2.2  Query:     

  Taxability of lease equalisation charge/credit.

1. The querist has drawn the attention of the Expert Advisory Committee to the ‘Guidance Note on Accounting for Leases’, issued by the Institute of Chartered Accountants of India, according to which the difference between annual lease charge and the statutory depreciation is to be treated as lease equalisation charge/credit and is debited or credited to profit and loss account as the case may be. The Guidance Note also recommends that the lease equalisation charge should be reduced from the lease rentals for disclosure and vice versa.

2.The querist has sought the opinion of the Expert Advisory Committee as to whether lease equalisation charge if debited to profit and loss account is an allowable expenditure for income-tax and if lease equalisation credit is credited to profit and loss account, whether it would be taxed as income for the purpose of Income-tax.

                                                                              Opinion                              February 8, 1995

1.The Committee is of the opinion that the purpose of creating lease equalisation charge/credit is to determine the net income from the lease for accounting purposes only, e.g., for preparation of profit and loss account and balance sheet under the Companies Act, 1956, in case of a company. The taxable income in respect of the leased asset has to be determined in accordance with the relevant provisions of the Income-tax Act, 1961, which may differ from the income from the leased asset as determined for accounting purposes.

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