2019 (11) TMI 1806 - AT - Income Tax

Lease rentals qualify as revenue expenditure and allowable deduction when lessor retains ownership and depreciation rights

M/s. Rak Ceramics India Private Limited Versus Dy. Commissioner of Income Tax, Circle 3 (1) Hyderabad

ITAT Hyderabad held that lease rentals paid by the assessee constituted revenue expenditure and were allowable as deduction. The DRP had disallowed the ... Nature of expenditure - lease rentals - capital or revenue expenses - DRP held that the repayment of the principal amount is in the capital a/c and would not be eligible for deduction as revenue expenditure - HELD THAT:- As per the terms of the agreement L&T Finance Ltd, is the lessor and the assessee is the lessee. Sub clause 1.10 of clause (i) defines “lease rental” as the amount of periodical payments made for the use of the assets by the lessee to the lessor as specified under schedule together with taxes applicable from time to time. Sub clause 12.3 of clause 12 specifies that on expiration of the agreement or termination of the lease, the assets can be repossessed by the lessor and if the repossessed assets do not fetch a sale value more than or equal to all moneys due under the agreement including the future payments payable, lessee shall make good the loss by paying the difference between the total of the receivable by the lessor and the sale price. Assessee is required to select the asset and pay the insurance for the asset and has to pay the lease rentals and other charges in accordance with the schedules. In case of failure by the assessee to pay the rentals, the said asset can be taken over by the lessor. It is also stipulated that the vehicles shall be registered in the name of the lessor. In the case of Rajshree Roadway vs. Union of India [2003 (3) TMI 50 - RAJASTHAN HIGH COURT] considered similar case wherein the assessee, who was carrying on transport business, had entered into a lease agreement for taking on lease certain trucks and in terms of the agreement, both the parties had agreed that during the lease period, the lessor would be the owner of the trucks and would get the benefit of depreciation and lessee would have no right to transfer or alienate such trucks to other parties in any form and therefore, the lease rent paid by the assessee should be allowed as revenue expenditure. In the case of ICDS also [2013 (1) TMI 344 - SUPREME COURT] SC has held that the lessor is the owner of the property and is eligible for depreciation on the vehicles leased out. We find that it is the assessee, who has stated before the DRP that the lease rentals paid by the assessee included the principal amount and finance charges - It is also stated that in the books of account of the company, the assets were capitalized and the depreciation was claimed, but, while computing the taxable income, the assessee had added back the depreciation claimed in the books of account and only claimed it as revenue expenditure. As rightly pointed out by the learned DR, depreciation can be allowed only in the hands of one party i.e. the owner of the property. As held by the Hon'ble Supreme Court in the case cited Supra, the lessor continues to be the owner of the property of the assets till the entire payment including the finance charges are paid to the lessor. Admittedly, the assessee had not claimed depreciation on the said assets, and even as per the definition of the lease rentals in the agreement, it is the payment made for the use of the asset. Therefore, we hold that the assessee is eligible to claim the lease rentals as revenue expenditure. Issues:1. Disallowance of lease rental claimed by the assessee.2. Bifurcation of lease rental into principal and interest components.3. Allowability of lease rental as revenue expenditure.Analysis:1. The assessee, engaged in the business of manufacturing ceramic tiles, filed its return for A.Y. 2013-14, claiming a loss. The AO disallowed a portion of the claimed lease rental of Rs. 31,00,777 under section 37 of the Income Tax Act. The DRP upheld the disallowance, distinguishing between repayment of loans and actual lease rent. The final assessment order allowed only a portion of the claimed amount, leading to the assessee's appeal.2. The assessee argued that the entire lease rental should be allowed as revenue expenditure, citing the Supreme Court's decision in ICDS Ltd vs. CIT (2013) and Rajshree Roadway vs. Union of India (2003). The agreement identified L&T Finance Ltd as the lessor and the assessee as the lessee, outlining terms for payment, repossession, and ownership. The Court emphasized that depreciation can only be claimed by the owner of the property, as seen in the agreement and the legal precedents cited. Therefore, the assessee, being the lessee, was eligible to claim the lease rentals as revenue expenditure.3. The Tribunal found that the lease rentals were indeed revenue in nature, as the lessor retained ownership until full payment, and the assessee did not claim depreciation on the assets. Following the legal principles established by the Supreme Court and the Rajasthan High Court, the Tribunal allowed the assessee's appeal, concluding that the entire lease rental amount should be treated as revenue expenditure.This detailed analysis of the judgment highlights the issues of disallowance of lease rental, the bifurcation of components, and the allowability of lease rental as revenue expenditure, providing a comprehensive understanding of the legal reasoning and decisions involved.