| COURT: | Supreme Court |
| CORAM: | Abhay Manohar Sapre J, R. K. Agrawal J |
| SECTION(S): | 145, 4 |
| GENRE: | Domestic Tax |
| CATCH WORDS: | capital vs. revenue receipt, lease finance, real income theory |
| COUNSEL: | - |
| DATE: | April 24, 2018 (Date of pronouncement) |
| DATE: | April 26, 2018 (Date of publication) |
| AY: | 1999-00 |
| FILE: | Click here to view full post with file download link |
| CITATION: | |
| Bifurcation of lease rentals into interest and loan recovery: An assessee can only be taxed on "real income". The bifurcation of lease rental is not an artificial calculation. 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. The Guidance Note issued by the ICAI carries great weight. The method of accounting prescribed in such a Guidance Note, in order to compute real income and offering the same for taxation, cannot be disregarded by the AO unless such action falls within the scope and ambit of S. 145(3) of the IT Act | |
The method of accounting 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
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