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2015 (8) TMI 168 - ITAT DELHI

2015 (8) TMI 168 - ITAT DELHI - [2015] 42 ITR (Trib) 615 (ITAT [Del]) - Disallowance on account of lease payment made by the assessee - Held that:- AS-19 on accounting for "Leases" issued by the ICAI is only applicable for accounting the lease transaction in the books of accounts. It is a settled law that treatment in the books of accounts is not determinative of liability towards income-tax for the purpose of the Act. The liability under the Act is governed by provisions of the Act and is not d .....

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, is described as a lease other than a finance lease. The aforesaid Accounting Standard provides that under the finance lease, the lessee should recognize the asset in its books and should charge depreciation on the same. In the case of operating lease, the Accounting Standard provides that the lessee should recognize the lease payments as an expense in the profit and loss account and the lessor should recognize the asset given on lease and charge depreciation in respect of the same. The aforesa .....

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A No.1962/Del./2012 - Dated:- 31-7-2015 - SHRI N.K. SAINI AND SHRI GEORGE GEORGE K, JJ. For The Assessee : Shri Rohit Jain, Advocate and Ms. Deepashree Rao, CA For The Revenue : Shri P. Dam Kanunjna, Senior DR ORDER PER GEORGE GEORGE K., JM : This appeal, at the instance of the assessee, is directed against the order of the Commissioner of Income-tax-IX, New Delhi dated 24.01.2012. The relevant assessment year is 2003-04. 2. The assessee in his grounds of appeal has raised two issues, namely, (i .....

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for scrutiny and scrutiny assessment u/s 143 (3) of the Income-tax Act, 1961 was completed by order dated 28.03.2006 assessing total income of ₹ 3,18,14,069/-. The assessment was reopened u/s 147 and reassessment was completed by order dated 05.11.2007 fixing a total income of ₹ 4,16,49,460/-. Against the order completed u/s 147 read with section 143 (3), assessee preferred an appeal to the CIT (A) and also a writ petition to the Hon ble Delhi High Court. The Hon ble Delhi High Cour .....

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IT Act. It is observed that this expenditure was incurred for acquiring fixed assets (Rs. 15,58,610/-) and vehicles (Rs. 9,29,592/-). As the expenditure claimed by the assessee was of capital nature, it should have been disallowed and added back to the total income of the assessee. It is also found that during the relevant previous year assessee had increased the provisions towards employees retirement benefit amounting to ₹ 7,75,629/- (58,85,695 - 51,10,06) to the balance sheet. As this a .....

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see should have been disallowed and added to the total income of the assessee. It is also found that the assessee company had claimed and was allowed managerial remuneration amounting to ₹ 41,54,400/- during the previous year. This remuneration exceeds the limits prescribed in the Companies Act. Approval from the Central Government and share holders of the company was also pending. As the expenditure is not an authorized one, it should have been disallowed and added back to the total incom .....

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unt of the lease payment made by the assessee and ₹ 14,60,327/- on account of the excess managerial remuneration. As regards the other additions proposed in the reasons recorded for reopening, the same was dropped on account of the explanation given by the assessee in the course of reassessment proceedings. 4. Aggrieved by the reassessment order dated 03.12.2010, the assessee preferred an appeal before the first appellate authority, challenging the reassessment proceedings, as well as the .....

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ed from the income of the assessee in the next assessment year. Since the alternative plea of the assessee was accepted with reference to the addition of ₹ 14,60,327/-, the assessee did not challenge the same before us. As regards the rejection of assessee s plea of reopening of reassessment and issue on merits, namely, the disallowance of ₹ 9,29,592/- on account of payment of lease amount, the assessee is in appeal before us raising the following grounds :- 1. That the CIT(A) erred .....

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order is illegal and bad in law. 1.2 That the CIT(A) erred on facts and in law in upholding the initiation of the impugned reassessment proceedings without appreciating that proceedings were initiated on mere change of opinion without forming a reasonable belief of escapement of income, which is sine qua non for assumption of valid jurisdiction. 1.3 That the CIT(A) erred on facts and in law in not appreciating that there being no failure on the part of appellant to disclose fully and truly all m .....

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rder of the CIT (A). 5. We have heard the rival submissions and perused the material on record. We shall take up for consideration the issue on merits. The brief facts in relation to the disallowance are as follows. The assessee company acquired vehicles worth ₹ 27,88,776/- on financial lease. In terms of Accounting Standard 19 -"Leases" ( AS-19 ) issued by the Institute of Chartered Accountants of India ('ICAI'), the assets acquired under financial lease were capitalized .....

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ame was required to be capitalized and not allowable as deduction under section 37 of the Act. Further, depreciation was also not allowed on the purported cost of the fixed asset. 5.1 After having heard rival submissions, we are of the view that AS-19 on accounting for "Leases" issued by the ICAI is only applicable for accounting the lease transaction in the books of accounts. It is a settled law that treatment in the books of accounts is not determinative of liability towards income-t .....

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escribed as a lease that transfers substantially all the risks and rewards in respect of ownership of an asset; title may or may not be transferred under such lease. An operating lease, on the other hand, is described as a lease other than a finance lease. The aforesaid Accounting Standard provides that under the finance lease, the lessee should recognize the asset in its books and should charge depreciation on the same. In the case of operating lease, the Accounting Standard provides that the l .....

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rights in the same, are allowable as revenue expenditure under section 37 of the Act. 5.3 The Circular No.2 of 2001 dated 09.02.2001 (247 ITR (St.) 53) issued by the Central Board of Direct Taxes (CBDT) has opined that the aforesaid accounting standard issued by ICAI creating distinction between finance lease and operating lease will have no implications under the provisions of the Act. The relevant excerpt of the said Circular are reproduced herein below:- "Under the Income-tax Act, in all .....

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transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the Act. 5.4 Thus, the CBDT's view on the treatment of finance lease is not aligned to the accountant's perspective of a finance lease. For accounting purposes, although the lessee shows the asset in his balance sheet, charges depreciation in accounts and even makes impairment provision, yet the assessee is not eligible to claim depreciation under the Act, which is al .....

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e Act. 5.5 The aforesaid legal position finds support from the decision of the Hon ble Supreme Court in the case of ICDS Ltd. vs. CIT - 350 ITR 527, wherein the Hon ble Court held that the lessor is the owner of the leased property in case of finance lease, entitled to depreciation of the same. The pertinent observation of the Hon ble Court is reproduced hereunder : " The revenue's objection to the claim of the assessee is founded on the lease agreement. It argued that at the end of the .....

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the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly point in favour of the assessee" 5.6 The Hon ble Rajasthan High Court in the case of Rajshree Roadways vs. Union of India - [2003] 129 Taxman 663 upheld the assessee's claim of allow ability of lease rentals paid as lessee of the Trucks as a revenue expenditure under section 37(1) of the Act, even though the lease was categorized as finance lease. 5.7 The other relevant judgments are .....

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