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TMI Blog2012 (2) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... 04 AND 680 OF 2011 - - - Dated:- 7-2-2012 - SANJAY KISHAN KAUL AND RAJIV SHAKDHER, JJ. JUDGMENT Rajiv Shakdher, J. The captioned appeals lay challenge to a common judgment of the Income Tax Appellate Tribunal, Delhi Bench, New Delhi (in short the Tribunal) passed on 19.02.2010. The only point raised in the captioned appeals is: whether an assessee's leased rental income could be allowed to be reduced by taking recourse to lease equalization charges. 2. It is relevant to note that before the Tribunal the assessment years (in short AY) in issue were: AYs 1996-97 to 2000-01. Thus, the Tribunal, by virtue of the impugned judgment dealt in all with five (5) appeals being ITA Nos. 117, 118, 119, 120 2292/Del/2006 04. In so far as the first appeal was concerned, that is, the one relating to 1996-97, the challenge before the Tribunal was laid vis-a-vis the order dated 26.03.2004, passed by the Commissioner of Income Tax (in short CIT) under Section 263 of the Income Tax Act, 1961 (in short the I.T. Act). The issue on merits was the same as indicated hereinabove by us. As regards the remaining four (4) appeals, what was challenged before the Tribunal was a common order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the substantive order of the CIT dated 26.03.2004 passed under Section 263 of IT. Act in appeal before the Tribunal, which culminated in the impugned judgment. Assessment Year 1998-99 to 2000-01 4.4 In so far as the remaining four assessment years were concerned the assessing officer appears to have passed separate orders of even date, i.e., 28.01.2005.A perusal of the order would show that a common thread flows through the said assessment orders. 4.5 The assessment's were re-opened for the said years, by the assessing officer, after taking recourse to the provisions of section 147/148 of the IT Act. Notices were issued to Show Cause as to why lease equalization charges debited to the profit and loss account should not be disallowed and, thereupon added to the assessee's income. 4.6 The assessee, filed his reply and objected to the assessment being re-opened as, according to it, there was no reason to believe that income had escaped assessment. On merits, the assessee had submitted that it had relied upon the Guidance Note dated 20.09.1995 (in short the Guidance Note) issued by the Institute of Chartered Accountants of India (in short ICAI), in respect of, Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion that since, in the first instance, no definitive finding with regard to lease equalization charges had been given, it could not be said that there was a change of opinion on the part of the assessing officer. The CIT(A) held, that based on a consideration of the facts, the assessing officer had come to the conclusion that the lease equalization charges had been wrongly claimed as deduction and hence, there was occasion to initiate proceedings under Section 147 read with Section 148 of the IT Act. The CIT(A), was thus of the view, that the assessing officer's action of re-assessment had to be sustained. 4.9 On the merits, the CIT(A) followed his own order dated 27.07.2004 passed in the assessee's case in AY 2001-02 and sustained the addition. He briefly held that, the Guidance Note issued by the ICAI itself, indicated that income of the assessee had to be determined as per the prevalent tax laws, and that the Guidance Note was evolved only for the purposes of finalization of the accounts of the assessee. As noticed by us above, the assessing officer had followed the order of the CIT(A) for AY 2001-02. 5. The assessee being aggrieved by both the order of the CIT da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pending in another appeal being ITA No. 142/2007, titled CIT v. Goodwill India . For these reasons, Ms Chopra argued that the view taken by the Tribunal, was erroneous and ought to be reversed. 7.2 On the other hand, Mr Krishnan contended that, regard may be had to the fact that the assessee was entitled to change its accounting policy which it had done, by taking recourse to the provisions of the Guidance Note issued by the ICAI, while accounting for lease transactions. The method of accounting which the assessee had followed was based what has been provided in paragraphs 11 and 22 of the Guidance Note. Mr Krishnan submitted that, the courts had accepted the recommendations issued by the ICAI from time to time, with respect to the manner and mode of reflecting transactions in books of accounts, in a number of judgments, pronounced by both the High Courts' as well as the Supreme Court. In this regard he placed reliance on the judgment of this court in the case of CIT v. Woodward Governor India Pvt. Ltd . [2007] 294 ITR 451 (Delhi) and the Judgment of the Supreme Court in the case of Collector of Central Excise Etc. v. Dai Lchi karkaria Ltd [1999] 156 CTR 172 (SC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, issued by the ICAI, on Accounting For Leases. The ICAI's publication on the subject indicates that the Guidance Note on accounting of leases was issued by it, for the first time, in 1988, which was, then revised in 1995. The hiatus between the date when it was first issued, and its revision, appears to be on account of an interim order granted by the Madras High Court in a case, which was, disposed of on, 14.07.1995. It appears that the case was dismissed as withdrawn. 8.2 We may also note that our discussion is prefaced by the fact that on 01.04.2001, the ICAI did publish A.S. 19 in respect of leases. The said A.S. 19, is applicable, in respect of, assets leased during accounting periods commencing on or after 01.04.2001. The periods, which are under consideration, in the present appeals, are prior to 01.04.2001. 