2013 (3) TMI 127 - HC - Income Tax

Lease rent of the machinery said to have been taken on hire disallowed - as per AO the lease agreement was of financing and not of operational work hence the lease rent was not that of business expenditure - ITAT affirmed the order of CIT (A)deleted the addition - Held that - As decided in CIT Vs. Shaan Finance (P.) Ltd (1998 (3) TMI 8 - SUPREME COURT) and Rajshree Roadways Vs. Union of India & Ors (2003 (3) TMI 50 - RAJASTHAN HIGH COURT) the findings of the CIT (A) and the Tribunal, allowing lease rental as business expenditure, not calling for any interference - in favour of assessee.

Summary

Issues Involved:
1. Classification of the lease agreement as a finance lease or an operational lease.
2. Allowability of lease rentals as business expenditure.

Issue-Wise Detailed Analysis:

1. Classification of the Lease Agreement:
The primary issue was whether the lease agreement was a finance lease or an operational lease. The Assessing Officer (AO) concluded that the lease agreements were finance leases, not operational leases, based on the examination of the agreements. The AO observed that the risks incident to ownership of the assets were substantially transferred to the lessee, indicating a finance lease. This conclusion was drawn from the fact that the lease agreement seemed structured to ensure the lessor recovered the finance involved in acquiring the machines, with lease rentals being akin to repayment of capital loan and interest. The AO disallowed the lease rent of Rs.50,76,176/- on this basis but allowed Rs.5,41,977/- as interest on borrowed funds.

2. Allowability of Lease Rentals as Business Expenditure:
The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, re-examining the lease agreements and determining that the lease rentals were allowable as business expenditure. The CIT(A) noted several clauses in the lease agreements that supported the ownership of the lessor, such as re-delivery of equipment by the lessee on termination, the lessor's right to assign receivables, and the lessee's obligation to insure the equipment. The CIT(A) emphasized that the lease transactions were genuine and not sham, and the lessor was legally the owner of the assets. The CIT(A) also referenced prior years where similar lease rentals were allowed as business expenditure and cited relevant case law, including Rajshree Roadways Vs. Union of India and Shree Rajasthan Syntex Ltd. Vs. ACIT, to support the decision.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, affirming that the lease agreements were genuine and the lessor was the actual owner of the assets. The ITAT highlighted that the lease rentals had been allowed as business expenditure in previous years and referenced the same case law as the CIT(A) to substantiate their decision.

Judgment:
The High Court examined the appeal and concluded that the appeal lacked merit. The court noted that the revenue did not contest the genuineness of the lease transactions. The CIT(A) and ITAT had correctly determined that the ownership of the machinery remained with the lessor, and the lease agreements were genuine. The court referenced the principles laid out by the Supreme Court in CIT Vs. Shaan Finance (P.) Ltd., which clarified that hire charges paid by the hirer are revenue expenditure, and the owner is entitled to depreciation.

The court also considered the case of Rajshree Roadways, where it was established that during the lease period, the lessor remained the owner, and the lessee had no right to transfer or alienate the leased assets. The court affirmed that the findings of the AO about the substantial transfer of ownership were incorrect and rightly reversed by the CIT(A).

The court concluded that the lease rentals paid by the assessee were allowable as business expenditure, answering the formulated question of law in the affirmative, against the revenue and in favor of the assessee. Consequently, the appeal was dismissed with no costs.