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TMI Blog2022 (6) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the Act. The assessee as a lessee would be entitled for deduction of gross lease rental payments. The assessee s methodology is to be accepted. The lease payments made by the assessee would be revenue expenditure for the assessee. We order so. The alternative claims as allowed by Ld. AO shall stand reversed. The claim of foreign exchange loss on these transactions shall be re-considered / re-adjudicated by Ld. AO in the light of our above adjudication. The appeal stand partly allowed in terms of our above order. Disallowance u/s 40(a)(i) for want of TDS on lease rental payments - HELD THAT:- CIT(A) held the principal component of lease rental would be capital expenditure and the same is not allowable u/s 37. Therefore, the issue of disallowance u/s 40(a)(i) was held to be academic in nature. Facts being pari-materia the same as in AY 2012-13, our adjudication as contained therein shall mutatis mutandis apply to this year also. The directions of Ld. CIT(A), with respect to foreign exchange loss, stand reversed. Having said so, the issue of disallowance u/s 40(a)(i) shall be restored back to the file of Ld. AO for fresh adjudication since the expenditure has been hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed the whole lease rentals as revenue expenditure. 10. The learned counsel on the either side referred to the relevant conditions in the agreement. The learned counsel for the assessee referred to the business conditions dated 15.08.2001, more particularly, Clause 3(b), which deals with the lessee's liability to the lessor for all damage to or loss or destruction of the containers. Reference was made to Clause 6(b), which deals with default remedies and Clause 10, which deals with subleasing and assignment. These clauses were referred to by the learned Senior Counsel to emphasize as regards the ownership rights. 11. Ms.V.Pushpa, the learned Counsel for the Revenue referred to the rate schedule and in particular Clause B, which states that the term of the agreement shall be 5 years commencing on the day of pick-up by the lessee and expires on 14.08.2006. The learned counsel also referred to the other conditions contained in paragraph IV(C) which deals with casualty and paragraph E, which deals with Security Interest. Thus, the interpretation given by the assessee and the revenue wholly revolves around the interpretation of terms and conditions of lease agreement. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter is remitted 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. It is evident that the order of the Tribunal has been set aside and matter has been remitted back for fresh consideration to examine all factual and legal issues and proceed in accordance with the law. Accordingly, the appeals are placed before us for fresh consideration. The appeal for AY 2014-15 has similar issue and therefore, this appeal has also been consolidated with aforesaid bunch of appeals. 2. For the sake of adjudication, AY 2012-13 is taken as the lead year. This appeal arises out of the order of learned Commissioner of Income Tax (Appeals)-11 Chennai [CIT(A)] dated 22.02.2016 in the matter of assessment framed by learned Assessing Officer (AO) u/s 143(3) of the Act on 25.03.2015. The impugned order is common order for AYs 2009- 10 and 2012-13. The grounds taken by the assessee read as under: - 1. The Appellant challenges the order of the Commissioner of Income Tax (Appeals) ( CIT(A) ) on the following grounds amongst others each without prejudice to the other or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us. The dispute stem from the fact that in the computation of income, the assessee adds back the book depreciation and claim the gross lease rentals as deduction from the profits. The Ld. AO opined that finance lease is a lease that transfers substantially all the risks and rewards incident to the ownership of the assets. Therefore, the assessee would be entitled for depreciation as well as finance charges only. The portion which is attributable to principal repayment could not be allowed as deduction. 4.2 The assessee defended its stand, inter-alia, on the ground that there was no distinction in operating lease and finance lease under the Income Tax Act. The lessee is entitled for deduction of lease payment whereas lessor declares the lease rental as its income and pays tax on it. The lessor would be entitled for depreciation on the leased assets. The assessee also submitted that this methodology was accepted by revenue up-to AY 2010-11 in regular assessment proceedings. 4.3 However, Ld. AO opined that lease rental would have two components i.e., principal and interest. The interest portion represents revenue expenditure whereas principal repayment is capital expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations in revisional order, the stand of Ld. AO qua disallowance of container lease payment was confirmed. 5.3 The foreign exchange loss on lease rental was upheld with following observations: I have carefully considered the AO s observation mentioned above under Para 7.1 and the appellant s submissions mentioned above under para 7.2 above. 7.3.1 The aforesaid issue has already been dealt with by my predecessor in AY 2009-10 by the order vide ITA No.12.12/2013-14 dated 30.12.2014, when the appellant went in appeal against the original order u/s 143(3) dated 23.12.2011. In the said order, in line with the revision order u/s 263 dated 19.03.2014 passed by the CIT-III, Chennai, in AY 2009-10, my predecessor had directed the AO to apply the provision of Sec.43A as amended w.e.f. 01.04.2003. Accordingly, the AO has already adjusted the forex loss on restatement of lease rental payable at the end of the year to the cost of the assets as per Sec.43A. Therefore, the AO s addition is upheld and no interference is called for. The appellant s ground is dismissed. Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 6. Upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat under the finance lease, the lessee should recognize the asset in its books and should charge depreciation on the same. In the case of operating lease, the Accounting Standard provides that the lessee should recognize the lease payments as an expense in the profit and loss account and the lessor should recognize the asset given on lease and charge depreciation in respect of the same. The aforesaid distinction between finance lease and operating lease is not recognized under the Act. Under the provisions of the Act, depreciation is admissible under section 32 of the Act only to the 'owner' of the asset. Lease charges paid for the use of the asset, without acquiring any ownership rights in the same, are allowable as revenue expenditure under Section 37 of the Act. Thus, what AS-19 provides is the accounting treatment to be given to the two types of leases. It is not determinative of the tax treatment of the lease which has to be computed in accordance with the provisions of the Act. It is trite law that book entries are not determinative of tax liability as per the ratio laid down in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) as well as in Kedarnath Jute Mfg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Court referred to its earlier decision in CIT V/s Shann Finance Pvt. Ltd. (97 Taxman 435). The Hon ble Court also took note of similar decision rendered in CIT v. A.M. Constructions [1999] 238 ITR 775 (AP); CIT v. Bansal Credits Ltd. [2003] 259 ITR 69/126 Taxman 149 (Delhi); CIT v. M.G.F. (India) Ltd. [2006] 285 ITR 142/[2007] 159 Taxman 335 (Delhi); CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451/146 Taxman 627 (Mad.) and agreed with the ratio contained therein. In each of these cases, the leasing company was held to be the owner of the asset and accordingly held entitled to claim depreciation and also at the higher rate applicable on the asset hired out. 9. Similar is the decision of Hon'ble Rajasthan High Court in the case of Rajshree Roadways v. Union of India [2003] 263 ITR 206/129 Taxman 663 wherein Hon ble Court upheld the assessee's claim of allowability of lease rentals paid as lessee of the vehicles as a revenue expenditure u/s 37(1) of the Act, even though the lease was categorized as finance lease. 10. In the present case, rule of consistency also favors the case of the assessee. It is undisputed position that the aforesaid accounting / tax treatm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon ble Supreme Court in ICDS Limited Vs CIT (supra). 14. The Ld. CIT-DR, in the written submissions and by drawing attention to assessee s financial statements, have emphasized the fact that the aforesaid lease transactions are finance lease transactions and therefore, the action of Ld. AO was to be held. We find that there is no quarrel on the proposition since the only dispute under the appeal is tax treatment under finance lease. The operating lease transactions have not been disturbed by Ld. AO and the only dispute is qua deduction of principal component under finance lease transactions. This fact is nowhere in dispute. 15. In further support, Ld. CIT-DR has emphasized the fact that it was the lessee who was responsible to obtain insurance coverage at its own expense and therefore, the assessee was to be considered as owner of the asset. However, we find that this conclusion run contrary to the terms of the agreement as noted by us in preceding paragraphs. It has also been emphasized that in case of casualty to containers while on lease, the lease obligation terminate and the lessor would receive an equal amount to the balance of rent owed for the remainder term wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not pressed. Since that fact as well as issue, on merits, are pari-materia the same as in AY 2012-13, our adjudication as above shall mutatis mutandis apply to this appeal also. In the result, the appeal stands partly allowed. 19. In AY 2008-09, the assessee has been reassessed u/s 143(3) r.w.s. 147 of the Act on 25.03.2015. The lease rental charges have been disallowed and depreciation finance charges have been allowed by Ld. AO. The CIT(A), relying on revisional order u/s 263 for AY 2009-10, confirmed the stand of Ld. AO. The AO was directed to allow depreciation on the financial lease rentals capitalized as per IT Rules in view of Sec.43(6)(b) of the Act. Aggrieved, the assessee is in further appeal before us. Though the assessee has raised legal grounds assailing the validity of reassessment proceeding, however, the same has not been pressed before us during hearing. Therefore, these grounds stand dismissed as not pressed. Since that facts as well as issue, on merits, are pari-materia the same in AY 2012-13, our adjudication as above shall mutatis mutandis apply to this appeal also. The relief granted by Ld. CIT(A) in the impugned order stand reversed. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f disallowance u/s 40(a)(i) shall be restored back to the file of Ld. AO for fresh adjudication since the expenditure has been held by us to be revenue in nature. The assessee is directed to substantiate its case in terms of the provisions of Sec.40(a)(i). The appeal stands partly allowed. 23. In AY 2014-15, the assessee has been assessed u/s 143(3) on 20.12.2016. The assessee was saddled with disallowance of forex losses, lease rentals. The depreciation on capitalized principal portion was allowed. The profit on sale of container was reduced. The assessee claimed cost of club services for Rs.1.43 Lacs as paid to Madras Cricket Club which was disallowed, being not related to the business of the assessee. The appeal was dismissed by Ld. CIT(A) since there was no representation from the assessee. Aggrieved, the assessee is in further appeal before us. 24. Facts being pari-materia the same as in other years, the principal component of lease rental shall be allowed as revenue expenditure. The depreciation on capitalized principal portion shall stand reversed. The issue of forex loss shall stand remitted back to the file of Ld. AO for re-adjudication. The profit on sale of contain ..... X X X X Extracts X X X X X X X X Extracts X X X X
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