DELFIN FINANCE P.LTD.,NEW DELHI V. ITO, WARD-7(1), NEW DELHI

ITA 2958/DEL/2019

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Delfin Finance P. Ltd. appealed against the orders of the Learned Commissioner of Income Tax (Appeals)-3, New Delhi, which had confirmed the disallowance of lease equalization charges and depreciation by the Assessing Officer. The Tribunal considered the submissions and the accounting practices followed by the assessee, which were in line with the revised Guidance Note on Accounting for Leases issued by the Institute of Chartered Accountants of India. The Tribunal found that the method of accounting for lease equalization charges and depreciation was consistent with the principles laid down in the guidance note and had been regularly followed by the assessee. Consequently, the Tribunal allowed the appeals, thereby reversing the additions made by the Assessing Officer.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 793086 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 1998-1999
• Appeal Filed On: 04-04-2019
• Other Referred Cases: CIT Vs VIRTUAL SOFT SYSTEMS TO ITA NOS 216/2011, 398/2011, 404/2012 & 680/2011, CIT vs. Virtual Soft Systems Ltd. (Appeal No. 4358 of 2018), Commissioner of Income Tax-VIL, New Delhi vs. Punjab Stainless Steel Industries (2014) 15 SCC 129
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Keywords: Set aside; Reassessment proceedings; Depreciation; Tax effect
• Section: 143(3); 142(1); 145

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER and SHRIS.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.2957/DEL/2019 (Assessment Year: 1997-98) ITA No.2958/DEL/2019 (Assessment Year: 1998-99) Delfin Finance P. Ltd., vs. ITO, Ward 7 (1), C/o L.N. Nangalya & Co., New Delhi. 101, Neelkanth House, S-524, Vikas Marg, Delhi – 110 014. (PAN : AAACD1154D) (APPELLANT) (RESPONDENT) ASSESSEE BY : None REVENUE BY : Shri Rajesh Kumar Dhanesta, Sr. DR Date of Hearing : 02.07.2025 Date of Order : 22.09.2025 O R D E R PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER : 1. The assessee has filed appeals against the order of the Learned Commissioner of Income Tax (Appeals)-3, New Delhi [“Ld. CIT(A)”, for short] dated 04.02.2019 for the Assessment Years 1997-98 & 1998-99. 2. None appeared on behalf of the assessee. We proceeded to hear the appeal with the assistance of ld. DR of the Revenue. Printed from counselvise.com 2 ITA Nos.2957 & 2958/DEL/2019 3. Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. We take up the assessee’s appeal being ITA No.2957/Del/2029 for AY 1997-98 as lead case. 4. At the time of hearing, ld. DR of the Revenue brought to our notice the relevant facts from the assessment order. The relevant facts are, this is second round of appeal wherein Assessing Officer has disallowed the claim of the assessee relating to lease equalization charges to the extent of Rs.44,59,754/- and in the second appellate proceedings, the coordinate Bench has restored back the issue to the file of Assessing Officer to consider the submissions of the assessee and decide the issue afresh. Accordingly, notices u/s 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued. In response assessee submitted vide letter dated 28.12.2015. We are reproducing the relevant part of the same for the purpose of brevity :- “Clarification on lease equalization charge \"Lease Equalization charges have been computed in accordance with the Revised Guidance Note on Accounting for leases issued by the Institute of Chartered Accountants of India. Lease rentals (those received and those due but not received) under a lease should be shown separately under Gross Income in the Profit & Loss Account of the relevant period. It is appropriate that against the lease rental, a matching lease annual charges is made in the profit and loss account. The annual lease charges should represent recovery of the net investment/fair value of the leased asset over the lease term. The said charge should be calculated by deducting the finance Printed from counselvise.com 3 ITA Nos.2957 & 2958/DEL/2019 income for the period from the lease rental for the period. The annual lease charge would comprise lease equalization charge, where the annual charge is more than the annual 'statutory depreciation and minimum statutory depreciation. However, where annual lease charge is less than minimum statutory depreciation, a lease equalization credit would arise. In this regard the following account entries/disclosures should be made- a. A separate Lease Equalization Account should be opened with a corresponding debit or credit to Lease Adjustment Account, as the case may be. b. Lease Equalization Account should be transferred every year to the Profit & Loss Account and disclosed separately: c. Statutory depreciation should be shown separately in the Profit & Loss Account. Accumulated statutory depreciation should be deducted from the original cost of the leased asset in the balance sheet of the lessor to arrive at the net book value. d. Balance sheet in lease Adjustment Account should be adjusted in the net book value of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet the Fixed Assets Schedule as a separate column in the section related to