In Brief
The Supreme Court considered whether lease equalization charges could be deducted from rental income under the Income Tax Act using the ICAI Guidance Note on Accounting for Leases. The respondent company claimed Rs 1.65 crore as lease equalization charges, which the tax authority disallowed. The Court held that bifurcating lease rental into capital recovery (principal repayment) and finance income (interest) is permissible and necessary to calculate real taxable income. Following accounting standards prescribed by ICAI reflects substance over form. Only finance income, not capital recovery, is a revenue receipt subject to tax. The Court upheld the High Court's decision and dismissed the Revenue's appeals, affirming the assessee's entitlement to apply ICAI accounting standards for lease bifurcation.
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