Depreciation treatment under financial lease: accounting capitalisation clashes with tax rules, creating legal uncertainty for lessees.
A divergence exists between AS 19 accounting treatment, which capitalises leased assets and allocates depreciation to the lessee, and income tax rules under Section 32 as clarified by a CBDT circular, which do not automatically recognise such accounting capitalization for tax depreciation. The draft DTC attempts to define "financial lease" and place depreciation with the lessee but the proposed definition is defective-requiring full cost recovery through rentals and ownership by lessee at lease end-thereby failing to capture the full accounting concept and leaving resolution to fact driven judicial analysis and the substance over form principle. (AI Summary)