Whether merely because lease arrangement is treated as finance lease for purpose of AS 19, lease rentals paid for vehicles is not to be allowed as revenue expenditure – NO: ITAT

THE issue is – Whether merely because lease arrangement is treated as finance lease for purpose of AS 19, lease rentals paid for vehicles is not to be allowed as revenue expenditure. NO is the answer.
Facts of the case

The assessee had taken certain vehicles on lease and paid lease rent consisting of principal repayment and finance charges to the lessor. The assessee chose to treat the lease transactions differently in its books of accounts. The leased asset was capitalized in the books of accounts of the assesee at lower of fair value and present value of minimum lease rental) and depreciation claimed in the books on the premise that the assessee is the owner of the leased assets in line with the Accounting Standard (AS) 19 on ‘Leases’ issued by the Institute of Chartered Accountants of India (ICAI). Hence for the purpose of its books, the assessee is the owner of the leased assets and claimed depreciation. In respect of finance charges paid by the assessee, the same was debited as expenditure in its profit and loss account. The assessee disallowed the depreciation on leased assets and finance charges debited to profit and loss account in its statement of total income and claimed the entire lease rentals paid (including principal repayment) as deduction in its return of income. AO allowed the claim of lease rentals as deduction in the scrutiny assessment proceedings. According to the CIT, the assessee is not entitled to claim the principal repayment of lease rent as revenue expenditure as the assessee is defacto owner of the vehicles and all the risk and rewards rest with the assessee and for all practical purposes, the assessee is the owner of the vehicles as per terms of contract. Hence, the order of AO is erroneous and prejudicial to interest of revenue.
Having heard the parties, the ITAT held that,
++ the ownership / title on the vehicles always lies with lessor during the subsistence of the lease vide clause 8 of the lease deed. During the subsistence of this lease arrangement and till the vehicles are delivered back to the lessor, the lessee shall insure the vehicles with the lessor’s name as the owner vide clause 11 of the lease deed. Clause 15 of the Lease deed clearly specifies that upon expiration or earlier termination of the lease, the lessee shall deliver to the lessor the said vehicles at a place designated by the lessor. Since the ownership does not vest with the assessee at any point of time during the subsistence of the lease, the claim of allowability of depreciation u/s 32 as owner of the vehicles, does not arise. Lease arrangement cannot be considered as one of hire purchase as per Circular No. 9/1943 No. 9 [R.Dis.No. 27(4)-IT/43] dated 23.3.1943, since the terms of the agreement does not provide that the equipments shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipments. Merely because the lease arrangement has been considered as finance lease for the purpose of AS 19, that itself does not render the lessee (assessee herein) as the owner of asset for IT Act for claiming depreciation. Assessee had duly complied with the Circulars laid down in this regard more so when the CBDT has itself clarified vide Circular No. 2/2001 dated 9.2.2001 that the AS 19 will have no implication on the allowance of depreciation on assets under the provisions of IT Act. CBDT Circulars are binding on the revenue. As per this Circular No. 2/2001 dated 9.2.2001, in a lease transaction, the owner of the assets is entitled to depreciation. The lessor being the owner had the right to claim depreciation and the assessee has not claimed any depreciation as per the provisions of the IT Act and instead had claimed the entire lease rental as revenue expenditure.
++ the order passed u/s 143(3) by the AO does not suffer from any error. This issue of allowability of lease rentals has been elaborately examined by the AO in the scrutiny assessment proceedings after posing a specific query in this regard and assessment completed after duly considering the replies filed by the assessee, even though no mention is made in the assessment order regarding the same. The issue is accepted by the revenue in assessee’s own case for the Asst Year 2011-12 pursuant to the directions of the DRP. The order passed by the AO cannot be considered as erroneous.