M/S SEHGAL LEASING AND INVESTMENTS LTD R/O SOMAJIGUDA, HYD V. THE DY. COMMISSIONR OF I.T., BASHEERBAGH, HYDERABAD

ITTA/243/2006

AI Insights

The case revolves around the appellant, M/S Sehgal Leasing & Investments Limited, challenging the disallowance of a lease equalization charge claimed as a deduction from gross lease rentals received from finance leases of assets. The dispute originated from the assessment year 2000-01, where the Assessing Officer disallowed the deduction, a decision upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. The appellant argued that the lease equalization charge was in accordance with the accounting standards and should be allowed as a deduction. The High Court, referencing a Supreme Court decision, found in favor of the appellant, emphasizing the application of accounting standards in determining taxable income.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 726546 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 14-12-2022
• Assessment Year: misc
• Other Referred Cases: Indian Molasses Co. Pvt. Ltd. Vs. CIT, CIT Vs. Malayalam Plantations Ltd., Commissioner of Income Tax-VI v. Virtual Soft Systems Limited
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: C V NARASIMHAM
• Keywords: Hyderabad Bench; Income tax appellate tribunal; Lease equalization charge; Deduction from gross lease rentals; Finance lease of assets; Accounting standard AS 19
• Section: 148; 143(3); 143(1); 260A; 145(2); 115JA

