2013 (11) TMI 64 - AT - Income Tax

Disallowance on account of lease equalization Held that - Relevant transactions are treated as finance lease and the assessee is allowed depreciation after having found him the owner of the leased assets, the depreciation allowed as per the rates prescribed in the Income Tax Act could be more than the depreciation claimed by the assessee in its books of account at the rate prescribed under the Companies Act. For example, the assessee may be entitled to claim depreciation at 100% on the leased assets in the first year itself under the income Tax Act whereas in the books of account, it might have claimed depreciation on the said leased assets under the companies Act @ 10%. In such a case, if the annual leasing charge is equivalent to 30% of the value of leased assets, the assessee would debit its P&L account by lease equalization charges to the extent of 20% of the value of asset as per the guidance note issued by ICAI. If the lease equalization charges so debited are allowed as deduction while computing the total income of the assessee under the Income tax Act in addition to 100% depreciation already allowed, the assessee will get deduction of 120% of the value of asset in the first year itself and the very purpose of adopting the concept of lease equalization based on the rationale of matching cost with the revenue would be defeated. This will result in absurdity and give misleading results. In our opinion, it is therefore necessary that while allowing deduction on account of lease equalization charges for the purpose of computing total income under the Income Tax Act, the difference between the annual lease charge of the leased assets and depreciation allowed on the said leased asset under the Income Tax Act should be taken into consideration and not the difference between the annual lease charge and depreciation claimed by the assessee in the books of account as per the Companies Act - Restored this issue to the file of the A.O. for deciding the same afresh. The assessee is directed to furnish the working of lease equalization charges based on the figures of the depreciation on the leased assets allowed as per the income Tax Act which the A.O. shall verify and allow the claim of the assessee for deduction on account of lease equalization charges based on such verification in accordance with law. - matter remanded back - decided in favor of assessee.

Issues Involved:
1. Disallowance of lease equalization charges by the Assessing Officer (A.O.) and confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-wise Detailed Analysis:

1. Disallowance of Lease Equalization Charges:

The primary issue in these appeals is the disallowance of lease equalization charges claimed by the assessee, a non-banking finance company (NBFC) engaged in leasing business. The assessee computed lease equalization as per the guidelines issued by the Institute of Chartered Accountants of India (ICAI) and claimed it as a deduction while computing its total income. The A.O. disallowed this claim on the grounds that the guidelines issued by ICAI do not alter the character of lease equalization, which he considered a non-cash charge associated with lease rental. He noted that there was no provision in sections 30 to 43D of the Income Tax Act allowing such a deduction, and even the general residuary section 37 was not applicable as lease equalization charges were not an expenditure but merely an accounting adjustment.

The assessee challenged this disallowance before the CIT(A), arguing that the lease rental consists of principal recovery and interest component, and the method prescribed by ICAI should be accepted for tax purposes. The CIT(A) upheld the A.O.'s decision, stating that while lease equalization might be an accounting concept, it had no basis under the Income Tax Act. He reasoned that allowing such a deduction would result in double deduction of the cost of leased assets, as the entire cost is already deductible in the form of depreciation.

2. Tribunal's Analysis and Decision:

The Tribunal considered the rival submissions and reviewed the guidance note issued by ICAI. It acknowledged that the concept of lease equalization is based on matching cost with revenue to determine periodic net income from finance leases accurately. However, it emphasized that while the concept can be followed for computing total income under the Income Tax Act, it must be done cautiously to avoid absurd results.

The Tribunal highlighted that in cases where transactions are treated as finance leases and the assessee is allowed depreciation as the owner of the leased assets, the depreciation allowed under the Income Tax Act could be significantly higher than that claimed in the books of account. For instance, an assessee might claim 100% depreciation in the first year under the Income Tax Act, while only claiming 10% under the Companies Act. Allowing lease equalization charges based on the latter would result in a total deduction exceeding the asset's value, which is illogical.

Therefore, the Tribunal restored the issue to the A.O. for fresh consideration. It directed the assessee to furnish the working of lease equalization charges based on the depreciation allowed under the Income Tax Act. The A.O. was instructed to verify these figures and allow the deduction in accordance with the law.

Conclusion:

The Tribunal concluded that the appeals of the assessee are allowed for statistical purposes and remanded the matter back to the A.O. for a fresh decision based on the appropriate figures of depreciation as per the Income Tax Act. The order was pronounced in the open court on 6th September 2013.

← Previous Next →