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2002 (3) TMI 221
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....hod of accounting does not disclose true and correct income for income-tax purposes without which rejection would be unlawful. 4. The learned CIT(A) ought not to have sustained the rejection of accounts when the Assessing Officer himself has observed that the accounts are correct and complete and in accordance with the guidelines of the Institute of Chartered Accountants of India. 5. The learned CIT(A) ought to have considered the detailed explanations and submissions made by the assessee to establish the correctness of the system followed by it both for the purposes of Companies Act as well as Income-tax Act. 6. The learned CIT(A) failed to appreciate that the method followed by the assessee being based on the guidance of the Institute of Chartered Accountants of India, is very scientific and considered every aspect of the transaction and the business in contra distinction to the method followed by the Assessing Officer which fails to address several issues that will arise like, treatment of balancing charge at the time of completion of transaction, treatment of lease adjustment account credited etc. 7. The CIT(A) ought not to have been carried ....
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....ccount of the assessee are correct and complete, the method of accounting employed by the assessee is such that the income cannot be properly deduced therefrom. He disallowed the deduction in respect of lease terminal adjustment account amounting to Rs. 13,16,123. On appeal, the learned Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer. While doing so, he held that the method prescribed by the ICAI is perfectly alright as long as depreciation is claimed as per Companies Act but not when depreciation is claimed as per the Income-tax Act, and held that the assessee cannot have the benefit of both the systems. He held that by claiming a higher depreciation under the Income-tax Act, the assessee had already obtained more deduction than the amount of principal recovered as per its method of accounting. The learned Commissioner (Appeals) concluded that by choosing to claim depreciation as per the I.T. Act, the assessee had already excluded itself from the method of calculation of lease equalisation method for which depreciation debited in its books of account was the determining factor. Aggrieved by this addition, the assessee preferred this appeal. 6. The....
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....e asset is removed from the books by adjusting the same with the balance of accumulated lease adjustment account. He further submitted that in respect of profit and loss account, the lease equalisation will be either debited or credited depending on the quantum of allowable statutory depreciation. He submitted that if the capital recovery is more than statutory depreciation, lease equalisation will be debited and that if the capital recovery is less than statutory depreciation, lease equalisation fund will be credited. He further submitted that over the period of lease term, the targeted return implicit in the lease is disclosed in the profit and loss account. 6.1 He vehemently argued that the company has followed the method of accounting not only because this is the only method available but also because the company is legally bound to follow the method of accounting prescribed by the Institute of Chartered Accountants of India. He argued that the company is a non-banking finance company registered with the Reserve Bank of India and that the Department of Non-banking Supervision of the Reserve Bank of India in its regulatory framework for Non-Banking Financial Companies, 1998 c....
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....f accounting recommended in the guidance note. He took the Bench through the provisions in the guidance note wherein the Chairman of the Research Committee had emphasised the importance of the Guidance Note. He argued that the Company followed the methods suggested in the Guidance Note scrupulously. The only difference, as per the counsel, is that the terminology used was 'lease terminal adjustment account' instead of 'lease adjustment account'. He further submitted that the Assessing Officer himself had agreed that the assessee had scrupulously followed the guidance note. The Assessing Officer did not agree with the method suggested in the guidance note as according to the Assessing Officer the accounting treatment may be good for the purpose of Companies Act or for the purpose of Reserve Bank of India regulation but not for the purpose of Income-tax Act. He submitted that the Assessing Officer held: (a) that the method of accounting cannot affect the charging section itself; (b) that the rates of depreciation under Income-tax Act are higher compared to the rates of depreciation allowed under Companies Act; and (c) that if the rate of dep....
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....e submitted before this Bench another example. He argued that another error in which the Assessing Officer fell into was in thinking that lease equalisation account and lease adjustment account are one and the same. He submitted that both these accounts might be the same in the first accounting year, but in the subsequent years, there would be divergence in both. He argued that lease equalisation account is a revenue item dealt with in the profit and loss account whereas lease adjustment account is a capital item dealt with in the balance sheet. The balance in the lease Adjustment Account at the end of the year actually represents the cumulative position of the Lease Equalisation Account. The learned counsel for the assessee pointed out that this aspect does not appear to have been noticed by the Assessing Officer while disallowing the deduction of Lease Adjustment Account. Though the Assessing Officer has explained the lease terminal adjustment account rather correctly at page 5 of his order, according to the counsel for the assessee, he erred while illustrating the Lease Equalisation Account. It is here, he submitted that the Assessing Officer lost track of the concept and he mig....
