Commissioner of Income-tax v. Pact Securities and Financial Services Ltd
[Citation -2015-LL-0205-8]

Citation 2015-LL-0205-8
Appellant Name Commissioner of Income-tax
Respondent Name Pact Securities and Financial Services Ltd.
Court HIGH COURT OF HYDERABAD FOR THE STATE OF TELANGANA AND THE STATE OF ANDHRA PRADESH
Relevant Act Income-tax
Date of Order 05/02/2015
Judgment View Judgment
Keyword Tags mercantile system of accounting • substantial question of law • specific provision • accounting method • rental income • lease income • cash basis
Bot Summary: Sub-section of section 145 empowers the Assessing Officer to disregard the books of account submitted by the assessee only if he is not satisfied with the correctness or completeness of the accounts of the assessee or the method of accounting employed by the assessee or on account of the accounting standards notified under sub-section, not being particularly followed by the assessee. As a matter of fact, the proviso to the said sub-section, quite clearly specifies that till such time the Central Government prescribes the accounting standards the accounting standards issued by the Institute of Chartered Accountants of India shall be deemed to be the relevant accounting standards. For the purposes of this section, the expression accounting standards means the standards of accounting, recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section of section 201A: Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub-section. In our view, as long as there was a disclosure of the factum of change in the accounting policy and its effect in the accounts no fault could be found with the change in the accounting policy merely on account of the fact that it was employed for the first time in the assessment year 1996-97. In the absence of any specific provision in the Act dealing on the subject, when the accounting standard is now made the basis for maintaining the accounts for the purpose of income-tax, even if the Central Government has not notified in the Official Gazette the accounting standards, certainly the accounting standards prescribed by the Institute of Chartered Accountants has to be followed. The reasoning of the authorities though the claim of the assessee is based on such accounting standards of the Institute of Chartered Accountants of India while deciding whether receipt of money is taxable or not it has to be decided in accordance with the provisions of law and not in accordance with the accounting practice has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act. Merely because, the Central Government has not notified in the Official Gazette accounting standards to be followed by any class of assessees or in respect of any class of income, it cannot be stated that the accounting standards prescribed by the Institute of Chartered Accountants of India or the accounting standards reflected in the guidance note cannot be adopted as an accounting method by an assessee.


JUDGMENT judgment of court was delivered by Dilip B. Bhosale J.-The first four appeals, under section 260A of Income-tax Act, 1961 (for short "the Act"), are preferred by Revenue. Out of which, first two appeals are against orders dated July 30, 2002, and November 29, 2002, in I. T. A. Nos. 142/Hyd/2002 and 141/Hyd/2002, respectively, and remaining two are against common order dated March 26, 2002, rendered by Income-tax Appellate Tribunal in Income Tax Appeal bearing No. 229/Hyd/2000 and 273/Hyd/2000. By these orders, Tribunal allowed Income Tax Appeals filed by respondent- assessee against orders of Commissioner of Income-tax (Appeals) dated December 10, 2001, December 14, 2001, and January 28, 2000. In so far as I. T. A. No. 273/Hyd/2000 is concerned, that was also disposed of by order dated January 28, 2000, along with assessee's appeal bearing I. T. A. No. 229/Hyd/2000. All these appeals pertain to assessment years 1996-97 to 1999-2000. Before Commissioner of Income-tax (Appeals), assessees had called in question orders of Assessing Officer (for short "the AO"), who, while completing assessment for relevant assessment years disallowed deduction of "lease equalisation" charges from lease rental income. disallowed amounts by Commissioner of Incometax (Appeals) in these appeals are of Rs. 48,56,224, Rs. 44,18,245 and Rs. 13,16,123. Since questions raised and assessee in all four appeals are common, for sake of convenience we state facts leading to I. T. T. A. No. 252 of 2003 preferred by Revenue, to extent they are necessary, as follows: assessee-company had filed its return of income on November 30, 1998, declaring income of Rs. 58,65,660. return was processed under section 143(1)(a) of Act on September 28, 1999, without any adjustments. Then assessee's case was selected for scrutiny by issue of notice under section 143(2) dated September 28, 1999. notice was served on assessee on October 11, 1999. Subsequently, notices under section 142(1) and 143(2) were issued, in response to which, chartered accountant of assessee appeared before Assessing Officer and furnished details called for. assessment was then completed and Assessing Officer disallowed lease equalisation charges of Rs. 48,56,224 from lease rental charges for assessment year 1998-99. 