NBFC lease accounting under ICAI Guidance Note challenged u/s145(1) proviso; lease terminal adjustment disallowance deleted.

The dominant issue was whether the AO could invoke the proviso to s.145(1) to reject the assessee's lease accounting and disallow lease terminal adjustment/lease equalisation. The ITAT held that the assessee, an NBFC, followed the ICAI Guidance Note and applicable accounting standards, which constitute a recognised, scientific, and regulator-mandated method from which true income can be deduced; the AO's illustrations were flawed and no proper alternative method was demonstrated. Consequently, rejection of the method of accounting under s.145 was unwarranted, and the disallowance of the lease terminal adjustment amount was deleted; the assessee's appeal was allowed.

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Issues: Whether the Assessing Officer was justified in invoking the first proviso to section 145(1) of the Income-tax Act to reject the assessee's method of accounting based on the ICAI Guidance Note on leases and disallow the lease terminal adjustment account of Rs. 13,16,123.

Analysis: The dispute turns on whether the method of accounting regularly followed by the assessee (IRR/Guidance Note method for finance leases) fails to disclose true and correct income for tax purposes and whether the Assessing Officer offered a suitable alternative method. The legal framework includes section 145(1) (power to adopt a different method where accounts do not disclose true income) and section 5 (chargeability of income). Precedents and authorities recognise that a consistently adopted, commercially accepted accounting method sanctioned by professional bodies may not be lightly displaced; rejection under section 145 requires material showing inherent defect and a demonstrated alternative. The Guidance Note on Accounting for Leases is accepted for company and RBI regulatory purposes; lease equalisation and lease adjustment are distinct concepts and form part of the comprehensive accounting scheme. The Assessing Officer's isolated disallowance of the lease terminal adjustment account, flawed illustrative computations, confusion between lease equalisation and lease adjustment, and failure to formulate a coherent substitute method meant he did not demonstrate that the assessee's method failed to disclose true and correct income.

Conclusion: The Assessing Officer's invocation of the proviso to section 145(1) is not justified; the method of accounting based on the ICAI Guidance Note discloses true and correct income and the addition of Rs. 13,16,123 is deleted; the assessee's appeal is allowed.

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