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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 ..... 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 of the Commissioner of Income Tax (Appeals) [in short the CIT(A)] dated 15.09.2003 pertaining to AY 1997-98 to 2000-01. In these appeals as indicated in the judgment of the Tribunal, there were two issues raised. The first issue, pertained to the validity of the re-assessment proceedings carried out in the case, while the second issue, on merits, was the same as indicated above by us. 3. It is in this factual background that the Tribunal, in the first instance, dealt with the issue on merits and, having come to the conclusion that the contention of the assessee had to be sustained, the validity of the order passed in AY 1996-97 under Section 263 of the IT Act or, the validity of the reassessment proceedings, in so far as, the remaining four assessment years were concerned, was not examined, as they had become, according to the Tribunal, "of academic interest". 4. It is in this background that the Revenue has come up in appeal to this court. Assessment Year 1996-97 4.1 In respect of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Guidance Note) issued by the Institute of Chartered Accountants of India (in short ICAI), in respect of, Accounting for Leases. It was also submitted that the Central Government on 25.01.1996, had already issued an Accounting Standard qua Section 145 of the IT Act, which mandated that accounting policy of the assessee should be such so as to represent true and fair view of the affairs of the assessee's business. 4.7 The assessing officer, however, rejected the submission of the assessee, and came to the conclusion that the taxable income of the assessee had to be determined as per the IT Act and, that the said Guidance Note of the ICAI only provided guidelines for preparation of financial statements for the purposes of accounting. This apart, the assessing officer relied upon the order of the CIT(A) dated 27.07.2004 passed in the assessee's own case, for AY 2001-02. The sum and substance of the order passed by the CIT(A), in AY 2001-02, was that the lease equalization charge, was a notional charge on the profits of an assessee. The said lease equalization charge, represented an amount set aside out of profits of the assessee to equalize the imbalance between lease rental and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the CIT(A) for AY 2001-02. 5. The assessee being aggrieved by both the order of the CIT dated 26.03.2004 passed under Section 263 of the IT Act pertaining to AY 1996-97, and the common order passed by the CIT(A) dated 15.09.2003 vis-à-vis AY 1997-98 to 2000-01, preferred appeals to the Tribunal. The Tribunal, by the impugned judgment dated 19.02.2010, allowed the appeals of the assessee, on merits. 6. The revenue being aggrieved, has preferred the captioned appeals before us. In these appeals, the predecessor bench had framed the following common questions of law by an order dated 06.07.2011. (a) Whether on the facts and circumstances of the case, the ITAT erred in law and on merits in allowing the deduction of lease equalization charges from lease rental income? (b) Whether the Guidance Note issued by ICAI for presentation of accounts would override the statutory provisions of the Income Tax Act, 1961? 6.1 By a subsequent order passed on 10.01.2012, the second question of law was reformulated with the consent of counsels for the assessee and revenue. The reformulated question of law reads as follows: (b) Whether in determination of the real inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lector of Central Excise Etc. v. Dai Lchi karkaria Ltd [1999] 156 CTR 172 (SC). 7.3 Mr Krishnan, further submitted that, what is provided in the Guidance Note stands transcended into an Accounting Standard (in short 'A.S.') issued by the ICAI, in 2001. 7.4 In this regard Mr Krishnan placed reliance on A.S. 19 issued by the ICAI. Mr Krishnan, also placed reliance on two judgments of different benches of the Tribunal in the case of Indian Railways Finance Corporation Ltd v. JCIT (Delhi Tribunal) ITA Nos. 699, 359, 3357 & 2109/Del/04 and JCIT v. Pact Securities & Financial Ltd 86 ITD 115 (Hyd.). The latter being extensively referred to in the former judgment of the Tribunal. 7.5 It was Mr Krishnan's contention that lease equalization charge was nothing but a method of adjusting the depreciation claimed in the books of accounts to enable the assessee to represent its real income by adopting an accounting methodology which, even though not mandatory, had surely the seal of approval of a professional body, such as, the ICAI. Mr Krishnan submitted that the Tribunal, had rightly come to the conclusion that the lease equalization charge could not be disallowed and hence, could not be add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 145 of the I.T. Act adverts to the method of accounting followed by an assessee. Sub-section (1) of Section 145 provides that income chargeable under the head "profits and gains of business or profession" or "income from other sources" shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying A.S. in respect of any class of assessee or class of income. Sub-section (3) of Section 145, empowers the assessing officers to disregard the books of accounts submitted by the assessee only if he is not satisfied with: the correctness or completeness of the accounts of the assessee or, the method of accounting employed by the assessee or on account of A.S. notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the assessing officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in Section 145 of the IT Act. