7/19/2019 A New Era Dawns for Lease Accounting - Ind AS 116 and its Tax Ramifications!

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A New Era Dawns for Lease Accounting - Ind AS 116 and its Tax
Rami cations!
April 23,2019 Rate this story:          

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K. R. Girish (K. R. Girish & Associates)

Whether interest element/ nance cost which is part lease rentals paid to a NR-AE will be subject to
restriction on deduction under section 94B of the Act?

Earlier, in an operating lease arrangement, lease rentals were charged to the P&L as per AS 19. Now, Ind
AS 116 has split the lease rentals and requires it to be disclosed as interest expenditure and
amortization charges. Under provisions of section 94B, maximum interest paid to NR-AE is restricted to
30% of EBITDA. Whether interest and amortization charges will be increased while determining
EBITDA for section 94B of the Act?

·Rule 11UA of the Income-tax Rules, 1962 ('the Rules') prescribes method of valuation of property and
shares in an entity. One of the methods prescribed by the Rules is to value shares based on Net Book
Value of the entity, considering net of assets and liabilities. Whether the lease liability and right of use
asset will be included while determining value of shares in an entity under Rule 11UA, especially where
the BS is contains majority of assets under operating lease arrangement?

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7/19/2019 A New Era Dawns for Lease Accounting - Ind AS 116 and its Tax Ramifications! | Taxsutra

·While determining book pro ts under section 115JB of the Act, depreciation on revalued assets is not
eligible for deduction. An ongoing lease arrangement will also have to be recognized by the company
based on Ind AS 116. Could the tax authorities contest deduction of depreciation/ amortization stating
that the leased asset was used by the Company prior to 1 April 2019 and hence, recognizing the same
now in BS is nothing but revaluation of asset?

·While determining book pro ts under section 115JB of the Act, there is an adjustment to be made for
the value of unabsorbed depreciation or brought forward loss whichever is lower. Under Ind AS 17, for
a company running in loss, the total lease rentals will add to the existing business loss.

Under Ind AS 116, the lease rentals are split into 'interest/ nance cost' and 'amortization'. The
amortization charges will form part of unabsorbed depreciation and nance cost will be added to
business loss. In such case, whether there should be an effect in the quantum of adjustment in the book
pro t as compared to Ind AS 17?

Conclusion

To sum up, Ind AS 116 prescribes a signi cant change in recognizing a lease arrangement for a lessee, to
provide better visibility to the users of the nancial statements. However, the consequent tax
implications, not restricted to the points discussed above, are debatable unless clari ed by the Central
Board of Direct Taxes ('CBDT') will put assesee's into unnecessary litigation.

The article is co-authored by Ms. Veena Ramachandran.

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