TMI Blog2018 (4) TMI 1472X X X X Extracts X X X X X X X X Extracts X X X X ..... led for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. There is no express bar in the IT Act regarding the application of such accounting standards. Deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act, 1961, - Civil Appeal No. 4358 of 2018 (Arising out of Special Leave Petition (C) No. 25006 of 2012) - - - Dated:- 24-4-2018 - CIVIL APPEAL NO. 4359 OF 2018 (Arising out of Special Leave Petition (C) NO. 29129 OF 2012) CIVIL APPEAL NO. 4360 OF 2018 (Arising out of Special Leave Petition (C) NO. 35430 OF 2012) CIVIL APPEAL NO. 4361 OF 2018 (Arising out of Special Leave Petition (C) NO. 33942 OF 2012) CIVIL APPEAL NO. 4365 OF 2018 (Arising out of Special Leave Petition (C) NO. 8381 OF 2013) CIVIL APPEAL NO. 4362 OF 2018 (Arising out of Special Leave Petition (C) NO. 5262 OF 2013) CIVIL APPEAL NO. 4363 OF 2018 (Arising out of Special Leave Petition (C) NO. 3610 OF 2013) CIVIL APPEAL NO. 4364 OF 2018 (Arising out of Special Leave Petition (C) NO. 5229 OF 2013) CIVIL APPEAL Nos.4366-4367 OF 2018 (Arising out of Special Leave Petition (C) NOs. 22197-22198 OF 2013) CIVIL APPEAL NO. 4368 OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Assessment Order, the Respondent preferred an appeal before the Commissioner of Income Tax (Appeals). Learned CIT (Appeals), vide order dated 15.09.2005, upheld the order of the Assessing Officer and dismissed the appeal. (e) Being dissatisfied, the Respondent preferred an appeal before the ITAT. Vide order dated 19.02.2010, the ITAT allowed the appeal of the Respondent while setting aside the orders passed by Learned CIT (Appeals) and the Assessing Officer. (f) Being aggrieved, the Revenue took the matter before the High Court. The High Court, vide judgment and order dated 07.02.2012, dismissed the appeals at the preliminary stage while confirming the decision of the ITAT. (g) Hence, this instant appeal has been filed before this Court by the Revenue. 4) We have given our thoughtful consideration to the submissions of learned senior counsel for the parties and perused the relevant records of the case. Point(s) for consideration:- 5) The short question that arises for consideration before this Court is whether the deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act, 1961, on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he authority to recommend accounting standards for ultimate prescription by the Central Government in consultation with the National Advisory Committee of Accounting Standards for the presentation of true and fair financial statements. 9) Section 211 of the Companies Act, 1956 as it stood before the amendment dealt with the Form and contents of balance-sheet and profit and loss account . Sub clause (3C) of Section 211 was added vide 1999 amendment with retrospective effect. The relevant portion of Section 211 of the Companies Act is reproduced herein as under: (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 (38 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 210A: 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opened with a corresponding debit or credit to Lease Adjustment Account, as the case may be. (b) Lease Equalisation Account should be transferred every year to the Profit and Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Income . (c) Statutory depreciation should be shown separately in the profit and loss account. Accumulated statutory depreciation should be deducted from the original cost of the leased asset in the balance sheet of the lessor to arrive at the net book value. (d) Balance standing in Lease Adjustment Account should be adjusted in the net book value of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the section related to leased assets. (e) The aggregate amount included under Lease Adjustment Account on account of lease equalisation credits should be disclosed separately. The method of income measurement suggested in this paragraph, is in consonance with the inherent nature of a finance lease. The above method is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, as it is not, in essence, a revenue receipt chargeable to income tax. 13) The method of accounting followed, as derived from the ICAI s 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, and is in fact, incorporated in the ICAI s Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act and to its Scheme and spirit. 14) The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he method of bifurcation as prescribed by the expert team of ICAI. Further, a conjoint reading of Section 145 of the IT Act read with Section 211 (un-amended) of the Companies Act make it clear that the Respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of law. Moreover, the 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. Hence, we do not find any 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. 17) To sum up, we are of the view that the Respondent is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards. 18) In view of above detailed discussion, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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