2023 (4) TMI 195 - HC - Income Tax

Lease equalization charge claimed as a deduction from gross lease rentals received by the assessee in respect of finance lease of assets - accounting standards prescribed by the ICAI - additions to lease rental income recognised by assessee in compliance with the mandatory accounting standard AS 19 read with accounting standard No.1 notified U/s.145 (2) - HELD THAT - As decided in own case 2022 (12) TMI 1285 - TELANGANA HIGH COURT 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 held that 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. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalisation is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. No express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. 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. 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. If a term is not defined in a statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Thus bifurcation of lease rental as per the accounting standards prescribed by the ICAI to be allowed. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards. Following the above questions framed is decided in favour of the assessee.

Summary

Issues involved:
Appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal for the assessment year 1998-99. Interpretation of lease equalization charge claimed as a deduction from gross lease rentals received by the assessee. Compliance with mandatory accounting standards AS 19 and accounting standard No.1. Disallowance of lease equalization charge and taxation of capital receipts.

Analysis:
The appeal was filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal for the assessment year 1998-99. The appellant contended that a similar order to a previous judgment should be passed in the present appeal. The questions raised by the appellant pertained to the correctness of disallowing the lease equalization charge claimed as a deduction and upholding additions to lease rental income as per accounting standards. The High Court referred to a Supreme Court decision in Commissioner of Income Tax-VI v. Virtual Soft Systems Limited, emphasizing the importance of accounting standards recommended by the Institute of Chartered Accountants of India (ICAI) until prescribed by the Central Government. The Supreme Court highlighted that the method of accounting followed based on ICAI Guidance Note is valid for capturing real income from finance lease transactions. The Court ruled that the bifurcation of lease rental is essential to ensure that only revenue receipts are captured for income tax purposes, akin to a bank treating EMI payments. The contention that there is no express provision for deduction of lease equalization charges in the Income Tax Act was dismissed by the Supreme Court, stating that the respondent applied the method prescribed by ICAI for bifurcation, which is permissible under the law.

The Court concluded that the appellant is entitled to bifurcation of lease rental as per accounting standards prescribed by ICAI, and there is no express bar in the Income Tax Act regarding the application of such standards. Therefore, the questions framed by the appellant were answered in favor of the assessee and against the Revenue. The appeal was allowed with no order as to costs, and any pending miscellaneous petitions were closed accordingly.