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TMI Blog2016 (3) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... our of assessee Disallowance of lease rentals on principal repayment of vehicle loan - Held that:- merely because the lease arrangement has been considered as finance lease for the purpose of AS 19 , that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. We find that AS 19 provides for various situations in order to decide as to whether the lease can be considered as finance lease or operating lease for the limited purpose of such AS 19. We find that the assessee had duly complied with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No. 2/2001 dated 9.2.2001 that the AS 19 will have no implication on the allowance of depreciation on assets under the provisions of IT Act. It is well settled that the CBDT Circulars are binding on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 263 of the Act and direct the A.O. to modify the order of assessment on any similar issue as depreciation. 4. For that no new material or evidence has been brought on record by the Commissioner of Income Tax to hold contrary to what has been held in the assessment by the A.O. in respect of liability of lease rental paid for taking the cars on hire and as the order of the A.O. was perfectly in accordance with law, the same could not be revised under section 263 of the Act. 5. For that further and in any event and without prejudice to the above, the CIT erred in revising the assessment order allowing the aggregate lease rental charges, simply because an alternate view is possible. 6. For that further and in any event and without prejudice to the above the order passed is vague and tentative and no definite finding or direction has been given by the Commissioner of Income Tax as to how the disallowance has to be computed with reference to the two issues and as such the order passed under section 263 of the Act is erroneous, illegal and void. 7. For that further and in any event and without prejudice to the above there cannot be any personal use as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses to 10%. The assessee as well as the revenue had preferred appeals before this tribunal against the order of the Learned CITA which is pending adjudication. Later the Learned CIT invoked jurisdiction u/s 263 of the Act in order to disallow proportionate depreciation on aircraft as the same was held to be used for non-business purposes in the assessment proceedings and hence correspondingly the depreciation on aircrafts also is to be disallowed proportionately in terms of section 38 of the Act. The Learned CIT did not appreciate the contentions of the assessee and directed the Learned AO to disallow the proportionate depreciation on aircraft in terms of section 38(2) of the Act vide his section 263 order dated 30.1.2013. Aggrieved, the assessee is in appeal before us. 3.2. The Learned AR argued that during the relevant previous year, the assessee maintained two aircrafts bearing Registration No. VT EJZ (King Air C 90A) and VT OBR (Hawker 850 XP). The aircraft bearing Registration No. VT-OBR (Hawker 850XP) was acquired during the financial year 2007-08 relevant to assessment year under consideration. The cost of acquisition of new aircraft Hawker 850XP was ₹ 55,87,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002-03 and for subsequent years that no disallowance could be made towards aircraft maintenance expenses for nonbusiness or personal purposes, then correspondingly no disallowance of depreciation on aircrafts could be made and hence the order passed by the Learned AO in granting full depreciation on aircrafts does not suffer from any infirmity. In addition to this, he also argued that this issue has been adjudicated by the Learned AO and Learned CITA in assessment and first appellate proceedings respectively and hence cannot be the subject matter of revision u/s 263 of the Act. 3.3. In response to this, the Learned DR vehemently supported the order of the Learned CIT u/s 263 of the Act and stated that the provisions of section 38(2) of the Act mandate the Learned AO to make a fair estimate of the usage of aircrafts for business purposes and correspondingly the depreciation on aircrafts could be disallowed by the Learned AO. He placed reliance on the observation of the Learned AO who had stated that the persons who had travelled in aircrafts are not directors or employees of the assessee company. He argued that the provisions of section 38(2) of the Act are very clear to disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in respect of the said matter. But the crucial point to be addressed here is that the Learned AO and the Learned CITA adjudicated the issue of maintenance expenses of aircraft for business or non-business purposes. They never had an occasion to discuss the issue of allowability of depreciation on aircrafts. Though it could be said that the issue of allowability of depreciation on aircrafts flows from the maintenance expenses of aircrafts being used for non-business purposes as could be seen from the show cause notice issued u/s 263 of the Act by the Learned CIT, still we hold that the provisions of Explanation 1 (c ) to section 263(1) of the Act are very clear on this aspect. It would be relevant to reproduce the same herein for the sake of convenience :- Explanation 1 (c ) to section 263(1) 263 (1) - ------------- Explanation 1 For the removal of doubts, it is hereby declared that , for the purposes of this sub-section,- (a) (b) . (c ) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June 1988, the powers of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses have been charged to revenue. The chartering revenue offered by the assessee has been accepted by the revenue and hence it can safely be concluded that the aircrafts are used for the purpose of its business. In this regard, it would be relevant to refer to the tribunal order in assessee s own case in Asst Year 2002-03 in ITA No. 316/Kol/2006 dated 11.9.2015, wherein, a similar issue was discussed at length. In the said decision, we had held that that assessee company being a nonnatural person cannot have personal element thereon and all the expenditure incurred thereon had to be construed only for business purposes. It was also held that if at all there was any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors or employees and it is only for the Learned TDS officer to look into the alleged violations, if any, on the same and the Learned AO cannot resort to make any disallowance of expenditure on that count on an estimated basis. We also draw support from the decision of the Hon ble Gujarat High Court in the case of Sayaji Iron and Engineering Co vs CIT reported in 253 ITR 749 (Guj) in this regard. