REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4358 OF 2018 (Arising out of Special Leave Petition (C) NO. 25006 OF 2012) Commissioner of Income Tax-VI .Appellant(s) Versus Virtual Soft Systems Ltd. . Respondent(s) 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) Signature Not Verified CIVIL APPEAL NO. 4363 OF 2018 Digitally signed by ASHA SUNDRIYAL Date: 2018.04.25 17:36:12 IST (Arising out of Special Leave Petition (C) NO. 3610 OF Reason: 2013) 1 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) 2 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) JUDGMENT R.K.Agrawal, J. SLP (C) No. 25006 of 2012 1) Leave granted. 2) This batch of appeals has been filed against impugned judgment and order dated 07.02.2012 passed by High Court of Delhi at New Delhi in ITA Nos. 216, 398, 403, 404 and 680 of 2011 whereby Division Bench of High Court upheld decision of Income Tax Appellate Tribunal (in short Tribunal ) dated 19.02.2010. Since moot question of law in all these appeals is akin, hence, vide this common judgment, all appeals would stand disposed of. 3) In order to appreciate controversy at hand, it is pertinent to allude to relevant facts in summarized way for proper insightful of instant case. 3 (a) appellant herein is Income Tax Department, on other hand, Respondent - M/s Virtual Soft Systems Ltd. is company registered under provisions of Companies Act, 1956. (b) On 29.12.1999, Respondent filed return of income for Assessment Year 1999-2000 declaring loss of Rs 70,24,178/- while claiming amount of Rs 1,65,12,077/- as deduction for lease equalization charges. (c) On scrutiny, Assessing Officer, after perusal of return and hearing parties, vide Assessment Order dated 28.01.2005 disallowed deduction claimed as lease equalization charges amounting to Rs. 1,65,12,077/- and added same to income of Respondent under Income Tax Act, 1961 (in short IT Act ). (d) Being aggrieved with said Assessment Order, Respondent preferred appeal before Commissioner of Income Tax (Appeals). Learned CIT (Appeals), vide order dated 15.09.2005, upheld order of Assessing Officer and dismissed appeal. 4 (e) Being dissatisfied, Respondent preferred appeal before ITAT. Vide order dated 19.02.2010, ITAT allowed appeal of Respondent while setting aside orders passed by Learned CIT (Appeals) and Assessing Officer. (f) Being aggrieved, Revenue took matter before High Court. High Court, vide judgment and order dated 07.02.2012, dismissed appeals at preliminary stage while confirming decision of ITAT. (g) Hence, this instant appeal has been filed before this Court by Revenue. 4) We have given our thoughtful consideration to submissions of learned senior counsel for parties and perused relevant records of case. Point(s) for consideration:- 5) short question that arises for consideration before this Court is whether deduction on account of lease equalization charges from lease rental income can be allowed under Income Tax Act, 1961, on basis of Guidance Note issued by Institute of Chartered Accountants of India (ICAI)? 5 Rival submissions:- 6) At outset, learned senior counsel for Revenue contended that lease equalization charge is additional deduction debited to Profit and Loss Account (P&L) in addition to depreciation claimed in books so as to make it equal to capital recovery. This is artificial calculation which bifurcates lease rental to capital recovery and interest component. Learned senior counsel further contended that in fact entire lease income constitutes income of assessee. Also, there is no concept of deduction regarding lease equalization charges under IT Act. Hence, learned senior counsel contended that impugned decision of High Court is perverse and is liable to be set aside. 7) On other hand, learned senior counsel for Respondent submitted that this issue is no longer res integra. Now, it is settled principle that Guidance Note issued by ICAI carries great weight and by adopting method of accounting prescribed in such Guidance Note, in order to compute real income and offering same for taxation, cannot be disregarded by Assessing Officer unless such 6 action falls within scope and ambit of Section 145(3) of IT Act. Further, it was submitted that lease equalization charge was nothing but method of adjusting depreciation claimed in books of accounts to enable Respondent to represent its real income by adopting accounting methodology which had surely seal of approval of professional body such as ICAI. Learned senior counsel finally submitted that judgment passed by High Court is well-versed and within parameters of law and no interference is sought for by this Court in matter. Discussion:- 8) Prior to critically examining case, it would be appropriate to have understanding and significance of Guidance Note issued by ICAI. ICAI is expert body, created by Parliament under Chartered Accountants Act, 1949. ICAI s publication on subject indicates that Guidance Note on Accounting for Leases was issued by it for first time in 1988 which was later on revised in 1995. Guidance Note reflects best practices adopted by accountants throughout world. ICAI is recognized 7 body vested with authority to recommend accounting standards for ultimate prescription by Central Government in consultation with National Advisory Committee of Accounting Standards for presentation of true and fair financial statements. 9) Section 211 of Companies Act, 1956 as it stood before amendment dealt with Form and contents of balance-sheet and profit and loss account . Sub clause (3C) of Section 211 was added vide 1999 amendment with retrospective effect. relevant portion of Section 211 of Companies Act is reproduced herein as under: (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 210A: 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. (Emphasis supplied by us) 10) purpose behind amendment in Section 211 of Companies Act, 1956 was to give clear sight that 8 accounting standards, as prescribed by ICAI, shall prevail until accounting standards are prescribed by Central Government under this sub-section. purpose behind accounting standards was to arrive at computation of real income after adjusting permissible deprecation. It is not disputed that these accounting standards are made by body of experts after extensive study and research. 11) At this stage, it would be pertinent to reproduce relevant provisions of Guidance Note on Accounting for Leases, revised in 1995, which is as under:- Accounting for leases in Books of lessor Finance Leases 9. Assets leased under finance leases should be disclosed as Assets given on lease , as separate section under head Fixed Assets in balance sheet of lessor. classification of Assets given on lease should correspond to that adopted in respect of other fixed assets. In addition to particulars required by statute, e.g., Schedule VI to Companies Act, 1956, particulars relating to Lease Adjustment Account should be disclosed as stated in Para 11. 10. Lease rentals (those received and those due but not received) under finance lease should be shown separately under Gross Income in profit and loss account of relevant period. 11. It is appropriate that against lease rental, matching lease annual charge is made to profit and loss account. This annual lease charge should represent recovery of net investment/ fair value of leased asset over lease term. said charge should be calculated by deducting 9 finance income for period (as per para 12 below) from lease rental for that period. This annual lease charge would comprise (i) minimum statutory depreciation (e.g., as per Companies Act, 1956) and (ii) lease equalization charge, where annual lease charge is less than minimum statutory depreciation. However, where annual lease charge is less than minimum statutory depreciation, lease equalization credit would arise. In this regard following accounting entries/disclosure should be made. (a) separate Lease Equalization Account should be opened with corresponding debit or credit to Lease Adjustment Account, as case may be. (b) Lease Equalisation Account should be transferred every year to Profit and Loss Account and disclosed separately as deduction from/addition to gross value of lease rentals shown under head Gross Income . (c) Statutory depreciation should be shown separately in profit and loss account. Accumulated statutory depreciation should be deducted from original cost of leased asset in balance sheet of lessor to arrive at net book value. (d) Balance standing in Lease Adjustment Account should be adjusted in net book value of leased assets. amount of adjustment in respect of each class of fixed assets may be shown either in main balance sheet or in Fixed Assets Schedule as separate column in section related to leased assets. (e) aggregate amount included under Lease Adjustment Account on account of lease equalisation credits should be disclosed separately. method of income measurement suggested in this paragraph, is in consonance with inherent nature of finance lease. above method is illustrated in Appendix to this Guidance Note. 12. finance income for period should be calculated by applying interest rate implicit in lease to net investment in lease during relevant period. This method would ensure recognition of net income in respect of finance lease at constant periodic rate of return on lessor s net investment outstanding in lease. However, 10 some lessor use simpler method for calculating finance income for each of periods comprising lease term by appropriating total finance income from lease in ratio of minimum lease payments outstanding during each of respective periods comprising lease term. (The total finance income from lease is difference between aggregate minimum lease payments receivable over lease term and fair value of leased asset at inception of lease.) This method may be used where finance income in respect of all individual periods as per this method approximate finance income for corresponding periods determined according to former method. It is however clarified that where this method is used, overdue lease rentals, i.e., lease rentals fallen due but not collected should not be taken into account for determining amount of minimum lease payments outstanding during each of respective periods comprising lease term. 12) At first look, it appears that method of accounting provided in Guidance Note of 1995, on one hand, adjusts inflated cost of interest of assets in balance sheet. Secondly, it captures real income by separating element of capital recovery (essentially representing repayment of principal amount by lessee, principal amount being net investment in lease), and finance income, which is revenue receipt of lessor as remuneration/reward for lessor s investment. As per Guidance Note, annual lease charge represents recovery of net investment/fair value of asset lease term. finance income reflects constant periodic rate of return on 11 net investment of lessor outstanding in respect of finance lease. While finance income represents revenue receipt to be included in income for purpose of taxation, capital recovery element (annual lease charge) is not classifiable as income, as it is not, in essence, revenue receipt chargeable to income tax. 13) method of accounting followed, as derived from ICAI s Guidance Note, is valid method of capturing real income based on substance of finance lease transaction. rule of substance over form is fundamental principle of accounting, and is in fact, incorporated in ICAI s Accounting Standards on Disclosure of Accounting Policies being accounting standards which is kind of guidelines for accounting periods starting from 01.04.1991. It is cardinal principle of law that difference between capital recovery and interest or finance income is essential for accounting for such transaction with reference to its substance. If same was not carried out, Respondent would be assessed for income tax not merely on revenue receipts but also on 12 non-revenue items which is completely contrary to principles of IT Act and to its Scheme and spirit. 14) bifurcation of lease rental is, by no stretch of imagination, artificial calculation and, therefore, lease equalization is essential step in accounting process to ensure that real income from transaction in form of revenue receipts only is captured for purposes of income tax. Moreover, we do not find any express bar in IT Act which bars bifurcation of lease rental. This bifurcation is analogous to manner in which bank would treat EMI payment made by debtor on loan advanced by bank. repayment of principal would be balance sheet item and not revenue item. Only interest earned would be revenue receipt chargeable to income tax. Hence, we do not find any force in contentions of Revenue that whole revenue from lease shall be subjected to tax under IT Act. 15) Without doubt, in catena of cases, this court has discussed relevancy of Guidance Note. While dealing with one of such matters, this Court, in Commissioner of 13 Income Tax-VII, New Delhi vs. Punjab Stainless Steel Industries (2014) 15 SCC 129 held as under: 17. So as to be more accurate about word Turnover , one can either refer to dictionaries or to material which are published by bodies of Accountants. Institute of Chartered Accountants of India (hereinafter referred to as ICAI ) has published some material under head Guidance Note on Tax Audit under Section 44B of Income Tax Act . said material has been published so as to guide members of ICAI. In our opinion, when recognized body of Accountants, after due deliberation and consideration publishes certain materials for its members, one can rely upon same . 16) In present case, relevant Assessment Year is 1999-2000. main contention of Revenue is that Respondent cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in IT Act. However, it is apt to note here that Respondent can be charged only on real income which can be calculated only after applying prescribed method. IT Act is silent on such deduction. For such calculation, it is obvious that Respondent has to take course of Guidance Note prescribed by ICAI if it is available. Only after applying such method which is prescribed 14 in Guidance Note, Respondent can show fair and real income which is liable to tax under IT Act. Therefore, it is wrong to say that Respondent claimed deduction by virtue of Guidance Note rather it only applied method of bifurcation as prescribed by expert team of ICAI. Further, conjoint reading of Section 145 of IT Act read with Section 211 (un-amended) of Companies Act make it clear that Respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to principles of law. Moreover, rule of interpretation says that when internal aid is not available then for proper interpretation of Statute, court may take help of external aid. If term is not defined in Statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in contentions of Revenue that accounting standards prescribed by Guidance Note cannot be used to bifurcate lease rental to reach real income for purpose of tax under IT Act. 15 17) To sum up, we are of view that Respondent is entitled for bifurcation of lease rental as per accounting standards prescribed by ICAI. Moreover, there is no express bar in IT Act regarding application of such accounting standards. 18) In view of above detailed discussion, we are not inclined to interfere in impugned decision of High Court. Accordingly, appeal is hereby dismissed leaving parties to bear their own cost. In view of above, other connected appeals are also disposed off accordingly. ..... J. (R.K. AGRAWAL) . . J. (ABHAY MANOHAR SAPRE) NEW DELHI; APRIL 24, 2018. 16 Commissioner of Income-tax-VI v. Virtual Soft Systems Ltd