# Application of AS-22 on AS-19

Esha Agrawal

Hello everyone thanks for the appreciation for my last article “why AS 22 is applied”, coming with another article application of AS-22 on AS -19 “leases”. I am writing this article to discuss with you all how AS- 22 deferred taxes is applied on AS-19

There are two types of lease

1)      Financial lease

2)      Operating lease

Financial lease is lease where risk and reward are also transferred to lessee by lessor

Operating lease means lease other than financial lease

In case of financial lease we get the ownership of asset so we charge depreciation on asset but in case of income tax they don’t consider asset on lease as an asset so depreciation and finance charges are not allowed, only lease rentals paid are allowed as expense. So DTA/DTL are created on such difference

ILLUSTRATION

Ram took one machine on lease whose fair value was Rs 100000. Agreed lease rentals were

 Y0 10000 Y1 39000 Y2 26000 Y3 34000

Guaranteed residual value on lease was Rs 10000

Rate of interest 10%, Expenses on lease nil, Tax rate 30 %, life of machine 3 years

SOLUTION

Calculation of value of machine

Lower of following

1)      Fair value

OR

2)      P.V. of minimum lease payments from standpoint of lessee

 Year Lease rental discount P.V. Y0 10000 1 10000 Y 1 39000 0.909 35451 Y 2 26000 0.826 21476 Y3 44000 0.751 33044 TOTAL                                             99971

So value of machine Rs 99971(lower of fair value rupees 100000 or P.V. of MLP RS 99971)

Calculation of finance charges
 Y0 Loan 99971 Instalment Interest Y0 Less:-     down payment 10000 Balance:- 89971 39000 8997 Y1 Less:- paid 30003 Balance:- 59968 26000 5997 Y2 Less:- paid 20003 Balance:- 39965 44000 4035(balancing figure) Y3 Less:- 39965

Finance charges is just like a loan account here value of machine is rupees 99971 of which Rs 10000 is down payment so balance payment is Rs 89971 on which interest is levied @ 10% Rs 8997 for 1styear , instalment paid at the end of 1st year Rs 39000 so principal payment is Rs 30003. Now the outstanding amount in the second year is Rs 59968 on which interest is levied at the end of 2nd year @ 10% Rs 5997, instalment paid Rs 26000 so principal payment is Rs 20003 and so on.

Effects in accounts and taxation

 Accounts treatment                                      Tax treatment     Timing difference     Deferred tax Years finance charges depreciation Instalments 1 8997 33324 49000 6679 2004(DTL) 2 5997 33324 26000 13321 1993(DTA) 3 4035 33323 44000 6642 1993(Reversal of DTA)

For accounting purpose the lease asset is treated as asset so depreciation is charged on asset and finance charges on outstanding loan amount, in the first year total deduction allowed as per accounting purpose is Rs 42321, for tax purpose, lease asset do not consider as asset so depreciation and finance charges are not allowed, only lease rentals are allowed which is Rs 49000, the amount of deduction allowed for tax purpose exceed the deduction allowed for accounting purpose by Rs 6679 and therefore taxable income is lower than the accounting income. This gives rise to deferred tax liability is of Rs 2004, in second year deduction for accounting purpose is Rs 39321 and deduction for taxation purpose is Rs 26000, accounting income is more than is more than taxable income, this gives rise to DTA Rs 1993(Rs 3993 minus 2004 opening balance of DTL), 3rd year deduction allowed for taxation purpose exceeds deduction allowed for accounting purpose so DTA created in second year Rs 1993 is reversed in 3rd year.

This is the treatment of AS-22 on AS-19

So i have discussed just a part of this accounting standard, Hope you enjoyed reading the article and gain some knowledge from this. If you have any queries please ask me i will try to solve it, you can mail me at eshaag6@gmail.com.

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### 0 responses to “Application of AS-22 on AS-19”

1. Raj Prakash says:

Basis the view presented above, Lessee shall capitalise asset both in books and tax and hence depreciation shall be claimed by Lessee under books and tax both. Therefore technically speaking there will not be any timing difference as such.

Hence deferred tax shall not be recognised under AS-22 for finance lease transaction under AS-19.

2. Raj Prakash says:

Thanks Esha for your informative article. I just wanted to give you filler of the recent practice being followed across the leasing industry.

Under Income-tax Act, 1961, there is no any classification of operating and finance lease. There lease means only operating lease.

CBDT has clarified that the owner of the asset is entitled to the depreciation if the same is used in the business, under section 32 of the Act. However, there are contradictory judgments over treating the lessee as owner in substance.

In the year 2012, in a landmark judgment, Delhi High Court in the case of “CIT vs. The Installment Supply Ltd (2012) Income Tax Appeal No. 442/2007 (Delhi High Court)”, upheld the concept of finance lease and confirmed that lessee is entitled to the depreciation being the beneficial owner.

Further proposed Direct Taxes Code also specifically defines finance lease and allows depreciation to the lessee in the case of finance lease.

In such a case, Currently Lessee will capitalize the assets under both books maintained under Companies Act and for tax purposes. Also Lessee would be eligible to claim the depreciation under Income-tax. Payment of lease rentals for right to use asset may then not be treated as rent payments under section 194-I of the Act.

Hope you will appreciate the views presented above. This will give the broad view of finance lease transaction under current scenario.

Thanks

3. pradeep jain says:

Hello Esha,

Article is greate. please keep writing and do share the knowledge.

Regds

4. pradeep jain says:

Hello Esha,

Article is great. Please keep writing and share the knowledge.

Regds

5. Srinivasan says:

6. Unnikuttan says:

” in second year deduction for accounting purpose is Rs 39321 and deduction for taxation purpose is Rs 26000, accounting income is more than is more than taxable income, ”

I think u made a mistake.. leave it if not and correct me..
replace as ” taxable income is more than accounting income”

7. Unnikuttan says:

” in second year deduction for accounting purpose is Rs 39321 and deduction for taxation purpose is Rs 26000, accounting income is more than is more than taxable income, ”
I think u made a mistake.. leave it if not and correct me..

replace as ” taxable income is more than accounting income”

8. Krishan says:

Hi Esha,

very good article ,

i am not sure why Y3 will have 44K as Lease rental ,i think you have added 10K for the resudual part ,if yes i thought it should be reduced .Money will get collected after third year right?

not sure

9. Dheeraj Goyal says:

Hi Esha

Thanks for your Informative article.

Keep Writing

Rg.
Dheeraj Goyal

10. Vishal says:

Good Article. Never encountered such a situation so far, so very useful.

11. Harish says:

Hi Esha

Very nice and informative article. Keep writing.

Regards
Harish

12. Satya Rakesh says:

Hi Esha,

A good article

Rg
Satya