same to P&L a/c as well as withdrawals made from said provision by writing back same in P&L a/c of subsequent years with help of accounting entries passed in books of account of assessee while recording relevant transactions. 1 5 . We have considered rival submissions and also perused relevant material on record. It is observed at outset that similar issue relating to adjustment made on account of provision made for lease equalization charges while computing book profits under s. 115JA had arisen for consideration before Delhi Bench of Tribunal in case of SREI International Finance Ltd. (supra) cited by learned counsel for assessee. In said case, similar adjustment made by AO on account of lease equalization charges while computing book profits under s. 115JA was directed to be deleted by learned CIT(A) for reasons as summarised by Tribunal in para No. 8 of its order as follows : CIT(A) firstly analysed provisions of s. 115JA of Act and reasons for its introduction. CIT(A) thereafter referred to provisions of s. 211(2) of Companies Act, 1956 which provides that every P&L a/c of company shall give true and fair view of P&L a/c of company for financial year and shall comply with requirements of Parts II and III of Sch. VI to Companies Act. Sub-s. (3A) of s. 211 of Companies Act, 1956 further, provides that every P&L a/c and balance sheet of company shall comply with Accounting Standards. Sub-s. (3C) of s. 211 defines Accounting Standards to mean standards of accounting recommended by ICAI constituted under Chartered Accountants Act, 1949 as may be prescribed by Central Government in consultation with National Advisory Committee on Accounting Standards established under sub-s. (1) of s. 201A. It was further, laid down that Standards of Accounting specified by ICAI shall be deemed to be Accounting Standards until Accounting Standards are determined by Central Government under that sub-section. CIT(A) held that though these Accounting Standards were only recommendatory in nature but assessee being company would be required to follow same in view of provisions of s. 211(3C) of Companies Act, 1956. Since P&L a/c prepared by assessee were in accordance with provisions of Parts II and III of Sch. VI to Companies Act, AO could not disturb such profit unless case fell within ken of cls. (a) to (f) of Explanation to s. 115JA. Thereafter, CIT(A) analysed nature of lease equalization charges and, finally, concluded that these equalization charges represent recovery of fair value of leased assets over lease term and is deducted from lease rentals to bifurcate annual lease with revenue component and capital portion and does not as such fall under any of these categories enumerated under cls. (a) to (f) of Explanation to s. 115JA of Act. CIT(A) has also referred to decision of Hon ble Supreme Court in case of Apollo Tyres Ltd. (supra) and held that AO could not disturb book profits which are determined in accordance with provisions of Parts II and III of Sch. VI to Companies Act. conclusion of AO in adding lease equalization charges to book profits was thus directed to be deleted by CIT(A). Revenue is aggrieved by this order of CIT(A) and has raised aforesaid ground of appeal. 16. When aforesaid relief given by learned CIT(A) was challenged by Revenue in appeal filed before Tribunal, provisions of s. 115JA relevant in this context were referred to by Tribunal in para No. 10 of its order and after analyzing same, purpose behind introducing said provisions was explained by Tribunal as follows : provisions of s. 115JA of Act, insofar as same is relevant for purpose of deciding issue in present appeal, reads as follows : "Deemed income relating to certain companies. (1) Notwithstanding anything contained in any other provisions of this Act, where in case of assessee, being company, total income, as computed under this Act in respect of any previous year relevant to assessment year commencing on or after 1st April, 1997 (but before 1st April, 2001) hereafter in this section referred to as relevant previous year) is less than thirty per cent of its book profit, total income of such assessee chargeable to tax for relevant previous year shall be deemed to be amount equal to thirty per cent of such book profit. (2) Every assessee, being company, shall, for purpose of this section prepare its P&L a/c for relevant previous year in accordance with provisions of Parts II and III of Sch. VI to Companies Act, 1956 (1 of 1956) : Provided that while preparing P&L a/c, depreciation shall be calculated on same method and rates which have been adopted for calculating depreciation for purpose of preparing P&L a/c laid before company at its annual general meeting in accordance with provisions of s. 210 of Companies Act, 1956 (1 of 1956) : Provided further that