DELFIN FINANCE P.LTD.,NEW DELHI vs. ITO, WARD-7(1), NEW DELHI

& 2958/DEL/2019 7. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-3, New Delhi and filed detailed submissions as under :- “Assessee company was initially assessed on 22.03.2000 by making the audition of Rs.44,59,745/- on account of lease equalization charge which was created by assessee as per Guidance Note issued by Institute of Chartered Accountant of India. And Rs.24,35,000/- on account of depreciation by invoking explanation 3 & 4A to section 43(1) of the act.. The assessee went to appeal upto TAT Delhi and Tribunal set aside the case to the file of Assessing Officer. The case was again re-assessed by assessing officer Ward 7(1) New Delhi vide order dated 31. 12.2016 and confirmed the addition. During the course of initial assessment proceedings, it has been established that assessee company is engaged in business of leasing and finance and lease equalization charge has been created as per the Guidance Note issued by Institute of Chartered Accountant of India and has been accepted by assessing officer also but the assessing officer has taken the plea that this Guidance Note has not been approved by tax authorities and on this around made the addition. During the course of re-assessment proceedings, assessing officer has confirmed that Assessee has created a lease, equalization charge as per Guidance Note but confirmed the addition It is further submitted that assessment order dated 31.12.2016 was not served to the assessee company. Assessee company came to know about the facts when penalty notice was served to the counsel. The certified copies of the order were received on 28.06.2017. During the course of initial assessment proceedings it has been established by A.O in his order dated 2703.2001 that Assessee company has created a Lease Equalization Charge as per the Guidance Note issued by Institute of Chartered Accountants of but made the addition due to non clarity of act at that time. Also the same has been confirmed during the course of reassessment proceedings Relevant provisions of the guidance note on accounting for lease, revised in 1995, is as under. Accounting for leases in the Books of a lessor Finance Leases 9. Assets leased under finance leases should be disclosed as "Assets given on lease", as a separate section under the head "Fixed Assets" in the balance sheet of the lessor. The classifications of Assets given on lease' should & 2958/DEL/2019 correspond to that adopted in respect of other fixed assets. In addition to the particulars required by statute, eg. Schedule VI to the Companies Act, 1956, particulars relating to Lease Adjustment Account should be disclosed as stated in Para 17.

& 2958/DEL/2019 12) The finance income for the period should be calculated by applying the interest rate implicit in the lease to the net investment in the lease during the relevant period. This method would ensure recognition of net income in respect of a finance lease at a constant periodic rate of return on the lessor's net investment outstanding in the lease. however, some lessor use a simpler method for calculating the finance income for each of the periods comprising the lease term by appropriating the total finance income from the lease n the ratio of minimum lease payments- outstanding during each of the respective periods comprising the lease term. (The total finance income from the lease is the difference between the aggregate minimum lease payments receivable over the lease term, and the fair value of the leased asset at the inception of the lease.) This method may be used where the finance income in respect of all individual periods as per this method approximate the finance income for the corresponding periods determined according to the former method. It is however clarified that where this method is used, overdue lease rentals, ie., lease rentals fallen due but not collected should not be taken into account for determining the amount of minimum lease payments outstanding during each of the respective periods comprising the lease term. The books of accounts of the assessee company were audited by M/s Metra Sistani Chartered Accountants Delhi and this aspect of guidance note and its treatment has been disclosed at point No 3 of notes to the accounts forming part of the audited balance sheet Which is being reproduced below: Lease Income. a. Lease income is recognized on the basis of internal rate of return on the amount financed. The residual of lease rental, after income, is debited to lease equalization charge net of depreciation as per schedule xi' of the companies act 1956. b. As per revised guidance note on accounting for lease issued by institute of chartered accountants of India, lease rental in respect of financial lease have to be accounted for whenever they fall due. The guidance note was properly followed by the company by 1) Assets amounting to Rs.33722685 (gross cost) leased under finance leases has been disclosed as "Assets given en lease", as a separate section under the head “fixed Assets" in the balance sheet 2) Lease rentals amounting to Rs. 2651849/- (those received and those due but not received) under a finance lease has been shown separately under 'Gross Income' in the profit and loss account. 3) Lease equalization charge Rs. 44, 59, 754 has been made after considering the depreciation as per companies act Rs.48,57,778 and disclosed under income head by reducing the lease rental. Lease adjustment account of Rs.45,02,952/- has been adjusted under the fixed assets schedule.

