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

ITAT Hyderabad held that lease rentals paid by the assessee constituted revenue expenditure and were allowable as deduction. The DRP had disallowed the claim, treating principal repayment as capital expenditure. However, the tribunal found that under the lease agreement, the lessor remained the owner of the vehicles and was entitled to depreciation, while the assessee paid rentals merely for asset usage. Since the assessee had not claimed depreciation on these assets and the lease rentals were payments for use rather than ownership, they qualified as revenue expenditure under the agreement terms.

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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.

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