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Doubts on Lease Accounting

M.Sriram Shenoy (CA Final) (814 Points)

28 April 2008

Please Clarify my doubt. A company (Public ltd company) has taken cars on operational lease (status of the lessor unknown). The said company have made additions to the said cars such as fixing of LCD tv, new seat covers, music system, photoelectric glass windows etc. The company is of the view to charge all such expenses in relation to all cars to revenue. Is this practice right?The lease deed is silent in this regard. If there are any relevant tax implications, then do let me know.

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A.Deepa (CA ) (195 Points)
Replied 02 May 2008

In the above case the Public Ltd Co has taken a car on Operating Lease. As per AS-19 Accounting for Leases, the lease which is in the nature of Finance lease has to be capitalized in the books of Lessee.

Simple meaning of finance Lease is the purchaser will be given the option to buy an asset at the end of Lease period just like in Hire Purchase. In the above case since the Lease is in the nature of Operating

Lease the amount spent for fixing L.C.D t.v, New seat Covers, music system, photoelectric glass windows etc has to be treated it as revenue because in case of operating Lease the original owner is Lessee. If the Additions made to the asset can be used separately (i.e without car) after the lease period and if the co has a right over it then it can be capitlised in their books depending on the usefl life of the asset as per AS-10.

The view of the company is right.

Moreover As-19 issued by ICAI does not have any implication on Income Tax Act vide Circular No.2 dated 9-2-2001.

By A.Deepa (CA Final).