From the above discussion it can be said that assessee company has followed the guidance note parameters at the time of finalization of books of accounts Hon'ble supreme court in case of Virtual soft systems Limited CIVIL APPEAL NO 4358 OF 2018 held that: The method of amounting followed, as derived from the ICAI's 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, and is in fact, incorporated in the ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act, and to its scheme and spirit. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, 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 purpose 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 by the bank. The repayment of principal would be a balance sheet item and not a revenue item. Only the interest earned would be a revenue receipt chargeable to income tax. Hence, we do not find any force in the contentions of the revenue that whole revenue from lease shall be subjected to tax under the IT Act. Without a doubt, in a catena of cases, this court has discussed the relevancy of the Guidance Note. While dealing with one of such matters, this court, in commissioner of Income Tax-VIL, New Delhi us. Punjab Stainless Steel Industries (2014) 15 SCC 129 held as, under: “17 So as to be more accurate about the word “turnover", One can either refer to dictionaries or to material which are published by bodies of Accountants. The Institute of Chartered Accountants of India (hereinafter referred to as the "ICAI) has published some material under the head "Guidance Note on Tax Audit under Section 44B of the Income Tax Act". The said material has been published so as to guide the members of the ICAI n our opinion, when a recognized body of Accountants, after due deliberation and consideration publishes certain materials for its members, one Can rely upon the same..."

& 2958/DEL/2019 In the present case, the relevant Assessment year is 1999-2O00. The main contention of the Revenue is- that the Respondent cannot be allowed to claim deduction regarding lease equalization 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 calculations, it is obvious that the Respondent has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applying 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, it is wrong to say that the Respondent claimed deduction by virtue of guidance note rather it only applied the method of bifurcation as prescribed by the expert team of 1CAI. Further, a conjoint reading of section 145 of the IT Act read with Section 211 (un-amended) of the Companies Act make it clear that the Respondent 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 law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the statute, the Court may take the help of external aid. If a term is not defined in a statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find 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 the IT Act."

is dismissed.”

9. Aggrieved assessee is in appeal before us raising following grounds of appeal :-

1. That on the facts and in the circumstances of the case and in law, Ld. CIT (A) erred in confirming the addition of Rs.24,35,000/- on account of depreciation which was claimed by appellant as per applicable law.

2. That on the facts and in the circumstances of the case and in law, Ld. CIT (A) erred in confirming the addition of Rs.42,82,685/- on account of lease equalization charge which was created by appellant as per the guidance note issued by Institute of Chartered Accountants of India.”

10. Ld. DR after narrating the facts on record submitted that he relied on the findings of the lower authorities since assessee could not convince the lower authorities.

11. Considered the rival submissions and material available on record. We observe that the assessee is carrying on the business of finance, leasing and its activities include hire and purchase of assets, inter corporate deposits and bill discounting etc. Assessee is involved in the finance leasing business. During the year under consideration, assessee has purchased two boilers from different companies and these assets were given on lease during the year under consideration. We observe that assessee has followed and computed the lease equalization charges in accordance with the revised Guidelines Note on Accounting for lease & 2958/DEL/2019 issued by the Institute of Chartered Accountants of India. Accordingly, assessee has declared the lease rentals separately under gross income in its Profit & Loss account. Based on the above Guidelines Note, against the abovesaid lease rental income, matching lease annual charges are charged to the Profit & Loss account. The annual lease charges represent recovery of the net investment/share value of lease asset over the leased term. It is calculated by deducting the finance income for the period from the lease rent for the period. The annual lease charges comprise of lease equalization charges, where the annual charge is more than the annual statutory depreciation and minimum statutory depreciation. The treatment depends upon whether the annual lease charge is less than the minimum statutory depreciation or more than the minimum statutory depreciation, the lease equalization credit would arise. Accordingly the same is being treated in their books of account. Therefore, where the lease equalization charges are claimed by the assessee when the lease charges are less than the minimum statutory depreciation and the same is claimed as expenditure in their books of account, this is on top of the regular depreciation claimed by the assessee. This is so happened that in this assessment year, the annual charges recorded by the assessee is less than minimum statutory depreciation, therefore, the assessee has claimed the same as expenditure during the year. In case, the annual charges are & 2958/DEL/2019 more than the minimum depreciation, the assessee will record as income or credit to the depreciation account.

12. Since this is a standard accounting policy which assessee has already declared in its books of account and it follows regularly as per the Guidelines Note issued by ICAI. Since it is being regularly followed accounting standard and which is also properly declared in the financial statements, the same cannot be rejected by the tax authorities. The assessee is regularly following the abovesaid method of accounting, there is no loss to the Revenue which equalizes the tax effect in the subsequent assessment years. Therefore, we do not see any reason to disturb the accounting method adopted regularly by the assessee. Accordingly, the grounds raised by the assessee are allowed.

13. In the result, the appeal filed by the assessee for AY 1997-98 is allowed.

14. With regard to AY 1998-99, since the facts are exactly similar to AY 1997-98 our above findings in AY 1997-98 are applicable mutatis mutandis in AY 1998-99. Accordingly, the appeals filed by the assessee being for AY 1998-99 is allowed.