Lease rental payments for trucks allowed as revenue expenditure under section 37(1) despite finance lease classification

The ITAT Delhi allowed the assessee's appeal regarding lease rental payments. The AO had disallowed lease rent expenses by treating the arrangement as a finance lease rather than an operating lease. The tribunal, following the precedent in Minda Corporation Limited, held that lease rentals paid by the lessee for trucks constitute allowable revenue expenditure under section 37(1) of the Income Tax Act, despite the lease being categorized as a finance lease. The disallowance by the AO was deemed unjustified, and the assessee's claim for deductibility of lease rentals was upheld.

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Issues Involved:
1. Disallowance of lease rental payments as capital expenditure.
2. Reliance on judicial precedents and subsequent judgments.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Lease Rental Payments as Capital Expenditure:
The primary issue is the disallowance of INR 3,72,621/- in respect of lease rental paid by the appellant, termed as 'principal payment towards finance lease,' for motor vehicles taken on lease. The Assessing Officer (AO) treated the payments as capital expenditure, relying on the precedent set by IndusInd Bank Ltd. vs. Additional Commissioner of Income Tax (2012) 15 ITR (T) 89 (Mumbai). The AO calculated consequential depreciation of Rs. 3,58,883/- and made a net disallowance of Rs. 3,72,621/-.

2. Reliance on Judicial Precedents and Subsequent Judgments:
The appellant argued that the AO erred in solely relying on the IndusInd Bank case without considering the subsequent judgment of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd. v. CIT (2013) 350 ITR 527 (SC) and other judgments from the Delhi Tribunal, which held that lessees are eligible for deduction of lease rentals as revenue expenditure. The appellant cited the case of M/s Minda Corporation Limited vs. DCIT, where the ITAT Delhi ruled in favor of the assessee, allowing lease rentals as revenue expenditure. The ITAT observed that the issue under consideration is a finance lease and should be decided based on subsequent legal developments.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant also contested the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. However, this issue was not elaborately discussed in the judgment.

Conclusion:
After considering the rival submissions and material placed on record, the ITAT observed that the issue of lease rent payment as finance lease has been elaborately dealt with in the case of M/s Minda Corporation Limited vs. DCIT. The ITAT noted that the Accounting Standard 19 (AS-19) on "Leases" issued by the Institute of Chartered Accountants of India (ICAI) is applicable only for accounting purposes and not determinative of liability under the Income Tax Act. The Circular No. 2 of 2001 issued by the CBDT clarified that the accounting standard would have no implications under the Act. The ITAT also referred to the Supreme Court judgment in ICDS Ltd. vs. CIT, which held that the lessor is the owner of the lease property in a finance lease and is entitled to depreciation.

Respectfully following these precedents, the ITAT allowed the appeal filed by the assessee, holding that the disallowance of lease rentals as capital expenditure was not justified. The ITAT also noted that the decision of the Hon'ble Kolkata High Court, relied upon by the DR, was related to Assessment Year 1955-56 and could not be relied upon due to subsequent clarifications and conflicting decisions. Consequently, the appeal filed by the assessee was allowed, and the disallowance was overturned.

Order Pronounced on 26th June, 2024.

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