TaxTMI 
TaxTMI 
2025 (10) TMI 471
X X X X Extracts X X X X
X X X X Extracts X X X X
.... facts are, this is second round of appeal wherein Assessing Officer has disallowed the claim of the assessee relating to lease equalization charges to the extent of Rs. 44,59,754/- and in the second appellate proceedings, the coordinate Bench has restored back the issue to the file of Assessing Officer to consider the submissions of the assessee and decide the issue afresh. Accordingly, notices u/s 142(1) of the Income-tax Act, 1961 (for short 'the Act') were issued. In response assessee submitted vide letter dated 28.12.2015. We are reproducing the relevant part of the same for the purpose of brevity :- "Clarification on lease equalization charge "Lease Equalization charges have been computed in accordance with the Revised Guidance Note on Accounting for leases issued by the Institute of Chartered Accountants of India. Lease rentals (those received and those due but not received) under a lease should be shown separately under Gross Income in the Profit & Loss Account of the relevant period. It is appropriate that against the lease rental, a matching lease annual charges is made in the profit and loss account. The annual lease charges should rep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder :- "Reg. Income Tax Assessment u/s 143(3) for A.Y 1997-98 and 1998-99 in case of M/s Delfin Finance Private Limited Dear Sir Reference to the above it is submitted as follows: Regarding the matter of disallowance: of depreciation the detailed reply has been submitted for A.Y 1996-97. Regarding the matter of the Lease equalization charge it is submitted. that, lease rent income comprises of the following :- (a) Interest recovery (IRR) on the capital value of an asset. (b) Recovery of the capital value of an asset The Institute of Chartered accountants of India has issued a guidance note on lease equalization charge according to that all the finance companies are required to maintain their financial books of accounts. A detailed discussion on the lease equalization charge has been submitted in our reply dated 28/12/2015. The assessee company has accounted for the interest income and recovery of depreciation (wear and tear) as applicable and the difference whether negative or positive has been kept under an account named lease equalization charge, which over the years will be taxed according....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... per Guidance Note but confirmed the addition It is further submitted that assessment order dated 31.12.2016 was not served to the assessee company. Assessee company came to know about the facts when penalty notice was served to the counsel. The certified copies of the order were received on 28.06.2017. During the course of initial assessment proceedings it has been established by A.O in his order dated 2703.2001 that Assessee company has created a Lease Equalization Charge as per the Guidance Note issued by Institute of Chartered Accountants of but made the addition due to non clarity of act at that time. Also the same has been confirmed during the course of reassessment proceedings Relevant provisions of the guidance note on accounting for lease, revised in 1995, is as under. Accounting for leases in the Books of a lessor Finance Leases 9. Assets leased under finance leases should be disclosed as "Assets given on lease", as a separate section under the head "Fixed Assets" in the balance sheet of the lessor. The classifications of Assets given on lease' should correspond to that adopted in respect of other fixed assets. In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aph, is in consonance with the inherent nature of a finance lease. The above method is illustrated in the Appendix to this Guidance Note. 12) The finance income for the period should be calculated by applying the interest rate implicit in the lease to the net investment in the lease during the relevant period. This method would ensure recognition of net income in respect of a finance lease at a constant periodic rate of return on the lessor's net investment outstanding in the lease. however, some lessor use a simpler method for calculating the finance income for each of the periods comprising the lease term by appropriating the total finance income from the lease n the ratio of minimum lease payments- outstanding during each of the respective periods comprising the lease term. (The total finance income from the lease is the difference between the aggregate minimum lease payments receivable over the lease term, and the fair value of the leased asset at the inception of the lease.) This method may be used where the finance income in respect of all individual periods as per this method approximate the finance income for the corresponding periods determined accord....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of accounting, and is in fact, incorporated in the ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act, and to its scheme and spirit. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purpose of income tax. Moreover, we do not find any express bar in the. IT Act, which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cation as it is according to the principles of law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the statute, the Court may take the help of external aid. If a term is not defined in a statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act." 8. After considering the above submissions, ld. CIT (A) rejected the same and sustained the additions by observing as under :- "5.3 I have considered the facts of the case and the submission made by the AR. It has been contended that the lease equalization charges have been claimed by following the guidance note issued by ICAI. The AR has explained the guidance note in the written submission and has also relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. Virtual Soft Systems Ltd. (Appeal No. 4358 of 2018). I have perused the said decision of the Apex Court. It is ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Considered the rival submissions and material available on record. We observe that the assessee is carrying on the business of finance, leasing and its activities include hire and purchase of assets, inter corporate deposits and bill discounting etc. Assessee is involved in the finance leasing business. During the year under consideration, assessee has purchased two boilers from different companies and these assets were given on lease during the year under consideration. We observe that assessee has followed and computed the lease equalization charges in accordance with the revised Guidelines Note on Accounting for lease issued by the Institute of Chartered Accountants of India. Accordingly, assessee has declared the lease rentals separately under gross income in its Profit & Loss account. Based on the above Guidelines Note, against the abovesaid lease rental income, matching lease annual charges are charged to the Profit & Loss account. The annual lease charges represent recovery of the net investment/share value of lease asset over the leased term. It is calculated by deducting the finance income for the period from the lease rent for the period. The annual lease charges compris....