Delfin Finance P. Ltd. Vs ITO (ITAT Delhi)
ITAT Delhi Upholds Lease Equalization – ICAI Guidance Note Recognized as Valid- Consistent Accounting Method Cannot Be Rejected
Assessee, engaged in finance leasing, had claimed lease equalization charges computed as per the revised Guidance Note on Accounting for Leases issued by ICAI. AO disallowed lease equalization charges of Rs.44.59 lakh & depreciation of Rs.24.35 lakh on the ground that ICAI’s guidance note was not binding on tax authorities & that Assessee was trying to reduce taxable income by claiming dual benefit of depreciation & lease equalization. CIT(A) upheld the disallowance alleging that Assessee purchased second-hand assets, claimed inflated depreciation & simultaneously reduced lease rentals through lease equalization.
Before Tribunal, it was argued that lease equalization charge is a standard accounting treatment recognized by ICAI to capture only real income from lease transactions, by bifurcating capital recovery & finance income. Assessee pointed out that its accounts were duly audited, the method consistently followed, & that SC in Virtual Soft Systems Ltd. Vs CIT (CA No.4358/2018) had upheld validity of lease equalization as essential for reflecting real income.
Tribunal observed that lease equalization charge represents only an adjustment mechanism to align lease rentals with statutory depreciation, ensuring recognition of finance income at a constant periodic rate of return. It is a standard accounting policy, regularly followed by Assessee & duly disclosed in audited financial statements. Since the method neutralizes itself over years & causes no loss to Revenue, disallowance was unjustified. Tribunal emphasized that once accounts are consistently maintained in accordance with ICAI guidance, tax authorities cannot disregard them without cogent reasons. Accordingly, Tribunal allowed the appeals, deleting additions for both years.