Judgement Text

"n IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY,THE FOURTEENTH DAY OF DECEMBER TWO THOUSAND AND TWENTY TWO PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN THE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 243 OF 2006 Appeal under section 260-4 of the lncome Tax Act, 1961 against the order daled 2410612005 passed by the lncome Tax Appellate Tribunal, Hyderabad Bench Hyderabad in ITA No.29lHyd/04 for the Assessment Year-2000-200'1 Preferred against the order of the Commissioner of lncome Tax (Appeal) lV, Hyderabad dated:19.9.2003- Preferred against the order of the Deputy Commissioner of lncome Tax Circle 3 (1), Hyderabad, in PAN/GlR No.SE-28 dated:24.O2.2OO3 Between: M/S Sehgal Leasing & lnvestments Limited, 6-3-1092, Raj Bhavan Road, Somajiguda, Hyderabad Rep. by its Managing Director ...APPELLANT AND Deputy Commissioner of lncome Tax, Circle 7(7), Aayakar Bhavan, Basheerbagh, Hyderabad ...RESPONDENT Counsel for the Appellant: SRl. C.V. NARASIMHAM, r1s sa?ia Re7Di a'LP Counsel for the Respondent: SRI J.V. PRASAD, SC FOR INCOME TAX DEPARTMENT The Court made the following: JUDGMENT a THE HON'BLE THE CHIEF JUSTICE UJJAL BHITYAN .AND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY JUDGMENT i Per the Hon'ble the Chief Justice Ujjal Bhugan) Heard Mr. C.V.Narasimham, learned counsel for the appellant. Ms. Sapna Reddy, learned counsel representing Mr. J.V.Prasad, learned Standing Counsel, Income Tax 2. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, i 96 1 (briefly referred to hereinafter as the Act) against the order dated 24.06.2005 passed by the Income Tax Appellate Tribunal, Hyderabad Bench A', Hyderabad (briefly referred to hereinafter as the Tribunal') in I.T.A.No.29/Hyd/2OOa for the assessment year 2O0O-0 1. 3. From the docket proceedings, we find that on 06.07.2006, the appeal was admitted for hearing though no ) ) substantial question of law u,as tiamed. I.T.T.A. No.243 of 2o06 Department is present for the respondent. I I I HCJ & CVBRJ I.T.T.A.No.243 of 2006 4. Appellant has proposed the following questions as \"(A) Whether ttre Appellate Tribunal is correct in 1aw in disallowing the lease equalization charge ciairned as a deduction from gross lease rentals received by tJ:e assessee in respect of hnance lease of assets? (B) Whether the Appellant Tribunal is correct in law rn upholding the additions to lease rental income recognised by assessee in compliance with the mandatory accounting staldard AS 19 read with accounting staldard No.i notified U/s.145 (2) of the Income Tax Act? (C) Whether the Appellate Tribunal is correct in law in disallowing the lease equali?ation charge claimed by the appellant which as per the accounting standard is mealt to mitigate the effect of capital receipts embedded in lease rentals and disallowance of t}le lease equa-lization charge would arnount to taxing capital receipts?\" 5. Appellant is an assessee under the Act having the status of a company. Assessment year under consideration is 20OO-O 1. Initially, appellant had filed return of income declaring an income of Rs. i0,22,685.00 under Section 115JA of the Act and regular income of Rs.9,46,382.O0. Intimation 2 I substantial questions of law: 7 / 3 a I a HC) & CVBRJ I.T.T.A.No.243 of 2OO6 under Section 143(1) was issued on O5.03.2001. Later on, notice under Section 148 of the Act was issued on O5.l2.2OOl, wherea-fter assessment order was passed on 24.O2.2OO3 under Section 143(3) read with Section 148 ol the Act. 6. Appellant is engaged in the business of providing hire purchase and finance. Assessee had claimed deduction of Rs.6,06,437.00 on account of transfer to lease equalisation charges from the lease rental of Rs.50,05,024.00. 7 . After hearing the appellant and considering the materials on record, Assessing Officer disallowed the aforesaid claim of the appellant. B. The aforesaid decigion of the assessing officer was challenged by the appellant. before the Commissioner of Income Tax (Appeals)-IV, Hyderabad (briefly referred to hereinafter as the CIT(A)). By the order dated 19.09.2003, CIT(A) upheld the disallowance made by the Assessing Officer. I I HC] & CVBRJ I.T.T.A.No.243 of 2006 Thereafter appellant filed lurther appeal before the Tribunal 9. On this issue, we lind that CIT(A) held that the amount claimed by the assessee and disallowed by the Assessing Officer represented the difference between cost of asset leased minus the depreciation claim and the lease deposit received. This amount did not represent actual expenditure incurred in the business of the appellant and therefore, the claim was disallowed. CIT(A) held as follows: \"The appellant quantified lease equalization fund representing the difference, being the cost of asset leased minus the depreciation claimed arrd the lease deposit received. It is contended that the amount debited to the P&L account is allowable ap a deduction since it is worked out as prescribed by the Institute of Chartered Accountants. An amount can .pe allowable as a deduction provided it is a-n expenditure relatable to the business and is laid out wholly and exclusively for the purpose of the business. In the appellant's case, ttre lease equalization fund represents an amount set apart from the taxable income as a ro.serve. In other words, this debit reduces the taxable income. This amount is not an outgo for the business. It is in the nature of creation of reserve or provision. It cannot be said that the amount represents al actual expenditure incurred relating to the I I l 4 which a-lso carne to be rejected. HC] & CVBRJ I.T.T.A.No.243 of 2OO6 business. Since it is not a real expenditure it cannot be allowed by the hction of quantification based upon the guidelines of Institute of Chartered Accountants. An expense to be a-llowed should have a legal sanction. The amount claimed by the appellart has no such legal sanction and is not an allowable expenditure. The Hon'ble Supreme Court in the case of Indian Molasses Co. Pvt. Ltd. Vs. CIT (37.ITR) held that the expenditure which is deductible for Incometax purposes is one which is either actually paid 'or, provided for towards the liability actually existing at the time, but putting aside of money which may become expenditure on the happening of an event is not expenditure. The Hontrle Supreme Court in the case of CIT Vs. Malayalam Plantations Ltd. (53 ITR 140) held tiat 'Jre expenditure is not allowable unless it is laid out or erpended wholly and exclusively for the purposes of busihess or profession. In view of these decisions of the Supreme Court, t}re expenditure claimed by the appellant, not being a real expenditure, cannot be said to have been laid out arrd expended wholly and exclusively for the purposes of business. The AO is correct as per law ln disallourlng the claim for deductlon. The AO's actlon ls upheld. This ground of appeal fails aod is rejected.