TMI Blog2024 (2) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... case being peculiar we are inclined to allow the ground raised by the assessee. Accordingly, ground raised by the assessee is allowed. Disallowance of expenses treating the same as provisions - HELD THAT:- Before us, Ld.AR of the assessee brought to our notice summary of expenses disallowed by the AO along with the supporting evidences which was also submitted before Ld. CIT(A). The various expenditures claimed by the assessee are disallowed without there being any proper verification. Therefore, we are inclined to remit this issue along with the various supporting evidences submitted by the assessee to the file of the AO with a direction to verify the same as per law. It is needless to say that assessee may be given proper opportunity of being heard. Accordingly, Ground No. 2 raised by the assessee is allowed for statistical purpose. Foreign Tax Credit - assessee had inadvertently failed to claim credit of foreign taxes in its return of income - AR submitted that the assessee is eligible to claim credit of foreign taxes paid in Japan to avoid any double taxation in respect of same income. HELD THAT:- During the course of assessment proceedings, the assessee submitted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n held that the lessor is the owner of the asset. The natural corollary of the said Circular and the Supreme Court decision is that the lease rental payment made by the lessee even under finance lease is a revenue expenditure and allowable under section 37(1) of the Act. 2. Disallowance of expenses of INR 4,14,46,637/-treating the same as provisions: 2.1 The CIT(A) grossly erred, on the facts and circumstances of the case and in law, in disallowing expenses on the alleged ground that the said expenses are not incurred / paid in relevant assessment year and are mere provisions without considering the detailed submissions and supportings provided by the Appellant. The CIT(A) ought to have appreciated that the services are pertaining to and availed by the Appellant in the year under consideration and the invoices are also dated in the year under consideration. 2.2 The CIT(A) ought to have appreciated that the Appellant is following the mercantile system of accounting and as per mercantile system of accounting all the expenses relating to earning of revenues for the stipulated period should be booked in that year itself. The CIT(A) also ought to have appreciated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of assets. Hence, no depreciation is claimed on leased assets for tax purposes. iii) Lease rentals (principal amount as well as interest component) paid are claimed as revenue expenditure. Only interest component of lease rent payment is debited to profit and loss account and hence principal portion which is not debited in profit and loss account (INR 6,47,09,747/-) is claimed as deduction in computation of income. 6. The Assessing Officer, relying on the treatment given for accounting purpose, held that the principal component of finance lease rental is towards acquisition of capital asset and thus, capital in nature not allowable under section 37(1) of the Act. Further, the Assessing Officer also did not allow the depreciation on such leased asset on the ground that Assessee a lessee is not the owner of such leased assets. 7. Aggrieved assessee preferred appeal before Ld. CIT(A) and filed detailed submissions, after considering the detailed submissions Ld.CIT(A) upheld the order of the Assessee Officer. 8. Before us, at the time of hearing, Ld.AR of the assessee submitted that in sustaining the additions, the Assessing Officer and the Ld.CIT(A) disregarded the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther interests therein, as requested by Lessor and will keep the Equipment free of any other labeling which might be interpreted as a claim of ownership This clause also showcases that ownership of leased assets at all times during the lease period is with the lessor. Page 47/ Para 5.7 Alterations and Modifications Lessee shall not make any additions, attachments, alterations or improvements to the equipment... Ownership rights is a bundled right with all other rights such as right to modify, right to discard, alienate etc. Restriction on the Appellant to make modification to leased assets, sub-letting assets, part with possession of assets, etc. showcases that the lessee did not get any ownership rights in leased assets. Page 51/ para 12.1 Assignment - Lessee shall not assign its rights or obligations, sublet the Equipment or otherwise permit the Equipment to be operated or used by, or to come into the possession of, anyone but lessee. Page 49/ para 9.1 Return of equipment Upon expiration of the original lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act 14. The debate of determination of ownership under finance lease was put to rest by the Hon'ble Supreme Court in case of ICDS Ltd v. CIT [2013] 350 ITR 527 (SC) wherein the Hon'ble Supreme Court pointing out specific clauses in the finance lease agreement held the lessor as the owner of the leased assets. Decision of Hon'ble Supreme Courtis enclosed at page no. 140 to 167 of the paper book. 15. The below are the relevant