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TMI Blog2012 (6) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to assessee. Preliminary expenses - dis-allowance - Held that:- Indisputably, the assessee failed to submit necessary information in support of the claim of expenses written off. Hence dis-allowance upheld. Contribution towards Federation of Indian Mining Industries Building Fund - revenue or capital expenditure - assessee being one of the members of the said Federation - Held that:- Expenditure incurred by way of contribution towards building fund of the said federation, is for commercial consideration and it is not incurred for the purpose of securing any capital assets. Therefore, the same is allowable as revenue expenditure - Decided in favor of assessee. - ITA No. 363/Del/2012 - - - Dated:- 22-6-2012 - U . B . S . Bedi And A . N . Pahuja, JJ. For Appellant: Nageshwar Rao, AR For Respondent: B . R . R . Kumar, DR ORDER Per: A . N . Pahuja, AM: This appeal filed on 24.01.2012 by the assessee against an order dated 25.11.2011 of the ld. CIT(A)-XVIII, New Delhi, raises the following grounds:- 1. The entire order of the CIT(A)-XVIII[CIT(A)] is based on conjectures, surmises, incorrect applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Leases issued by the Institute of Chartered Accountants of India. Though the depreciation on capitalized leased vehicles was debited to P L account, the same was added back in the computation of income. It was further pointed out that circular no.2 of 2001 dated 9th February, 2001, issued by CBDT clarified that accounting standard-19 by itself did not have any implications on the allowance of depreciation on assets acquired under the finance lease agreement in the hands of the lessee and also the amount of lease charges incurred during the year will be allowed as deduction. Accordingly, the repayment of principal amount of ₹ 11,03,660/- was reduced from the computation of income, the assessee submitted. However, the AO did not accept the submissions of the assessee on the ground that in schedule 15 to the accounts, clause 1(f) on leases reads as under:- Assets acquired under leases where the Company has substantially all the risks and rewards of ownership, are classified as finance leases. 2.1 Moreover, Accounting Standard 19 on leases, inter alia, stipulated as under:- 4.7.1 The lease has to recognize it as capital asset and liability and deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant has paid ₹ 11,03,660/- as principal payment towards financial lease besides making payment on account of interest. The AO has allowed payment of interest as revenue expenses but has treated ₹ 11,03,660/- as a capital expenses. Since, the lease period is for 48 months thus the appellant gets enduring benefit of the vehicles for the period of lease. The terms and conditions of the agreement shows that it is a financial lease in which the vehicle has been financed by the lessor while the ownership and the right to use vehicle remains with the lessee. The lessee is using the vehicle/asset for substantial part of its economic life and may even continue to use the asset even after the expiry of the lease period by making a notional payment for the vehicle. Even the registration of the vehicle and insurance is in the name of the lessee. All the terms and conditions of the lease agreement show that the appellant has entered into a financial lease and not an operational lease and thus only interest payment can be allowed as an expense and not the repayment of principal. The appellant s claim for allowing the depreciation in case it is held to be the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit and loss account on accrual basis. 6.1 Here, we may also have a look at the relevant terms and conditions of the agreement with LPIN. Article 2.2 of the agreement with LPIN provides for arrangement for the registration insurance of the vehicles and inter alia, stipulates that vehicles shall be insured and registered in the name of the client i.e the assessee as required under the Motor Vehicles Act, 1988. In terms of Clause vi) of Article 2.2 LPIN is required to pay for maintenance of vehicles. Article 3 of the agreement provides for lease period while the Article 4 provides for payment of lease rentals in advance for every quarter and stipulates that in case, LPIN is required to make advance payment to the manufacturer/dealer to book the vehicle ordered by the client, the client shall be liable to pay to LPIN a simple interest computed using the contracted interest rate as built in the quotation for the period starting from the date of payment to the manufacturer/dealer till the date of delivery of the vehicle. Besides, the assessee is also required to deliver a promissory note for each vehicle, for such sum as may be required by LPIN based on the lease rentals and L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10.5 (i) not claim any relief by way of any deduction, allowance or grant available to LPIN as the owner of the vehicle under the Income-tax Act, 1961 or under any other statute, rule, regulation or guideline issued (or as may be amended and existing from time to time) by the Government of India or any statutory authority and not do or omit to do or be done any act, deed or thing whereby LPIN is deprived, whether wholly or partly, of such relief by way of deduction, allowance or grant. The client