leased assets. e. The aggregate amount included under lease Adjustment Account on account of lease equalization credits should be disclosed separately The finance income for the period should be calculated by applying the interest rate implicit in the lease to the net investment in the lease during the relevant period. This method would ensure recognition of net income in respect of a finance lease at a constant periodic rate of return on the lessor's net investment outstanding in the lease. This principal has been laid down by the statute and has been followed by the assessee company. In totality the assessee company has considered its lease rental income over a period of time and has paid tax.” 5. Further vide order sheet dated 07.11.2016, the assessee was asked to explain on the issue of depreciation and also to furnish the working of lease equalization charges. In response, assessee submitted vide letter dated 11.01.2016 as under :- “Reg. Income Tax Assessment u/s 143(3) for A.Y 1997-98 and 1998-99 in case of M/s Delfin Finance Private Limited Printed from counselvise.com 4 ITA Nos.2957 & 2958/DEL/2019 Dear Sir Reference to the above it is submitted as follows: Regarding the matter of disallowance: of depreciation the detailed reply has been submitted for A.Y 1996-97. Regarding the matter of the Lease equalization charge it is submitted. that, lease rent income comprises of the following :- (a) Interest recovery (IRR) on the capital value of an asset. (b) Recovery of the capital value of an asset The Institute of Chartered accountants of India has issued a guidance note on lease equalization charge according to that all the finance companies are required to maintain their financial books of accounts. A detailed discussion on the lease equalization charge has been submitted in our reply dated 28/12/2015. The assessee company has accounted for the interest income and recovery of depreciation (wear and tear) as applicable and the difference whether negative or positive has been kept under an account named lease equalization charge, which over the years will be taxed accordingly. The same view has been considered by Diehl High Court in CIT Vs VIRTUAL SOFT SYSTEMS TO ITA NOS 216/2011, 398/2011, 404/2012 & 680/2011 dated 07.02.2012 (which has been placed on record) under which the court has considered that above method of accounting followed by the assessee enable it to determine the real income which was offered to tax. The Assessing officer by adding back the lease equalization charge, added to taxable income of the assessee that which is not part of its income, but only an adjustment of the amount claimed as depreciation. Hence the lease equalization charge should not be added to its income of the assessee company.” 6. Not satisfied with the submissions of the assessee, another show-cause notice dated 08.02.2016 was issued. Since assessee has not filed any reply to the abovesaid notice, the Assessing Officer proceeded to disallow the lease equalization charges of Rs.44,59,754/- and depreciation claimed by the assessee to the extent of Rs.24,35,000/-. Printed from counselvise.com 5 ITA Nos.2957 & 2958/DEL/2019 7. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-3, New Delhi and filed detailed submissions as under :- “Assessee company was initially assessed on 22.03.2000 by making the audition of Rs.44,59,745/- on account of lease equalization charge which was created by assessee as per Guidance Note issued by Institute of Chartered Accountant of India. And Rs.24,35,000/- on account of depreciation by invoking explanation 3 & 4A to section 43(1) of the act.. The assessee went to appeal upto TAT Delhi and Tribunal set aside the case to the file of Assessing Officer. The case was again re-assessed by assessing officer Ward 7(1) New Delhi vide order dated 31. 12.2016 and confirmed the addition. During the course of initial assessment proceedings, it has been established that assessee company is engaged in business of leasing and finance and lease equalization charge has been created as per the Guidance Note issued by Institute of Chartered Accountant of India and has been accepted by assessing officer also but the assessing officer has taken the plea that this Guidance Note has not been approved by tax authorities and on this around made the addition. During the course of re-assessment proceedings, assessing officer has confirmed that Assessee has created a lease, equalization charge as per Guidance Note but confirmed the addition It is further submitted that assessment order dated 31.12.2016 was not served to the assessee company. Assessee company came to know about the facts when penalty notice was served to the counsel. The certified copies of the order were received on 28.06.2017. During the course of initial assessment proceedings it has been established by A.O in his order dated 2703.2001 that Assessee company has created a Lease Equalization Charge as per the Guidance Note issued by Institute of Chartered Accountants of but made the addition due to non clarity of act at that time. Also the same has been confirmed during the course of reassessment proceedings Relevant provisions of the guidance note on accounting for lease, revised in 1995, is as under. Accounting for leases in the Books of a lessor Finance Leases 9. Assets leased under finance leases should be disclosed as \"Assets given on lease\", as a separate section under the head \"Fixed Assets\" in the balance sheet of the lessor. The classifications of Assets given on lease' should Printed from counselvise.com 6 ITA Nos.2957 & 2958/DEL/2019 correspond to that adopted in respect of other fixed assets. In addition to the particulars required by statute, eg. Schedule VI to the Companies Act, 1956, particulars relating to Lease Adjustment Account should be disclosed as stated in Para 17. 