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TMI Blog2015 (8) TMI 471X X X X Extracts X X X X X X X X Extracts X X X X ..... 28, 2000, along with the assessee's appeal bearing I. T. A. No. 229/Hyd/2000. All these appeals pertain to the assessment years 1996-97 to 1999-2000. 2. Before the Commissioner of Income-tax (Appeals), the assessees had called in question the orders of Assessing Officer (for short "the AO"), who, while completing the assessment for the relevant assessment years disallowed the deduction of the "lease equalisation" charges from the lease rental income. The disallowed amounts by the Commissioner of Income- tax (Appeals) in these appeals are of Rs. 48,56,224, Rs. 44,18,245 and Rs. 13,16,123. 3. Since the questions raised and the assessee in all four appeals are common, for the sake of convenience we state the facts leading to I. T. T. A. No. 252 of 2003 preferred by the Revenue, to the extent they are necessary, as follows : the assessee-company had filed its return of income on November 30, 1998, declaring the income of Rs. 58,65,660. The return was processed under section 143(1)(a) of the Act on September 28, 1999, without any adjustments. Then the assessee's case was selected for scrutiny by issue of a notice under section 143(2) dated September 28, 1999. The notice was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessees, are against the orders passed by all the three authorities, disallowing the deduction of "lease equalisation charges" from the gross lease receipts, holding that the assessee was in the wrong in employing the "guidance note" issued by the Institute of Chartered Accountants of India for computing their income from lease rent. In these appeals, the following substantial question of law is raised for our consideration : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing deduction of lease equalisation charges from the gross lease receipts ?" 6. Counsel for the assessees, at the outset, invited our attention to the judgments of the Delhi High Court in CIT v. Virtual Soft Systems Ltd. (2012) 205 Taxman 257 (Delhi) and of the Karnataka High Court in Prakash Leasing Ltd. v. Deputy CIT (2012) 208 Taxman 464 (Karnataka) and contended that similar questions fell for consideration of these High Courts and based on the guidance note issued by the Institute of Chartered Accountants of India held that the assessees are entitled for deduction of lease equalisation charges from lease receipts. In short, it was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of the Karnataka High Court in Prakash Leasing Ltd. and also the provisions contained in sub-section (2) of section 145 of the Income-tax Act. In view thereof, we would like to have a glance at both the judgments and the provisions of section 145(2) of the Income-tax Act. 8.1 In Virtual Soft Systems Ltd. (supra), the following questions were framed (page 599 of 341 ITR) : "(1) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal erred in law and on the merits in allowing the deduction of the lease equalisation charges from the lease rental income ? (2) Whether the guidance note issued by the Institute of Chartered Accountants of India for presentation of accounts would override the statutory provisions of the Income-tax Act, 1961 ?" 8.2 The facts leading to the appeal before the Delhi High Court were almost similar, in the sense the assessment of the assessee for the assessment year 1996-97 was set aside by the Commissioner directing the Assessing Officer to include the assessee's lease rental income. For the assessment years 1997-98 to 2000-01, the assessments were reopened by the Assessing Officer and he came to the conclusion that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the said guidance note. Both the Assessing Officer as well as the Commissioner of Income-tax (Appeals) have adverted to paragraph 2 of the guidance note to come to what we consider an erroneous conclusion inasmuch as they have held that in determining as to whether deduction on account of the lease equalisation charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the Income-tax Act. In our view, such an observation in paragraph 2 of the guidance note is really saying the obvious. Therefore, even if this guidance note was silent on this aspect the provisions of the Income-tax Act would undoubtedly still apply. Thus, as to what is the impact of the provision of para graph 2 of the guidance note will be considered by us as we progress further with our judgment. 9.1 However, what is important at this stage is to first address ourselves to the aspect as to whether the Assessing Officer could have disregarded the method of accounting followed by the assessee in respect of the lease rentals. In our view, the Assessing Officer could not have done so, as the method of accounting was based on a guide line commended for adoption by a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting policy with regard to the lease rentals was not disclosed by the asses see. The Assessing Officer seems to have taken umbrage to the change in the accounting policy having been brought about only with effect from the assessment year 1996-97. In our view, as long as there was a disclosure of the factum of change in the accounting policy and its effect in the accounts no fault could be found with the change in the accounting policy merely on account of the fact that it was employed for the first time in the assessment year 1996-97. The change in the accounting policy, as noticed by us above, had the imprimatur of a duly recognised professional body, i.e., the Institute of Chartered Accountants of India. Therefore, notwithstanding the fact that the opinion of the Institute of Chartered Accountants of India was expressed in a guidance note which had not attained a mandatory status, would not, in our view, provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect method of accounting for leases followed by the asses see." 8.3 The Karnataka High Court, in Prakash Leasing Ltd. (supra) framed the following questions of law : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevailing in commerce and industry. Therefore, it is judicially accepted that when determining whether there has in fact been accrual of liability or income, the accountancy standards prescribed by the Institute of Chartered Accountants of India would have to be followed and applied'. Therefore, the reasoning of the authorities though the claim of the assessee is based on such accounting standards of the Institute of Chartered Accountants of India while deciding whether receipt of money is taxable or not it has to be decided in accordance with the provisions of law and not in accordance with the accounting practice has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act." 9. We would now like to consider the provisions of section 145 of the Act. Section 145 deals with method of accounting. This provision was substituted by the Finance Act, 1995, with effect from April 1, 1997. In the present case, we are concerned with the assessment years 1997-98 to 2000- 01. Sub-section (1) of section 145 states that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the subject indicates that the "guidance note" on accounting leases was issued by it, for the first time, in 1988, which was then revised in 1995. On April 1, 2001, the Institute of Chartered Accountants of India did publish Accounting Standard 19 in respect of leases. It is not in dispute that the said Accounting Standard 19 is applicable in respect of assets leased during accounting periods commencing on or after April 1, 2001. The assessment years, which are under consideration, in these appeals are prior to April 1, 2001. We are not entering into the details as to how the accounting standards work or applied in respect of lease income since the question that falls for our consideration is whether the assessees in these appeals were obliged to employ or to take recourse to guidance note issued by the Institute of Chartered Accountants of India on accounting for leases even though the accounting standard was not notified by the Central Government in the Official Gazette as contemplated by sub-section (2) of section 145 of the Act. It is not in dispute that the guidance note reflects the best practices adopted by the accountants in India. Further, it cannot be disputed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing standards while interpreting section 10(2)(vi), (via), (vib) and section 10(5) of the Indian Income-tax Act, 1922, and the expression "actual cost". Thus, even if at the relevant time, it was not mandatory to adopt the methodology prescribed by the guidance note or for that matter the accounting standard as it was not notified by the Central Government in the Official Gazette, in our opinion, it is not relevant for the reason that, as long as there was a disclosure of the accounting policy in the accounts, which had a backing of a professional body, such as the Institute of Chartered Accountants of India, it could not be discarded by the Assessing Officer. 13. Lastly, we would like to consider the submission that the word "may" employed in sub-section (2) of section 145 of the Act should be read as "shall". Sub-section (2) provides that the Central Government "may" notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. The question, therefore, is whether in the absence of such notification, being issued by the Central Government, the accounting standards or the guidance note, prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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