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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Smt. P. Madhavi Devi & Shri A. Mohan Alankamony
Per Smt. P. Madhavi Devi, J.M.
This is assessee’s appeal for the A.Y 2013-14 against the final assessment order passed u/s 143(3) r.w.s. 144C (13) of the I.T. Act, dated 30.10.2017.
Brief facts of the case are that the assessee company, engaged in the business of manufacture of ceramic vitrified tiles & sanitary wares, filed its return of income for the A.Y 2013-14 on 29.11.2013 admitting a loss of Rs.2,69,10,242/-. During the assessment proceedings u/s 143(3) r.w.s. 92CA(3) of the Act, the AO observed that the assessee has claimed an amount of Rs.31,00,777/- towards “lease rental” u/s 37 in the computation of income. Observing that the assessee has not given any reason for claiming the same in the computation rather than in the P&L Page 1 of 6
ITA No 2226 of 2017 Rak Ceramics India P Ltd Secunderabad.
A/c, the AO disallowed the same and brought it to tax. Against the draft assessment order, the assessee filed its objections before the DRP. The DRP noted that out of the claim of deduction of Rs.31,00,777/-, an amount of Rs.28,64,684/- represented repayment of loans and the balance amount of Rs.2,36,096/- only was towards lease rent. The DRP held that the repayment of the principle amount is in the capital a/c and would not be eligible for deduction as revenue expenditure. Following the decision of the DRP, the final assessment order was passed allowing only the sum of Rs.2,36,096/- and making the addition of Rs.28,64,684/- against which the assessee is in appeal before us by raising the following grounds of appeal:
“On the facts and in the circumstances of the case and in law: 1. The order dated October 30,2017 passed by Learned AO under section 143(3) r.w.s 144C(13) of the Act is erroneous and contrary to law and hence, liable to be quashed. 2. The Learned AO/Hon'ble DRP erred in disallowing the claim of lease rent of Rs. 28,64,684 under the provisions of the Act disregarding the fact that the lease rentals paid are revenue in nature. 3. The Learned AO/Hon'ble DRP erred in bifurcating the lease rental into principal and interest and erred in treating the principal component of lease rentals of RS.28,64,684 as capital in nature and disallowing the same. The grounds mentioned herein are without prejudice to one another. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal”.
The learned Counsel for the assessee reiterated the submissions made before the DRP while the learned DR supported the orders of the authorities below.
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The learned Counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of ICDS Ltd vs. CIT (2013) 29 Taxmann.com 129 (S.C) wherein the Hon'ble Supreme Court was considering the allowability of depreciation of leased vehicles in the hands of the assessee therein who was engaged in the business of hire purchase of vehicles and leasing of such vehicles and real estate etc. The Hon'ble Supreme Court held that the assessee therein was recorded as the exclusive owner of the vehicles at all points of time and in case of default committed by the lessee therein, the assessee lessor was empowered to re-possess vehicles as the owner of the vehicles. Thus, it was held that the lessor is eligible for depreciation thereon. The learned Counsel for the assessee submitted that in the case before us, the assessee is the lessee of the vehicles and therefore, not the owner of the vehicles and the entire amount paid as lease rental has to be allowed as revenue expenditure. He also placed before us the copy of the agreement of lease. Further, he also placed reliance upon the decision in the case of Rajshree Roadway vs. Union of India (2003) 29 Taxmann.com 663 (Raj.).
Having regard to the rival contentions and the material on record, we find that as per the terms of the agreement L&T Finance Ltd, is the lessor and the assessee is the lessee. Sub clause 1.10 of clause (i) defines “lease rental” as the amount of periodical payments made for the use of the assets by the lessee to the lessor as specified under schedule together with taxes applicable from time to time. Clause 1.11 defines “other charges” to include but not restricted to upfront fees, management fees, registration charges, stamp duty and documentation charges etc., whether paid or payable by the lender. As per the clause 3 of the
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agreement, the lessee agrees to pay to the lessor lease rentals and other charges as specified, punctually on or before the due date. Sub clause 12.3 of clause 12 specifies that on expiration of the agreement or termination of the lease, the assets can be repossessed by the lessor and if the repossessed assets do not fetch a sale value more than or equal to all moneys due under the agreement including the future payments payable, lessee shall make good the loss by paying the difference between the total of the receivable by the lessor and the sale price. Further, it is seen from the agreement that assessee is required to select the asset and pay the insurance for the asset and has to pay the lease rentals and other charges in accordance with the schedules. In case of failure by the assessee to pay the rentals, the said asset can be taken over by the lessor. It is also stipulated that the vehicles shall be registered in the name of the lessor. In the case of Rajshree Roadway vs. Union of India (2003) 29 Taxmann.com 663 (Raj.), the Hon'ble Rajasthan High Court has considered similar case wherein the assessee, who was carrying on transport business, had entered into a lease agreement for taking on lease certain trucks and in terms of the agreement, both the parties had agreed that during the lease period, the lessor would be the owner of the trucks and would get the benefit of depreciation and lessee would have no right to transfer or alienate such trucks to other parties in any form and therefore, the lease rent paid by the assessee should be allowed as revenue expenditure. In the case of ICDS also, the Hon'ble Supreme Court has held that the lessor is the owner of the property and is eligible for depreciation on the vehicles leased out. We find that it is the assessee, who has stated before the DRP that the lease rentals paid by the assessee included the principal amount of Rs.28.00 lakhs and finance charges of Rs.36,096/-. It is also stated that in the books of Page 4 of 6
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account of the company, the assets were capitalized and the depreciation was claimed, but, while computing the taxable income, the assessee had added back the depreciation claimed in the books of account and only claimed it as revenue expenditure. As rightly pointed out by the learned DR, depreciation can be allowed only in the hands of one party i.e. the owner of the property. As held by the Hon'ble Supreme Court in the case cited Supra, the lessor continues to be the owner of the property of the assets till the entire payment including the finance charges are paid to the lessor. Admittedly, the assessee had not claimed depreciation on the said assets, and even as per the definition of the lease rentals in the agreement, it is the payment made for the use of the asset. Therefore, respectfully following the decision of the Hon'ble Supreme Court and the Hon'ble Rajasthan High Court in the cases cited Supra, we hold that the assessee is eligible to claim the lease rentals as revenue expenditure.
In the result, assessee’s appeal is allowed.
Order pronounced in the Open Court on 15th November, 2019.
Sd/- Sd/- (A. MOHAN ALANKAMONY) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 15th November, 2019. Vinodan/sps
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Copy to:
1 M/s. Rak Ceramics India (P) Ltd, PO Box No.11 ADB Road, Samalkot 533440 A.P 2 Dy. CIT, Circle 3(1) Room No.714, 7th Floor, Signature Towers, Kondapur, Hyderabad 500084 3 DRP-1, Kendriya Sadan, 4th Floor, B&C Wing, Bengaluru 560034 4 Pr. CIT – 3 Hyderabad 5 CCIT(IT)(SZ) Bengaluru 6 The DR, ITAT Hyderabad 7 Guard File
By Order
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