10. Lease rentals (those received and those due but not received) under a finance lease should be shown separately under 'Gross Income' in the profit and loss account of the relevant period. 11. It is appropriate that against the lease rental, a matching lease annual charge is made to the profit and loss account. This annual lease charge should represent recovery of the net investment/ fair value of the leased asset over the lease term. The said charge should be calculated by deducting the finance income for the period (as per para 12 below) from the lease rental for that period. This annual lease charge would comprise (i) minimum statutory depreciation (e.g., as per the Companies Act, 1956) and (ii) lease equalization charge, where the annual lease charge is less than minimum statutory depreciation. However, where annual lease charge is less than minimum statutory depreciation, a lease equalization credit would arise. In this regard the following accounting entries / disclosure should be made. (a) A separate Lease Equalization Account should be opened with a corresponding debit or credit to Lease Adjustment Account, as the case may be. (b) Lease Equalization Account should be transferred every year lo the profit and loss account and disclosed separately as a deduction from/ addition to gross value of lease rentals shown under the head \"Gross Income (c) Statutory depreciation should be shown separately in the profit and loss account. Accumulated statutory depreciation should be deducted from the original cost of the leased asset in the balance sheet of the lessor to arrive at the net book value. (d) Balance standing in Lease Adjustment Account should be adjusted in the net book value of the leased asset. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in Fixed assets Schedule as a separate colųmn in the section related to leased assets. (e) The aggregate amount included under Lease Adjustment Account on account of lease equalization credits should be disclosed separately. The method of income measurement suggested in this paragraph, is in consonance with the inherent nature of a finance lease. The above method is illustrated in the Appendix to this Guidance Note. Printed from counselvise.com 7 ITA Nos.2957 & 2958/DEL/2019 12) The finance income for the period should be calculated by applying the interest rate implicit in the lease to the net investment in the lease during the relevant period. This method would ensure recognition of net income in respect of a finance lease at a constant periodic rate of return on the lessor's net investment outstanding in the lease. however, some lessor use a simpler method for calculating the finance income for each of the periods comprising the lease term by appropriating the total finance income from the lease n the ratio of minimum lease payments- outstanding during each of the respective periods comprising the lease term. (The total finance income from the lease is the difference between the aggregate minimum lease payments receivable over the lease term, and the fair value of the leased asset at the inception of the lease.) This method may be used where the finance income in respect of all individual periods as per this method approximate the finance income for the corresponding periods determined according to the former method. It is however clarified that where this method is used, overdue lease rentals, ie., lease rentals fallen due but not collected should not be taken into account for determining the amount of minimum lease payments outstanding during each of the respective periods comprising the lease term. The books of accounts of the assessee company were audited by M/s Metra Sistani Chartered Accountants Delhi and this aspect of guidance note and its treatment has been disclosed at point No 3 of notes to the accounts forming part of the audited balance sheet Which is being reproduced below: Lease Income. a. Lease income is recognized on the basis of internal rate of return on the amount financed. The residual of lease rental, after income, is debited to lease equalization charge net of depreciation as per schedule xi' of the companies act 1956. b. As per revised guidance note on accounting for lease issued by institute of chartered accountants of India, lease rental in respect of financial lease have to be accounted for whenever they fall due. The guidance note was properly followed by the company by 1) Assets amounting to Rs.33722685 (gross cost) leased under finance leases has been disclosed as \"Assets given en lease\", as a separate section under the head “fixed Assets\" in the balance sheet 2) Lease rentals amounting to Rs. 2651849/- (those received and those due but not received) under a finance lease has been shown separately under 'Gross Income' in the profit and loss account. 