2024 (2) TMI 1427 - AT - Income Tax

Revision u/s 263 - reversal of lease equalization charges was claimed as deduction in the computation of income instead of crediting the reversal of provisions to P L A/c - HELD THAT - The assessee has followed Accounting Standard-19 accounting for lease issued by the Institute of Chartered Accountants of India in respect of rent and lease charges paid for the relevant assessment year and created a lease equalization reserve . Assessee has debited lease equalization charges to P L A/c, but, added back to total income in the statement of total income for the relevant assessment years. Similarly, the assessee has reversed lease equalization charges for the impugned assessment year and credited to P L A/c. As reduced from the total income in the statement of total income, because, debit to P L A/c in the respective years has been added back to total income in the computation of income statement. The method of accounting followed by the assessee for debiting and crediting lease equalization charges and further adding to total income and reducing from the total income is in accordance with law. Therefore, PCIT is completely erred in observing that lease equalization charges created is a notional income/expenditure and crediting to P L A/c should not have been reduced from the total income, because debit to P L A/c has not been added to statement of total income is incorrect and devoid of merits. AO has verified the issue of lease equalization charges and its treatment in the books of accounts and computation of income during the course of assessment proceedings, which is clearly evident from notices u/s. 142(1) dated 09.12.2020 20.02.2012 issued by the AO, where specific question was asked in respect of accounting treatment of lease equalization charges and subsequent treatment in computing the total income as per the provisions of the Income Tax Act, 1961 The assessee vide submission explained the method of accounting of lease equalization charges in the books of accounts and subsequent treatment while computing income from business and profession. AO after considering relevant submissions has accepted the claim of the assessee. From the above, it is undoubtedly clear that the AO has carried out required enquiries he ought to have been carried out in light of relevant facts submitted by the assessee in respect of lease equalization charges . PCIT is completely erred in coming to the conclusion that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. The assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue as alleged by the PCIT in their order passed u/s. 263. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Revision under section 263 of the Income Tax Act - violation of principles of natural justice, merits, and applicable law.
2. Eligibility for deduction of reversal of lease equalization charges.

Analysis:
1. The appeal challenged the order of the Principal Commissioner of Income Tax under section 263 of the Income Tax Act, alleging violation of natural justice and lack of merit. The appellant contended that the revisionary order was erroneous and not based on proper inquiries or verification by the National e-Assessment Centre. The appellant argued that the Principal Commissioner erred in substituting his view for that of the Assessing Officer without due consideration of the detailed inquiry conducted by the latter. The appellant also asserted that the issue in question had been adequately addressed during assessment proceedings. The grounds raised by the appellant were comprehensive and without prejudice to each other.

2. The case involved the eligibility for deduction of reversal of lease equalization charges. The Principal Commissioner observed that the reversal of lease equalization charges was claimed as a deduction instead of being credited to the Profit and Loss Account, based on Accounting Standard-19. The appellant explained that the treatment of lease equalization charges followed the accounting standards and was consistent with previous years. The Assessing Officer had sought details and the appellant had provided explanations regarding the accounting treatment. The Principal Commissioner, however, deemed the assessment order erroneous and prejudicial to revenue, directing a fresh assessment. The appellant argued that the Assessing Officer had correctly accepted the treatment of lease equalization charges, and the order was not erroneous. The PCIT's decision was based on inadequate inquiries, leading to an erroneous conclusion regarding the treatment of lease equalization charges.

3. The Tribunal found that the appellant's method of accounting for lease equalization charges, as per Accounting Standard-19, was in accordance with the law. The Tribunal disagreed with the PCIT's view that the charges were notional and should not have been reduced from total income. It was noted that the Assessing Officer had conducted necessary inquiries during assessment proceedings, as evidenced by specific queries and the appellant's detailed responses. The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to revenue, as alleged by the PCIT. Therefore, the Tribunal allowed the appeal and quashed the order passed under section 263 of the Income Tax Act.

In conclusion, the Tribunal found in favor of the appellant, ruling that the assessment order was not erroneous or prejudicial to revenue, as claimed by the Principal Commissioner. The Tribunal upheld the appellant's treatment of lease equalization charges and quashed the revisionary order under section 263 of the Income Tax Act.