2015 (8) TMI 471 - HC - Income Tax

Court allows deduction of 'lease equalisation' charges from rental income following ICAI guidance.

The court held in favor of the assessee, allowing the deduction of 'lease equalisation' charges from lease rental income. It emphasized that the guidance ... Disallowance of deduction of the 'lease equalisation' charges from the lease rental income - Held that:- Even if at the relevant time, it was not mandatory to adopt the methodology prescribed by the guidance note or for that matter the accounting standard as it was not notified by the Central Government in the Official Gazette, in our opinion, it is not relevant for the reason that, as long as there was a disclosure of 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. 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 regard to 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 Issues Involved:1. Deduction of 'lease equalisation' charges from lease rental income.2. Validity of accounting policy based on the guidance note issued by the Institute of Chartered Accountants of India (ICAI).3. Applicability of section 145 of the Income-tax Act, 1961, and the requirement for Central Government notification of accounting standards.Detailed Analysis:1. Deduction of 'lease equalisation' charges from lease rental income:The primary issue in the appeals was whether the assessee was justified in deducting 'lease equalisation' charges from the lease rental income. The Commissioner of Income-tax (Appeals) disallowed these charges, whereas the Tribunal allowed them. The Revenue contended that the deduction should not be allowed as it was not in line with the statutory provisions of the Income-tax Act, 1961. The Tribunal's decision was based on the guidance note issued by the ICAI, which the Revenue argued should not override the statutory provisions.2. Validity of accounting policy based on the guidance note issued by the Institute of Chartered Accountants of India (ICAI):The assessee argued that their accounting policy, which included the deduction of lease equalisation charges, was based on the guidance note issued by the ICAI. The guidance note reflects best practices adopted by accountants and is recognized by the ICAI, a professional body vested with the authority to recommend accounting standards. The Delhi High Court in CIT v. Virtual Soft Systems Ltd. and the Karnataka High Court in Prakash Leasing Ltd. had previously upheld similar accounting practices based on the ICAI's guidance note. The courts acknowledged that the ICAI's recommendations, even if not mandatory at the time, should not be disregarded by the Assessing Officer as long as there was proper disclosure of the accounting policy.3. Applicability of section 145 of the Income-tax Act, 1961, and the requirement for Central Government notification of accounting standards:The Revenue argued that under section 145(2) of the Income-tax Act, the Central Government must notify accounting standards in the Official Gazette for them to be applicable. They contended that the guidance note issued by the ICAI could not be relied upon in the absence of such notification. However, the court noted that section 145(1) allows income to be computed based on the cash or mercantile system of accounting regularly employed by the assessee. Sub-section (3) empowers the Assessing Officer to disregard the books of account only if they are not satisfied with their correctness or completeness, or if the notified accounting standards are not followed. The court observed that the ICAI's guidance note, although not officially notified at the relevant time, represented best accounting practices and had the backing of a professional body. The court also referenced the Supreme Court's judgment in CIT v. Bilahari Investment (P.) Ltd., which upheld the use of ICAI's accounting standards in determining income.Conclusion:The court concluded that the guidance note issued by the ICAI, even though not mandatory, should not be disregarded by the Assessing Officer if it represents best accounting practices and is properly disclosed in the accounts. The court held that the word 'may' in section 145(2) should not be read as 'shall,' meaning that the absence of a Central Government notification does not preclude the adoption of ICAI's accounting standards. The substantial questions of law were answered in favor of the assessee, allowing the deduction of lease equalisation charges from the lease rental income. The appeals filed by the Revenue were dismissed, and those filed by the assessee were allowed.