1. Dispute over the allowability of deductions for lease equalization charges from lease rental income under the Income Tax Act, 1961. (Para 3 )
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2018 Supreme(SC) 415
SUPREME COURT OF INDIA
R.K. Agrawal and Abhay Manohar Sapre, JJ.
Commissioner of Income Tax-VI – Appellants
Versus
Virtual Soft Systems Ltd. – Respondents
Civil Appeal No. 4358 of 2018 (Arising out of Special Leave Petition (C) No. 25006 of 2012) With Civil Appeal No. 4359 of 2018 (Arising out of Special Leave Petition (C) No. 29129 of 2012), Civil Appeal No. 4360 of 2018 (Arising out of Special Leave Petition (C) No. 35430 of 2012), Civil Appeal No. 4361 of 2018 (Arising out of Special Leave Petition (C) No. 33942 of 2012), Civil Appeal No. 4365 of 2018 (Arising out of Special Leave Petition (C) No. 8381 of 2013), Civil Appeal No. 4362 of 2018 (Arising out of Special Leave Petition (C) No. 5262 of 2013), Civil Appeal No. 4363 of 2018 (Arising out of Special Leave Petition (C) No. 3610 of 2013), Civil Appeal No. 4364 of 2018 (Arising out of Special Leave Petition (C) No. 5229 of 2013), Civil Appeal Nos.4366-4367 of 2018 (Arising out of Special Leave Petition (C) Nos. 22197-22198 of 2013), Civil Appeal No. 4368 of 2018 (Arising out of Special Leave Petition (C) No. 8586 of 2014), Civil Appeal No. 4370 of 2018 (Arising out of Special Leave Petition (C) No. 16153 of 2014), Civil Appeal No. 4369 of 2018 (Arising out of Special Leave Petition (C) No. 13875 of 2014), Civil Appeal No. 4371 of 2018 (Arising out of Special Leave Petition (C) No. 17581 of 2015), Civil Appeal No. 4372 of 2018 (Arising out of Special Leave Petition (C) No. 22953 of 2015), Civil Appeal No. 4373 of 2018 (Arising out of Special Leave Petition (C) No. 22954 of 2015), Civil Appeal No. 4375 of 2018 (Arising out of Special Leave Petition (C) No. 24590 of 2015), Civil Appeal No. 4374 of 2018 (Arising out of Special Leave Petition (C) No. 24576 of 2015), Civil Appeal No. 4376 of 2018 (Arising out of Special Leave Petition (C) No. 25944 of 2015)
Decided On : 24-04-2018
Important Points
IMPORTANT POINT
Where the Income Tax act is silent, Guidance Note of ICAI will apply.
Where the Income Tax act is silent, Guidance Note of ICAI will apply.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
Income Tax Act, 1961 – Section 145 r/w section 211, Companies Act, 1956 – Lease rental – Bifurcation of – Lease equalisation charges – Deduction of – No express provision – ICAI Guidance Notes – Act not barring application of accounting standards prescribed by ICAI, particularly where the act is silent – Held, assessee entitled to such bifurcation. (Para 16, 17, 18)
(2014) 15 SCC 129 – Relied upon
Facts of the case:
The Respondent filed return of income for the Assessment Year 1999-2000 declaring loss of Rs. 70,24,178/- while claiming an amount of Rs. 1,65,12,077/- as deduction for lease equalization charges.
The Assessing Officer disallowed deduction claimed as the lease equalization charges amounting to Rs. 1,65,12,077/- and added the same to the income of the Respondent.
The Respondent preferred an appeal before the Commissioner of Income Tax (Appeals) which was dismissed. The Respondent preferred an appeal before the ITAT which was allowed.
The High Court dismissed the appeals at the preliminary stage while confirming the decision of the ITAT.
Finding of the Court:
Respondent is entitled to the bifurcation.
Result: Appeal dismissed.
Legal Category Hierarchy
Advocates Appeared:
For the Appellants : K. Radhakrishnan, Sr. Adv., Mrs. Anil Katiyar, Advs.
For the Respondents:- Mrs. Rani Chhabra, Santosh Kumar-I, Nikhil Nayyar, Advs.
For the Appellants : K. Radhakrishnan, Sr. Adv., Mrs. Anil Katiyar, Advs.
For the Respondents:- Mrs. Rani Chhabra, Santosh Kumar-I, Nikhil Nayyar, Advs.
