2002 (3) TMI 221 - AT - Income Tax

Summary

Issues Involved:
1. Invocation of proviso to section 145(1)
2. Rejection of the method of accounting followed by the assessee
3. Disallowance of lease terminal adjustment account

Summary:

Issue 1: Invocation of proviso to section 145(1)
The assessee argued that the Assessing Officer (AO) erred in invoking the proviso to section 145(1) on the mistaken presumption that the method of accounting followed by the assessee does not disclose the true and correct income for income tax purposes. The AO contended that the method of accounting employed by the assessee is such that the income cannot be properly deduced therefrom. However, the Tribunal noted that the assessee followed the accounting standards and guidance notes issued by the Institute of Chartered Accountants of India (ICAI), which is mandatory for Non-Banking Financial Companies (NBFCs) as per the Reserve Bank of India (RBI) regulations.

Issue 2: Rejection of the method of accounting followed by the assessee
The Tribunal observed that the assessee's method of accounting, based on the guidance note from ICAI, is a recognized and scientific method for accounting leases. The AO's illustrations and alternative methods were found to be flawed and not in accordance with the principles laid down by ICAI. The Tribunal held that the method prescribed by ICAI is appropriate and should not be disturbed, as it is followed by several companies and mandated by various regulatory bodies like RBI. The Tribunal emphasized that the AO did not provide a suitable and proper alternative method of accounting, and mere disallowance of a particular item does not constitute a correct alternative system.

Issue 3: Disallowance of lease terminal adjustment account
The AO disallowed the deduction of Rs. 13,16,123 claimed by the assessee under the lease terminal adjustment account, arguing that the method of accounting does not reflect the true income. The Tribunal, however, concluded that the AO did not understand the concept of lease equalisation and that the method followed by the assessee is in line with the guidance note from ICAI. The Tribunal found that the assessee's method of accounting was consistent, recognized, and mandated by regulatory authorities, and thus, the disallowance was unjustified.

Conclusion:
The Tribunal allowed the appeal of the assessee and deleted the addition of Rs. 13,16,123 made on account of the lease terminal adjustment account. The Tribunal held that the method of accounting followed by the assessee, as prescribed by the ICAI, is appropriate and should not be rejected by the AO under section 145 of the Income-tax Act.