2014 (4) TMI 215 - HC - Income Tax

Accrual of income - Nature of Lease Finance by hire purchase lease - Whether the Tribunal was right in holding that in the case of Finance Lease transaction the entire lease rental should be offered as income contrary to the AS-19 dealing with accounting of leases issued by the ICAI Held that - In respect of lease of a car, the terms of lease was stated to be three years, with monthly rentals and total rentals payable - The terms of the lease agreement point out that the lessor takes on lease the goods described in the Schedule on terms and conditions set forth in the Schedule - the agreement is a lease agreement sample and that there is nothing in the agreement to speak about mere financing for the purchase of an equipment as it had been contended by the assessee. The fact that the equipment is delivered by the supplier to the location of the assessee thus by itself, will not make the agreement, the Finance Agreement and the terms thus seen are matters of arrangement between the parties, which in effect clearly points out that it is only a simple lease agreement and not a finance agreement - even in the calculation of the lease rental, the monthly repayment of the rent and the number of months of the lease rent payment is also clearly stated in the agreement - there was no justifiable ground to accept the case of the assessee that based on AS19 only that the agreement in question was entered into by the assessee and it has to be treated as the finance agreement - relying upon Sundaram Finance Limited vs. State of Kerala 1965 (11) TMI 123 - SUPREME COURT OF INDIA - the question has to be seen from the terms of the agreement entered into between the assessee, which was placed before the AO as well as before other Appellate Authorities - the contentions of the assessee s is rejected that the transaction is only a finance lease. - Decided against the assessee.

Issues Involved:
1. Whether the Tribunal was right in law in holding that in the case of "Finance Lease" transaction, the entire lease rental should be offered as income contrary to Accounting Standard-19.
2. Whether the Tribunal was justified in not directing the assessing officer to consider that in the case of financial lease only the interest income accrued to the assessee should be taxed and not the entire lease rental, and consequently withdraw the claim of depreciation on leased assets.

Detailed Analysis:

Issue 1: Entire Lease Rental as Income
The primary contention of the assessee was that, as per Accounting Standard 19 (AS-19), only the income portion of the lease rental should be offered as income, and the lessor cannot claim depreciation. The assessee argued that the lease transactions were financial leases, and hence, only the interest income should be taxed. However, the Assessing Officer (AO) viewed that offering only the interest portion of the lease rent for income tax purposes, while simultaneously claiming depreciation on the leased assets, amounted to a double benefit. The AO concluded that the entire lease rent was taxable as income of the lessor, and the lessor was entitled to depreciation on the equipment.

Issue 2: Taxation of Interest Income and Withdrawal of Depreciation Claim
The assessee appealed against the assessment, arguing that the treatment of the transaction in the books of accounts as per AS-19 should outweigh the contract entered into with the lessee. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the assessee, being the owner of the asset, claimed depreciation and received rentals normally in 36 installments. The Tribunal also upheld this view, stating that once depreciation was claimed on the leased assets, the entire lease rental had to be shown as income, regardless of the accounting standard followed by the assessee.

Tribunal's Decision and Assessee's Appeal
The Tribunal confirmed the AO's assessment, leading to the present appeals. The assessee's counsel contended that the transactions were pure financial leases and should be treated as such under AS-19. The counsel relied on a Delhi High Court decision, arguing that the distinction between financial and operational leases should be recognized, and only the interest income should be taxed.

Court's Analysis of Lease Agreement
The court examined a sample lease agreement and found that it was a simple lease agreement, not a finance agreement. The agreement included clauses on ownership, delivery, rent payments, and return of the equipment, indicating that the lessor retained ownership and the lessee had no right, title, or interest except as a lessee. The court rejected the assessee's argument that the agreement was a finance agreement, noting that the terms clearly pointed to a lease arrangement.

Reliance on Delhi High Court Decision
The court found that the Delhi High Court decision did not support the assessee's case, as it discussed the distinction between finance agreements and operational leases and remitted the case for fresh consideration. The Supreme Court's decision in Sundaram Finance Limited vs. State of Kerala was cited, emphasizing that the true effect of a transaction must be seen from the terms of the agreement.

Conclusion
The court concluded that the terms of the agreement indicated a lease arrangement, not a finance lease. Consequently, the entire lease rental was taxable as income, and the lessor was entitled to claim depreciation. The appeals were dismissed, and the connected miscellaneous petitions were closed.

Final Judgment
The Tax Case (Appeals) were dismissed with no costs, and the connected miscellaneous petitions were closed. The court upheld the Tribunal's decision that the entire lease rental should be offered as income and that the assessee was not justified in claiming only the interest income for tax purposes while also claiming depreciation on the leased assets.

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