Tribunal allows deduction of financial lease expenses as revenue expenditure under Income Tax Act

The Tribunal allowed the appeals partly, granting the deduction of financial lease expenses as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The Tribunal found the lease agreement genuine, reversed the disallowance of expenses treated as capital expenditure, and remanded the tax credit issue for further adjudication. Supporting evidence provided by the assessee, including invoices and lease agreements, played a crucial role in the Tribunal's decision.

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Issues Involved:

1. Disallowance of principal portion of financial lease expenses and its treatment as capital expenditure.
2. Allowability of finance lease expenses as revenue expenditure under Section 37(1) of the Income Tax Act, 1961.
3. Consideration of supporting evidence for the claimed expenses.
4. Double taxation due to lessor offering the lease rental for tax.
5. Consideration of lessor's undertaking regarding capitalization and depreciation.
6. Allowance of depreciation under Section 32 if lease expenses are treated as capital expenditure.
7. Applicability of CBDT Circular No. 2 of 2001 regarding finance lease.

Detailed Analysis:

1. Disallowance of Principal Portion of Financial Lease Expenses and Its Treatment as Capital Expenditure:

The assessee contested the disallowance of Rs. 1,99,66,749/- for AY 2012-13 and Rs. 2,67,38,822/- for AY 2014-15 by the Assessing Officer (AO) on account of the principal portion of financial lease expenses, which was treated as capital expenditure. The assessee argued that these expenses are periodic lease rentals for the use of assets in normal business operations and should be considered as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The Tribunal found that the agreement between the parties was genuine and not sham, as alleged by the Department. The Tribunal allowed the deduction of the financial lease expenses as business expenditure, thus reversing the AO's and CIT(A)'s decision on this matter.

2. Allowability of Finance Lease Expenses as Revenue Expenditure under Section 37(1):

The assessee maintained that the finance lease expenses are revenue in nature and eligible for deduction under Section 37(1). The Tribunal agreed, noting that the lease rentals constitute real business income and that the Revenue did not dispute the business nature of the lease rentals. Consequently, the Tribunal allowed the deduction of the financial lease expenses.

3. Consideration of Supporting Evidence for the Claimed Expenses:

The CIT(A) and AO had sustained the addition without considering the supporting evidence provided by the assessee, including invoices, confirmations, rental schedules, and asset details. The Tribunal noted that the signed lease agreement and other documents provided by the assessee were genuine and should have been considered. Thus, the Tribunal found in favor of the assessee on this ground.

4. Double Taxation Due to Lessor Offering the Lease Rental for Tax:

The assessee argued that the lessor, M/s. SREI Equipment Finance Pvt. Ltd., had already offered the entire amount of lease rental received from the assessee for tax, and adding the same amount in the hands of the assessee would result in double taxation. The Tribunal did not specifically address this issue in detail but allowed the deduction of the lease expenses, implicitly resolving the double taxation concern.

5. Consideration of Lessor's Undertaking Regarding Capitalization and Depreciation:

The assessee contended that the lessor had capitalized the asset given on lease and claimed depreciation under Section 32. The Tribunal acknowledged the lessor's undertaking and found that the lease agreement was genuine, thus supporting the assessee's claim.

6. Allowance of Depreciation under Section 32 if Lease Expenses are Treated as Capital Expenditure:

The assessee argued that if the lease expenses were treated as capital expenditure, depreciation under Section 32 should be allowed. The Tribunal did not need to address this issue explicitly as it allowed the deduction of the lease expenses as revenue expenditure.

7. Applicability of CBDT Circular No. 2 of 2001 Regarding Finance Lease:

The assessee cited CBDT Circular No. 2 of 2001, which clarifies that the distinction between operating and finance leases under accounting principles has no implications under the Income Tax Act. The Tribunal agreed with this interpretation, supporting the assessee's claim for deductibility of lease expenses.

Conclusion:

The Tribunal allowed the appeals partly for statistical purposes, granting the deduction of financial lease expenses as revenue expenditure and remanding the issue of tax credit for further adjudication. The Tribunal's decision was based on the genuineness of the lease agreement and supporting evidence provided by the assessee.

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