TMI Blog2015 (8) TMI 471X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions contained in section 145 of the Act, we are of the opinion that the word "may" used in sub-section (2) thereof cannot be read as "shall". Merely because, the Central Government has not notified in the Official Gazette "accounting standards" to be followed by any class of assessees or in respect of any class of income, it cannot be stated that the "accounting standards" prescribed by the Institute of Chartered Accountants of India or the accounting standards reflected in the "guidance note" cannot be adopted as an accounting method by an assessee. Thus, this submission also deserves to be rejected. Notwithstanding the fact that the opinion of the Institute of Chartered Accountants of India was expressed in the guidance note, which had not attained a mandatory status, would not, in our view, be a ground to discard the books of account of the assessee or method of accounting for lease followed by the assessee and disallowing the assessee to deduct the lease equalisation charges from the lease rental income. - Decided in favour of the assessee - I.T.T.A. Nos.252 & 291 of 2003, 76 & 77 of 2006 and 132 & 136 of 2004 - - - Dated:- 5-2-2015 - SRI DILIP B.BHOSALE AND SR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lease equalisation charges of ₹ 48,56,224 from the lease rental charges for the assessment year 1998-99. 3.1 During the assessment year 1998-99, the assessee had given cer tain assets on lease and shown gross lease rentals of ₹ 1,14,91,395, as income in the profit and loss account. Out of this, a sum of ₹ 48,56,224 was claimed as deduction by way of lease equalisation charges from the lease rental income. In the course of assessment proceedings, it was sub mitted on behalf of the assessee that the treatment in the accounts had been given as per the guidance note on accounting for leases, issued by the Institute of Chartered Accountants of India (for short the ICAI ). In this backdrop, the question that was considered by the Tribunal and Commissioner of Income-tax (Appeals) was whether the assessee could take recourse to the guidance note issued by the Institute of Chartered Accountants of India qua accounting for lease in determination of its income, and whether the deduction as claimed by the assessee ought to be allowed. 4. The Commissioner of Income-tax (Appeals) disallowed the lease equalisation charges from the lease rental income, whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for lease transactions. It was further submitted that the courts have accepted the recommendations issued by the Institute of Chartered Accountants of India from time to time, with respect to the manner and mode of reflecting transactions in books of account, in number of judgments pronounced by High Courts as well as the Supreme Court. Lastly, he submitted that what is provided in the guidance note stands transacted into an accounting standard issued by the Institute of Chartered Accountants of India and approved under sub-section (2) of section 145 of the Act by the Central Government. 7. Mr. S. R. Ashok, learned senior counsel appearing for the Revenue, on the other hand, at the outset, invited our attention to section 145 of the Act, in particular sub-section (2) thereof, and submitted that neither the accounting standards nor the guidance note issued by the Institute of Chartered Accountants of India could be taken recourse to in the absence of a notification being issued by the Central Government as contemplated by sub-section (2). He submitted that the Delhi High Court and the Karnataka High Court did not consider the provisions contained in sub-section (2) of section 145 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m attributed to lease equalisation charges, and, consequently, added to the assessee's income. The Commissioner (Appeals) confirmed the order of the Assessing Officer, whereas the Tribunal allowed the appeals of the assessee on the merits. In this backdrop, the relevant observations made by Delhi High Court in Virtual Soft Systems Ltd. (supra) read thus (page 602 of 341 ITR) : In this background what is required to be considered is whether the books of account 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 Income-tax Act. Section 145 of the Income-tax Act adverts to the method of accounting followed by an assessee. Sub-section (1) of section 145 provides that income charge able under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed either on the cash basis or on the mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying accounting standard in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issued by the Institute of Chartered Accountants of India is irrelevant for the reason that, as long as there was a disclosure of the change in 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. This is specially so, since the Institute of Chartered Accountants of India is recognised as the body vested with the authority to recommend accounting standards 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, 1956, 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 Institute of Chartered Accountants of India shall be deemed to be the relevant accounting standards. The relevant provision reads as follows : '211. (3C) For the purposes of this section, the expression accounting standards mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in not appreciating that the appellant being a NBFC had followed the norms required by its regulatory authority, namely, RBI and hence the claim made by the appellant with regard to the lease equalisation account was perfectly in order ? 3. Whether in law the Tribunal was justified in declining to accept the deduction claimed by the appellant which was in accordance with accounting standard which was consistently followed which declares the real income in the relevant year ? 4. Whether in law the Tribunal was justified in concluding that lease equalisation reserve is an appropriation of profit and thus cannot be allowed as deduction ? 8.4 The Karnataka High Court considered several judgments including the judgment of the Delhi High Court in Virtual Soft Systems Ltd. (supra) and in paragraph 12, observed thus : Admittedly, in so far as the lease equalisation charges are concerned, it is not provided in the notified accounting standards by the Department. It is also not in dispute that in the Act what the lease equalisation charges is not explained. In the absence of any specific provision in the Act dealing on the subject, when the accounting standard is now made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time accounting standards to be followed by any class of assessees or in respect of any class of income. Sub-section (3) of section 145 of the Act provides where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1), or accounting standards as notified under sub- section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. 10. On the basis of the provisions contained in section 145 of the Act, it was submitted on behalf of the Revenue that the taxable income of the assessee should be determined as per the Act and that the guidance note issued by the Institute of Chartered Accountants of India cannot be the basis for such determination. It was further submitted that the guidance note or the accounting standards prescribed by the Institute of Chartered Accountants of India cannot be taken recourse to or taken into account unless the Central Government notify such accounting standards in the Official Gazette to be followed by any class of assessees or in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al statements. In support, as observed by the Delhi High Court in Virtual Soft Systems Ltd., the provisions of section 211(3C) of the Companies Act are quite clear. The proviso to this section clearly specifies that till such time the Central Government prescribes the accounting standards issued by the Institute of Chartered Accountants of India shall be deemed to be the relevant accounting standards. It is not in dispute that the Accounting Standard 19 prescribed on April 1, 2001, in respect of leases and the accounting standard incorporated in the guidance note is one and the same. 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 the method of accounting for leases followed by the assessee as observed by the Delhi High Court in Virtual Soft Systems Ltd. (supra). In this connection, we would like to make a reference to the judgment of the Supreme Court in CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1 (SC) wherein it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountancy standards prescribed by the Institute of Chartered Accountants of India would have to be followed and applied. In other words, the accounting standards prescribed by the Institute of Chartered Accountants of India has received recognition in several decisions of the High Courts and the Supreme Court. We have also made reference to the provisions of section 211(3C) of the Companies Act, 1956. The proviso to this section clearly specifies that till such time the Central Government prescribes, the accounting standards issued by the Institute of Chartered Accountants of India shall be deemed to be the relevant accounting standards. Keeping that in view, it would not be possible to read the word may employed in sub-section (2) of section 145 of the Act as shall . It is well settled that the word may normally indicate that the provision is not mandatory. It is also true that the word may can also be used in the sense shall or must by the Legislature. The intent of the Legislature, however, will have to be gathered from the scheme of the relevant provision, Chapter or the relevant statute and also judicial pronouncements dealing with the relevant provision. Having rega ..... X X X X Extracts X X X X X X X X Extracts X X X X
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