DY.C.I.T., CC-4(4), MUMBAI, MUMBAI vs. CAPSAVE FINANCE PVT. LTD., MUMBAI

The Assessing Officer noted that the assessee had claimed withdrawal of finance lease rental receipts and corresponding depreciation through the revised computation. While the AO accepted the surrender of depreciation of ₹15,27,17,719/–, he did not allow the assessee’s claim for deduction of ₹6,81,45,073/– representing the principal recovery embedded in finance lease rentals, holding it to be a fresh claim not made in either the original return or the revised return filed under section 139(5). For this proposition, he invoked the dictum of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra).

Before the learned CIT(A), the assessee argued that its revised computation was merely a rationalisation of treatment, aimed at avoiding double taxation. It was submitted that if depreciation on finance lease assets was surrendered, it would be wholly illogical to continue taxing the principal recovery portion of lease rentals, since in a finance lease, only the interest component represents

In the recent case of M/s. Shriram Investments v. CIT, Civil Appeal No. 6274 of 2013, judgment dated 04.10.2024, the Hon’ble Supreme Court has held:

Thus, a view can be taken that the appellant is not entitled to the deduction of claim of Rs. 6,81,45,073/-, However, one needs to be conscious of the fact that this deduction cannot be viewed on a stand-alone basis. It has linkage with the reversal of depreciation of Rs. 15,27,17,719/-, for which addition has been made by the AO. In effect, what the appellant is requesting is that the addition made by the AO be confined to Rs. 8,45,72,646/- (15,27,17,719 less 6,81,45,073). I am of the view that the claim of the appellant is justified and reasonable. One has to treat the transaction as a whole and not in bits and pieces. When the appellant has changed the methodology for its claim (both for offering income and for claim of deduction of finance lease), the net effect has to be taken into account. In the instant case, it is evident that both offering of income and claiming of deduction are intrinsically linked to each other and cannot be seen in isolation. The reasonableness of the appellant's claim can also be tested by the fact that it had foregone the higher brought forward losses of AY 2017-18 by following the same method, even though a revised return was not filed for such year.

In view of the above, I am of the view that as against addition of Rs. 15,27,17,719/- made by the AO, it is appropriate that such addition be restricted to Rs. 8,45,72,646/-, Accordingly, Ground No. 1 to 7 stand PARTLY ALLOWED.

Thus, a view can be taken that the appellant is not entitled to deduction of the claim of ₹6,81,45,073/–. However, one needs to be conscious of the fact that this deduction cannot be viewed on a stand-alone basis. It has linkage with the reversal of depreciation of ₹15,27,17,719/–, for which addition has been made by the AO. In effect, what the appellant is requesting is that the addition made by the AO be confined to ₹8,45,72,646/– (₹15,27,17,719 less ₹6,81,45,073). I am of the view that the claim of the appellant is justified and reasonable. One has to treat the transaction as a whole and not in bits and pieces. When the appellant has changed the methodology for its claim (both for offering income and for claiming deduction of finance lease), the net effect has to be taken into account. In the instant case, it is evident that both offering of income and claiming of deduction are intrinsically linked to each other and cannot be seen in isolation. The reasonableness of the appellant’s claim can also be tested by the fact that it had foregone the higher brought-forward losses of A.Y. 2017–18 by following the same method, even though a revised return was not filed for such year.

In view of the above, I am of the view that as against the addition of ₹15,27,17,719/– made by the AO, it is appropriate that such addition be restricted to ₹8,45,72,646/–. Accordingly, Grounds No. 1 to 7 stand partly allowed.”

We have given our thoughtful consideration to the rival submissions and the material on record. The controversy pivots on whether the assessee is entitled to deduction of ₹6,81,45,073/– being the principal recovery component in finance lease transactions. The essential character of a P a g e | 7 CAPSAVE FINANCE PVT. LTD., Mumbai finance lease is well-settled: it is not a lease in substance, but a financing arrangement, in which the lessor recoups the capital cost through recovery of principal, and earns income only in the form of interest. This economic reality is also reflected in the accounting standards. If depreciation on finance lease assets has been surrendered, then it follows inexorably that the principal recovery is a mere return of capital and cannot be taxed as income. To hold otherwise would amount to simultaneously taxing the principal as income and disallowing depreciation, a manifest incongruity.

The Assessing Officer himself accepted the surrender of depreciation. Once that is accepted, logical consistency compels acceptance of the corresponding exclusion of principal recovery. To bifurcate the two and adopt a piecemeal approach would be antithetical to the principle of taxing real income. The Revenue’s reliance on Goetze (India) Ltd. is misplaced. That judgment merely limits the Assessing Officer’s juri iction to entertain new claims absent a revised return; it does not curtail the plenary appellate juri iction of the CIT(A) or this Tribunal to determine the correct taxable income on the basis of the record. More importantly, the present claim is not an independent or extraneous deduction, but an intrinsic corollary of the accepted treatment of finance leases.

We find ourselves in agreement with the observation of CIT(A) in para 11 as incorporated above and his approach.

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 24th September 2025. (RENU JAUHRI) JUDICIAL MEMBER Place: म ुंबई/Mumbai दिनाुंक /Date. 24.09.2025 Lubhna Shaikh / Steno