3) Lease equalization charge Rs. 44, 59, 754 has been made after considering the depreciation as per companies act Rs.48,57,778 and disclosed under income head by reducing the lease rental. Lease adjustment account of Rs.45,02,952/- has been adjusted under the fixed assets schedule. Printed from counselvise.com 8 ITA Nos.2957 & 2958/DEL/2019 From the above discussion it can be said that assessee company has followed the guidance note parameters at the time of finalization of books of accounts Hon'ble supreme court in case of Virtual soft systems Limited CIVIL APPEAL NO 4358 OF 2018 held that: The method of amounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991. It is a cardinal principle of law that the difference between capital recovery and interest or finance income is essential for accounting for such a transaction with reference to its substance. If the same was not carried out, the Respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to the principles of the IT Act, and to its scheme and spirit. The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purpose of income tax. Moreover, we do not find any express bar in the. IT Act, which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. The repayment of principal would be a balance sheet item and not a revenue item. Only the interest earned would be a revenue receipt chargeable to income tax. Hence, we do not find any force in the contentions of the revenue that whole revenue from lease shall be subjected to tax under the IT Act. Without a doubt, in a catena of cases, this court has discussed the relevancy of the Guidance Note. While dealing with one of such matters, this court, in commissioner of Income Tax-VIL, New Delhi us. Punjab Stainless Steel Industries (2014) 15 SCC 129 held as, under: “17 So as to be more accurate about the word “turnover\", One can either refer to dictionaries or to material which are published by bodies of Accountants. The Institute of Chartered Accountants of India (hereinafter referred to as the \"ICAI) has published some material under the head \"Guidance Note on Tax Audit under Section 44B of the Income Tax Act\". The said material has been published so as to guide the members of the ICAI n our opinion, when a recognized body of Accountants, after due deliberation and consideration publishes certain materials for its members, one Can rely upon the same...\" Printed from counselvise.com 9 ITA Nos.2957 & 2958/DEL/2019 In the present case, the relevant Assessment year is 1999-2O00. The main contention of the Revenue is- that the Respondent cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the Respondent can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculations, it is obvious that the Respondent has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applying such method which is prescribed in the Guidance Note the Respondent can show fair and real income which is liable to tax under the IT Act. Therefore, it is wrong to say that the Respondent claimed deduction by virtue of guidance note rather it only applied the method of bifurcation as prescribed by the expert team of 1CAI. Further, a conjoint reading of section 145 of the IT Act read with Section 211 (un-amended) of the Companies Act make it clear that the Respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the statute, the Court may take the help of external aid. If a term is not defined in a statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act.\" 8. After considering the above submissions, ld. CIT (A) rejected the same and sustained the additions by observing as under :- “5.3 I have considered the facts of the case and the submission made by the AR. It has been contended that the lease equalization charges have been claimed by following the guidance note issued by ICAI. The AR has explained the guidance note in the written submission and has also relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. Virtual Soft Systems Ltd. (Appeal No. 4358 of 2018). I have perused the said decision of the Apex Court. It is observed that the Hon'ble SC, considering the facts of the case has held that, lease equalization charges is a deductible Expenditure, as the essence of the accounting entries, is to only capture the finance income, which is the real income, in case of such transactions. However, it is to- be observed that one has to bear in mind that the proposition that accounting entries, Guidance Note of the ICAI, etc. determines the real income is limited to the facts of the case. In the present case, it has already been observed that the appellant is engaged in buying second hand assets and leasing them back to the sellers which results in inflated claim of depreciation. At the same time, lease rental on these assets accrue to the appellant which is required to be shown by the appellant as income and since the whole motive of such transactions is to reduce the taxable income, the appellant is using the pretext of the guidance note of ICAI in order to reduce the taxable lease rental by deducting lease equalization charges. By doing so, .the appellant wants to Printed from counselvise.com 10 ITA Nos.2957 & 2958/DEL/2019 enjoy double benefits i.e, the inflated depreciation on second hand assets and reduced lease rentals. It needs to be appreciated that such a scheme of tax evasion cannot be allowed to the appellant as the AO is not supposed to put on blinkers. In view of these facts, I am of the opinion that the appellant is not entitled for claim of lease equalization charges as the same have been claimed by the appellant with the intention to reduce its real income and therefore, the addition made by the AO is upheld and the ground of appeal is dismissed.” 