M/S Sehgal Leasing Investments ... vs The Dy. Commissionr Of I.T., ...
2022 Latest Caselaw 6797 Tel

    THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN

                                  AND

     THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY

                     I.T.T.A. No.243 of 2006


JUDGMENT: (Per the Hon'ble the Chief Justice Ujjal Bhuyan)


      Heard Mr. C.V.Narasimham, learned counsel for the

appellant.    Ms. Sapna Reddy, learned counsel representing

Mr. J.V.Prasad, learned Standing Counsel, Income Tax

Department is present for the respondent.

2. This appeal has been preferred by the assessee

under Section 260A of the Income Tax Act, 1961 (briefly

referred to hereinafter as the 'Act') against the order dated

24.06.2005 passed by the Income Tax Appellate Tribunal,

Hyderabad Bench 'A', Hyderabad (briefly referred to

hereinafter as the 'Tribunal') in I.T.A.No.29/Hyd/2004 for the

assessment year 2000-01.

3. From the docket proceedings, we find that on

06.07.2006, the appeal was admitted for hearing though no

substantial question of law was framed.

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4. Appellant has proposed the following questions as

substantial questions of law:

"(A) Whether the Appellate Tribunal is correct in law in disallowing the lease equalization charge claimed as a deduction from gross lease rentals received by the assessee in respect of finance lease of assets?

(B) Whether the Appellant Tribunal is correct in law in upholding the additions to lease rental income recognised by assessee in compliance with the mandatory accounting standard AS 19 read with accounting standard No.1 notified U/s.145 (2) of the Income Tax Act?

(C) Whether the Appellate Tribunal is correct in law in disallowing the lease equalization charge claimed by the appellant which as per the accounting standard is meant to mitigate the effect of capital receipts embedded in lease rentals and disallowance of the lease equalization charge would amount to taxing capital receipts?"

5. Appellant is an assessee under the Act having the

status of a company. Assessment year under consideration is

2000-01. Initially, appellant had filed return of income

declaring an income of Rs.10,22,685.00 under Section 115JA

of the Act and regular income of Rs.9,46,382.00. Intimation 3 HCJ & CVBRJ I.T.T.A.No.243 of 2006

under Section 143(1) was issued on 05.03.2001. Later on,

notice under Section 148 of the Act was issued on

05.12.2001, whereafter assessment order was passed on

24.02.2003 under Section 143(3) read with Section 148 of the

Act.

6. Appellant is engaged in the business of providing

hire purchase and finance. Assessee had claimed deduction

of Rs.6,06,437.00 on account of transfer to lease equalisation

charges from the lease rental of Rs.50,05,024.00.

7. After hearing the appellant and considering the

materials on record, Assessing Officer disallowed the

aforesaid claim of the appellant.

8. The aforesaid decision of the assessing officer was

challenged by the appellant before the Commissioner of

Income Tax (Appeals)-IV, Hyderabad (briefly referred to

hereinafter as the 'CIT(A)'). By the order dated 19.09.2003,

CIT(A) upheld the disallowance made by the Assessing Officer.

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                                                    I.T.T.A.No.243 of 2006

Thereafter appellant filed further appeal before the Tribunal

which also came to be rejected.

9. On this issue, we find that CIT(A) held that the

amount claimed by the assessee and disallowed by the

Assessing Officer represented the difference between cost of

asset leased minus the depreciation claim and the lease

deposit received. This amount did not represent actual

expenditure incurred in the business of the appellant and

therefore, the claim was disallowed. CIT(A) held as follows:

"The appellant quantified lease equalization fund representing the difference, being the cost of asset leased minus the depreciation claimed and the lease deposit received. It is contended that the amount debited to the P&L account is allowable as a deduction since it is worked out as prescribed by the Institute of Chartered Accountants. An amount can be allowable as a deduction provided it is an expenditure relatable to the business and is laid out wholly and exclusively for the purpose of the business. In the appellant's case, the lease equalization fund represents an amount set apart from the taxable income as a reserve. In other words, this debit reduces the taxable income. This amount is not an outgo for the business. It is in the nature of creation of reserve or provision. It cannot be said that the amount represents an actual expenditure incurred relating to the 5 HCJ & CVBRJ I.T.T.A.No.243 of 2006

