By TIOL News Service

NEW DELHI, APRIL 26, 2018: THE ISSUE IS - Whether bifurcation of lease rental income can be done as per the Guidance Note and accounting standards prescribed by the ICAI when there is no bar in the Act regarding the use of such Guidance Note and when the Act itself is silent on treatment for lease equalization charges. YES IS THE ANSWER.

Facts of the case

The assessee company filed return for the relevant AY declaring losses and claiming deduction for lease equalization charges on the basis of Guidance Note issued by the Institute of Chartered Accountants of India (ICAI). During assessment the AO disallowed deduction for lease equalization charges from lease rental income and added the same to the income. On appeal, CIT(A) upheld the order of the AO. On further appeal, Tribunal passed order in favour of assessee, which was also confirmed by the High Court.

On appeal, the Supreme Court held that,

Whether bifurcation of lease rental income can be done as per the Guidance Note and accounting standards prescribed by the ICAI when there is no bar in the Act regarding the use of such Guidance Note and when the Act itself is silent on treatment for lease equalization charges - YES: SC

++ guidance Note reflects the best practices adopted by the accountants throughout the world. The ICAI is a recognized body vested with the 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. 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;

++ 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 the form of revenue receipts only is captured for the purposes of income tax. Moreover, there is no express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. The repayment of principal would be a balance sheet item and not a revenue item. Only the interest earned would be a revenue receipt chargeable to income tax. Hence, no force is found in the contentions of the Revenue that whole revenue from lease shall be subjected to tax under the IT Act;

++ main contention of the Revenue is that the assessee cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the assessee can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculation, it is obvious that the assessee has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applying such method which is prescribed in the Guidance Note, the assessee can show fair and real income which is liable to tax under the IT Act. Therefore, it is wrong to say that the assessee claimed deduction by virtue of Guidance Note rather it only applied the 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 assessee is entitled to do such bifurcation and 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, their is no 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. The assessee 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. Accordingly, the appeal is dismissed.

(See 2018-TIOL-161-SC-IT)