24 October, 2013

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ITAT devises formula for claiming lease equalization charges – gap of annual lease charges and depreciation as per Income-tax Act

While allowing deduction on account of lease equalization charges, only difference between annual lease charge of leased assets and depreciation allowed on said leased asset under the Income-tax Act (the I-T Act) should be taken into consideration
The Tribunal held as under:

1) The concept of lease equalization charge could also be followed for the purpose of computing the total income under the I-T Act. However, the same has to be done with proper care and caution, otherwise it might result in absurdity and give misleading result;
2) In the instant case the relevant transactions were treated as finance lease transaction and, the depreciation allowed as per the rates prescribed in the I-T Act could be more than the depreciation claimed by the assessee at the rate prescribed under the Companies Act;
3) For example, the assessee might be entitled to claim depreciation at 100 per cent on the leased assets in the first year itself under the I-T Act whereas in the books of account, it might have claimed depreciation on the said leased assets under the Companies Act at the rate of 10 per cent;
4) In such a case if the annual leasing charge was equivalent to 30 per cent of the value of leased assets, the assessee would debit its profit and loss account by lease equalization charges to the extent of 20 per cent of the value of asset as per the guidance note issued by the ICAI;
5) If the lease equalization charges so debited were to be allowed as deduction while computing the total income of the assessee under the I-T Act in addition to 100 per cent depreciation already allowed, the assessee would get the deduction of 120 per cent of the value of asset in the first year itself and the very purpose of adopting the concept of lease equalization would be defeated. This would result in absurdity and give misleading results;
6) It was, therefore, necessary that while allowing deduction on account of lease equalization charges for the purpose of computing total income under the I-T Act, the difference between the annual lease charge of the leased assets and depreciation allowed on the said leased asset under the I-T Act should be taken into consideration - INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD V. DY.CIT (2013) 38 taxmann.com 40 (Mumbai - Trib.)

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