The Delhi High Court has ruled that Provisions for Non Performing Assets (NPA) are liable to be added back while computing book profit under Section 115JA of the Income Tax Act.
The Assessee engaged in the business of leasing assets and derives income from it where the ownership vested with the assessee were shown in the balance sheet under the head ‘Fixed Asset’.
The second issue raised in the present appeal was whether the value of NPAs is to be adjusted while determining book profits under Section 115 JA of the Act. The Assessee here relied on the decision of Commissioner of Income Tax v. Indian Railway Finance Corporation Ltd and argued that since lease equalization debited to the profit and loss account, and since the lease charges shown in the P&L Account were the net amount of lease equalization charges, the gross block of fixed assets was simultaneously reduced by an amount of ` 9,08,03,993/- which was the accumulated lease adjustment.
A division bench comprising of Justice S. Ravindra Bhat and Justice Sanjeev Sachdeva endorsed the decision of Gujarat and Madras High Courts which shows identical instances wherein the court has held that lease equalization charge is not in the nature of a reserve, inasmuch as, the amount of lease equalization charge over a period of lease is equal to the difference between the quantum of principal recovered and the residual value.
Finally this court held that lease equalization charges are not to be treated as adjustments needing to be added back while computing book profits, under Section 115JA on account of Explanation 1.
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