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2022 (9) TMI 72 - AT - Income TaxEligibility to claim principal portion of lease rental payments - Nature of expenditure - capital or revenue expenses - Addition made on the ground that the lease is in the nature of financial lease and the principal portion of lease amounts to cost of acquisition of capital assets which is capital in nature - HELD THAT - Hon ble High Court of Madras in Simpson and General Finance Co. Ltd. 2014 (4) TMI 215 - MADRAS HIGH COURT held that entire lease rent would be taxable in the hands of the lessor and the lessor would be entitled for depreciation on leased assets notwithstanding the accounting of the transactions as finance transaction by the lessor. This decision also supports our view as aforesaid. Considering the facts and circumstances of the case, we direct Ld. AO to allow the deduction of principal portion of leased assets. The depreciation, if any, as claimed by the assessee on such assets, shall stand reversed. We order so. The appeal stand allowed accordingly. Disallowance u/s 14A - prayer of AR is that the investment in debentures may be excluded while computing the disallowance - HELD THAT - We find that investment in debentures would not yield exempt income for the assessee. Therefore, we direct Ld. AO to exclude the same while computing indirect expense disallowance u/r 8D(2)(iii). The appeal stands partly allowed.
Issues Involved:
1. Eligibility to claim the principal portion of lease rental payments as a deduction. 2. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: Issue 1: Eligibility to Claim Principal Portion of Lease Rental Payments Background: The appellant challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] who confirmed the addition of the principal portion of lease rental payments amounting to Rs.15,98,265/-. The CIT(A) deemed the lease as a financial lease and considered the principal portion as capital in nature, thus disallowing it as a deduction. Appellant's Argument: The appellant argued that the lease agreement terms established the lessor as the absolute owner of the asset, and the appellant had no proprietary rights. They contended that the entire lease rental payments should be allowable as deductions. They also cited CBDT Circular No.2 of 2001, which clarifies that accounting standards should not impact the allowance of depreciation under the Income Tax Act. Tribunal's Findings: The Tribunal found that the issue was covered in favor of the appellant by previous decisions, specifically in the cases of M/s. Tristar Container Services (Asia) Private Ltd. and M/s Sundaram Infotech Solutions Ltd. The Tribunal noted that: 1. Nature of Lease: The assets under finance lease are capitalized in the balance sheet, and depreciation is claimed under the Companies Act. However, the Income Tax Act does not differentiate between finance and operating leases for tax purposes. 2. Depreciation and Ownership: Only the lessor is entitled to claim depreciation as per the Supreme Court decision in ICDS Limited Vs CIT. The lessee, in this case, the appellant, should be allowed to deduct the gross lease rental payments as revenue expenditure. 3. Consistency: The revenue had accepted this accounting/tax treatment in regular assessments from AYs 1998-99 to 2010-11, and thus, should maintain consistency. 4. Lease Agreement Terms: The lease agreement terms indicated that ownership remained with the lessor, and the lessee merely paid lease rentals, reinforcing that only the lessor could claim depreciation. Conclusion: The Tribunal directed the Assessing Officer (AO) to allow the deduction of the principal portion of lease rental payments. Any depreciation claimed by the appellant on such assets was to be reversed. Issue 2: Disallowance under Section 14A Background: For AY 2013-14, the appellant challenged the disallowance under Section 14A related to investments yielding exempt income. The AO computed a disallowance of Rs.5.18 Lacs, adding a differential of Rs.1.54 Lacs to the appellant's income. Appellant's Argument: The appellant requested that the investment in debentures amounting to Rs.60 Lacs be excluded while computing the disallowance, as these investments do not yield exempt income. Tribunal's Findings: The Tribunal agreed with the appellant, noting that investments in debentures do not yield exempt income. Therefore, the AO was directed to exclude the investment in debentures while computing the disallowance under Rule 8D(2)(iii). Conclusion: The Tribunal directed the AO to exclude the investment in debentures from the computation, thereby partially allowing the appeal. Final Order: Both appeals were partly allowed, with specific directions provided for the AO to follow in their recalculations and assessments. The order was pronounced on 03rd August 2022.
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