business. Since it is not a real expenditure it cannot be allowed by the fiction of quantification based upon the guidelines of Institute of Chartered Accountants. An expense to be allowed should have a legal sanction. The amount claimed by the appellant has no such legal sanction and is not an allowable expenditure. The Hon'ble Supreme Court in the case of Indian Molasses Co. Pvt. Ltd. Vs. CIT (37 ITR) held that the expenditure which is deductible for Incometax purposes is one which is either actually paid or, provided for towards the liability actually existing at the time, but putting aside of money which may become expenditure on the happening of an event is not expenditure. The Hon'ble Supreme Court in the case of CIT Vs. Malayalam Plantations Ltd. (53 ITR 140) held that the expenditure is not allowable unless it is laid out or expended wholly and exclusively for the purposes of business or profession. In view of these decisions of the Supreme Court, the expenditure claimed by the appellant, not being a real expenditure, cannot be said to have been laid out and expended wholly and exclusively for the purposes of business. The AO is correct as per law in disallowing the claim for deduction. The AO's action is upheld. This ground of appeal fails and is rejected."

10. In appeal before the Tribunal, it was noticed that

this issue was already decided by the Tribunal on previous

occasions. Agreeing with the same, Tribunal held that the

amount taken to the lease equalisation fund was not an 6 HCJ & CVBRJ I.T.T.A.No.243 of 2006

allowable business expenditure as it was an appropriation of

profit.

11. This issue is no longer res integra as the same has

been answered by the Supreme Court in Commissioner of

Income Tax-VI v. Virtual Soft Systems Limited1. In the

said decision, Supreme Court examined the guidelines issued

by the Institute of Chartered Accountants of India (briefly

referred to hereinafter as 'ICAI') and also referred to Section

211 of the Companies Act, 1956 to emphasize that

Accounting Standards prescribed by ICAI shall prevail until

Accounting Standards are prescribed by the Central

Government. It has been held as follows:

"11. Prior to critically examining the case, it would be appropriate to have an understanding and significance of the Guidance Note issued by the ICAI. The ICAI is an expert body, created by the Parliament under the Chartered Accountants Act, 1949. The ICAI's publication on the subject indicates that the Guidance Note on Accounting for Leases was issued by it for the first time in 1988 which was later on revised in 1995. The Guidance Note reflects the best practices adopted by the

1 (2018) 6 Supreme Court Cases 584 7 HCJ & CVBRJ I.T.T.A.No.243 of 2006

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.

12. 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-section (3-C) of Section 211 was added vide the 1999 Amendment with retrospective effect. The relevant portion of Section 211 of the Companies Act is reproduced herein as under:

"211. (3-C) 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 210-A:

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."

(emphasis supplied)

13. The purpose behind the amendment in Section 211 of the Companies Act, 1956 was to give clear sight that the accounting standards, as prescribed by the ICAI, shall prevail until the accounting standards are 8 HCJ & CVBRJ I.T.T.A.No.243 of 2006

prescribed by the Central Government under this sub- section. The purpose behind the accounting standards was to arrive at a computation of real income after adjusting the permissible deprecation. It is not disputed that these accounting standards are made by the body of experts after extensive study and research."

12. After referring to the Guidance Note on Accounting

for Leases, revised in the year 1995, Supreme Court held that

method of accounting followed as derived from ICAI 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.

Thereafter, Supreme Court held as follows:

"17. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalisation 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, we do not find any 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 9 HCJ & CVBRJ I.T.T.A.No.243 of 2006

earned would be a revenue receipt chargeable to income tax. Hence, we do not find any force in the contentions of the Revenue that whole revenue from lease shall be subjected to tax under the IT Act."

13. Supreme Court considered the main contention of

the Revenue that an assessee cannot be allowed to claim

deduction regarding lease equalisation charges since there is

no such express provision for deduction in the Act. This

contention was repelled by the Supreme Court in the

following manner:

"19. In the present case, the relevant assessment year is 1999-2000. The main contention of the Revenue is that the respondent cannot be allowed to claim deduction regarding lease equalisation 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 respondent 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 respondent 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 respondent can show fair and real income which is liable to tax under the IT Act. Therefore, it is wrong to say that the respondent claimed deduction by virtue of Guidance Note rather it only applied the 10 HCJ & CVBRJ I.T.T.A.No.243 of 2006

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 (unamended) of the Companies Act makes 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.

20. 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."

14. That being the position, the questions framed by

the appellant are answered in favour of the assessee and

against the Revenue.

15. Appeal is accordingly allowed. However, there

shall be no order as to costs.

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16. As a sequel, miscellaneous applications pending, if

any, in this Appeal, shall stand closed.

__________________________ UJJAL BHUYAN, CJ

___________________________ C.V.BHASKAR REDDY, J Date: 14.12.2022 KL