where company has adopted or adopts financial year under Companies Act, 1956 (1 of 1956), which is different from previous year under Act, method and rates for calculation of depreciation shall correspond to method and rates which have been adopted for calculating depreciation for such financial year or part of such financial year falling within relevant previous year. Explanation For purposes of this section, book profit means net profit as shown in P&L a/c for relevant previous year prepared under sub- s. (2), as increased by (a) amount of income-tax paid or payable, and provision therefor; or (b) amounts carried to any reserves by whatever name called; or (c) amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) amount by way of provision for losses of subsidiary companies; or (e) amount or amounts of dividends paid or proposed; or (f) amount or amounts of expenditure relatable to any income to which any of provisions of Chapter III applies." purpose behind introduction of provisions to s. 115JA was to tax, "zero tax companies". Sec. 115JA enacts deeming provisions of overriding nature. purpose behind introduction of s. 115JA was to tax, "zero tax companies". number of companies with huge profits were avoiding payment of tax by adjusting their profits against various allowances permissible under Act. It was to circumvent this strategy that s. 115JA was inserted in IT Act. Sub-s. (1) of s. 115JA takes care of situation, wherein case of assessee, being company, total income as computed under Act is less than 30 per cent of its book profit, then 30 per cent of book profit shall be liable to taxed. In other words, simply if total income of company after all deductions and allowances, is less than 30 per cent of its book profit then total income chargeable to tax is deemed to be 30 per cent of such book profits. Sub-s. (2) of s. 115JA makes it obligatory upon every company assessee to prepare its P&L a/c for relevant previous year in accordance with provisions of Parts II and III to Sch. VI of Companies Act, 1956 for purpose of this section. Explanation to s. 115JA defines book profit for purpose of this section so as to mean, "the net profit as shown in P&L a/c for relevant previous year prepared under sub-s. (2) of s. 115JA as increased by amounts mentioned in cls. (a) to (f) and as reduced by amounts covered by cls. (i) to (ix) of said Explanation. Sec. 115JA begins with non obstante clause. It is self-contained code and will apply notwithstanding any other provisions of Act. Book profit has been clearly defined and explained in aforesaid Explanation, and there is no scope for any allowance and deduction under any other section from what is deemed to be total income of company assessee. 1 7 . Thereafter, requirements of preparing P&L a/c by companies in accordance with Parts II and HI of Sch. VI to Companies Act, 1956 were also discussed by Tribunal in light of provisions of s. 115JA including especially Explanation below sub-s. (2) laying down permissible adjustments for computing book profits as well as decision of Hon ble Supreme Court in case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC) in para Nos. 11 and 12 of its order which read as under : "11. It is not case of AO that net profit as shown in P&L a/c in case of assessee is not prepared in accordance with Parts II and III of Sch. VI to Companies Act, 1956. Therefore, this profit will be starting point of computation of book profit as laid down in Explanation below sub-s. (2) of s. 115JA of Act. CIT(A) has clearly referred to provisions of s. 211(2)(3A)(3C) of Companies Act, 1956 and has rightly concluded that assessee while preparing its P&L a/c under Companies Act, 1956 was bound to follow Accounting Standards of ICAI. Accounting Standards of ICAI clearly contemplate deduction on account of lease equalisation charges in case of leasing companies in respect of Finance Lease Transactions . nature of this deduction and reason why this deduction is claimed has been very well explained by CIT(A). very idea of charging tax on book profits is that profits as per books of company will be basis of charge. When in books of company such as deduction is claimed and profits arrived thereafter, Revenue cannot further tinker with such profits except to extent provided in cls. (a) to (f) of Explanation below s. 115JA(2). nature of lease equalization charges is recovery of fair value of leased asset over term of lease. It is deduction against lease rentals to bifurcate annual lease into revenue component and capital component. They do not fall within categories enumerated in cls. (a) to (f) of Explanation to s. 115JA of Act. 12. In case of Apollo Tyres Ltd. (supra) High Court has explained scope of AO s powers under s. 115J which provisions learned Authorised