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2019 (7) TMI 1532 - AT - Income TaxLease rentals - disallowance of principal portion of the financial lease expenses and treating the same as capital expenditure - HELD THAT - The intangibles were taken on lease under the master operating lease agreement the same was decided by the lessor and lessee through rental schedule. M/s. SREI Equipment Finance Ltd. was not having any assets for the purpose of giving on lease to the assessee at the time of agreement this observation of the CIT(A) is contrary to the records available before us. The master operating lease agreement was executed on 22.12.2009 which covers all future leases of equipments with M/s. SREI Equipments and the assets which were taken under the master agreement and the same were sold by the assessee to the lessor vide agreement dated 29.12.2009. The assets were developed by the assessee and the same are customize to the peculiar requirements of the assessee which enabled it to operate its business across the country. Thus any modification in the assets could have hampered the entire business of the assessee and resulting into huge losses is correct. The CIT(A) should have looked into the total installment amount which should have been allowed to the assessee during the first appellate proceedings which was not done by the Assessing Officer as well as by the CIT(A). The reliance of the Hon ble Supreme Court decision in case of Virtual Soft Systems 2018 (4) TMI 1472 - SUPREME COURT will not be applicable in the present case as in the said case it is an admitted case of finance lease transaction and the department was disputing the accounting treatment. But the facts are different in the present case. In the present case the lease rentals constitutes the real business income which was not disputed by the Revenue. Therefore the CIT(A) as well as the Assessing Officer were not correct in making addition on account of disallowance of principal portion of the financial lease expenses and treating the same as capital expenditure. Thus the assessee be granted the benefit of the financial lease expenses
Issues Involved:
1. Disallowance of principal portion of financial lease expenses and its treatment as capital expenditure. 2. Allowability of finance lease expenses as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. 3. Consideration of supporting evidence for the claimed expenses. 4. Double taxation due to lessor offering the lease rental for tax. 5. Consideration of lessor's undertaking regarding capitalization and depreciation. 6. Allowance of depreciation under Section 32 if lease expenses are treated as capital expenditure. 7. Applicability of CBDT Circular No. 2 of 2001 regarding finance lease. Detailed Analysis: 1. Disallowance of Principal Portion of Financial Lease Expenses and Its Treatment as Capital Expenditure: The assessee contested the disallowance of ?1,99,66,749/- for AY 2012-13 and ?2,67,38,822/- for AY 2014-15 by the Assessing Officer (AO) on account of the principal portion of financial lease expenses, which was treated as capital expenditure. The assessee argued that these expenses are periodic lease rentals for the use of assets in normal business operations and should be considered as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The Tribunal found that the agreement between the parties was genuine and not sham, as alleged by the Department. The Tribunal allowed the deduction of the financial lease expenses as business expenditure, thus reversing the AO's and CIT(A)'s decision on this matter. 2. Allowability of Finance Lease Expenses as Revenue Expenditure under Section 37(1): The assessee maintained that the finance lease expenses are revenue in nature and eligible for deduction under Section 37(1). The Tribunal agreed, noting that the lease rentals constitute real business income and that the Revenue did not dispute the business nature of the lease rentals. Consequently, the Tribunal allowed the deduction of the financial lease expenses. 3. Consideration of Supporting Evidence for the Claimed Expenses: The CIT(A) and AO had sustained the addition without considering the supporting evidence provided by the assessee, including invoices, confirmations, rental schedules, and asset details. The Tribunal noted that the signed lease agreement and other documents provided by the assessee were genuine and should have been considered. Thus, the Tribunal found in favor of the assessee on this ground. 4. Double Taxation Due to Lessor Offering the Lease Rental for Tax: The assessee argued that the lessor, M/s. SREI Equipment Finance Pvt. Ltd., had already offered the entire amount of lease rental received from the assessee for tax, and adding the same amount in the hands of the assessee would result in double taxation. The Tribunal did not specifically address this issue in detail but allowed the deduction of the lease expenses, implicitly resolving the double taxation concern. 5. Consideration of Lessor's Undertaking Regarding Capitalization and Depreciation: The assessee contended that the lessor had capitalized the asset given on lease and claimed depreciation under Section 32. The Tribunal acknowledged the lessor's undertaking and found that the lease agreement was genuine, thus supporting the assessee's claim. 6. Allowance of Depreciation under Section 32 if Lease Expenses are Treated as Capital Expenditure: The assessee argued that if the lease expenses were treated as capital expenditure, depreciation under Section 32 should be allowed. The Tribunal did not need to address this issue explicitly as it allowed the deduction of the lease expenses as revenue expenditure. 7. Applicability of CBDT Circular No. 2 of 2001 Regarding Finance Lease: The assessee cited CBDT Circular No. 2 of 2001, which clarifies that the distinction between operating and finance leases under accounting principles has no implications under the Income Tax Act. The Tribunal agreed with this interpretation, supporting the assessee's claim for deductibility of lease expenses. Conclusion: The Tribunal allowed the appeals partly for statistical purposes, granting the deduction of financial lease expenses as revenue expenditure and remanding the issue of tax credit for further adjudication. The Tribunal's decision was based on the genuineness of the lease agreement and supporting evidence provided by the assessee.
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