CPT V24P7-Art1 (Content).pmd - Taxmann

Direct Tax Laws
678
DECISIONS
Bifurcation of Lease Rental into Capital and
Revenue Receipt
An analysis of Prakash Leasing Ltd. v. Deputy Commissioner
of Income-tax [2012] 23 taxmann.com 3 (Kar.)
(i) Lease rentals relating to finance lease consist
of two components, i.e., capital receipt
and financing charges.
(ii) Only financing charges represent real income
and are accordingly chargeable to tax.
(iii) The amount received towards capital
recovery constitutes the capital receipt and
is adjusted against cost of the asset.
(iv) The lease equalization charge is the result
of such an adjustment, which the assessee
makes whenever the amount put aside
towards capital recovery is not equivalent
to the depreciation claimed by the
assessee.
(v) While determining accrual of liability or
income, the Accounting Standards prescribed
by the ICAI would have to be
followed and applied if they are not
inconsistent with any provision of law.
FACTS
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The assessee was a non-banking financial
company. For the assessment year 1998-99 the
assessee had claimed a deduction of ` 4,35,89,486.
under the head 'lease equalization account.'
Under the profit and loss account for the said
year the assessee had reduced the aforesaid
amount representing the lease equalization account
from the lease rental of ` 11,84,21,434 on the
basis of Accounting Standard (AS) 19 issued by
the ICAI. The Assessing Officer disallowed the
said claim on the ground that the same was
neither a liability nor an allowance nor an
expenditure. He further observed that : (i) it
was just a matching entry for the purpose of
tallying the accounts with regard to the assets
leased out, (ii) this claim was made for the first
time during the year, (iii) depreciation was
provided in the books, (iv) lease income was
recognized. This order was confirmed by ld.
CIT(A) and the Tribunal on the ground that it
was an appropriation of profit and, therefore,
could not be allowed as a deduction.
The Hon'ble High Court admitted and allowed
the appeal of the assessee by holding as above.
COMMENTS
August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 58
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This judgment recognizes the importance of
Accounting Standards (AS in short) issued by
ICAI. The scheme of the Companies Act, 1956,
also indicates that Accounting Standards are
mandatory. They have to be followed by the
auditors. They have to be followed by the
companies, as they provide discipline,
harmonization of concepts and of accounting
principles. The prudential norms issued by
the Reserve Bank of India also hold that
Accounting Standards prescribed by the Institute
of Chartered Accountants of India would apply
to non-banking financial companies. Even section
211(3C) of the Companies Act specifies that
till such time when the Central Government
prescribes the Accounting Standards, the
Accounting Standards issued by the ICAI shall
be deemed to be the Accounting Standards.