Table of Contents
2. Revenue contends lease equalization is an artificial calculation without statutory basis; Respondent argues ICAI Guidance Notes provide a valid method for computing real income. (Para 6 , 7 )
3. ICAI is an expert body whose Guidance Notes help distinguish between non-taxable capital recovery and taxable finance income to determine real income. (Para 8 , 10 , 11 , 12 , 13 , 14 , 15 , 16 )
4. Bifurcation of lease rentals as per ICAI accounting standards is permissible to capture real income, absent an express bar in the Income Tax Act. (Para 17 )
5. Appeal dismissed; judgment of the High Court confirming the ITAT's decision is upheld. (Para 18 )
6. Can ICAI Guidance Notes be used to determine taxable income under the Income Tax Act?
Yes. When the Act is silent, Guidance Notes issued by the ICAI, a recognized expert body, can be relied upon as external aids to determine real income and fair taxation. (Para 8 , 15 , 16 )
7. What is the legal nature of lease equalization charges in finance leases?
Lease equalization charges represent the recovery of the net investment or fair value of the leased asset, which is a capital recovery element and not a revenue receipt chargeable to tax. (Para 11 , 12 )
8. Is the bifurcation of lease rentals into capital recovery and finance income considered an artificial calculation?
No. It is a valid application of the substance-over-form principle, analogous to separating principal repayment from interest in loan EMIs, ensuring only revenue receipts are taxed. (Para 13 , 14 )
JUDGMENT
R.K. Agrawal, J.
SLP (C) No. 25006 of 2012
Leave granted.
2. This batch of appeals has been filed against the impugned judgment and order dated 07.02.2012 passed by the High Court of Delhi at New Delhi in ITA Nos. 216, 398, 403, 404 and 680 of 2011 whereby the Division Bench of the High Court upheld the decision of the Income Tax Appellate Tribunal (in short 'the Tribunal') dated 19.02.2010. Since the moot question of law in all these appeals is akin, hence, vide this common judgment, all the appeals would stand disposed of.
3. In order to appreciate the controversy at hand, it is pertinent to allude to the relevant facts in a summarized way for the proper insightful of the instant case.
(a) The appellant herein is the Income Tax Department, on the other hand, the Respondent - M/s Virtual Soft Systems Ltd. is a company registered under the provisions of the Companies Act, 1956.
(b) On 29.12.1999, the Respondent filed return of income for the Assessment Year 1999-2000 declaring loss of Rs. 70,24,178/- while claiming an amount of Rs. 1,65,12,077/- as deduction for lease equalization charges.
(c) On scrutiny, the Assessing Officer, after perusal of the return and hearing the parties, vide Assessment Order dated 28.01.2005 disallowed deduction claimed as the lease equalization charges amounting to Rs. 1,65,12,077/- and added the same to the income of the Respondent under the Income Tax Act, 1961 (in short 'the IT Act').
(d) Being aggrieved with the said Assessment Order, the Respondent preferred an appeal before the Commissioner of Income Tax (Appeals). Learned CIT (Appeals), vide order dated 15.09.2005, upheld the order of the Assessing Officer and dismissed the appeal. (e) Being dissatisfied, the Respondent preferred an appeal before the ITAT. Vide order dated 19.02.2010, the ITAT allowed the appeal of the Respondent while setting aside the orders passed by Learned CIT (Appeals) and the Assessing Officer.
(f) Being aggrieved, the Revenue took the matter before the High Court. The High Court, vide judgment and order dated 07.02.2012, dismissed the appeals at the preliminary stage while confirming the decision of the ITAT.
(g) Hence, this instant appeal has been filed before this Court by the Revenue.
4. We have given our thoughtful consideration to the submissions of learned senior counsel for the parties and perused the relevant records of the case.
Point(s) for consideration:-
5. The short question that arises for consideration before this Court is whether the deduction on account of lease equalization charges from lease rental income can be allowed under the Income Tax Act, 1961, on the basis of Guidance Note issued by the Institute of Chartered Accountants of India (ICAI)?
Rival submissions:-
6. At the outset, learned senior counsel for the Revenue contended that the lease equalization charge is an additional deduction debited to Profit and Loss Account (P&L) in addition to the depreciation claimed in books so as to make it equal to capital recovery. This is an artificial calculation which bifurcates lease rental to capital recovery and interest component. Learned senior counsel further contended that in fact the entire lease income constitutes income of the assessee. Also, there is no concept of deduction regarding the lease equalization charges under the IT Act. Hence, learned senior counsel contended that impugned decision of the High Court is perverse and is liable to be set aside.
7. On the other hand, learned senior counsel for the Respondent submitted that this issue is no longer res integra. Now, it is a settled principle that a Guidance Note issued by the ICAI carries great weight and by adopting a method of accounting prescribed in such a Guidance Note, in order to compute real income and offering the same for taxation, cannot be disregarded by the Assessing Officer unless such action falls within the scope and ambit of Section 145(3) of the IT Act. Further, it was submitted that the lease equalization charge was nothing bu
