2022 (9) TMI 57 - AT - Income Tax

Tribunal allows lease rentals as deduction, emphasizing consistency in tax treatment.

The tribunal ruled in favor of the assessee, allowing the principal portion of lease rentals as a deduction in the computation of income. It held that ... Nature of expenditure - Disallowance of principal component of lease payment - disallowance of the principal portion of lease rent as capital expenditure as against the claim of the appellant that the entire lease rental is revenue expenditure as a lessee - AO disallowed the same on the ground that both SFL as well as assessee claimed depreciation on the same asset - CIT(A) upheld the stand of Ld. AO on the ground that principal portion was capital expenditure and allowing the same to the assessee would amount to double deduction - HELD THAT:- As decided in M/S. TRISTAR CONTAINER SERVICES (ASIA) PRIVATE LIMITED VERSUS ACIT COMPANY CIRCLE III (1) , CHENNAI [2022 (6) TMI 793 - ITAT CHENNAI] 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 ownership of the leased assets remains with the lessor. The assessee, as a lessee, pays lease rentals which are allowable as revenue expenditure for the reasons as stated in our adjudication as above. Therefore, facts being pari-materia the same, taking the same view, we would hold that principal portion of lease rentals would be an allowable deduction as revenue expenditure. The depreciation, if any, as separately claimed by the assessee on lease assets shall stand disallowed. The Ld. AO is directed to re-compute the income in terms of our above order. Issues Involved:1. Disallowance of the principal portion of lease rent as capital expenditure.2. Distinction between finance lease and operating lease under the Income Tax Act.3. Consistency in tax treatment of lease rentals in previous assessment years.Detailed Analysis:1. Disallowance of the Principal Portion of Lease Rent as Capital Expenditure:The primary grievance of the assessee was the disallowance of the principal component of lease payments. The assessee claimed the principal portion of lease payments as a deduction in the computation of income. The Assessing Officer (AO) disallowed this claim, asserting that both the lessor (Sundaram Finance Ltd.) and the assessee claimed depreciation on the same asset, leading to double deduction. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, treating the principal portion as capital expenditure. The tribunal found that the ownership of the leased assets remained with the lessor, and the assessee, as a lessee, paid lease rentals which are allowable as revenue expenditure.2. Distinction Between Finance Lease and Operating Lease Under the Income Tax Act:The tribunal referred to Accounting Standard-19 (AS-19) by the Institute of Chartered Accountants of India (ICAI), which distinguishes between finance leases and operating leases. According to AS-19, a finance lease transfers substantially all risks and rewards of ownership to the lessee, whereas an operating lease does not. However, the tribunal noted that this distinction is not recognized under the Income Tax Act. Under the Act, depreciation is admissible only to the owner of the asset. The tribunal cited the Supreme Court's decision in ICDS Limited Vs CIT, which held that the lessor, as the legal owner, is entitled to claim depreciation. The tribunal reiterated that lease charges paid for the use of the asset, without acquiring ownership rights, are allowable as revenue expenditure under Section 37 of the Act.3. Consistency in Tax Treatment of Lease Rentals in Previous Assessment Years:The tribunal emphasized the rule of consistency, noting that the revenue had accepted the assessee's accounting and tax treatment of lease rentals in regular assessment proceedings from AY 1998-99 to 2010-11. Given the unchanged facts, the tribunal held that the revenue could not alter its stance after so many years.Conclusion:The tribunal concluded that the principal portion of lease rentals is an allowable deduction as revenue expenditure. It directed the AO to re-compute the income, disallowing any separately claimed depreciation on lease assets. The tribunal's decision applied to all assessment years under appeal (2011-12, 2012-13, and 2014-15), allowing the appeals accordingly.Order:The tribunal allowed the appeals and directed the AO to re-compute the income in line with the tribunal's findings. The order was pronounced on 06th July, 2022.