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 263 of the Act for disallowance of lease rentals on principal repayment of vehicle loan in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the assessee has taken certain vehicles on lease from Orix Auto Infrastructure Services Limited. The assesse paid total lease rent of ₹ 393.52 lakhs consisting of principal repayment of ₹ 302.65 lakhs and finance charges of ₹ 90.88 lakhs to the lessor. The assessee chose to treat the lease transactions differently in its books of accounts and that for the purpose of income tax returns as below:- Treatment in books of accounts The leased asset was capitalized in the books of accounts of the assesee at lower of fair value and present value of minimum lease rental) and depreciation claimed in the books on the premise that the assessee is the owner of the leased assets in line with the Accounting Standard (AS) 19 on Leases issued by the Institute of Chartered Accountants of India (ICAI). Hence for the purpose of its books, the assessee is the owner of the leased assets and claimed depreciation. In respect of finance charges paid by the assessee to Orix Auto Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction in the books of accounts need not be the determinative factor for reckoning the taxable income under the provisions of the Act. In support of this proposition, he relied on the following decisions :- Kedarnate Jute Manufacturing Co Ltd vs CIT reported in (1971) 82 ITR 363 (SC) Sutlej Cotton Mills Ltd vs CIT reported in (1979) 116 ITR 1 (SC) 4.2.2. He further argued that the claim of lease rentals have been accepted by the revenue in all the earlier years in scrutiny assessment proceedings on the same set of facts and hence the order passed by the Learned AO cannot be termed as erroneous. In support of this proposition, he relied on the following decisions :- Radhasoami Satsang vs CIT reported in (1992) 193 ITR 321 (SC) CIT vs A.K.J. Security Printers reported in (2003) 264 ITR 276 (Del) 4.2.3. He argued that the taxability of the leased asset is required to be done as per the existing provisions of the IT Act read with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No.2 /2001 dated 9.2.2001 that the AS-19 will have no implication on the allowance of depreciation on assets unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is eligible for same quantum of deduction and the only difference is in respect of period in which the claim is allowed. Hence there is no prejudice caused to the revenue as there is no loss to the exchequer in so far as allowing the amount of claim to the assessee. He according argued that the order of the Learned AO being not anyway prejudicial to the interest of revenue, initiation of section 263 proceedings is not warranted. 4.3. In response to the same, the Learned DR argued that the reliance placed by the Learned AR on the proceedings of Hon ble DRP for Asst Year 2011-12 which is not relevant for the assessment year under consideration. He placed reliance on the order of the Learned CIT u/s 263 . He argued that principle of res judicata is not applicable to income tax proceedings. He relied on the decision of the co-ordinate bench of Delhi Tribunal in the case of Rio Tinto India (P) Ltd vs ACIT in ITA No. 363 (Delhi) of 2012 dated 22.6.2012 for Asst Year 2007-08 , wherein the Delhi Tribunal on the same set of facts had decided the issue in favour of the revenue. 4.4. We have heard the rival submissions and perused the materials available on record including the detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as finance lease for the purpose of AS 19 , that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. We find that AS 19 provides for various situations in order to decide as to whether the lease can be considered as finance lease or operating lease for the limited purpose of such AS 19. We find that the assessee had duly complied with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No. 2/2001 dated 9.2.2001 that the AS 19 will have no implication on the allowance of depreciation on assets under the provisions of IT Act. It is well settled that the CBDT Circulars are binding on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. In the instant case, the lessor (Orix Auto) being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure. We find that the issue is squarely covered by the decision of the Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation and was entitled thereto. Though this decision has been rendered on the allowability of depreciation on leased assets from the angle of the lessor, the principle laid down could be made very much applicable to the facts of the instant case for allowability of lease rentals in the hands of the assessee (lessee). We also find that the issue is squarely covered by the decision of the Hon ble Rajasthan High Court (Jaipur Bench) in the case of Rajshree Roadways vs Union of India Ors reported in (2003) 263 ITR 206 (Raj) wherein it was held that :- Held, that under the agreement there was a clause that after completion of lease period, if one per cent. of the total consideration of the trucks was paid, the lessee would be the owner of those trucks. However, the agreement dealt with the ownership of the trucks under the agreement. There was a clear provision that the said machinery shall at all times remain sole and exclusive property of the lessor and the lessee shall have no right, title or interest thereon. It further that irrecoverable undertaking of the lessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ean that the AO has not applied his mind to the said provisions and there is no material to indicate that the AO has not applied his mind to the provisions of section 80IB(13) read with section 80IA(9) of the Act. The presumption that the assessment orders u/s 143(3) had been passed upon application of mind has not been rebutted by the revenue. We hold that the impugned issue is squarely covered by the decision of the Hon ble Supreme Court (supra) and Hon ble Rajasthan High Court (supra) among others and the circulars issued by CBDT in this regard and hence it can be safely concluded that the order has been passed by the Learned AO by taking one of the possible views and hence the order cannot be termed as erroneous warranting initiation of revision proceedings u/s 263 of the Act. We also find that the issue is accepted by the revenue in assessee s own case for the Asst Year 2011-12 pursuant to the directions of the Hon ble DRP. In these circumstances, we hold that the order passed by the Learned AO cannot be considered as erroneous. Hence the grounds raised by the assessee on the issue of allowability of lease rentals are allowed. 5. In the result, the order passed by the Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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