clauses of the agreement basis which the Hon'ble Supreme Court held lessor as owner of leased assets: i. the assessee (lessor in that case) was the exclusive owner of the vehicle all points of time: ii. if the lessee committed a default, the assessee was empowered to repossess the vehicle (and not merely recover money from the customer); iii. at the conclusion of the lease period, the lessee was obliged to return the vehicle to the assessee; and iv. the assessee had the right of inspection of the vehicle at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act is governed by the provisions of the Act and not depending on the treatment also well followed for the same in the books of account. It is also well settled that whether the assessee was entitled to a particular deduction or not, would depend upon the provisions of Law relating thereto, and not on the view, which the assessee might take of his right, nor could the existence or absence of entries in the books of account by decisive or conclusive in the matter. (Emphasis supplied). Tristar Container Services Asia v. ACIT [2022] 143 taxmann.com 324(Chennai-Trib) where facts of the case are similar to that of the Appellant. In said case the assessee was engaged in taking assets on lease and further subleasing to various customers. The assessee claimed lease rental paid by it as deduction under section 37(1). The assessing officer was of the opinion that lease was a finance lease and disallowed principal amount on the ground that the same was capital in nature. Tribunal held that AS-19 only provides for the accounting is not treatment to be given to the two types of leases. It is not determinative of the tax treatment of the lease which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the issue is squarely covered by the High Court and Supreme Court in favour of the assessee. (Emphasis supplied). M/s Philips India Ltd. (formerly Philips Electronics India Ltd.) (ITA No.2489/Kol/2017) (Kolkata-Trib) The assessee claimed lease rental paid for motor car taken on finance lease from Citi Corp. The same was treated as capital expenditure by the assessing officer based on the reliance placed in the assessee's own case for another assessment year. Consequently, the DRP upheld the proposed adjustment. However, the Tribunal ruled in favour of the assessee and held as under: We have heard the rival submissions. We find that the issue under dispute iscovered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltdsupra in favour of the assessee. Hence respectfully following the same, weallow the Ground No. 8 raised by the assessee. (Emphasis supplied). 19. Based on the above submission, it is humbly submitted that the appellant's claim of deduction on account of lease rental paid may kindly be allowed. 10. On the other hand, Ld. DR relied on the order of the Ld. CIT(A) and submitted that the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sor has claimed the deduction of depreciation and interest in their computation of income, when the revenue disallowed the same in their hands Hon ble Karnataka High Court allowed the claim of lessor (Cisco Systems Capital (India) Private Limited) by observing as under:- 14. This Court has carefully gone through the assessment order passed by the assessing officer and the order passed by the Principal Commissioner of Income Tax. The order passed by the Principal Commissioner of Income Tax reveals that he has exercised jurisdiction under Section 263 of the Act of 1961 on the ground that although there was an enquiry by the assessing officer, the enquiry conducted by the assessing officer was inadequate and the assessing officer has ignored the vital facts resulting in loss to the revenue. However, the order passed by the assessing officer reveals that he has called for necessary evidence on the issue of depreciation claimed onassets leased under finance lease transactions by issuing show cause notice. The assessee has filed all relevant documents including the copies of agreements entered with the customers and the assessee has also referred to the Circulars issued by the CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held that the assessee is entitled to benefit of depreciation on leased assets under Section 32 of the Act. Thus, the questions of law involved in the appeal are no longer res integra and are squarely covered by the decision of the Supreme Court in I.C.D.S. Ltd. supra. 7. For yet another reason the substantial questions of law have to be answered in favour of the assessee. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. In the instant case, the revenue has accepted the claim of the assessee for depreciation under Section 32 of the Act for the Assessment Year 2002-03 and 2003-04. Therefore, the revenue cannot be allowed to take a different stand for the Assessment Year 2004-05. 