2015 (10) TMI 1389 - AT - Income Tax

Disallowance of lease equalization - Held that - Identical issues were therein earlier assessment years als 2013 (11) TMI 64 - ITAT MUMBAI as 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 by way of remand.

Summary

Issues Involved:
Disallowance of lease equalization reserve amount for A.Y. 1998-99.

Detailed Analysis:
1. The appellant, engaged in leasing and investment banking, filed a return for A.Y. 1998-99 showing Nil income, later revised to declare income and loss. The Assessing Officer disallowed the claim of deduction on lease equalization reserve of Rs. 49,66,03,405 based on earlier assessment findings.

2. The Ld. CIT(A) upheld the disallowance, stating that the assessee had been allowed the asset cost as depreciation, precluding a separate deduction as lease equalization reserve. The Ld. CIT(A) emphasized that the Income Tax Act supersedes accounting principles, and lease equalization reserve was not an expenditure under Sections 30 to 36 but a general provision under Section 37, not applicable in this case.

3. The appellant contended the Guidance Note by ICAI on leases, arguing it should not be disregarded. The Departmental Representative supported the lower authorities' findings.

4. The ITAT Mumbai, considering earlier years' assessments and the Tribunal's order, noted the concept of lease equalization for revenue recognition in leasing business. It emphasized the need for caution in applying lease equalization under the Income Tax Act to prevent misleading results. The ITAT directed the AO to reevaluate the issue in line with the findings of A.Yrs 1994-95 to 1997-98, allowing the appeal for statistical purposes.

This judgment clarifies the treatment of lease equalization reserves under the Income Tax Act, emphasizing the need for careful consideration to prevent misinterpretation and ensure accurate computation of income.