Representative for assessee akin to s. 115JA of Act as follows : AO, while computing book profits of company under s. 115 of IT Act, 1961, has only power of examining whether books of account are certified by authorities under Companies Act as having been properly maintained in accordance with Companies Act. AO, thereafter, has limited power of making increases and reductions as provided for in Explanation to s. 115. AO does not have jurisdiction to go behind net profits shown in P&L a/c except to extent provided in Explanation. use of words in accordance with provisions of Parts II and III of Sch. VI to Companies Act in s. 115 was made for limited purpose empowering AO to rely upon authentic statement of accounts of company. While so looking into accounts of company, AO has to accept authenticity of accounts with reference to provisions of Companies Act, which obligate company to maintain its accounts in manner provided by that Act and same to be scrutinized and certified by statutory auditors and approved by company in general meeting and thereafter to be filed before RoC who has statutory obligation also to examine and be satisfied that accounts of company are maintained in accordance with requirements of Companies Act. Sub-s. (1A) of s. 115 does not empower AO to embark upon afresh enquiry in regard to entries made in books of account of company." 18. It was thus held by Tribunal that AO had accepted net profit as per P&L a/c of assessee company to be one in accordance with provisions of Companies Act and there was no basis given even by him to show as to how lease equalization charges were covered within any of cls. (a) to (f) of Explanation below s. 115JA(2) so as to empower him to make any adjustment in respect of same while computing book profits under s. 115JA. Tribunal accordingly found no ground to interfere with order of learned CIT(A) directing AO to delete adjustment made in respect of lease equalization charges and upheld same. 19. Before us, learned Departmental Representative has not disputed position that issue involved in case of SREI International Finance Ltd. (supra) decided by Tribunal is similar to one involved in present case. He, however, has contended that plea now taken by him stating that provision made for equalization charges was in nature of reserve and same accordingly was covered by cl. (b) of Explanation to s. 115JA(2), had not been raised before Tribunal and there was thus no occasion for Tribunal to consider this aspect of matter in case of SREI International Finance Ltd. (supra). It is, therefore, relevant to ascertain exact nature of lease equalization charges debited by assessee company to its P&L a/c so as to decide as to whether same was covered within cl. (b) of Explanation below sub-s. 115JA(2) in light of submissions made by both sides as well as material relied upon in support. Before we do so, it would be appropriate to consider and deal with preliminary objection raised by learned Departmental Representative which is relevant in present context. learned Departmental Representative has contended before us that no provision for lease equalization charges was actually made by assessee in its profit and loss account and same was made only while computing book profits under s. 115JA, which is not permissible. In this regard, it is observed that no such allegation was made either by AO or by learned CIT(A) in their respective orders. Moreover, copy of annual accounts filed by assessee for year under consideration clearly shows that lease equalization charges of Rs. 2,119.91 lakhs were reduced by assessee from income from leases and said income was declared on net basis under head Income from operations . Furthermore, in Sch. XV of annual accounts giving significant account policies and notes , it was clearly mentioned that in addition to depreciation on single shift basis, principle of recovery of capital was followed to ensure full capital recovery within tenure of lease agreement. It was further, mentioned that difference of capital recovery viz-a-viz depreciation was reduced from income from leases as lease equalization charge in accordance with guidance note on lease accounting issued by ICAI. As per "Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998" issued by Reserve Bank of India vide its Notification No. DFC. 119/DG(SPT)-98, dt. 31st Jan., 1998, it was mandatory for assessee to follow all accounting standards and guidance notes issued by ICAI insofar as they were not inconsistent with any of directions so issued. contention raised by assessee in this regard stating that lease equalization charges were not debited by assessee company to its P&L a/c thus is based on wrong assumption of facts and we reject same being devoid of any merits. 