2018 (4) TMI 1472 - SC - Income Tax

Deduction on account of lease equalization charges from lease rental - significance of Guidance Note issued by the Institute of Chartered Accountants of India (ICAI) - Held that - It is wrong to say that the Respondent claimed deduction by virtue of Guidance Note rather it only applied the method of bifurcation as prescribed by the expert team of ICAI. A conjoint reading of Section 145 of the IT Act read with Section 211 (un-amended) of the Companies Act make it clear that the Respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of law. The rule of interpretation says that when internal aid is not available then for the proper interpretation of the Statute the court may take the help of external aid. 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. Thus the Respondent is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. There is no express bar in the IT Act regarding the application of such accounting standards. Deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act 1961,

Issues Involved:
1. Whether the deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act, 1961, based on the Guidance Note issued by the Institute of Chartered Accountants of India (ICAI).

Issue-wise Detailed Analysis:

1. Background and Facts:
The appellant, the Income Tax Department, challenged the decision of the High Court of Delhi, which upheld the Income Tax Appellate Tribunal's (ITAT) decision allowing the deduction of lease equalization charges claimed by the respondent, M/s Virtual Soft Systems Ltd. The respondent had filed a return of income for the Assessment Year 1999-2000, declaring a loss and claiming a deduction for lease equalization charges. The Assessing Officer disallowed this deduction, which was upheld by the Commissioner of Income Tax (Appeals). However, the ITAT allowed the appeal of the respondent, and the High Court confirmed this decision, leading to the present appeal before the Supreme Court.

2. Point for Consideration:
The main question for consideration was whether the deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act, 1961, based on the Guidance Note issued by the ICAI.

3. Rival Submissions:
The Revenue argued that lease equalization charges are an artificial calculation and not recognized under the Income Tax Act. They contended that the entire lease income should be taxable. Conversely, the respondent argued that the Guidance Note by ICAI is authoritative, and adopting its method of accounting to compute real income should not be disregarded. They asserted that the lease equalization charge is a method to adjust depreciation in the books of accounts, representing real income.

4. Discussion and Analysis:
The Court examined the significance of the Guidance Note issued by the ICAI, an expert body established by the Parliament. The Guidance Note on Accounting for Leases, revised in 1995, reflects best practices and is recognized under Section 211 of the Companies Act, 1956. The amendment to Section 211 clarified that accounting standards recommended by ICAI would prevail until prescribed by the Central Government.

5. Guidance Note Provisions:
The Guidance Note specifies the method for accounting leases in the books of a lessor, including the disclosure of assets leased under finance leases and the calculation of lease rentals and annual lease charges. The annual lease charge includes minimum statutory depreciation and lease equalization charge, ensuring that only real income (finance income) is taxed.

6. Real Income and Accounting Methodology:
The Court emphasized that the method prescribed by the ICAI captures real income by distinguishing between capital recovery and finance income. The principle of substance over form is fundamental in accounting, ensuring that only revenue receipts are taxed. The bifurcation of lease rental is necessary to reflect true income and is not an artificial calculation.

7. Legal Precedents and Interpretation:
The Court referred to previous judgments affirming the relevance of the ICAI's Guidance Note. It highlighted that the Respondent's method of accounting, based on the Guidance Note, is valid and essential for computing real income. The Income Tax Act does not explicitly bar such bifurcation, and the accounting standards prescribed by ICAI can be used to determine real income for tax purposes.

8. Conclusion:
The Supreme Court concluded that the respondent is entitled to bifurcate lease rental as per the ICAI's accounting standards. There is no express bar in the Income Tax Act against such bifurcation. The Court upheld the High Court's decision, dismissing the appeal and confirming that the respondent's method of accounting is lawful and appropriate for determining taxable income.

Judgment:
The appeal was dismissed, and the High Court's decision was upheld, allowing the deduction of lease equalization charges based on the ICAI's Guidance Note. The other connected appeals were also disposed of accordingly.

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