9. Aggrieved assessee is in appeal before us raising following grounds of appeal :- “1. That on the facts and in the circumstances of the case and in law, Ld. CIT (A) erred in confirming the addition of Rs.24,35,000/- on account of depreciation which was claimed by appellant as per applicable law. 2. That on the facts and in the circumstances of the case and in law, Ld. CIT (A) erred in confirming the addition of Rs.42,82,685/- on account of lease equalization charge which was created by appellant as per the guidance note issued by Institute of Chartered Accountants of India.” 10. Ld. DR after narrating the facts on record submitted that he relied on the findings of the lower authorities since assessee could not convince the lower authorities. 11. Considered the rival submissions and material available on record. We observe that the assessee is carrying on the business of finance, leasing and its activities include hire and purchase of assets, inter corporate deposits and bill discounting etc. Assessee is involved in the finance leasing business. During the year under consideration, assessee has purchased two boilers from different companies and these assets were given on lease during the year under consideration. We observe that assessee has followed and computed the lease equalization charges in accordance with the revised Guidelines Note on Accounting for lease Printed from counselvise.com 11 ITA Nos.2957 & 2958/DEL/2019 issued by the Institute of Chartered Accountants of India. Accordingly, assessee has declared the lease rentals separately under gross income in its Profit & Loss account. Based on the above Guidelines Note, against the abovesaid lease rental income, matching lease annual charges are charged to the Profit & Loss account. The annual lease charges represent recovery of the net investment/share value of lease asset over the leased term. It is calculated by deducting the finance income for the period from the lease rent for the period. The annual lease charges comprise of lease equalization charges, where the annual charge is more than the annual statutory depreciation and minimum statutory depreciation. The treatment depends upon whether the annual lease charge is less than the minimum statutory depreciation or more than the minimum statutory depreciation, the lease equalization credit would arise. Accordingly the same is being treated in their books of account. Therefore, where the lease equalization charges are claimed by the assessee when the lease charges are less than the minimum statutory depreciation and the same is claimed as expenditure in their books of account, this is on top of the regular depreciation claimed by the assessee. This is so happened that in this assessment year, the annual charges recorded by the assessee is less than minimum statutory depreciation, therefore, the assessee has claimed the same as expenditure during the year. In case, the annual charges are Printed from counselvise.com 12 ITA Nos.2957 & 2958/DEL/2019 more than the minimum depreciation, the assessee will record as income or credit to the depreciation account. 12. Since this is a standard accounting policy which assessee has already declared in its books of account and it follows regularly as per the Guidelines Note issued by ICAI. Since it is being regularly followed accounting standard and which is also properly declared in the financial statements, the same cannot be rejected by the tax authorities. The assessee is regularly following the abovesaid method of accounting, there is no loss to the Revenue which equalizes the tax effect in the subsequent assessment years. Therefore, we do not see any reason to disturb the accounting method adopted regularly by the assessee. Accordingly, the grounds raised by the assessee are allowed. 13. In the result, the appeal filed by the assessee for AY 1997-98 is allowed. 14. With regard to AY 1998-99, since the facts are exactly similar to AY 1997-98 our above findings in AY 1997-98 are applicable mutatis mutandis in AY 1998-99. Accordingly, the appeals filed by the assessee being ITA No.2958/Del/2019 for AY 1998-99 is allowed. 15. To sum up : both the appeals filed by the assessee are allowed. Order pronounced in the open court on this 22nd day of September, 2025. Sd/- sd/- (SATBEER SINGH GODARA) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 22.09.2025/TS Printed from counselvise.com 13 ITA Nos.2957 & 2958/DEL/2019 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals). 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI Printed from counselvise.com "