8. In view of preceding analysis, the subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the said agreement and that the registered owner refuses to deliver the certificate of registration or has absconded, such authority may, after giving the registered owner an opportunity to make such representation as he may wish to make (by sending to him a notice by registered post acknowledgment due at his address entered in the certificate of registration) and notwithstanding that the certificate of registration is not produced before it, cancel the certificate and issue a fresh certificate of registration in the name of the person with whom the registered owner has entered into the said agreement: Provided that a fresh certificate of registration shall not be issued in respect of a motor vehicle, unless such person pays the prescribed fee: Provided further that a fresh certificate of registration issued in respect of a motor vehicle, other than a transport vehicle, shall be valid only for the remaining period for which the certificate cancelled under this sub-section would have been in force. Therefore, the MV Act mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we hold that the lessor i.e. the assessee is the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of Section 32 of the Act and hence, is entitled to claim depreciation in respect of additions made to the trucks, which were leased out. 30. With regard to the claim of the assessee for a higher rate of depreciation, the import of the same term purposes of business , used in the second proviso to Section 32(1) of the Act gains significance. We are of the view that the interpretation of these words would not be any different from that which we ascribed to them earlier, under Section 32 (1) of the Act. Therefore, the assessee fulfills even the requirements for a claim of a higher rate of depreciation, and hence is entitled to the same. 31. In this regard, we endorse the following observations of the Tribunal, which clinch the issue in favour of the assessee. 15. The CBDT vide Circular No. 652, dated 14-6-1993 has clarified that the higher rate of 40% in case of lorries etc. plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, in the present case, with regard to the ownership, inspection, repossession of the equipment on default, delivery of equipment on expiry of lease and ownership at the end of the lease period, are similar and therefore, it is the assessee alone who can claim depreciation, as rightly held by the assessing officer. The clauses relating to lease have already been interpreted by the Supreme Court in the case of M/s ICDS Ltd., (supra) and it has been held that the assessee is entitled to the benefit of depreciation on leased assets under Section 32 of the Act of 1961 and therefore, the substantial question of law involved in the present appeal is no longer res integra and is squarely covered by the decision of the Hon ble Supreme Court in M/s ICDS Ltd., (supra) as well as the judgment delivered by the Division of this Court in Hewlett Packard India Sales Pvt. Ltd., (supra). Resultantly, the substantial question of law is answered in favour of the assessee and against the revenue. 13. Respectfully following the above decision, the same set of transaction on which lessor (Cisco Systems Capital (India) Private Limited) was allowed to claim the deduction/depreciation in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as expense under Income tax Act. Since these amounts were not the actual payments but only claimed as provisions, accordingly the same is not allowable. The Income-tax Act does not allow provisional expenses or provisions. Being a company entity, as per the provisions the assessee is required and it is following is Mercantile System of Accounting. As per the Mercantile System of Accounting, as per the Matching Principle one should record all expenses related to a revenue- generating transaction at the same time that one recognizes the revenue. This is the basic foundation for the use of accrual accounting. In the instant case the expenses which have been incurred in the next year after the balance sheet date have been debited in the current year though all Invoices pertain to the next year. Thus the assessee has claimed future expenses in the current and by doing so the assessee has decreased its tax liability. Further, even the assessee has not been able to substantiate with evidences of supporting as to how these are related wholly and exclusively for the purposes of the business of the assessee company since no details have been submitted. 5.4 It is also seen that while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus income was subjected to dual taxation, once in Japan by way of withholding and then in India. Pursuant to power granted under section 90(1) of the Act, the Central Government has entered into a double tax avoidance agreement with Japan ( India- Japan tax treaty) for granting relief in respect of double taxation of income. As per section 90(2) of the Act, the assessee can take benefit of treaty provisions if it is more beneficial. 19. Article 23 Elimination of Double Taxation of the India-Japan tax treaty reads as under: - 2. Double taxation shall be avoided in the case of India as follows: (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction. Such deduction in either case shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable, as the case may be, to the income which may be taxed in Japan.... [Emphasis Supplied] 20. In light of above submissions, Ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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