Manual - ICDS IV : Revenue Recognition

ICDS I relating to Accounting Policies states that the treatment and presentation of transactions shall be governed by their substance and not by the legal form. ICDS IV mandates that where the events of transfer of property in the goods and transfer of risk and rewards do not coincide, the revenue sholud be recognised when the risk and rewards are transferred. Lease transactions would not be treated as sale, but the lease rent would be taxed as income and the lessor will be entitled to depreciation. This view is supported by the fact that the definition of “revenue”, contemplates revenue arising from use of assessee’s resources by others, though the definition restricts itself to interest, royalties or dividends.

In case of hire purchase agreements the person taking the asset on hire and the person giving the asset on hire, cannot claim depreciation in respect of the same asset, it would appear that the person giving the asset on hire will need to recognise the sale of the asset and the hirer  would be entitled to claim the depreciation. This would also be in consonance with the requirement of the ICDS I that the treatment and  presentation of transactions and events shall be governed by their substance and not merely by the legal form.

Revenue recognition for leases: lease treated as income not sale; lessor taxed on rent and entitled to depreciation. ICDS IV recognises revenue when risk and rewards transfer, so leases are not sales: lease rent is taxable income and the lessor may claim depreciation. Under hire purchase, both parties cannot claim depreciation on the same asset; substance-over-form principles indicate the owner giving the asset on hire should recognise sale while the hirer is entitled to depreciation.