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....of the Assessing Officer that the guidance note itself has clarified at page 27 that the taxable income would have to be determined in accordance with the provisions of taxation laws and as such treatment may differ from the recommendations contained in the guidance note, the counsel submitted that this clarification cannot be taken as a licence to disturb the entire method of accounting in whatever fashion one may desire. According to him, the clarification is only to be understood in the limited sense that whenever certain provisions of taxation laws are available for treating certain taxable incomes such provisions take precedence over the recommendations made in the guidance note. A statute will always have precedence over other forms of guidance available. He therefore submitted that the said clarification should not be misconstrued as otherwise it will make the entire exercise in evolving the guidance note on a complex issue like this an exercise in futility. He submitted that if a statute provided for a particular rate of depreciation that should be applied. The assessee has only followed a method of accounting recommended by a competent professional body i.e. the Institute ....
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....r determining taxable income would have to be in accordance with the provisions of Taxation Laws; such treatments may differ from the recommendations contained in the guidance note. (b) If the guidance note is followed for I.T. purposes also, the gross rentals of the assessee during the current year would get enhanced substantially as the depreciation rates under I.T. Rules are much higher than what is prescribed under Schedule XIV of the Companies Act. This gives distorted picture of the profits for the current year. (c) By following the guidance note, the assessee intends to shift his tax liabilities to another year which is an incorrect method of computing profits and gains for tax purposes. As held by the Supreme Court, such assessment year is a self-contained unit and the profits of one year cannot be shifted to another year. Under section 5 of the I.T. Act, since the income has already accrued by way of lease rentals, the same cannot be shifted to another year by way of appropriation towards lease equalisation. (d) The method of accounting followed by the assessee for accounting lease rentals is such that true and correct profits cannot be deduced t....
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....ficer and sought for its sustenance. 8. In reply to the arguments of the Revenue, the learned counsel for the assessee submitted that the Special Bench of this Tribunal in the case of Nagarjuna Investment Trust Ltd. held that section 145 cannot override section 5 of the Income-tax Act. He submitted that this decision is in his favour as the Special Bench found that when the method in the books of account represented real income, the same has to be taken into account and where it does not so represent, section 5 takes precedence. He submitted that he relied on this very judgment of the Tribunal as the submissions of the assessee in the present case are the same as in the above case viz., (i) that the accounts are made in accordance with the guidance note issued by the Institute of Chartered Accountants of India and (ii) that these are approved by the Board of Directors and shareholders and auditors. He then drew the attention of the Bench to the methodology adopted by the Institute of Chartered Accountants of India while issuing the guidance note to demonstrate that it was well debated by an Expert Committee after circulation of draft proposals and submitted that it should not be....
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.... the ITO very rightly computed the income of the assessee in accordance with the said method regularly employed by the assessee. It is not permissible for the assessee to ignore its own method of accounting and its own book results and recompute its income in accordance with another method for income-tax purposes. In that view of the matter, the learned CIT(A) wholly erred in rejecting the method of accounting employed by the assessee in its books and directing the Assessing Officer to recompute the income with reference to the terms contained in hire purchase agreements and leasing agreements entered into by the assessee with its customers. The learned CIT(A) made certain uncharitable remarks against the assessee for adopting this internationally recognised and scientifically devised method of accounting under the wrong notion or belief that the assessee by adopting the said method had shown non-existent income. The assessee cannot be found fault with for adopting SOD/index method of accounting. It is in accordance with Accounting Principles from which income can properly be deduced. Accordingly we hereby set aside the order of the first appellate authority on this issue and resto....
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....tion of leased assets should be termed on a basis consistent with the lessor's normal depreciation policy. 42.1 In the aforesaid example, the assessee has a right to receive annual lease rent of Rs. 30 per annum as per the lease agreement. The income which accrues to the assessee as per the Agreement is only Rs. 30 per annum. Any amount of income accounted for in the books of account in the first few years of the lease term beyond the amount of Rs. 30 clearly represents hypothetical income which did not in fact accrue to the assessee in the relevant accounting year. 43. The assessee in its income-tax returns has declared income by way of lease rentals on the basis of lease rent fixed in the respective lease agreements and has claimed the excess amount recognised in the books of account beyond the agreed amount of lease rental, as differential income not liable to tax on the ground that income to that extent has not accrued in the relevant previous year. The assessee in relation to the specimen lease agreement has shown income from lease rental; Rs. 7,816.20 i.e. Rs. 93,794.40 per annum for tax purposes. The assessee is entitled to receive lease rent @ Rs. 7,81....
