Business expenditure – Accounting – Sections 37 and 145 – A. Ys. 1996-97 to 1999-00 – Accounting standards issued by ICAI not to be disregarded – Accounting standard employed by assessee, issued by ICAI but not notified by Central Government – Not a ground to discard – Lease equalisation charges – Deductible from lease rental income

For the A. Y. 1998-99, the assessee showed gross lease rental of Rs. 1,14,91,395/- as income. Out of this, a sum of Rs. 48,56,224/- was claimed as deduction of lease equalization charges from the lease rental income following the guidance note on accounting of leases, Issued by the ICAI. The Assessing Officer disallowed the lease equalisation charges. The Tribunal allowed the claim.

On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“(i) The Assessing Officer could not have disregarded the method of accounting followed by the assessee in respect of the lease rental as it was based on a guidance commended for adoption by a professional body such as the ICAI. The guidance note reflected the best practices adopted by accountants the world over. The fact that at the relevant point of time, it was not mandatory to adopt the methodology professed by the guidance note issued by the ICAI was irrelevant because as long as there was a disclosure of the change in the accounting policy in the accounts, which had the backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer.

(ii) Notwithstanding the fact that the opinion of ICAI was expressed in a guidance note which had not attained a mandatory status, would not provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect the method of accounting of leases followed by the assessee.

iii) Merely because the Central Government has not notified in the Official Gazette “accounting standards” to be followed by any class of assesses or in respect of any class of income, it could not be stated that the accounting standards prescribed by the ICAI or the accounting standards reflected in the “guidance note” cannot be adopted as an accounting method by an assessee.

iv) T he questions of law are answered in favour of the assessee and against the Revenue.”