3.1 During assessment year 1998-99, assessee had given certain assets on lease and shown gross lease rentals of Rs. 1,14,91,395, as income in profit and loss account. Out of this, sum of Rs. 48,56,224 was claimed as deduction by way of "lease equalisation charges" from lease rental income. In course of assessment proceedings, it was submitted on behalf of assessee that treatment in accounts had been given as per "guidance note" on accounting for leases, issued by Institute of Chartered Accountants of India (for short "the ICAI"). In this backdrop, question that was considered by Tribunal and Commissioner of Income-tax (Appeals) was whether assessee could take recourse to "guidance note" issued by Institute of Chartered Accountants of India qua accounting for lease in determination of its income, and whether deduction as claimed by assessee ought to be allowed. Commissioner of Income-tax (Appeals) disallowed "lease equalisation" charges from lease rental income, whereas Tribunal allowed and, hence, Revenue preferred above four appeals raising five questions of law in memorandum of appeals. At stage of admitting appeals no substantial question of law was framed. In view thereof, learned senior counsel for Revenue, fairly submitted that only following substantial question of law, in their appeals, arise for our consideration: "(1) whether, on facts and in circumstances of case, Income-tax Appellate Tribunal was justified in allowing assessee to deduct lease equalisation charges from lease rental income, accepting its accounting policy based on guidance note issued by Institute of Chartered Accountants of India for preparation of accounts and whether it would override statutory provisions of Act? remaining two appeals, bearing I. T. T. A. Nos. 132 and 136 of 2004, preferred by assessees, are against orders passed by all three authorities, disallowing deduction of "lease equalisation charges" from gross lease receipts, holding that assessee was in wrong in employing "guidance note" issued by Institute of Chartered Accountants of India for computing their income from lease rent. In these appeals, following substantial question of law is raised for our consideration: "(1) Whether, on facts and in circumstances of case, Tribunal was justified in law in disallowing deduction of lease equalisation charges from gross lease receipts?" Counsel for assessees, at outset, invited our attention to judgments of Delhi High Court in CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593 (Delhi); [2012] 205 Taxman 257 (Delhi) and of Karnataka High Court in Prakash Leasing Ltd. v. Deputy CIT [2012] 208 Taxman 464 (Karn) and contended that similar questions fell for consideration of these High Courts and based on guidance note issued by Institute of Chartered Accountants of India held that assessees are entitled for deduction of lease equalisation charges from lease receipts. In short, it was contended that questions raised in these appeals are squarely covered by those judgments. It was further submitted that assessee is entitled to have its accounting policy taking recourse to guidance note issued by Institute of Chartered Accountants of India, while accounting for lease transactions. It was further submitted that courts have accepted recommendations issued by Institute of Chartered Accountants of India from time to time, with respect to manner and mode of reflecting transactions in books of account, in number of judgments pronounced by High Courts as well as Supreme Court. Lastly, he submitted that what is provided in guidance note stands transacted into accounting standard issued by Institute of Chartered Accountants of India and approved under sub-section (2) of section 145 of Act by Central Government. Mr. S. R. Ashok, learned senior counsel appearing for Revenue, on other hand, at outset, invited our attention to section 145 of Act, in particular sub-section (2) thereof, and submitted that neither accounting standards nor guidance note issued by Institute of Chartered Accountants of India could be taken recourse to in absence of notification being issued by Central Government as contemplated by sub-section (2). He submitted that Delhi High Court and Karnataka High Court did not consider provisions contained in sub-section (2) of section 145 of Act in proper perspective, and without reference thereto considered whether guidance note could be basis for accepting accounting system followed by assessee. He submitted that taxable income of assessee should be determined as per Income-tax Act and not on basis of guidance note issued by Institute of Chartered Accountants of India. In other words, it was submitted that assessee cannot take recourse to guidance note issued by Institute of Chartered Accountants of India qua accounting for lease in determination of its income and, therefore, in that