2014 (3) TMI 611 - AT - Income Tax

Depreciation - finance lease or operating lease Addition on fixed assets Difference in the accounting treatment of computers taken on lease - Held that - The assessee has added a sum being value of leased computers in the block of assets and depreciation under Companies Act was computed and debited to the profit loss account - For income tax purposes, the assessee added back the depreciation under the Companies Act which was debited to profit and loss account - In the depreciation that under Income Tax Act, the assessee did not include Rs. 2,58,71,588/- worth of the computers instead assessee claimed Rs. 85,73,228/- being amount paid to the lessor as lease charges in terms of section 37(1) of the Act - As such no depreciation was claimed on such lease computers under the provisions of the Income Tax Act - The assessee has not at all made any depreciation claim in this regard in the Income Tax Act and AO has not disallowed any depreciation - thus, the basis of CIT(A) s adjudication is wrong. For depreciation u/s. 32 of the Act there is no distinction between a finance lease or operating lease and it is the owner / lessor only who is entitled to claim depreciation in all leasing transactions - the contention of the assessee is accepted that the Accounting of the leased computers has been done as per the Accounting Standards and provision of Companies Act and Income Tax Act is correct - assessee has not claimed any depreciation on this lease computers - the contention of the assessee have not been noted or discussed either in the AO s order or in the CIT s order thus, the matter remitted back to the AO for fresh examination Decided inf avour of Assessee.

Issues: Disallowance of depreciation on leased computers for income tax purposes due to difference in accounting treatment under Companies Act and Income Tax Act.

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi involved a dispute regarding the disallowance of depreciation on leased computers for income tax purposes due to a variance in accounting treatment under the Companies Act and the Income Tax Act for the assessment year 2002-03. The primary issue raised by the assessee was the addition of Rs. 2,58,71,588 as undisclosed income by the Assessing Officer (AO) based on discrepancies in fixed assets schedules under both Acts.

The AO noted a difference in the addition to fixed assets as per the Companies Act and the Income Tax Act, resulting in an overstatement of inventory in the balance sheet by Rs. 2,58,71,588. Consequently, the AO adjusted this amount as undisclosed income, leading to under-assessment of income. The Commissioner of Income Tax (Appeals) upheld this addition, emphasizing that the leased computers were not owned by the assessee and were not included in the assets for income tax purposes, justifying the disallowance of depreciation.

However, the Appellate Tribunal found merit in the assessee's argument that the accounting treatment of leased computers under Accounting Standard-19 differed from the provisions of the Income Tax Act regarding depreciation. The tribunal agreed that the distinction between finance lease treatment under AS-19 and the Income Tax Act was crucial, highlighting that the assessee had not claimed any depreciation on the lease computers for income tax purposes. The tribunal observed that the lower authorities had failed to consider this distinction and directed the AO to verify the factual accuracy of the assessee's submissions.

Ultimately, the Appellate Tribunal allowed the assessee's appeal for statistical purposes, remitting the issue back to the AO for further examination in light of the correct accounting treatment of leased computers under AS-19 and the provisions of the Income Tax Act. The judgment underscored the importance of aligning accounting practices with relevant standards and laws to avoid discrepancies in income tax assessments.

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