2016 (3) TMI 870 - AT - Income Tax

Tax Tribunal Rejects Commissioner's Section 263 Challenge, Upholds Deductibility of Lease Rentals

EIH Limited Versus The Commissioner of Income Tax

The Tribunal held that the Commissioner of Income Tax's invocation of Section 263 was not justified as the Assessing Officer's order was deemed neither ... Revision u/s 263 - disallowance of proportionate depreciation on Aircraft - Held that:- The order passed by the Learned AO in allowing the depreciation on aircrafts could not be treated as erroneous much less prejudicial to the interests of revenue. In this regard, we place reliance on the decision of the Hon’ble Apex Court in the case of CIT vs Max India Ltd reported in (2007 (11) TMI 12 - Supreme Court of India) wherein held the phrase ‘prejudicial to the interest of the Revenue’ in section 263 of the IT Act, 1961, has to be read and in conjunction with the expression ‘erroneous’ order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the AO adopts one or two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue , unless the view taken by the AO is unsustainable in law. - Decided in favour 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 entire lease rental as revenue expenditure.. Thus 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.- Decided in favour of assessee Issues Involved:1. Jurisdiction and legality of the order under Section 263 of the Income Tax Act, 1961.2. Whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of revenue.3. Disallowance of proportionate depreciation on aircrafts under Section 38 of the Act.4. Disallowance of lease rentals on principal repayment of vehicle loan.Issue-wise Analysis:1. Jurisdiction and Legality of the Order under Section 263:The assessee contended that the order under Section 263 dated 30.01.2013 was without jurisdiction and illegal as the conditions precedent for exercising power under Section 263 were not satisfied. The Tribunal examined whether the Commissioner of Income Tax (CIT) had the authority to invoke Section 263 in this case.2. Whether the Order Passed by the AO was Erroneous and Prejudicial to the Interest of Revenue:The assessee argued that the AO's order was neither erroneous nor prejudicial to the interest of revenue. The CIT's decision to invoke Section 263 was based on the belief that the AO's order was erroneous and prejudicial to the revenue's interest. The Tribunal analyzed whether the AO had taken a permissible view and whether the CIT could revise the order under Section 263.3. Disallowance of Proportionate Depreciation on Aircrafts under Section 38:The CIT invoked Section 263 to disallow proportionate depreciation on aircrafts, arguing that they were used for non-business purposes. The Tribunal examined the facts, including the aircrafts' usage for chartering and business purposes, and previous judicial decisions. The Tribunal found that the aircrafts were used for business purposes and that the AO had considered the issue in detail during assessment. The Tribunal concluded that the provisions of Section 38(2) were not applicable, and the AO's order allowing full depreciation was not erroneous or prejudicial to the revenue.4. Disallowance of Lease Rentals on Principal Repayment of Vehicle Loan:The CIT argued that the principal repayment of lease rent should not be allowed as revenue expenditure, asserting that the assessee was the de facto owner of the vehicles. The Tribunal reviewed the lease agreement, which indicated that ownership remained with the lessor, and the lessee (assessee) did not have the option to buy the vehicles. The Tribunal referenced the Supreme Court's decision in M/s I.C.D.S. Ltd vs CIT and other relevant case laws, concluding that the lease rentals were deductible as revenue expenditure. The Tribunal also noted that the AO had examined this issue in detail during assessment and had taken a permissible view.Conclusion:The Tribunal held that the CIT's invocation of Section 263 was not justified as the AO's order was neither erroneous nor prejudicial to the revenue. The Tribunal set aside the order passed by the CIT under Section 263 and allowed the appeal of the assessee. The Tribunal emphasized that the AO had taken one of the possible views, and the CIT could not revise the order simply because he disagreed with the AO's view. The Tribunal also noted that the issue of lease rentals had been consistently accepted by the revenue in previous years and was covered by judicial precedents.