ICAI Accounting Standards differentiating Lease Transactions has no relevance in allowing Deduction: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) that the Accounting Standards differentiating lease transactions has no relevance in granting deduction under section 37 of the Income Tax Act, 1961 as the Act does not recognize or differentiate between different types of lease transactions.

As per the provisions of the Income Tax Act, any expenditure incurred on capital assets cannot be allowed as a deduction of expenditure, however, an assessee can claim depreciation as prescribed by the rules on the value of such an asset, the Tribunal said.

The assessee, M/s Fastway Transmission (P) Ltd is engaged in the business of Multi-System Operators and Digital Cable Services (DCS). The DCS services are rendered to the customers through set-top boxes. The assessee acts as an intermediate between local cable operators and broadcasters. The assessee for the assessment year under consideration declared a loss in the return of income.

The AO, after analyzing the various clauses of the agreement entered into by the assessee with CISCO, held that the assessee had entered into a finance lease agreement with CISCO and was entitled to claim depreciation on the assets so leased. Accordingly, the Assessing Officer disallowed the claim of deduction of the Principal component of the lease rentals made by the assessee and allowed depreciation @15% on the leased assets, thus resulting in an addition. The assessee appealed against the order of the Assessing Officer before the CIT(Appeals) but could not succeed on any of the issues raised.

The tribunal headed by a Vice President N.K. Saini and a Judicial Member  Sanjay Garg held that the assessee that the Income Tax Act does not recognize or differentiate between different types of lease transactions.

Allowing the contentions of the assessee, the Tribunal held that “the Income Tax Act does not recognize or differentiate between different types of lease transactions. As per the provisions of the Income Tax Act, any expenditure incurred on capital assets cannot be allowed as a deduction of expenditure, however, an assessee can claim depreciation as prescribed by the rules on the value of such an asset. However, if such an asset, as claimed in this case by the assessee, is not owned by the assessee, rather, the same has been procured on the lease or hire basis to be used solely for the business purpose of the assessee, the hire charges/lease rental paid for such an asset will be admissible as revenue expenditure u/s 37 of the Act. In this case, the Revenue has tried to draw a distinction between two types of leases classifying them as operating lease and finance lease as per guidelines issued by the ICAI vide AS-19. We find that AS-19 has been prescribed by the ICAI to be followed for maintaining the account books by the companies. However, so far as the Income Tax Act is concerned, the same has no relevance. There is no provision under the Income Tax Act differentiating between Operating Lease and Finance Lease.”