In Brief
Virtual Soft Systems claimed deduction of lease equalization charges totalling Rs 1.65 crores while reporting losses. The tax department disallowed the deduction, but the Income Tax Tribunal allowed it based on ICAI accounting standards. The Supreme Court upheld the Tribunal's decision, holding that lease rental must be bifurcated into capital recovery (principal repayment) and finance income (interest) components. Only the finance income constitutes taxable revenue receipt. The Court found this method of accounting, prescribed by ICAI guidelines, valid and in consonance with the substance-over-form principle. The bifurcation mirrors how banks separate principal from interest in EMI payments and ensures only real income is taxed.
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