Accounting Method Consistently Followed with ICAI Guidance Note Cannot Be Disturbed: ITAT Upholds Deduction of Lease Equalization Charges [Read Order]
“Since it is being regularly followed accounting standard and which is also properly declared in the financial statements, the same cannot be rejected by the tax authorities,” the Tribunal observed.
Accounting Method - ICAI - ITAT - taxscan
Accounting Method - ICAI - ITAT - taxscan
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the accounting method consistently and properly followed in accordance with the Institute of Chartered Accountants of India (ICAI) Guidance Note cannot be disturbed by the tax authorities.
Delfin Finance Pvt. Ltd., the appellant-assessee, a company engaged in the business of financing and leasing, which had claimed deduction of ₹44.59 lakh as lease equalization charges for AY 1997-98 (and corresponding amounts for AY 1998-99).
The AO disallowed the claim, contending that such charges were not explicitly allowable under the Income Tax Act, 1961, and further alleged that the method adopted reduced taxable income by using the ICAI’s Guidance Note as a pretext.
The assessee submitted that the lease equalization charges were computed in accordance with the Revised Guidance Note on Accounting for Leases (1995) issued by the ICAI.
The company consistently followed the prescribed method of accounting by recognizing lease rentals as gross income and charging annual lease expenses, including depreciation and lease equalization, to reflect the real income from finance lease transactions.
It was contended that such bifurcation between finance income and capital recovery is recognized in accounting practice and had been upheld by the Supreme Court in CIT v. Virtual Soft Systems Ltd.
The apex court had ruled that the ICAI’s method ensures that only real income is subjected to tax and that the bifurcation of lease rentals is not an artificial calculation but an essential step to avoid taxing non-revenue items.
However, the CIT(A) had sustained the disallowance on the ground that the assessee’s leasing transactions allegedly involved purchase of second-hand assets and lease-back arrangements designed to claim double benefits both depreciation and reduced taxable income via lease equalization.
The Bench comprising Satbeer Singh Godara (Judicial Member) and S. Rifaur Rahman (Accountant Member) disagreed with the CIT(A)’s reasoning.
The tribunal noted that the assessee had consistently followed the ICAI-prescribed accounting method, duly disclosed the treatment in its audited financial statements, and that such method had been accepted in earlier years.
“Since it is being regularly followed accounting standard and which is also properly declared in the financial statements, the same cannot be rejected by the tax authorities,” the Tribunal observed.
The Bench further held that where an accounting method is consistently applied and reflects true income, there is no loss to the Revenue as the impact gets neutralized over time.
The Tribunal stated that the real income principle must prevail and that the AO cannot disregard a recognized accounting method merely because the Act does not expressly mention it.
Accordingly, the ITAT allowed the assessee’s appeals for both AY 1997-98 and AY 1998-99, holding that the disallowance of lease equalization charges was unjustified and that the accounting method followed by assessee was valid in law.
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