regard whether particular deduction ought to be allowed or disallowed, one should only have to look to provisions of Income-tax Act. arguments advanced by learned counsel for parties were centered around judgment of Delhi High Court in Virtual Soft Systems Ltd. and of Karnataka High Court in Prakash Leasing Ltd. and also provisions contained in sub-section (2) of section 145 of Income-tax Act. In view thereof, we would like to have glance at both judgments and provisions of section 145(2) of Income-tax Act. 8.1 In Virtual Soft Systems Ltd. (supra), following questions were framed (page 599 of 341 ITR): "(1) Whether, on facts and circumstances of case, Income-tax Appellate Tribunal erred in law and on merits in allowing deduction of lease equalisation charges from lease rental income? (2) Whether guidance note issued by Institute of Chartered Accountants of India for presentation of accounts would override statutory provisions of Income- tax Act, 1961?" 8.2 facts leading to appeal before Delhi High Court were almost similar, in sense assessment of assessee for assessment year 1996-97 was set aside by Commissioner directing Assessing Officer to include assessee's lease rental income. For assessment years 1997- 98 to 2000-01, assessments were reopened by Assessing Officer and he came to conclusion that taxable income of assessee had to be determined in accordance with Act and not on basis of guidance note, which only provided guidelines for preparation of financial statements for purpose of accounting. Assessing Officer, accordingly, disallowed sum attributed to lease equalisation charges, and, consequently, added to assessee's income. Commissioner (Appeals) confirmed order of Assessing Officer, whereas Tribunal allowed appeals of assessee on merits. In this backdrop, relevant observations made by Delhi High Court in Virtual Soft Systems Ltd. (supra) read thus (page 602 of 341 ITR): "In this background what is required to be considered is whether books of account could be rejected by Assessing Officer merely for reason that recourse to guidance note was taken by assessee. In this regard, we would be required to examine provisions of section 145 of Income-tax Act. Section 145 of Income-tax Act adverts to method of accounting followed by assessee. Sub-section (1) of section 145 provides that income chargeable under head'Profits and gains of business or profession' or 'Income from other sources' shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by assessee. This provision is, however, subject to Central Government notifying accounting standard in respect of any class of assessee or class of income. Sub-section (3) of section 145 empowers Assessing Officer to disregard books of account submitted by assessee only if he is not satisfied with correctness or completeness of accounts of assessee or method of accounting employed by assessee or on account of accounting standards notified under sub-section (2), not being particularly followed by assessee. In this particular case, Assessing Officer has disregarded, in substance, method of accounting followed by assessee qua lease rentals without basing it on grounds provided in section 145 of Income-tax Act. fact that assessee justified its method of accounting, by taking recourse to guidance note issued by Institute of Chartered Accountants of India in that behalf, was disregarded, on what we would term as, disjointed reading of provisions of said guidance note. Both Assessing Officer as well as Commissioner of Income-tax (Appeals) have adverted to paragraph 2 of guidance note to come to what we consider erroneous conclusion inasmuch as they have held that in determining as to whether deduction on account of lease equalisation charges ought to be allowed or not, what has to be borne in mind is ultimately provisions of Income-tax Act. In our view, such observation in paragraph 2 of guidance note is really saying obvious. Therefore, even if this guidance note was silent on this aspect provisions of Income-tax Act would undoubtedly still apply. Thus, as to what is impact of provision of paragraph 2 of guidance note will be considered by us as we progress further with our judgment. 9.1 However, what is important at this stage is to first address ourselves to aspect as to whether Assessing Officer could have disregarded method of accounting followed by assessee in respect of lease rentals. In our view, Assessing Officer could not have done so, as method of accounting was based on guideline commended for adoption by professional body such as Institute of Chartered Accountants of India. guidance note reflects best practices adopted by accountants world over. fact that, at relevant point in time, it was not mandatory to adopt methodology professed by guidance note issued by Institute of Chartered Accountants of India is irrelevant for reason that, as long as there was disclosure of change in accounting policy in accounts, which had backing of professional body such as Institute of Chartered Accountants of India, it could not be discarded by