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....ccepted under the Companies Act whereunder also income is accounted on accrual, basis in an accounting year. It would, therefore, be anomalous to say that the accounts maintained by SOD/Indexing Method depict true and fair picture of the profit and loss under the Companies Act, but a different picture when it is seen with reference to income-tax." 13. In the case on hand the arguments of revenue are just the opposite to their arguments in these two cases. The pleadings of the Department in those cases that the income should be computed in accordance with the guidance note of the ICAI are the pleadings of the assessee in this case. The Tribunal has upheld the contentions of the Revenue in those two cases. Thus our decision cannot be otherwise and we have to follow the Special Bench decision which is binding on us and uphold the contention of the assessee that the income should be computed only in accordance with the guidance note of the ICAI. 14. Before going into what the Assessing Officer has done and what the Commissioner of Income-tax (Appeals) has opined, it would be useful to examine the various case laws brought to our notice. In the case of Margadarsi Chit Funds (P.) L....
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....o account for income on an acceptable basis, or in other words the choice of the Method of Accounting is that of the assessee though it is not an unlimited choice. (b) There should be some material to indicate why the Income-tax Officer considers the system of accounting regularly employed by the assessee to be defective. (c) There should be a finding that the system of accounting followed by the assessee is such that correct profit cannot be deduced therefrom. (d) The Assessing Officer has power as per provisions of section 145 to substitute the system of accounting. (e) Just because there is a better system of accounting provisions of section 145 cannot be invoked to reject the system of accounting followed by the assessee uniformly and regularly. (f) The Assessing Officer cannot substitute a system of accounting on the ground that the system which better commends to the Income-tax Officer should be followed i.e. Method of Accounting cannot be rejected on mere revenue consideration. 14.1 The Ahmedabad Bench of this Tribunal in the case of Shri Dinesh Mills Ltd. held that when the assessee is adopting a method approved by the Institu....
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....ed by the assessee does not show the correct profit. The second aspect to be examined, is whether the Assessing Officer could substitute the method of accounting followed by the assessee. By a suitable alternative which can also be said to be a correct method of accounting. 15.1 Coming to the second aspect first, we observe that the Assessing Officer could not come out with a substitute or alternative method of accounting. The learned counsel for the assessee has clearly demonstrated that the Assessing Officer has erred on a number of issues and that the examples cited by him are flawed and incorrect and that when completed lead to illogical conclusions. The Assessing Officer with a view to demonstrate that the method of accounting suggested by the Guidance Note is not correct and is one from which correct profits cannot be deduced has tried to formulate new Illustrations prepared by him. His illustrations are totally flawed for the following reasons: "(a) Though his idea appears to be to disallow lease equalisation amount, he confused the same with lease terminal adjustment account and added the same in his assessment order. The difference between the two is not realis....
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....om which correct profit cannot be deduced. This is an internationally accepted method having the sanction of the Institute of Chartered Accountants of India. As already stated this method has been approved and made mandatory by the RBI and also under the Company Law. In fact a number of companies have been following this method. An illustrative list of companies which have published their accounts cited before us by the learned counsel for the assessee and not controverted by revenue are as under: 1. Raymond Synthetics Ltd. 2. DCM Shriram Leasing & Finance Ltd. 3. Greaves Leasing Finance Ltd. 4. Gujarat Lease Financing Ltd. 5. Gujarat Gas Financial Services Ltd. 6. ITC Bhadrachalam Finance & Investment Ltd. 7. India Equipment Leasing Ltd. 8. Larsen & Toubro Ltd. 9. Fortune Financial Services (India) Ltd. 15.3 Thus we can conclude that the Assessing Officer has not understood the guidance note and the method of accounting followed by the assessee. He has not made out a case that by following this method of accounting, the correct income of the assessee is not brought to tax nor has he come out with s....
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....ount i.e. (i) Lease rentals, (ii) Implicit rate of return, (iii) Depreciation, and (iv) Lease equalisation, while three are known factors, i.e. lease rentals, I.R.R. and depreciation, the fourth one is obviously arrived at by balancing the other three. Thus the quantum of depreciation that is allowed does not invalidate the method of accounting as lease equalisation varies directly in proportion to the quantum of depreciation. The depreciation whether arrived at by applying the rates provided in the Companies Act or arrived at by rates provided under the Income-tax Act does not in any way affect the recognition of income. The logic that, when a particular rate of depreciation is applied or when a particular rate of I.R.R. is applied would result in invalidating a particular method of accounting is highly incorrect. The method of accounting suggested in the Guidance Note is not rate specific or Act specific. Thus the conclusion of the learned Commissioner (Appeals) that a higher rate of depreciation provided in the Income-tax Act if availed by the assessee disentitles him to adopt the method of accounting suggested by the Institute of Chartered....