2 0 . Reverting back to main issue relating to nature of lease equalization charges, it is observed that "guidance note on accounting for leases" issued by Institute of Chartered Accountants of India (ICAI) is vital and relevant document in this regard. learned Departmental Representative at outset has raised objection by stating that said guidance note issued by ICAI in 1988 has been subsequently withdrawn. perusal of copy of said guidance note as placed at page Nos. 45 to 55 of assessee s paper book however shows that same has been issued in year 1995 and as clearly mentioned therein, it was revised guidance note replacing earlier guidance note issued by ICAI in year 1988. submission of learned Departmental Representative that said guidance note issued in 1988 has been subsequently withdrawn is, therefore, factually incorrect inasmuch as there is no such withdrawal and as matter of fact, earlier guidance note issued in 1988 has been replaced with revised guidance note issued by ICAI in 1995. It has also been clarified in foreword to said note itself that such revision has been made in view of various developments taken place subsequent to its issuance earlier in year 1988. Further, as stated in para No. 2 of introduction part of said note, matter relating to issuance of accounting standard on subject of accounting for leases was under consideration of ICAI with view to establish sound accounting practices. However, recognizing that issuance of such standard would take some time, guidance note was issued only as interim measure. It was also clarified in foreword itself by President, ICAI that said guidance note was meant for preparation of financial statements for accounting purposes only such as under Companies Act, 1956. 21. In revised guidance note on accounting for leases issued by ICAI, it was stated that same is based on rationale of matching costs with revenues so that periodic net income from finance lease is true and fair. As explained in note, such matching is achieved by showing lease rentals received under finance lease separately under gross income in P&L a/c of relevant period and against such lease rental income, matching lease annual charge is made to P&L a/c. This annual lease charge represents recovery of net investment/fair value of leased asset over lease term and is calculated by deducting finance income for period from lease rental for that period. Accordingly, where annual lease charge is more than minimum statutory depreciation, lease equalization charge account will be debited to that extent whereas when annual lease charge is less than minimum statutory depreciation, lease equalization would arise. As stated in note, following entries/disclosures shall be required to be made in this regard : (a) separate lease equalization account should be opened with corresponding debit or credit to lease adjournment account, as case may be. (b) Lease equalization account should be transferred every year to P&L a/c and disclosed separately as deduction from/addition to gross value of lease rentals shown under head "Gross income". (c) Statutory depreciation should be shown separately in P&L a/c. Accumulated statutory depreciation should be deducted from original cost of leased asset in balance sheet of lessor to arrive at net book value. (d) Balance standing in lease adjournment account should be adjusted in net book value of leased assets. amount of adjustment in respect of each class of fixed assets may be shown either in main balance sheet or in fixed assets schedule as separate column in section related to leased assets. (e) aggregate amount included under lease adjustment account on account of lease equalization credits should be disclosed separately. 2 2 . Keeping in view purpose behind making provision for lease equalization charges and accounting treatment given in books of account to incorporate relevant transactions, we can now endeavour to ascertain nature thereof in order to find out as to whether same constitutes reserve as envisaged in Expln. (b) below s. 115JA(2). Reserves or reserve funds mean amounts set aside out of profits as ascertained by P&L a/c or other surpluses which are not meant to cover any liability, contingency, commitment or depreciation in value of assets. Reserves or reserve funds thus mean amounts which belong to proprietors over and above capital contributed by them. amount to be transferred to reserve is debited to P&L appropriation account and purpose of creating reserves is to enable firm to tide over difficult financial period and not to meet any particular contingency. As discussed above, amount of lease equalization charges however is neither debited by assessee company to its P&L appropriation account nor purpose of same is to enable assessee to tide over difficult financial period. purpose of providing for lease equalization charges is entirely different as explained in guidance note is issued by ICAI and amount so provided is not transferred by assessee company in its books of account to any reserve account, but same is adjusted against depreciation/WDV of relevant fixed assets given on lease. 