2022 (12) TMI 1285 - HC - Income Tax

Disallowing lease equalization charge claimed as a deduction from gross lease rentals received by the assessee in respect of finance lease of assets - difference between cost of asset leased minus the depreciation claim and the lease deposit received - Tribunal held that the amount taken to the lease equalisation fund was not an allowable business expenditure as it was an appropriation of profit - HELD THAT - This issue is no longer res integra as the same has been answered by the Supreme Court in Commissioner of Income Tax-VI v. Virtual Soft Systems Limited 2018 (4) TMI 1472 - SUPREME COURT as examined the guidelines issued by the Institute of Chartered Accountants of India (briefly referred to hereinafter as ICAI ) and also referred to Section 211 of the Companies Act, 1956 to emphasize that Accounting Standards prescribed by ICAI shall prevail until Accounting Standards are prescribed by the Central Government. Method of accounting followed as derived from ICAI Guidance Note is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting. No force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act. Bifurcation of lease rental as per the accounting standards prescribed by the ICAI allowed. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of lease equalization charge as a deduction from gross lease rentals.
2. Upholding additions to lease rental income as per accounting standards.
3. Taxing capital receipts due to disallowance of lease equalization charge.

Analysis:
1. The appellant, a company, filed an appeal under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal disallowing the lease equalization charge claimed as a deduction from gross lease rentals. The appellant argued that the amount set apart as lease equalization fund was allowable as a deduction as per guidelines of the Institute of Chartered Accountants. However, the Assessing Officer, CIT(A), and the Tribunal disallowed the claim, stating that it did not represent actual expenditure incurred in the business. The CIT(A) emphasized that the amount was not a real expenditure but an appropriation of profit, citing legal precedents. The Tribunal also held that the amount was not an allowable business expenditure. The Supreme Court, in a related case, clarified that the method of accounting for lease transactions based on ICAI guidelines is valid and essential to capture real income for tax purposes. The Court concluded that the appellant was entitled to bifurcate lease rental income based on accounting standards, rejecting the Revenue's contention that there was no express provision for such deduction in the Act.

2. The appellant also challenged the additions to lease rental income recognized in compliance with accounting standard AS 19 and accounting standard No.1 under Section 145(2) of the Income Tax Act. The CIT(A) upheld the additions, stating that the amount claimed by the appellant and disallowed by the Assessing Officer represented the difference between the cost of the asset leased, depreciation claimed, and lease deposit received. The CIT(A) held that this amount did not qualify as an allowable deduction as it was not an actual expenditure incurred for the business. The Tribunal, in line with previous decisions, affirmed that the amount taken to the lease equalization fund was not an allowable business expenditure but an appropriation of profit. The Supreme Court's ruling in a similar case emphasized the validity of the method of capturing real income from lease transactions based on accounting standards, ultimately ruling in favor of the appellant.

3. The issue of taxing capital receipts due to the disallowance of the lease equalization charge was also addressed. The appellant argued that disallowing the lease equalization charge would amount to taxing capital receipts. The CIT(A) and the Tribunal upheld the disallowance, stating that the amount set apart as lease equalization fund did not represent actual expenditure incurred in the business. However, the Supreme Court clarified that the appellant was entitled to bifurcate lease rental income based on accounting standards, ensuring that only real income from the transaction was captured for tax purposes. The Court rejected the Revenue's contention that there was no express provision for such deduction in the Act, ruling in favor of the appellant.

In conclusion, the High Court allowed the appeal, stating that the questions framed by the appellant were answered in favor of the assessee and against the Revenue. The Court emphasized the importance of following accounting standards prescribed by the ICAI to determine real income for tax purposes, ultimately ruling in favor of the appellant on all issues raised in the appeal.