2010 (2) TMI 865 - AT - Income Tax

Allowability of reduction in lease rental income by way of lease equalisation charges - held that - In the present case also the lease in question is a finance lease because the entire amount of cost of asset being the amount financed minus residual value is being recovered during the lease period in addition to the finance charges. Hence in the present case the lease in question is financial lease and hence the guidance notes issued by the ICAI is applicable and the assessee has followed the same in reporting in income for tax purposes. The idea or the basis of ICAI guideline is not that in all the years for the lease period income should be same. - In the chart furnished by the assessee it can be seen that in some years the lease equalisation amount is minus which means that in those years there will be increase of income on account of lease equalisation charges and in the remaining years it is positive and in those years it will be decreased from the lease rental income but at the end of the lease period the sum total of lease equalisation charges is only Rs. 22, 799 i.e residual value. It means that neither any deduction is allowed to the assessee on account of lease equalisation charges in the form of any expenses nor there is any reduction in the lease rental income being included in the income of the assessee because the ultimate total of the lease equalisation charges is Rs. 22, 799 only which is of residual value and hence for the lease period as a whole there is no impact on the income shown by the assessee on account of lease equalisation. . Regarding depreciation we have already noted that deduction claimed by the assessee on account of depreciation is equivalent to the cost of asset and even if the assessee is allowed depreciation as per Income-tax Rules then also it does not have any impact because the depreciation as per companies Act is added back and depreciation as per Income-tax Rules is reduced from the income of the relevant year. Validity of the order passed under section 263 - Validity of the re-assessment proceedings Held that - technical issues regarding validity of section 263 proceedings in assessment year 1996-97 and the validity of reassessment proceedings in the remaining four years are of academic interest only. Hence we decline to adjudicate upon these issues

Issues Involved:
1. Validity of the order passed under section 263 for the assessment year 1996-97.
2. Allowability of reduction in lease rental income by way of lease equalisation charges for the assessment year 1996-97.
3. Validity of the re-assessment proceedings for the assessment years 1997-98 to 2000-01.
4. Allowability of reduction from lease rental income on account of lease equalisation charges for the assessment years 1997-98 to 2000-01.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263 for the Assessment Year 1996-97:
The issue pertains to the validity of the order passed by the CIT under section 263. However, since the primary issue on merit regarding the allowability of lease equalisation charges has been decided in favor of the assessee, the Tribunal deemed it unnecessary to adjudicate on this technical issue, considering it of academic interest only.

2. Allowability of Reduction in Lease Rental Income by Way of Lease Equalisation Charges for the Assessment Year 1996-97:
The Tribunal examined whether the reduction in lease rental income by way of lease equalisation charges, as per the guidance notes issued by the Institute of Chartered Accountants of India (ICAI), is allowable. The assessee argued that the guidance notes on accounting for leases issued by ICAI should be followed, citing previous Tribunal decisions in favor of this practice. The Tribunal agreed with the assessee, noting that the guidance notes ensure that correct finance income is brought to tax each year. The Tribunal found that the leases in question were finance leases, as the assessee recovered the full financed amount during the lease period, making the guidance notes applicable.

3. Validity of the Re-assessment Proceedings for the Assessment Years 1997-98 to 2000-01:
Similar to the issue under section 263, the Tribunal did not adjudicate on the validity of the re-assessment proceedings for these years, as the primary issue on merit regarding lease equalisation charges was decided in favor of the assessee.

4. Allowability of Reduction from Lease Rental Income on Account of Lease Equalisation Charges for the Assessment Years 1997-98 to 2000-01:
The Tribunal reiterated its stance from the 1996-97 assessment year, affirming that the reduction in lease rental income by way of lease equalisation charges is allowable. The Tribunal referenced the guidance notes issued by ICAI and previous Tribunal decisions supporting the assessee's position. It was emphasized that the method prescribed by ICAI should not be easily upset by lower authorities. The Tribunal also addressed the objections raised by the Revenue, including the argument that the guidance notes are not binding and the claim that the lease equalisation charges are not covered under any specific provision of the Income-tax Act. The Tribunal dismissed these objections, stating that the guidance notes ensure the correct finance income is taxed each year and that the lease equalisation charges do not result in any additional deduction over the lease period.

Conclusion:
The Tribunal allowed all the appeals of the assessee, affirming the allowability of reduction in lease rental income by way of lease equalisation charges for the assessment years 1996-97 to 2000-01. The technical issues regarding the validity of section 263 proceedings and re-assessment proceedings were not adjudicated, as they were deemed of academic interest following the decision on the primary issue.

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