shall, at the end of each financial year of LPIN, provide to LPIN such information as it may require to claim relief by way of deduction, allowance, or grant, as the owner of the vehicle under /the Income-tax Act, 1961 and the client undertakes to comply with and observe, at all times, all the terms and conditions to be complied with or observed in respect of the use of the vehicle to entitle LPIN to obtain such relief. (ii) In case of a sale and lease back, the client agrees to make available all necessary documents immediately on request of LPIN to enable the endorsement of LPIN s name as financier and transfer of name, if required, in the registration certificate of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o release payments without certain documents and if such documents are not provided to LPIN by the client within two weeks of release of the payment, LPIN will reserve the right to foreclose the lease of the particular vehicle and the client will need to pay to LPIN the outstanding book value and all the applicable taxes. 12.4 If for any reason it is not possible to transfer the registration certificate of the vehicle in the name of the client and/or it is not possible to endorse the registration certificate with LPIN s name as the lessor , LPIN will reserve the right to foreclose the lease of the particular vehicle and the client will need to pay to LPIN the outstanding book value and all the applicable taxes. 6.3 In the light of aforesaid terms and conditions of the agreement it is apparent that the assessee entered in to a financing lease arrangement with LPIN for taking certain vehicles for its use. A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omit to do or be done any act, deed or thing whereby LPIN is deprived, whether wholly or partly, of such relief by way of deduction, allowance or grant. Inter alia, the assessee is also required to provide to LPIN, at the end of each financial year of LPIN, such information as it may require to claim relief by way of deduction, allowance, or grant, as the owner of the vehicle under the Income-tax Act, 1961 and the assessee undertook to comply with and observe, at all times, all the terms and conditions of the agreement. In view of these specific covenants in the agreement, especially when the ld. AR did not make even a whisper before us in the light of terms and conditions stipulated in Article 10 of the agreement, we are not prepared to accept the alternate claim of the assessee. As regards certain observations in respect of depreciation available to the lessee in the decision of Special Bench in IndusInd Bank Limited(supra),which was the case of a lessor and not the lessee, since the relevant terms and conditions of the agreement in that case, have not been placed before us nor the ld. AR stated as to why the terms and conditions stipulated in Article 10 of the agreement in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and since it provides support to mining industries and the assessee is rendering services to the mining industries, the expenditure was wholly and exclusively incurred for the purpose of business. However, the AO did not accept the submissions of the assessee on the ground that the assessee failed to establish that expenditure was incurred wholly and exclusively for the purpose of business. Inter alia, the AO relied upon decision in CIT Vs. Chandulal Keshavlal Co. (1960) 38 ITR 601 (SC) and distinguished the decision relied upon by the assessee in CIT Vs. Kamal and Co. 203 ITR 1038(Raj.) . 14. On appeal, the ld. CIT(A) upheld the disallowance, holding as under:- 6.1 I have carefully considered the assessment order and the submission made by the learned AR. The payments of ₹ 50 lacs is towards the building fund of FIMI i.e. Federation of Indian Mineral Industries. The payment cannot be said to be for the purpose of business and revenue in nature. The appellant s plea that the payment has been made to FIMI as it provides support to the mining industries and therefore should be allowed as revenue expense is not acceptable. The expense is in the nature of donatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contribution made by the company is for the Chamber of Commerce, whose activities are closely linked with the welfare of the corporate entities, who are members therein and whose interest are taken care of by the Chamber of Commerce, irrespective of whether the expense incurred is compulsory or otherwise., it satisfies the commercial expediency test. In CIT vs. T.V. Sundaram Iyengar And Sons Pvt. Limited., 186 ITR 276 (SC) , Hon ble Apex Court upheld the findings of the ITAT that the amount advanced by the assessee-employer for construction of houses under Subsidised Industrial Scheme for its employees would be in the nature of a revenue expenditure and the fact that the scheme was not for any temporary or particular duration makes little difference to the nature of the expenditure. In Rajasthan Spinning and Weaving Mills Ltd(supra) contribution to the export promotion fund made by the assessee for promoting its business interest by augmenting exports was held to be incurred and laid out wholly and exclusively for the purpose of the assessee's business. In L.H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293(SC) the Hon ble Supreme Court allowed the contrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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