CPT V24P7-Art1 (Content).pmd - Taxmann

Direct Tax Laws
680
(e) The aggregate amount included under
Lease Adjustment Account on account
of lease equalization credits should
be disclosed separately.
The method of income measurement
suggested in this paragraph, is in
consonance with the inherent nature of
a finance lease.”
Thus, the “guidance notes” effective till AS 19
was issued, made it obligatory on the part of
the companies to debit to the lease rentals,
annual lease charge comprising of minimum
statutory depreciation and lease equalization
charge, where the annual lease charge is more
than the minimum statutory depreciation.
On 1-4-2001 Accounting Standard AS 19 about
accounting of leases was for the first time
published by the ICAI and was made effective
in respect of leases commencing on or after
that date. AS 19 provides accounting of “Leases”,
appropriate accounting policies and disclosure
in relation to finance leases and operating leases.
Para 26 thereof provides that lessor should
recognize asset given under finance lease in
its balance sheet as receivable at an amount
equal to the net investment in the lease. As
per para 27 thereof the lease payment receivable
is treated by the lessor as repayment of principal,
i.e., net investment in the lease and finance
income to reimburse and reward the lessor for
its investment and services. As per para 28
finance income is recognized on the basis of
a constant periodic rate of return on the net
investment of the lessor outstanding in respect
of the lease.
Hon'ble High Court noticed that there is no
conflict between AS 19 and any provision of
the IT Act. Further, the Government has not
notified any Accounting Standards in respect
of lease, even though it has notified other
Accounting Standards as required under section
145(2). Therefore, the Hon'ble High Court in
the impugned judgment took the view that
recognition of revenue out of lease rentals will
be governed by AS 19 by apportionment of
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lease rentals into capital recovery and finance
charges. There is a rationale in such an
apportionment. Depreciation claimed according
to the IT Act or according to the Companies
Act may not always be equal to actual reduction
in value of the asset with passage of time and
due to wear and tear. The market value (residuary
value) of the leased asset at the end of the
lease period may not be equal to the written
down value (WDV). The difference between
the residuary value (Say RV) of the leased
asset and its written down value is adjusted
yearly by an amount called the “lease equalization
charges”. It can be positive, meaning thereby
that RV is more than WDV. It will result into
a profit chargeable to tax. From the same logic
if RV is less than the WDV, then the lease
equalization charge will be negative and will
be a charge on the profit. Thus, “lease
equalization charges” are yearly adjustment
entries to act as supplement to, or recovery
from, statutory depreciation claimed and debited
to P/L account and signify full recovery of
value of asset reduced during the lease period.
This can be claimed in the profit and loss
account.
The concept of apportionment of receipt into
capital and revenue can also be understood
from EMIs received by a finance company on
grant of a housing loan or a car loan. EMIs
consist of return of principal and interest and
entire loan along with interest is paid back at
the end of the term of the loan. What is taxed
in the hands of the lender is not the entire EMI
received by the lender but only the interest
part of it. The other part is the recovery of
capital advanced as a loan.
Theoretically the concept of real income is
applicable when there is technical or legal
right to receive an income but really no income
is received due to factors beyond the control
of the assessee. In State Bank of Travancore v.
CIT [1986] 24 Taxman 337 (SC) question of
interest on sticky loans accrued to the assessee
was involved: In Godhra Electricity Co. Ltd. v.
CIT [1997] 91 Taxman 351 (SC) issue regarding