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2015 (8) TMI 168 - AT - Income TaxDisallowance on account of lease payment made by the assessee - Held that - AS-19 on accounting for Leases issued by the ICAI is only applicable for accounting the lease transaction in the books of accounts. It is a settled law that treatment in the books of accounts is not determinative of liability towards income-tax for the purpose of the Act. The liability under the Act is governed by provisions of the Act and is not dependent on the treatment followed for the same in the books of accounts. For above proposition, reference is made to Sutlej Cotton Mills Ltd. vs. CIT (1978 (9) TMI 1 - SUPREME Court) and Kedarnath Jute Mfg. Co. Ltd. vs. CIT 1971 (8) TMI 10 - SUPREME Court Finance Lease, in AS-19, is described as a lease that transfers substantially all the risks and rewards in respect of ownership of an asset; title may or may not be transferred under such lease. An operating lease, on the other hand, is described as a lease other than a finance lease. The aforesaid Accounting Standard provides that under the finance lease, the lessee should recognize the asset in its books and should charge depreciation on the same. In the case of operating lease, the Accounting Standard provides that the lessee should recognize the lease payments as an expense in the profit and loss account and the lessor should recognize the asset given on lease and charge depreciation in respect of the same. The aforesaid distinction between finance lease and operating lease is not recognized under the Act. Under the provisions of the Act, depreciation is admissible under section 32 of the Act only to the owner of the asset. Lease charges paid for the use of the asset, without acquiring any ownership rights in the same, are allowable as revenue expenditure under section 37 of the Act. Thus we hold that disallowance is not justified on facts and circumstances of the case. - Decided in favour of assessee.
Issues Involved:
1. Validity of the reopening of assessment. 2. Justification of the disallowance of Rs. 9,29,592/- on account of lease payment made by the assessee. Detailed Analysis: 1. Validity of the Reopening of Assessment: The first issue raised by the assessee pertains to the legality of the reopening of the assessment. The assessee argued that the reassessment proceedings were initiated on a mere change of opinion without forming a reasonable belief of escapement of income, which is a sine qua non for assuming valid jurisdiction. It was also contended that the reassessment was initiated after four years from the end of the relevant assessment year, and there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The CIT (A) upheld the initiation of reassessment proceedings, rejecting the assessee's plea that the reassessment was bad in law. 2. Justification of the Disallowance of Rs. 9,29,592/- on Account of Lease Payment: The second issue involves the disallowance of Rs. 9,29,592/- claimed by the assessee as a deduction under section 37 of the Income-tax Act. The brief facts are that the assessee company acquired vehicles worth Rs. 27,88,776/- on a financial lease and capitalized the assets in the books of accounts as per Accounting Standard 19 (AS-19) issued by the Institute of Chartered Accountants of India (ICAI). However, for tax purposes, the lease rental of Rs. 9,29,592/- paid by the assessee was claimed as a deduction under section 37 of the Act. The AO disallowed the deduction on the grounds that the payments were in the nature of a 'finance lease' and should be capitalized, not allowable as a deduction under section 37. The tribunal observed that AS-19 is applicable for accounting purposes and not determinative of liability towards income-tax under the Act. The liability under the Act is governed by its provisions and not by the treatment followed in the books of accounts. The tribunal referred to the CBDT Circular No.2 of 2001, which states that the accounting standard on 'Leases' issued by ICAI creating a distinction between finance lease and operating lease has no implications under the provisions of the Act. The tribunal also cited various judicial precedents, including the Hon'ble Supreme Court's decision in ICDS Ltd. vs. CIT, which held that the lessor is the owner of the leased property in case of a finance lease and entitled to depreciation. The tribunal concluded that the disallowance of Rs. 9,29,592/- was not justified and allowed the deduction claimed by the assessee. Consequently, the legal issue of reopening of assessment by issuance of notice u/s 148 of the Act was not adjudicated. Conclusion: The appeal of the assessee was partly allowed, with the tribunal holding that the disallowance of Rs. 9,29,592/- on account of lease payments was not justified on the facts and circumstances of the case. The issue of reopening of assessment was not adjudicated since the issue on merits was decided in favor of the assessee.
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