Case Law Details
Banks undertaking equipment leasing departmentally should follow prudential accounting system and only the interest charge component should be recognized as income and the recovery of cost of asset should be carried to balance sheet on the form of provision of depreciation. Therefore under the circular the transaction of equipment lease is treated at par with the loan transaction and accordingly only the interest component of the receipt is recognized as income. Since it is not permitted to recognize the entire receipt being lease rentals as income the assessee has also recognized only interest component of the receipt of the lease rental as income in the profit and loss account and the balance which represents the capital component is taken to the balance sheet. Thus, in the books of account, the assessee has treated the transaction in question as finance lease and not as an operating lease because the banks are permitted only to carry out the transaction of finance lease of equipments.
It is pertinent to note that in case of /CDS Ltd. (supra) it was not a lease by a bank but the assessee in the said case is a non-banking financial institution and one of the business of the assessee was leasing out the vehicles as the facts recorded by the Hon’ble Supreme Court in para 2 of the said decision as under:
“2. The assessee is a public limited company, classified by the Reserve Bank of/ndia (RB/) as a non-banking finance company. /t is engaged in the business of hire purchase, leasing and real estate etc. The vehicles, on which depreciation was claimed, are stated to have been purchased by the assessee against direct payment to the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. /n fact, lessees were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, /988 (hereinafter referred to as “the MV Act”).”
Therefore the Hon’ble Supreme Court has decided the issue in the case of non-banking financial company which is engage in the business of leasing whereas in the case of bank it is not permitted under the Banking Regulation Act to engage in the business of leasing of equipments. Following the decision of Special Bench of this Tribunal in case of Indusind Bank Ltd., we hold that the transaction in question is finance lease and not operating lease. Accordingly, we uphold the orders of the authorities below qua this issue.
Source- State Bank of India vs. DCIT (ITAT Mumbai), I.T.A. No. 5470/Mum/2002, Dt. Of Pronouncement: 26th July 2013
