Unregistered lease deed cannot defeat substance over form where lease income is consistently recognised proportionately over the lease period.
An unregistered lease deed does not, by itself, prevent examination of the true character of a transaction as a lease, since a right to enjoy property may arise expressly or by implication. Where lease receipts were consistently recognised on a proportionate basis over the lease term and there was no material showing tax avoidance, the disclosed accounting treatment could not be disturbed. On that reasoning, the note states that lease deposits or lump-sum leasing charges linked to the lease period could not be brought to tax in full for the year, and the disputed addition was not justified.
Issues: Whether an unregistered lease deed prevents determination of the true nature of the transaction as a lease; and whether lease rentals collected on a proportionate basis over the lease period could be disturbed and brought to tax as a higher amount.
Analysis: An unregistered instrument, even if compulsorily registrable, does not by itself prevent a court or tribunal from examining whether the underlying arrangement is in substance a lease. A lease is a transfer of a right to enjoy property, and such transfer may arise expressly or by implication. On the facts, the assessee had consistently recognised lease rentals proportionately over the lease period, and there was no material to show that the accounting method adopted resulted in tax avoidance. The remand by the High Court did not disturb the earlier factual foundation on which the transaction had been treated as lease-related receipts.
Conclusion: The unregistered lease deed did not bar examination of the transaction as a lease, and the addition made by the Assessing Officer was not justified.
Issue (ii): Whether the addition of Rs. 1.74 crore on account of lease deposits or lump-sum leasing charges was sustainable.
Analysis: Since the receipts were linked to lease transactions and were being offered to tax consistently on a proportionate basis in accordance with the lease period, the Revenue was not justified in disturbing the disclosed treatment. The material on record did not justify treating the entire amount as revenue of the year in question in the manner adopted by the Assessing Officer.
Conclusion: The addition of Rs. 1.74 crore was unsustainable and stood deleted, in favour of the assessee.
Final Conclusion: The appeal succeeded, and the assessee obtained complete relief in respect of the disputed addition.
Ratio Decidendi: An unregistered lease deed does not preclude determination of the real nature of the transaction, and a consistently followed proportionate method of recognising lease income cannot be rejected absent material showing tax avoidance.
TaxTMI 
AI Drafter ✕
TaxTMI 