Assessing Officer. This is specially so, since Institute of Chartered Accountants of India is recognised as body vested with authority to recommend accounting standards for ultimate prescription by Central Government in consultation by National Advisory Committee of Accounting Standards, for presentation of financial statements. provisions of section 211(3C) of Companies Act, 1956, are quite clear on this aspect. As matter of fact, proviso to said sub-section, quite clearly specifies that till such time Central Government prescribes accounting standards accounting standards issued by Institute of Chartered Accountants of India shall be deemed to be relevant accounting standards. relevant provision reads as follows: '211. (3C) For purposes of this section, expression "accounting standards" means standards of accounting, recommended by Institute of Chartered Accountants of India constituted under Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by Central Government in consultation with National Advisory Committee on Accounting Standards established under sub-section (1) of section 201A: Provided that standards of accounting specified by Institute of Chartered Accountants of India shall be deemed to be accounting standards until accounting standards are prescribed by Central Government under this sub-section.' In this context, it would be important to note that Accounting Standard 1 pertaining to disclosure of accounting policies has already been notified by Institute of Chartered Accountants of India as having attained mandatory status for periods commencing on or after April 1, 1991. It is not Assessing Officer's case that accounting policy with regard to lease rentals was not disclosed by assessee. Assessing Officer seems to have taken umbrage to change in accounting policy having been brought about only with effect from assessment year 1996-97. In our view, as long as there was disclosure of factum of change in accounting policy and its effect in accounts no fault could be found with change in accounting policy merely on account of fact that it was employed for first time in assessment year 1996-97. change in accounting policy, as noticed by us above, had imprimatur of duly recognised professional body, i.e., Institute of Chartered Accountants of India. Therefore, notwithstanding fact that opinion of Institute of Chartered Accountants of India was expressed in guidance note which had not attained mandatory status, would not, in our view, provide basis to Assessing Officer to disregard books of account of assessee and in effect method of accounting for leases followed by assessee." 8.3 Karnataka High Court, in Prakash Leasing Ltd. (supra) framed following questions of law: "1. Whether in law Tribunal was justified in confirming disallowance made by lower authorities on claim of appellant with regard to lease equalisation account to extent of Rs. 4,35,89,466? 2. Whether in law Tribunal is justified in not appreciating that appellant being NBFC had followed norms required by its regulatory authority, namely, RBI and hence claim made by appellant with regard to lease equalisation account was perfectly in order? 3. Whether in law Tribunal was justified in declining to accept deduction claimed by appellant which was in accordance with accounting standard which was consistently followed which declares real income in relevant year? 4. Whether in law Tribunal was justified in concluding that lease equalisation reserve is appropriation of profit and thus cannot be allowed as deduction?" 8.4 Karnataka High Court considered several judgments including judgment of Delhi High Court in Virtual Soft Systems Ltd. (supra) and in paragraph 12, observed thus: "Admittedly, in so far as lease equalisation charges are concerned, it is not provided in notified accounting standards by Department. It is also not in dispute that in Act what lease equalisation charges is not explained. In absence of any specific provision in Act dealing on subject, when accounting standard is now made basis for maintaining accounts for purpose of income-tax, even if Central Government has not notified in Official Gazette accounting standards, certainly accounting standards prescribed by Institute of Chartered Accountants has to be followed. In fact, hon'ble Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) has put its seal of approval on adopting accounting standards while interpreting section 10(2)(vi), (via), (vib) and section 10(5) of Indian Incometax Act 1922, while interpreting expression'actual cost'. Supreme Court held in (ITR page 173):'as expression "actual cost" has not been defined, it should, in, our opinion, be construed in sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain connotation of above expression in accordance with normal rules of accountancy prevailing in commerce and industry. Therefore, it is judicially accepted that when determining whether there has in fact been accrual of liability or income, accountancy standards prescribed by Institute of Chartered Accountants of India would