2 3 . As explained in book "Financial and Cost Accounting for Management (6th Edition)" by A.H. Teller and H. Shearing, essential point to be noted here is that reserve is not charge to be deducted before arriving at profit for period under review, but it is in appropriation of profit and reserve account represents fund to which part of profits has been allocated. reserve account thus is credited as result of debit to appropriation account and not to P&L a/c or other revenue account. In broad sense, all allocations to reserve represent additions to capital, some of which are intended to meet commitments that are expected to arise in future and some are made for purpose of permanently increasing capital of concern. former are revenue reserves and latter capital reserves. As already discussed amount of lease equalization, on other hand, is charge which has been deducted to arrive at true and correct profit of leasing business and it thus neither appropriation of profit or allocation of part of profits to any fund so as to call it as reserve. said charge thus is created as result of debit to P&L a/c and not debit to appropriation account. 24. In guidance note issued by Institute of Chartered Accountants of India explaining meaning of different terms used for financial statements, "reserve" has been defined in para 14.04 as portion of earnings, receipts or other surplus of enterprise appropriated by management for general or specific purpose other than provision for depreciation or diminution in value of assets or for known liability. In book of accountancy written by William Pickles (3rd Edition) reserves have been explained as amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at date of balance sheet. Reserves in effect are thus part of undistributed profits of business and, therefore, part of capital of business. amount of lease equalization charge however is neither portion of earnings/profits of Enterprise nor same is appropriated for general or specific purpose. same, in fact, is charge against profit to arrive at true and correct profits of leasing business which by no means can be treated as part of undistributed profits or capital of business. 25. In case of State Bank of Patiala (supra), Hon ble Supreme Court had occasion to consider distinction between provision and reserve and it was held by Hon ble apex Court in this context that provisions made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in P&L a/c and balance sheet. On other hand, reserves are appropriations of profits which are represented by assets being retained to form part of capital employed in business. amount set aside out of profits and other surpluses, not designed to meet lability, contingency, commitment are diminution in value of assets known to exist on date of balance sheet is reserve whereas amount set aside out of profits and other surpluses to provide for any liability of which amount cannot be determined with substantial accuracy is provision. As per cl. 1(1)(b) of Part III of Sch. VI of Companies Act, it is clarified that expression reserves shall not include any amount written off or retained by way of providing for depreciation, renewals or diminutions in value of assets or retained by way of providing for any known liability. expression reserve thus has been defined in negative manner and excludes certain amounts as specified. 26. If nature and character of lease equalization charges as evident from purpose for which same is provided as well as accounting treatment given thereto in books of account is considered in light of meaning of expression reserves as defined in context of terms common used in financial statements as well as by Hon ble apex Court in judicial pronouncement, we are of view that provision made for lease equalization charges cannot be regarded as amount transferred to reserves as envisaged in Expln. (b) to s. 115JA(2) and same, therefore, cannot be excluded while computing book profit under s. 115JA. In that view of matter, we hold that adjustment made by AO by adding amount of lease equalization charges while computing book profit under s. 115JA was not permissible since said amount was not covered within any of clauses of Explanation below s. 115JA(2) including cl. (b) and learned CIT(A), therefore, was not justified in confirming adjustment so made by AO on this count. His impugned order on this issue is therefore, set aside and AO is directed to delete adjustment/addition made on this issue. Ground No. 4 of assessee s appeal is accordingly allowed. 