INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Lease rental to lessor - Allowability -

Assessee company was engaged in leasing of marine containers. It obtained the containers on lease from lessor and sub-leased the same to various customers. The lease rentals so earned by assessee were considered as its income and the same was credited to Profit & Loss Account. The leased containers were treated as part of fixed assets in the Balance Sheet and assessee charged depreciation on the same as per Companies Act in the books of account. The lease rental payable by assessee was shown as liabilities. The lease payments made by assessee had two components i.e., principal portion and finance portion. The finance portion was debited to the Profit & Loss Account which was allowed by AO and the same was not the subject matter of dispute. The dispute stem from the fact that in computation of income, assessee added back the book depreciation and claimed the gross lease rentals as deduction from profits. AO opined that finance lease was a lease that transferred substantially all the risks and rewards incident to the ownership of assets. Therefore, assessee would be entitled for depreciation as well as finance charges only. The portion which was attributable to principal repayment could not be allowed as deduction. Assessee defended its stand, inter-alia, on the ground that there was no distinction in operating lease and finance lease under the IT Act. The lessee was entitled for deduction of lease payment whereas lesser declared the lease rental as its income and pays tax on it. The lesser would be entitled for depreciation on the leased assets. However, AO opined that lease rental would had two components i.e., principal and interest. The interest portion represents revenue expenditure whereas principal repayment was capital expenditure. Held: As per business conditions, lessee was required to return all the containers to lessor's depot at the designated locations. The lessee was liable to lessor for all damages to or loss or destruction of the container subsequent to delivery and prior to return of containers to lessor, except that caused by normal wear and deterioration. It was responsibility of lessee to maintain containers in good repair and safe operating conditions. Further, lessee would not have right to assign this Agreement to any other party without the prior written consent of Lessor. However, lessee would have the right to sublet or rent the container on lease under this Agreement, except that any such subletting or rental shall not relieve Lessee of its obligation under the agreement. Upon perusal of terms and conditions of lease agreement, it could be concluded that ownership of containers had never been parted with by the lessor and lessee merely paid lease rental to the lessor. In such a case, it would only be the lessor which was entitled to claim depreciation. Considering the facts and circumstances of the case, assessee as a lessee would be entitled for deduction of gross lease rental payments. The assessee's methodology was to be accepted. Lease payments made by assessee would be revenue expenditure for assessee.

Relied:Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) : 1979 TaxPub(DT) 0782 (SC) as well as in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) : 1971 TaxPub(DT) 0366 (SC)Applied:ICDS Limited v. CIT (2013) 350 ITR 527 (SC) : 2013 TaxPub(DT) 414 (SC), Rajshree Roadways v. Union of India (2003) 263 ITR 106 (Raj) : 2003 TaxPub(DT) 1155 (Raj-HC)Distinguished:Indusind Bank Ltd. v. ADIT (2012) 19 Taxmann.com 173 (Mum) : 2012 TaxPub(DT) 1764 (Mum-Trib); 14-3-2012), Asea Brown Boveri Ltd. v. IFCI (2006) 154 Taxman 512 (SC) : 2006 TaxPub(DT) 0081 (SC), Association of Leasing & Financial Services Company v. UOI (2010) 29 STT 316 (SC) : 2010 TaxPub(ST) 0948 (SC)

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