have to be followed and applied'. Therefore, reasoning of authorities though claim of assessee is based on such accounting standards of Institute of Chartered Accountants of India while deciding whether receipt of money is taxable or not it has to be decided in accordance with provisions of law and not in accordance with accounting practice has no substance as there is no inconsistency between said accounting practice and any provisions of Act." We would now like to consider provisions of section 145 of Act. Section 145 deals with method of accounting. This provision was substituted by Finance Act, 1995, with effect from April 1, 1997. In present case, we are concerned with assessment years 1997-98 to 200001. Sub-section (1) of section 145 states that income chargeable under head "Profits and gains of business or profession" or "Income from other sources" shall, subject to provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. Sub- section (2) provides that Central Government may notify in Official Gazette from time to time "accounting standards" to be followed by any class of assessees or in respect of any class of income. Sub-section (3) of section 145 of Act provides where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee, or where method of accounting provided in sub-section (1), or accounting standards as notified under subsection (2), have not been regularly followed by assessee, Assessing Officer may make assessment in manner provided in section 144 of Act. On basis of provisions contained in section 145 of Act, it was submitted on behalf of Revenue that taxable income of assessee should be determined as per Act and that "guidance note" issued by Institute of Chartered Accountants of India cannot be basis for such Institute of Chartered Accountants of India cannot be basis for such determination. It was further submitted that guidance note or accounting standards prescribed by Institute of Chartered Accountants of India cannot be taken recourse to or taken into account unless Central Government notify such accounting standards in Official Gazette to be followed by any class of assessees or in respect of any class of income. Then, it was submitted that word "may" in sub-section (2) should be read as "shall" having regard to scheme of section 145 of Act. In other words, it was submitted that under any circumstances, accounting standards or guidance note issued by Institute of Chartered Accountants of India cannot be taken recourse to while accounting for lease transactions unless accounting standard is notified in Official Gazette by Central Government. In present case, at relevant time, accounting standard employed by assessee was not notified though it was subsequently notified by Central Government. We would, therefore, like to examine question on premise that at relevant time accounting standards employed by assessees in present case was not notified by Central Government. Institute of Chartered Accountants of India's publication on subject indicates that "guidance note" on accounting leases was issued by it, for first time, in 1988, which was then revised in 1995. On April 1, 2001, Institute of Chartered Accountants of India did publish Accounting Standard 19 in respect of leases. It is not in dispute that said Accounting Standard 19 is applicable in respect of assets leased during accounting periods commencing on or after April 1, 2001. assessment years, which are under consideration, in these appeals are prior to April 1, 2001. We are not entering into details as to how accounting standards work or applied in respect of lease income since question that falls for our consideration is whether assessees in these appeals were obliged to employ or to take recourse to guidance note issued by Institute of Chartered Accountants of India on accounting for leases even though accounting standard was not notified by Central Government in Official Gazette as contemplated by sub-section (2) of section 145 of Act. It is not in dispute that guidance note reflects best practices adopted by accountants in India. Further, it cannot be disputed that Institute of Chartered Accountants of India is authority to recommend accounting standards for ultimate prescription by Central Government in consultation by National Advisory Committee of Accounting Standards, for presentation of financial statements. In support, as observed by Delhi High Court in Virtual Soft Systems Ltd., provisions of section 211(3C) of Companies Act are quite clear. proviso to this section clearly specifies that till such time Central Government prescribes accounting standards issued by Institute of Chartered Accountants of India shall be deemed to be relevant accounting standards. It is not in dispute that Accounting Standard 19 prescribed on April 1, 2001, in respect of leases and accounting standard incorporated in guidance note is one and same. Therefore, notwithstanding fact that opinion of Institute of Chartered Accountants of India was expressed in guidance note which had not attained mandatory status, would