\" 10. In appeal before the Tribunal, it was noticed that this issue was already decided by the Tribunal on previous occastons. Agreeing with lhe sarne, Tribunal held that the 6 J a amount taken to the lease equalisation fund was not an , HC] & CVBRJ I.T.T.A.No.243 of 2OO6 11. This issue is no longer res integra as the same has been answered by the Supreme Court in Commissioner of Income Tax-VI v. Virtual Soft Systems Limitedl. In the said decision, Supreme Court exarnined the guidelines issued by the Institute of Chartered Accountalts of India (briefly referred to hereinafter as 'ICAI) and also referred to Section 2ll of the Companies Act, . 1956 to emphasize that Accounting Standards prescribed by ICAI shall prevaii until Accounting Stardards are prescribed by the Central Government. It has been held as follows: \"11. Prior to critically examining the case, it would be appropriate to have an understanding and significance of the Guidance Note issued by the ICAI. The ICAI is an expert body, created by the Parliament under the Chartered Accountants Act, 1949. The ICAI's publication on the subject indicates that the Guidance Note on Accounting for Leases was issued by it for the frrst time in 1988 which was later on revised in 1995. The Guidance Note reflects the best practices adopted by the 6 I (2018) 6 Supreme Court Cases 584 allowable business expenditure as it was an appropriation of profit. 7 HC] & CVBRJ LT.T.A.No.243 of 2O06 e accountants throughout the wo d. The ICAI is a recogniz-ed body vested with the autlority to recommend accounting standards for ultimate prescription by the Central Government in consultation with the National Advisory Committee of Accounting Standards for the presentation of true and fair financial statements. 12. Section 21 1 of the Companies Act, 1956 as it stood before the amendment dealt with \"the Form and contents of balance sheet and profit and loss account\". Sub-section (3-C) of Sectiort 21 I was added vide the 1999 Amendment witJl retrospective effect. The relevalt porLion of Section 2 I I of the Companies Act is reproduced herein as under: 211. (3-C) For the purposes of this section, the expression \"accounting standards\" means the standards of accounting recommended bg the Institute of Chartered Accountdnts of Indta constituted under the Chartered Accountants Act, 1949 (38 of 1949), as.mag be prescibed bg the Central Gouernment in consultatton uith tLLe National Adui-sory Committee on Accounting Standards estabLished under sub-section (1) of Section 21O-A: Provided that the standards of accounting specilied by the lnstitut€ of Chartered Accountants of India shall be deem€d to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section.\" (emphasis supplied) 13. The purpose behind the amendment in Section 21 I of the Companies Act, 1956 was to give clear sight that the accountlng standards, as prescrlbed by the ICAI, shall prevail until ther-accounLing standards are 't HC] & CVBRJ I.T.T.A.No.243 of 2OO6 12. After referring to the Guidance Note on Accounting for Leases, revised in the year 1995, Supreme Court held that method of accounting followed as derived from ICAI Guidance Note is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting. Thereafter, Supreme Court held as follows: 8 ( prescribed try the Central Government under this sub- section. The purpose behind the accounting sta-ndards was to arrive at a computation of real income a-fter adjusting the permissible deprecation. It is not disputed that these accounting stardards are made by the body of experts after extensive study and research-\" I I \"17. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalisation is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. Moreover, we do not find any express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced b1' the ha-nk. The repa-wment of principa,l woulci, be a haia:'rce sheet item and not a revenue item. Onlv the interest l - / HCJ & CVBRJ I.T.T.A.No.243 of 2006 earned would be a revenue receipt chargeable to income ta- . Hence, we do not find any force in the contentions of the Revenue that whole revenue from lease sha-l] be subjected to ta-x under the {T Act.\" 13. Supreme Court considered the main contention of the Revenue that al assessee cannot be allowed to claim deduction regarding lease equalisation charges since there is no such express provision for deduction in the Act. This contention was repelled by the Supreme Court in the following manner: \"L9. In the present case, tJle relevalt assessment year is 1999-2000. The main contention of the Revenue is that the respondent cannot be allowed to claim deduction regarding lease equalisation charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the respondent can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculalion, it is obvious that the respondent has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applylng such method which is prescribed in the Guidance Note, the respondent can show fair and real income which is liable to tax under the IT Act. Therefore, ir ic rr=rta !^ c.!, rl-,.r +he --r^^-.lq-r ^l^:-a.{ .{qr,,^r:^- by virtue of Guidance Note rather it only applied the 9 o ) \"l 10 HCJ & CVBRJ I.T.T.A.No.243 of 2006 method of bifurcation as prescribed by the expert team of ICAI. Further, a conjoint reading of Section 145 of the IT Act read with Section 21 1 (unamended) of the Companies Act makes it clear that the r.espondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of 1aw. Moreover, the ruie of interpretation says that when internal aid is not available tJlen for the proper interpretation of the statute, the court may take the help of external aid. If a term is net defined in a statute then its mealing cal be taken as is prevalent in ordinaqr or commercial parlance. Hence, we do not Iind any force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under th'e IT Act. 20. To sum up, we a-re of the view that the respondent is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreo-rer, there is no express bar in the IT Act regarding the application of such accounting standards.\" 14. That being the position, the questions framed by the appellant are answered in favour of the assessee alrd against the Revenue. 15. Appeai 1S accordingly allowed. However, there chall he nn nrder ^a fn.^qfq I / 11 HCJ & CVBRJ I.T.T.A.No.243 of 2006 To, 16. As a sequel, miscellaneous applications pending, if any, in this Appeal, shall stand closed. Sd/. B.S. CHIRANJEEVI JOINT REGISTRAR //TRUE COPY// D-- SECTION OFFICER 5. One CC to SRl. J.V. PRASAD, SC FOR INCOTUE TAX DEPARTIV1ENT Advocate [OPUCI 6. Two CD Copies kam ( L 1. The Assistant Registrar, lncome Tax Appellant Tribunal Hyderabad Bench-A, Hyderabad. 2. The Commissioner, lncome Tax(Appeals) lV, Hyderabad. 3. The Deputy Commissioner of lncome Tax 3(1), Hyderabad. 4. One CC to SRl. A SANJAY KISHORE, Advocate [OPUC] I I I C HIGH COURT HCJ & CVBRJ DATED:1411212022 1 tIE SIA r4r 1 4 FEB 2123 .o JUDGMENT ITTA.No.243 of 2006 ALLOWINGTHE ITTA, WITHOUT COSTS. ffi tJ ;. fl Irtul I I I I ll tl ./ ? @ "