TMI Blog2013 (11) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fair and correct income and the net amount of lease equalization debited to the P L account was rightly claimed as deduction. The A.O. did not find merit in the submission made on behalf of the assessee on this issue. According to him, the guidelines issued by ICAI would not change the character of lease equalization which was in the nature of non-cash charge associated with lease rental. He held that there was no specific or general provision contained in section 30 to 43D of the Act allowing deduction on account of lease equalization charges. He also held that even the general residuary section 37 of the Act was not applicable to lease equalization charges as the same was not the expenditure but was only the accounting adjustment to compute finance income from the lease transactions which was included in the lease rentals. He accordingly disallowed the claim of the assessee for deduction on account of lease equalization in all the four years under consideration. 3. The disallowance made by the A.O. on account of lease equalization charges was challenged by the assessee in the appeals filed before the ld. CIT(A) for all the four years under consideration and the following subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as deduction. We are enclosing a worksheet containing the details of the working of the method of lease equalization reserve for a lease. As can be seen from the same, the gross lease rental is split up into two parts - finance income which comprises the return on investment and annual charge which is the capital recovery on the investment. This calculation is based on the intrinsic IRR% of the transaction. The annual charge is further bifurcated into statutory depreciation (which is the depreciation as per the Companies Act) and lease equalization reserve (which could be either debit to P L or credit to P L based on the total annual charge). This bifurcation is being done as per the guideline prescribed by the institute of Chartered Accountants of India (ICAI) - the guidance note of 1CM enclosed as an annexure. Any lease equalization which is a credit to the P L is offered for tax by the company. Thus as a corollary, any debit to P L also should be allowed as a deduction. We wish to submit before your Honour, a recent caselaw of Hyderabad ITAT in. the case of Pact Securities Financial Ltd. wherein it has been held that the method of accounting prescribed by I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Virtual Soft Systems Ltd., (2012) 341 ITR 593(Del) ii. Jt. CIT v. Pact securities Financial Ltd. [2003] 86 ITD 115 (Hyd.) iii. Catholic Syrian Bank Ltd. v. Asstt. CIT [2010] 38 SOT 553 (Coch.) iv. Prakash Leasing Ltd. v. DCIT (IT Appeal Nos. 301,302 491 of 2007. 6. The ld. D.R., on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case on this issue that the assessee already having claimed depreciation at higher rate under the income Tax Act, no further deduction on account of lease equalization charges is allowable to the assessee. 7. We have considered the rival submissions and also perused the relevant material available on record. We have also gone through the guidance note issued by ICAI explaining the concept of lease equalization with the illustration. The said guidance note is basically issued for the purpose of accounting and the concept of lease equalization, as mentioned therein, is based on the rationale of matching cost with revenue so that the periodic net income from the finance lease is determined in a true and fair manner. This constitutes the parallel method of accounting followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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