9. In this background what is required to be considered is whether the books of accounts could be rejected by the assessing officer merely for the reason that recourse to the Guidance Note was taken by the assessee. In this regard, we would be required to examine the provisions of Section 145 of the I.T. Act. Section 145 of the I.T. Act adverts to the method o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fessional body such as the ICAI. The Guidance Note reflects the best practices adopted by accountants the world over. The fact that, at the relevant point in time, it was not mandatory to adopt the methodology professed by the Guidance Note issued by the ICAI, is irrelevant, for the reason that, as long as there was a disclosure of the change in Accounting Policy in the accounts, which had a backing of a professional body such as the ICAI, it could not be discarded by the assessing officer. This is specially so, since the ICAI is, recognized as the body vested with the authority to recommend A.Ss for ultimate prescription by the Central Government in consultation by the National Advisory Committee of Accounting Standards, for presentation of financial statements. The provisions of section 211(3C) of the Companies Act are quite clear on this aspect. As a matter of fact, the proviso to the said sub-section, quite clearly specifies that till such time the Central Government prescribes the accounting standards the accounting standards issued by the ICAI, shall be deemed to be the relevant accounting standards. The relevant provision reads as follows: "211(3C) For the purposes of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson (lessor) to another (lessee) for a specified period of time, in return for rent or other compensation. (See Dictionary for Accountants, Eric L. Kolher 1978, 5th edition). This traditional view, underwent a change over a period of time when, parties and/or entities entered into lease transactions even qua movable assets, such as, plant, machinery and various other assets, which also included vehicles; to name some of them. The Oxford Dictionary of Accounting (New Edition), 1999 represents that change. The definition of lease contained therein, is indicative of the shift. For the sake of convenience the definition of lease as appearing in the said dictionary is also extracted hereinbelow: "Lease: A contract between the owner of a specific asset, the lessor, and another party, the lessee, allowing the latter to hire the asset. The lessor retains the right of ownership but the lessee acquires the right to use the asset for a specific period of time in return for the payment of specific rentals or payments. Statement of Standard Accounting Practice, 21 Accounting for Leases and Hire Purchase Contracts, classifies leases into operating leases and finance leases with differing acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilitates recovery of a substantial part of the fair value of the leased assets. While fixing the lease rentals and the lease period, the economic life of leased asset is borne in mind. The lease period is normally shorter than the economic life of the asset. The other attribute of such a transaction is that the risk of breakdown or technological obsolescence is transferred to the lessee, who therefore ordinarily would bear the cost of maintenance, repairs and insurance of the leased assets. The ownership, however, is retained with the lessor. 14. The Tribunal, in the captioned cases, has returned a finding of fact after examining transaction at hand that it is a finance lease. Being a final fact finding authority we do not intend to disturb this finding; which in any case cannot be disturbed except on the ground of perversity. The learned counsel for the revenue though, did attempt to argue before us, that there is no determination by the assessing officer as to whether the lease transactions in issue were in the nature of a finance lease; we tend to disagree as the Tribunal quite categorically in paragraph 9 of the impugned judgment has come to a conclusion that the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btained sample working from the assessee by refixing the case for clarification to satisfy ourselves that the leases in question in the present case is finance leases and as per the discussion above, we have noted that in the present case, the leases are finance lease whereas in the case of Goodwill India Ltd. ( supra ), the lease was not finance lease as per the facts noted by the tribunal in that case." (emphasis is ours) 14.1 A perusal of the grounds of appeal would show that there is no averment whatsoever that such a finding of fact recorded by the Tribunal, was perverse. Therefore, we would have to accept that the Tribunal examined the record, and came to a correct conclusion. 14.2 The Tribunal having found that the lease in issue is a finance lease we would be required to consider whether the method employed by the assessee with regard to determination of the real income is a correct method. Paragraph 11 and 12 of the Guidance Note of the ICAI read with the appendix attached to it is, quite instructive in this regard. Therefore, paragraph 2 of the Guidance Note on which great stress is laid on behalf of revenue has to be read with paragraphs 11 and 12. We do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lease equalization amount being reduced to a naught, as the debit and credits in the profit and loss account would square off with each other. Hence, the contention of the revenue that it is a claim in the form of a deduction which cannot be allowed, as there is no provision under the I.T. Act is, in our view, a complete misappreciation of what constitutes a lease equalization charge. In our opinion, as long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in the AYs in issue, in its profit and loss account. This represents true and fair view of the accounts; a statutory requirement under Section 211(2) of the Companies Act. As explained by us above, the rationale is that over the entirety of the lease period the said debit would work itself out. 15. Therefore, for the reasons given hereinabove, in our opinion, the method of accounting followed by the assessee enabled, it to determine the real income, which was offered for tax in the instant case. The assessing officer, by disallowing th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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