Deduction Under the Income-tax Act is Allowable If Assessee Claims it Following AS Prescribed by ICAI | HC

Case Details: Sehgal Easing Nvestments Ltd. v. DCIT - [2023] 157 taxmann.com 29 (Telangana)

Judiciary and Counsel Details

• • Ujjal Bhuyan, CJ. & C.V. Bhaskar Reddy, J.

Facts of the Case

The assessee was engaged in the business of providing hire purchase and finance. It had claimed deduction for transfer to lease equalization charges from the lease rental. Assessing Officer (AO) disallowed the claim of the assessee.

On appeal, the CIT(A) upheld the disallowance made by AO which was further confirmed by the Tribunal. Aggrevied-assessee filed the instant appeal before the High Court.

High Court Held

The High Court held that the issue was no longer res integra as the same had been answered by the Supreme Court in CIT v. Virtual Soft Systems Ltd. (2018) 6 Supreme Court Cases 584. In the decision, the Supreme Court examined the guidelines issued by the Institute of Chartered Accountants of India (ICAI). Also, it referred to section 211 of the Companies Act, 1956 to emphasize that Accounting Standards prescribed by ICAI shall prevail until the Central Government prescribes them.

The Supreme Court held that the accounting method derived from the ICAI Guidance Note is valid for capturing real income based on the substance of the finance lease transaction. The rule of substance over form is a fundamental principle of accounting.

The Supreme Court held that the bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation. Thus, lease equalization 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.

Further, the assessee is entitled to bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreover, the IT Act has no express bar regarding applying such accounting standards. That being the position, the Tribunal was not correct in law in disallowing the lease equalization charge claimed by the assessee.