not, in our view, provide basis to Assessing Officer to disregard books of account of assessee and in effect method of accounting for leases followed by assessee as observed by Delhi High Court in Virtual Soft Systems Ltd. (supra). In this connection, we would like to make reference to judgment of Supreme Court in CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1 (SC) wherein it was observed that every assessee is entitled to arrange its affairs and follow method of accounting, which Department has earlier accepted. It is only in those cases where Department records finding that method adopted by assessee results in distortion of profits that Department can insist on substitution of existing method. Therefore, certainly method adopted by assessee in maintaining its accounts for earlier period is important factor, which authorities have to keep in mind at time of framing assessment orders. It is well settled that in determining whether there has in fact been accrual of liability or income, accountancy standards prescribed by Institute of Chartered Accountants of India would have to be followed and applied (see Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167). In this judgment, Supreme Court has put its seal of approval on adopting accounting standards while interpreting section 10(2)(vi), (via), (vib) and section 10(5) of Indian Income-tax Act, 1922, and expression "actual cost". Thus, even if at relevant time, it was not mandatory to adopt methodology prescribed by guidance note or for that matter accounting standard as it was not notified by Central Government in Official Gazette, in our opinion, it is not relevant for reason that, as long as there was disclosure of accounting policy in accounts, which had backing of professional body, such as Institute of Chartered Accountants of India, it could not be discarded by Assessing Officer. Lastly, we would like to consider submission that word "may" employed in sub-section (2) of section 145 of Act should be read as "shall". Sub-section (2) provides that Central Government "may" notify in Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. question, therefore, is whether in absence of such notification, being issued by Central Government, accounting standards or guidance note, prescribing accounting standards, issued by Institute of Chartered Accountants of India could be adopted as method for accounting. It is judicially accepted that in determining whether there has in fact been accrual of liability or income, accountancy standards prescribed by Institute of Chartered Accountants of India would have to be followed and applied. In other words, accounting standards prescribed by Institute of Chartered Accountants of India has received recognition in several decisions of High Courts and Supreme Court. We have also made reference to provisions of section 211(3C) of Companies Act, 1956. proviso to this section clearly specifies that till such time Central Government prescribes, accounting standards issued by Institute of Chartered Accountants of India shall be deemed to be relevant accounting standards. Keeping that in view, it would not be possible to read word "may" employed in sub-section (2) of section 145 of Act as "shall". It is well settled that word "may" normally indicate that provision is not mandatory. It is also true that word "may" can also be used in sense "shall" or "must" by Legislature. intent of Legislature, however, will have to be gathered from scheme of relevant provision, Chapter or relevant statute and also judicial pronouncements dealing with relevant provision. Having regard to provisions contained in section 145 of Act, we are of opinion that word "may" used in sub-section (2) thereof cannot be read as "shall". Merely because, Central Government has not notified in Official Gazette "accounting standards" to be followed by any class of assessees or in respect of any class of income, it cannot be stated that "accounting standards" prescribed by Institute of Chartered Accountants of India or accounting standards reflected in "guidance note" cannot be adopted as accounting method by assessee. Thus, this submission also deserves to be rejected. Therefore, in our opinion, notwithstanding fact that opinion of Institute of Chartered Accountants of India was expressed in guidance note, which had not attained mandatory status, would not, in our view, be ground to discard books of account of assessee or method of accounting for lease followed by assessee and disallowing assessee to deduct lease equalisation charges from lease rental income. Thus, substantial questions of law framed by us are answered in favour of assessee and against Revenue. first four (4) appeals filed by Revenue are accordingly dismissed and remaining two (2) appeals filed by assessee are allowed with no order as to costs. Miscellaneous petitions pending in appeals, if any, also stand disposed of. *** Commissioner of Income-tax v. Pact Securities and Financial Services Ltd
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