2018 (12) TMI 1521 - HC - Income Tax

Lease rentals paid under the Lease Agreement - revenue expenditure - an allowable expenditure - Held that - We may refer to Accounting Standard 19 issued in the year 2001 and in particular, the Chapter relating to classification of leases and in Clause 8 of the said Chapter, it has been stated that whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. Illustrations have been given pointing out the examples of situation which would normally lead to a lease being classified as finance lease. However, the Tribunal did not make any endeavour to appreciate the documents examining the effect of Accounting Standard 19 as projected by the assessee. Therefore, the matter has to be decided afresh by the Tribunal by examining the documents, effect of Accounting Standard 19 as pointed out by the assessee and then take a decision on merits and in accordance with law. As we are convinced that the Tribunal did not undertake any exercise to examine the factual aspect, we are well justified in interfering with the order passed by the Tribunal and remanding the matter for fresh consideration. Having come to such a conclusion, there would be no necessity of answering the Substantial Questions framed for consideration. The appeals are allowed; the order passed by the Tribunal is set aside and the matter is remanded for fresh consideration to examine all factual and legal issues and proceed in accordance with law and the Substantial Questions of Law framed for consideration are left open

Summary

Issues:
1. Whether lease rentals paid by the appellant constitute revenue expenditure under the Income Tax Act, 1961?
2. Whether the findings on the treatment of accounts relating to containers and lease expenditure were contrary to the materials presented before the Tribunal?

Analysis:
1. The appellant filed returns of income for various years, including 2007-08, claiming lease rental payments as revenue expenditure. The Assessing Officer disallowed this, stating the lease was a financial lease with capital expenditure elements. The CIT(A) and Tribunal upheld this decision. The Tribunal noted the ambiguity in the lease agreement and confirmed the lower authorities' decision. However, the appellant argued that all lease rentals should be considered revenue and raised concerns about double taxation. The High Court found that the Tribunal did not adequately consider the impact of Accounting Standard 19, which classifies leases based on substance over form. The matter was remanded for fresh consideration, emphasizing the need to analyze the documents and Accounting Standard 19's effects.

2. The High Court highlighted the importance of examining the factual position and the impact of Accounting Standard 19 on lease classification. It criticized the Tribunal for not delving into these aspects and remanded the case for a thorough review. The Court emphasized that the Tribunal's failure to analyze the documents and Accounting Standard 19 necessitated setting aside the order and initiating a fresh assessment. Consequently, the Substantial Questions of Law were left open for reconsideration, and the appeals were allowed without costs, directing a reevaluation of all factual and legal aspects in accordance with the law.

This detailed analysis of the judgment from the Madras High Court underscores the significance of Accounting Standard 19 in determining lease classification and the need for a comprehensive review of factual and legal aspects in tax assessments involving lease rentals and expenditures.