TMI Blog2013 (9) TMI 1248X X X X Extracts X X X X X X X X Extracts X X X X ..... nks and financial institutions and is mainly engaged in leasing business. During the years under consideration, the assessee had entered into various transactions of finance lease and after working out the lease equalization in respect of each and every lease transactions as per the guidelines issued by The Institute of Chartered Accountants of India (ICAI), the lease equalization so worked out was claimed by the assessee as deduction while computing its total income. While explaining its claim for deduction on account of lease equalization, it was submitted on behalf of the assessee before the A.O. that the finance income which is embedded in the lease rental was determined by using implicit rate and the difference between the lease rental and finance income was treated as annual lease charge. It was contended that the depreciation was provided in the books of account by following straight line method of depreciation and if the annual lease charge was more than the statutory depreciation, difference was debited to P L account as lease equalization whereas if the annual charge was more than the depreciation then P L was credited on account of lease equalization. It was contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns on the investments by way of lease rentals. The Institute of Chartered Accountants of India has prescribed the method of recognizing the income and the other issues related to the same. The finance income which is embedded in the lease rental is derived from the lease rental specified in the agreements using implicit rate over the primary lease period. The difference between the lease rentals, being the minimum, lease payment, and the finance income is to be treated as annual charge. The annual charge comprises of statutory depreciation and lease equalization. The depreciation is provided in the books of accounts by following straight line method of depreciation and the rates prescribed in Schedule XIV of the Companies Act, 1956. If the annual lease charge is more than the statutory depreciation then the profit and loss account is credit. Thus the debit to profit and loss account by way of this equalization is directly correlated to lease rentals. The lease equalization is debited to profit and loss account as per the statutory method of accounting prescribed by the Institute of Chartered accountants of India and by following this accounting with the view to reflect the fair a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore held that the assessee being eligible for deduction of the entire cost of leased assets in the form of depreciation, there was no question of allowing separate deduction in the form of lease equalization reserve and no such deduction was indeed allowed under the Income Tax Act. Accordingly, the disallowance made by the A.O. on account of lease equalization reserve was confirmed by the ld. CIT(A) in all the four years under consideration. Aggrieved by the orders of the ld. CIT(A), the assessee has preferred these appeals before the Tribunal. 5. The ld. counsel for the assessee took us through the guidance note issued by the ICAI placed on 83 to 94 of his paper book and explained the nature of lease equalization charges and the exact purpose for which the same are required to be taken into account in the case of a company engaged in leasing business. He submitted that the assessee being a non-banking finance company, is obliged to follow the guidance note issued by ICAI and provide for lease equalization charges as suggested in the said guidance note. He contended that the deduction claimed by the assessee for lease equalization charges so provided thus is an allowable de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses claimed in the form of depreciation and the effect of higher or lower claim of depreciation, than the corresponding recovery of investment made in the leased assets is nullified. In the books of account, the leasing companies are entitled to claim the depreciation by following one of the various methods prescribed in the Companies Act and if such depreciation claimed is more or less than the corresponding annual lease charge representing recovery of investment in the leased asset over the lease term, the difference is adjusted in the form of lease equalization based on the rationale of matching cost with the revenue so that the resultant income from the leasing is true and fair. The concept of lease equalization thus is basically an accounting concept and the same is followed for the purpose of revenue recognition of leasing income as per the guidance note issued by ICAI. 8. It is no doubt true that the concept of lease equalization can also be followed for the purpose of computing the total income under the Income Tax Act as held in the various judicial pronouncements cited by the ld. counsel for the assessee. However the same, in our opinion, has to be done with proper c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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