2012 (7) TMI 754 - HC - Income Tax

Lease rental capital or revenue - assessee had reduced the aforesaid amount representing the lease equalisation account from the lease rental of Rs. 11,84,21,434/-. - disallowance made by the lower authorities on the claim of the appellant with regard to the lease equalisation account Held that - amount received towards capital recovery constitute the capital expenditure, whereas, the financing charge represents the revenue receipt, which is the real income. It is as per the accounting standards prescribed by the ICAI. Therefore, the assessee under the Act has to offer to tax only the real income and not the total receipt. - He is not liable to pay any tax under the Act on the capital recovery - assessee was justified in adopting the accounting standards and he is entitled to claim the said amount as deductions In favor of assessee

Issues Involved:

1. Disallowance of the lease equalisation account as a deduction.
2. Compliance with RBI norms by the appellant, a non-banking financial company (NBFC).
3. Adherence to accounting standards and declaration of real income.
4. Classification of Lease Equalisation Reserve as an appropriation of profit.

Detailed Analysis:

1. Disallowance of the Lease Equalisation Account as a Deduction:
The primary issue was whether the lease equalisation account amounting to Rs. 4,35,89,466 could be allowed as a deduction. The assessing authority disallowed this claim, stating it was neither a liability, an allowance, nor an expenditure. The Tribunal upheld this view, considering it an appropriation of profit. The court, however, noted that the lease equalisation charge was a method of recalibrating depreciation claimed by the assessee, which is in line with accounting standards and reflects the true and fair view of the accounts. The court concluded that the entire lease rental received does not constitute real income, as it includes both financing charges and capital recovery. Thus, the financing charge is the real income to be taxed, not the capital recovery.

2. Compliance with RBI Norms by the Appellant:
The appellant argued that as an NBFC, it followed RBI norms, which required the exclusion of lease equalisation charges from total rental receipts to reflect real income. The court acknowledged that the RBI's guidelines, along with ICAI standards, support this accounting treatment. The court emphasized that the accounting standards prescribed by the ICAI should be followed when determining whether there has been an accrual of liability or income.

3. Adherence to Accounting Standards and Declaration of Real Income:
The court examined whether the appellant's method of accounting, which included the lease equalisation charge, was consistent with accounting standards and reflected real income. The court cited various judgments, including those from the Apex Court, emphasizing that real income must be ascertained by making permissible deductions and that accounting standards should be adhered to. The court found that the appellant's method of separating financing charges from capital recovery and adjusting for lease equalisation charges was appropriate and provided a true and fair view of the financial statements.

4. Classification of Lease Equalisation Reserve as an Appropriation of Profit:
The Tribunal had concluded that the lease equalisation reserve was an appropriation of profit and thus could not be allowed as a deduction. However, the court disagreed, noting that the lease equalisation charge is a method of ensuring that only real income is taxed. The court held that the lease equalisation charge is not an appropriation of profit but a necessary adjustment to reflect the true income of the assessee.

Conclusion:
The court allowed the appeals, setting aside the impugned orders and answering the substantial questions of law in favor of the assessee. It emphasized that the lease equalisation charge is a legitimate deduction as per accounting standards and reflects the real income of the assessee. The court also highlighted the importance of following RBI norms and ICAI guidelines in accounting practices for NBFCs.

← Previous Next →