Preamble
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.

In the case of conflict between the provisions of the Income-tax Act, 1961(„the Act‟) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

Scope
1. This Income Computation and Disclosure Standard shall be applied for leases other than:
(a) lease agreements to explore for or use of natural resources, such as oil, gas, timber, metals and other mineral rights;
(b) licensing agreements such as agreement of motion picture film, video recording, play, manuscript, patent and copyright;
(c) lease agreements to use lands.

2. This Income Computation and Disclosure Standard shall apply to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. This Income Computation and Disclosure Standard shall not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other.

Definitions
3 (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
       (a) A “lease” is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments 
           the right to use an asset for an agreed period of time and includes a hire purchase agreement.
       (b) A “finance lease” is a lease that transfers substantially all the risks and rewards incident to ownership of an asset.
       (c) An “operating lease” is a lease other than a finance lease.
       (d) A “non-cancellable lease” is a lease that is cancellable only: 
           (i) upon the occurrence of a remote contingency; 
           (ii) with the permission of the lessor; 
           (iii) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or 
           (iv) upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is 
               reasonably certain.
      (e) The “inception of the lease” is the earlier of the date of the lease agreement and the date of a commitment by the
           parties to the principal provisions of the lease.
      (f) The “lease term” is the non-cancellable period for which the lessee has agreed to take the asset on lease together 
          with any further periods for which the lessee has the option to continue the lease of the asset, with or without
          further payment, which option at the inception of the lease it is reasonably certain that the lessee will exercise.
     (g) “Minimum lease payments” are the payments over the lease term that the lessee is, or can be required, to make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with any residual value guaranteed by or on behalf of the lessee. Where the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable and that option, at the inception of the lease, is reasonably certain to be exercised, the minimum lease payments shall comprise of minimum payments payable over the lease term and the payment required to exercise the purchase option.
     (h) “Fair value” is the amount for which an asset could be exchanged or a liability could be settled between
          knowledgeable and willing parties in an arm‟s length transaction. 
      (i) “Economic life” is either: 
         (i) the period over which an asset is expected to be economically usable by one or more users; or
         (ii) the number of units expected to be obtained from the asset by one or more users. 
      (j) “Useful life” of a leased asset is either:
         (i) the period over which the leased asset is expected to be used by the lessee; or 
         (ii) the number of units expected to be obtained from the use of the asset by the lessee.
     (k) “Residual value” of a leased asset is the estimated fair value of the asset at the end of the lease term as estimated
          at the inception of the lease.
     (l) “Guaranteed residual value” is that part of the residual value which is the maximum amount guaranteed by the lessee or by a party on behalf of the lessee
    (m) “Unguaranteed residual value” of a leased asset is the amount by which the residual value of the asset exceeds
          its guaranteed residual value.
    (n) The “interest rate implicit in the lease” is the discount rate that, at the inception of the lease, which equals the fair
         value of the leased asset to the aggregate present value of 
        (a) the minimum lease payments under a finance lease; and
        (b) any unguaranteed residual value.
   (o) The “lessee’s incremental borrowing rate of interest” is the rate of interest the lessee would have to pay on a similar lease or, if that is not determinable, the rate that, at the inception of the lease, the lessee would incur to borrow over a similar term, and with a similar security, the funds necessary to purchase the asset.
    (p) “Contingent rent” is that portion of the lease payments that is not fixed in amount but is based on a factor other than
         the passage of time.

3(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act.

Classification of Leases
4(1) Classification of a lease as a finance lease or an operating lease shall depend on the substance of the transaction rather than its form.

4(2) A lease shall be deemed to be a finance lease, where:
(a) the lease transfers the ownership of the asset to the lessee by the end of the lease term;

(b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised;
(c) the lease term is for the major part of the economic life of the asset although the title is not transferred;
(d) at the inception of the lease the present value of the minimum lease payments constitutes at least substantially the fair value of the leased asset; or
(e) the leased asset is of a specialized nature such that only the lessee can use it without major modifications being made.

5(1) Lease classification shall be made at the inception of the lease and shall not be changed except as provided in Para 5 (2).

5(2) If at any time the lessee and the lessor agree to change the provisions of the lease agreement, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease, had the changed terms been in effect at the inception of the lease, the revised agreement is considered as a new agreement over its revised term and shall be classified accordingly.

6. Classification of a lease agreement shall be same for the lessor and the lessee and they shall execute a joint confirmation regarding such classification.

Tax Treatment of Leases in case of Lessees
Finance Leases
7. At the inception of a finance lease, the lessee shall recognise the asset acquired under lease as his own asset with corresponding liability. The cost of acquisition of such asset shall be the present value of the minimum lease payments or fair value of such asset, whichever is lower. In calculating the present value of the minimum lease payments, the discount rates hall be the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee‟s incremental borrowing rate shall be used.

8. The costs identified as directly attributable to activities performed by the lessee for a finance lease are included as part of the cost of acquisition of the asset.

9. Borrowing cost shall be the amount by which the minimum lease payments exceed the outstanding liability at the inception of the lease. The borrowing cost shall be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

10. Subject to execution of the joint confirmation referred to in Para 6, lessee shall be entitled to depreciation on the asset acquired under finance lease in accordance with the provisions of the Act.

Operating Leases
11. Lease payments under an operating lease shall be recognised as an expense on straight line basis over the lease term.

Tax Treatment of Leases in case of Lessors
Finance Leases
12. The lessor, other than manufacturer or dealer, shall recognise the asset given under a finance lease as sale and recognize the corresponding receivable at a sum equal to 
    (i) the cost of acquisition of such asset, where the asset is acquired and given on lease immediately; or 
    (ii) the fair value of such asset in any other case;

13. The manufacturer or dealer lessor shall recognize the asset given under a finance lease as sale and recognize the corresponding receivable at a sum equal to the fair value of the leased asset. Where artificially low or high rate of interest is quoted, then the present value of the minimum lease payments and unguaranteed residual value accruing to the lessor computed at a commercial rate of interest shall be recorded as sales revenue and corresponding receivable.

14. Finance Income shall be amount by which the aggregate of lease receipts and residual value exceeds the receivable at the inception of the lease. The finance income, net of costs identified as directly attributable to the activities performed by the lessor for a finance lease, shall be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the receivable for each period.

15. The balance of the receivable at the end of the lease term shall be treated as the cost of acquisition or actual cost of the asset given under finance lease at the time of end of the lease term.

16. The Lessor shall not be entitled to depreciation on asset given on a finance lease in accordance with the provisions of the Act.

Operating Leases
17. Lease income under an operating lease shall be recognised as an income on a straight line basis over the lease term.

18. Initial direct costs incurred specifically to earn revenues from an operating lease are deferred and allocated on a straight line basis over the lease term.

19. Subject to execution of the joint confirmation referred to in Para 6, lesssor shall be entitled to depreciation on the asset given under operating lease in accordance with the provisions of the Act.

Sale and Leaseback Transactions
20. A sale and leaseback transaction shall be dealt with in accordance with the provisions of the Act.

Transitional Provisions
21. The provisions of this standard shall apply to all lease transactions undertaken on or after 1st day of April, 2015. The lease transactions undertaken on or before 31st day of March, 2015 shall continue to be governed by the provisions of the Act applicable to the previous year ending on or before 31st day of March, 2015.