2012 (2) TMI 120 - HC - Income Tax

Deduction of lease equalization charges from lease rental income - lease equalization charges is a method of re-calibrating the depreciation debits and credits of same to P&L A/c square off each other over the full term of lease period Revenue contending for dis-allowance of same on ground that there is no provision for it under the I.T. Act - whether in determination of the real income of the assessee recourse can be taken by the assessee to the Guidance Note issued by ICAI - Held that - 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 P&L A/c. This represents true and fair view of the accounts; a statutory requirement u/s 211(2) of the Companies Act. As explained by us, the rationale is that over the entirety of the lease period the said debit would work itself out Decided in favor of the assessee.

Issues Involved:
1. Whether an assessee's leased rental income could be allowed to be reduced by taking recourse to lease equalization charges.
2. Validity of the re-assessment proceedings.
3. Whether the Guidance Note issued by ICAI for presentation of accounts would override the statutory provisions of the Income Tax Act, 1961.
4. Whether in determination of the real income of the assessee, recourse can be taken by the assessee to the Guidance Note issued by ICAI.

Issue-Wise Detailed Analysis:

1. Whether an assessee's leased rental income could be allowed to be reduced by taking recourse to lease equalization charges:
The Tribunal concluded that the assessee's contention had to be sustained, thus allowing the deduction of lease equalization charges from the lease rental income. The Tribunal found that the lease transactions in question were finance leases, and the method employed by the assessee for accounting of income met the principles of accountancy. This method involved adjusting the depreciation claimed in the books of accounts to reflect the real income. The lease equalization charge was deemed a method of re-calibrating depreciation, ensuring that over the lease period, the debits and credits would square off, presenting a true and fair view of the accounts.

2. Validity of the re-assessment proceedings:
The Tribunal did not examine the validity of the reassessment proceedings for AYs 1997-98 to 2000-01 as it considered them "of academic interest" after deciding the issue on merits in favor of the assessee. The CIT(A) had earlier sustained the re-assessment proceedings, stating there was no definitive finding on lease equalization charges initially, and thus, no change of opinion by the assessing officer.

3. Whether the Guidance Note issued by ICAI for presentation of accounts would override the statutory provisions of the Income Tax Act, 1961:
The Tribunal and the High Court noted that the Guidance Note issued by the ICAI, though not mandatory, reflected best practices and had the approval of a professional body. The High Court emphasized that the assessing officer could not disregard the method of accounting based on the Guidance Note, as it was backed by ICAI, a recognized authority. The provisions of Section 211(3C) of the Companies Act were highlighted, indicating that ICAI's standards are deemed relevant until prescribed by the Central Government.

4. Whether in determination of the real income of the assessee, recourse can be taken by the assessee to the Guidance Note issued by ICAI:
The High Court affirmed that the assessee could take recourse to the Guidance Note issued by ICAI. The method of accounting employed by the assessee, which included lease equalization charges, was to determine real income derived from lease transactions accurately. The Court held that the method met the rudimentary principles of accountancy and ensured that only revenue income was offered for tax. The Tribunal's finding that the lease transactions were finance leases was upheld, and the method employed for accounting was deemed correct in determining the real income.

Conclusion:
The High Court dismissed the revenue's appeals, answering both questions of law in favor of the assessee. The method of accounting followed by the assessee, including the deduction of lease equalization charges, was upheld as it enabled the determination of real income and complied with the principles of accountancy. The Tribunal's judgment was affirmed, and the reassessment proceedings were not further examined.

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