2 7 . As regards ground Nos. 5 and 6 relating to additions of Rs. 2,46,792 and Rs. 1,24,350 made by AO and confirmed by learned CIT(A) by disallowance of fees paid to RoC and expenditure treated as capital in nature is respectively while computing book profits under s. 115JA, learned counsel for assessee has submitted before us that these additions made by AO were beyond scope of permissible additions specified in provisions of s. 115JA and learned CIT(A), therefore, was not justified in confirming same. In support of this contention, he has relied on decision of Hon ble Supreme Court in case of Apollo Tyres Ltd. (supra). Since learned Departmental Representative has not been able to raise any material contention in this regard to point out as to how adjustments in question made by AO while computing book profits of assessee were permissible under s. 115JA, we hold, respectfully following decision of Hon ble Supreme Court in case of Apollo Tyres Ltd. (supra), that said additions made by AO while computing book profits of assessee were beyond scope of adjustments permissible under s. 115JA and learned CIT(A) was not justified in confirming same. impugned order, of learned CIT(A) on these issues is, therefore, reversed and AO is directed to delete adjustments made on these counts while computing book profits under s. 115JA. 2 8 . Ground No. 7 raised by assessee in this appeal has not been pressed by learned counsel for assessee at time of hearing before us. same is accordingly, dismissed as not pressed. 29. Ground No. 8 relates to disallowance of Rs. 16,79,58,897 made by AO and confirmed by learned CIT(A) on account of provision for bad and doubtful debts while computing profits under s. 115JA. 30. We have heard arguments of both sides and also perused relevant material on record. learned counsel for assessee has submitted that issue involved in this appeal is squarely covered in favour of assessee and against Revenue by decision of Kolkata Special Bench of Tribunal in case of Jt. CIT vs. Usha Martin Industries Ltd. (2006) 105 TTJ (Kol)(SB) 543 : (2007) 104 ITD 249 (Kol)(SB) wherein it was held that provision for bad and doubtful debt is not provision for liability, but it is provision for diminution in value of assets. It was also held that said provision thus is not for any liability as contemplated in cl. (c) of Explanation to s. 115JA and question as to whether said liability is ascertained or unascertained does not arise. learned Departmental Representative on other hand has relied on decision of Hon ble Madras High Court in case of Dy. CIT vs. Beardsell Ltd. (2000) 162 CTR (Mad) 467 : (2000) 244 ITR 256 (Mad) wherein it was held that provision for doubtful debts was made by assessee towards alleged recoverable debt and same being not ascertained liability, provision so made could not be excluded from book profits. In this regard it is observed that decision of Hon ble Madras High Court in case of Beardsell Ltd. (supra) has already been considered by Special Bench of Tribunal in case of Usha Martine Industries Ltd. (supra) and this being so, judicial proprietary requires that we have to follow decision of Special Bench. Accordingly, following decision of Kolkata Special Bench of Tribunal in case of Usha Martine Industries Ltd. (supra), we hold that learned CIT(A) was not justified in confirming disallowance made by AO on account of provision for bad and doubtful debts while computing book profits under s. 115JA and setting aside his impugned order on this issue, we direct AO to delete said disallowance. 31. As regards ground No. 9, learned counsel for assessee has submitted before us that issue raised therein relating to disallowance made by AO and confirmed by learned CIT(A) on account of interest paid on interest tax liability is squarely covered in favour of assessee by decision of Delhi C Bench of Tribunal rendered in case of GE Capital Services India vs. Dy. CIT for asst. yrs. 1995-96, 1996-97 and 1997-98 vide its common order dt. 25th Aug., 2006 in ITA No. 2038/Del/2002 and others. copy of said order is also filed by him in paper book at page Nos. 35 to 57 and perusal of same reveals that similar disallowance made by AO and confirmed by learned CIT(A) was deleted by Tribunal holding that interest charged on interest tax liability was not of penal nature. Respectfully following said decision of Tribunal, we set aside impugned order of learned CIT(A) confirming disallowance made by AO on account of interest charged on interest tax liability and direct AO to delete same. Ground No. 9 of assessee s appeal is accordingly allowed. 32. In result, appeal of assessee is partly allowed. *** GE CAPITAL TRANSPORTATION FINANCIAL SERVICES LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX