Summary
For assessment year 1999–2000, the Supreme Court upheld bifurcation of finance-lease rentals using the ICAI Guidance Note’s lease-equalisation method. Capital recovery was distinct from taxable finance income; treating the entire rental as income would include non-revenue receipts. The assessee was applying an accounting method to ascertain real income rather than creating a deduction solely through professional guidance. The Revenue’s appeal was dismissed and connected appeals disposed of accordingly.
Issues
- Whether finance-lease rentals could be bifurcated into capital recovery and finance income using the ICAI Guidance Note.
- Whether absence of an express lease-equalisation deduction prohibited that accounting treatment.
Provisions considered
- Section 211(3C), as considered in the judgment, Companies Act, 1956The quoted provision and proviso recognised ICAI accounting standards pending prescription by the Central Government. The Court considered that framework in evaluating the expert accounting method. (¶¶ 8, 9, 10, 16)
Held
- The finance-lease accounting method separated capital recovery, representing repayment of the lessor’s net investment, from finance income representing the periodic return. Only the latter was revenue income; the distinction followed the substance of the transaction. (¶¶ 11, 12, 13)
- Lease equalisation was an accounting adjustment to capture real income, not an artificial bifurcation rendering the entire lease rental taxable. The Court compared the distinction to separating principal repayment from interest in a loan instalment. (¶¶ 13, 14)
- For the assessment year and statutory framework considered, the absence of an express deduction provision did not preclude the method. The assessee used the Guidance Note to ascertain real income, and the Court found no express statutory bar to that bifurcation. (¶¶ 16, 17)
- The ICAI’s expert guidance could assist interpretation and computation where the legislation was silent. The decision did not state that professional accounting guidance could override an express tax prohibition. (¶¶ 8, 9, 10, 15, 16, 17)
Result
Revenue’s appeal dismissed; connected appeals disposed of accordingly. Parties to bear their own costs.