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: "211(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting, recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (30 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on accounting Standards established under sub-Section (1) of Section 201A. Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section." 10. In this context it would be important to note that AS1 pertaining to Disclosure of Accounting Policies has already been notified by the ICAI as having attained mandatory status for periods commencing on or after 01.04.1991. It is not, the Assessing Officer's case, that the accounting policy with regard to lease rentals was not disclosed by the assessee. The assessing officer seems to have taken umbrage to the change in accounting policy having been brought about only with effect from AY 1996-97. In our view, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d finance leases with differing accounting treatments." 12. A perusal of the definition would show that a lease represents an arrangement, which more often than not dons a form of a contract, whereby party 'A' confers upon party 'B' the right to use an asset, for a consideration, which ordinarily is labelled as lease rentals. 12.1 Over a period of time, the transactions stood refined, in the sense, a lessor need not necessarily have created or even bought an asset with his own funds. Therefore, you could have a lease transaction where 'A' was the lessor of an asset, which was financed by 'C', i.e., a lender, and which, ultimately, was leased to party 'B', i.e., the lessee. A lease transaction therefore attained several forms, depending on the comfort level of the parties entering into a transaction and, the purpose with which the transaction was entered into, bearing in mind, the nature of the asset and, the risk bearing capacity of the parties. Therefore, you could today execute a finance lease, or an operating lease, or evolve a sale and lease back arrangement, or a leveraged lease, or even, employ a direct leasing arrangement. 12.2 We do not intend to get into the various for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transactions in issue were in the nature of a finance lease. The relevant portion is extracted hereinafter for the sake of convenience: "9. As per the guidance notes, operating lease has been defined as lease other than the finance lease. If the entire value of asset was not recovered by the assessee in the case of Goowill India Ltd. (supra) during the period of lease, it cannot be a finance lease and hence guidance notes of the ICAI cannot be applicable to such an assessee. In the present case, in the sample working submitted before us, it is shown that as against amount financed by the assessee of Rs. 677,645/-, the assessee has recovered Rs. 654,944/- as depreciation and the balance amount of Rs. 22,799/- has been explained as residual value of the leased asset. This is only 3.36% of the amount financed and hence it is reasonable claim that this balance amount is residual value. In the case of Goodwill India Ltd. (supra) relied upon by the learned DR of the revenue, as per example noted by the tribunal on page 37 of 306 ITR, against cost of the asset of Rs. 100/-, only Rs.66/- was recovered depreciation and the unrecovered amount is 34%. This cannot be said to be residual v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rden the judgment with the extract of the said paragraphs, however, it is sufficient to note that the paragraphs adverts to the following four elements, which arise, for consideration for treatment of the amount received as lease rentals by the lessee, in order to bring to tax what is his real income and, present a true and fair view of the transaction in issue. The four elements which are considered are: lease rentals; the implicit rate of return (IRR); depreciation; and lease equalization charge. 14.3 Lease rental in monetary terms is a sum total of: the financing charge and the amount embedded in it in the form of the capital sum. What the assessee needs to do, while offering for tax income derived from lease is, to separate the financing charge from the amount recovered towards capital, that is, the capital recovery amount. The financing change is determined by applying the IRR to the net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease rental. The fourth element which is the lease equalization charge is the result of the adjustment, which the assessee has to make whenever, the amount put aside toward ..... X X X X Extracts X X X X X X X X Extracts X X X X
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