TMI Blog2005 (6) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturing of alums from bauxite and sulphuric acid and sales thereof with other trading items. During the course of scrutiny of accounts, it was found that the assessee had acquired 12 trucks from M/s Ashok Leyland Finance Ltd. on lease financing. The assessee had debited the amount of Rs. 2,35,938 as revenue expenditure and had shown deferred capital to the extent of Rs. 15,43,644. The assessee was asked to explain the reasons that the claim of Rs. 2,35,938 as revenue expenditure and was also directed to file copy of agreement with M/s Ashok Leyland Finance Ltd. The assessee explained the basis and assumptions made for the purpose of accounting on lease finance entries in the books of the lessee with regard to the arrangement made with M/s Ashok Leyland, lessors. It was claimed that as per agreement, the depreciation is to be claimed by the lessor and agreement prohibits capitalisation of the asset value by lessee during the tenure of lease agreement being made initially for a period of 36 months and thereafter the ownership of asset shall get transferred to lessee on payment of amount calculated at 1 per cent of the cost. The depreciation rate of 50 per cent is adopted WDV of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put by them on us for the purpose of proper accounting treatment of the transaction in our books of account in accordance with law and the agreement with them except that the depreciation will be claimed by them. Therefore, we after seeking expert advice, debited 50 per cent of the lease rental to the revenue account and put the balance amount to deferred capital expenditure which would be capitalised on the termination of the lease financing agreement after 36 months and then depreciation claimed by us at its fair estimated market value in accordance with the suggestion of the expert opinion. Then the AO states that we shall capitalise the cost of truck at the end of the lease financing agreement as per WDV in the books of Ashok Leyland Finance Ltd. This is against all accepted cannons of accountancy because the residual value of the trucks after claiming depreciation in the books of Ashok Leyland Finance Ltd. shall be only Rs. 4,048 as given by them in the agreement. It is not understood as to where the balance of amount paid by our company i.e., Rs. 4,81.909 minus Rs. 4,048 = Rs. 4,77,861 will go in the books of account of our company and under what head they will be charged. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order. 7. The CIT(A) after considering the facts and the circumstances of the case and considering the opinion of the Institute of Chartered Accountants of India, was of the view that the contention of the assessee is liable to be accepted. The CIT(A) accordingly allowed the appeal of the assessee and deleted the addition. 8. The Revenue is in appeal before us. The learned Departmental Representative relied upon the order of the AO and submitted that since the truck was not in the name of the assessee and, therefore, there was no basis for charging any expenditure in the P L a/c, therefore, the AO rightly disallowed the revenue expenditure. The learned Departmental Representative submitted that the CIT(A) without any basis deleted the addition in the matter. 9. On the other hand, the learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee paid the lease rental to M/s Ashok Leyland Finance Ltd. through lease agreement which includes the cost of chassis and cost of cabin and the remaining charges are service charges, management fund, financial charges and residual value of 1 per cent of the total cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heard the rival submissions and material available on record. The facts as regards the agreement between the assessee and M/s Ashok Leyland Finance Ltd. is not in dispute. As per lease agreement, the assessee was to pay certain amount by way of instalments for the purpose of acquiring the trucks. According to cl. 15(b) of the agreement, the lessor was entitled to claim depreciation relating to the equipment covered by the schedule as an owner thereof and the lessee is not entitled for any claim from the lessor in this regard. The assessee was entitled to the ownership of the asset on payment of 1 per cent of the cost after making the complete payment on lease rental. The assessee on payment of whole of the amount became entitled to the ownership of the asset in the asst. yr. 1994-95. The assessee accordingly claimed depreciation on the asset i.e. the amount on deferred capital expenditure. The CIT(A) vide order dt. 3rd June, 1997 allowed the claim of the assessee for depreciation in favour of the assessee on the amount of deferred capital expenditure. The Revenue though filed the appeal before us in ITA No. 475/1997 but the deduction allowed by way of depreciation was not challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the principle of commercial accountancy should ordinarily be applied in ascertaining profits and gains. The CIT(A) considered the opinion of the Institute of Chartered Accountants of India in favour of the assessee. This fact is also supported by the fact that in subsequent year the assessee was granted deduction on account of depreciation on the deferred capital expenditure. The AO, in case, would have treated the lease rent to be capital expenditure then the depreciation should have been allowed to the assessee. Since there was a clause in the lease agreement that only lessor would have entitled for depreciation then the AO should have allowed deduction as revenue expenditure in favour of the assessee. In the case decided by the Hon'ble Rajasthan High Court, the entire amount was allowed as revenue expenditure but in the case before us, the assessee only claimed 50 per cent of the payment to be as revenue expenditure and remaining was treated as deferred capital expenditure upon which subsequently depreciation has been allowed by the CIT(A). These factors would clearly prove that the assessee has been rightly allowed the deduction on account of revenue expenditure of the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred with a view to preserving and augmenting business and amount is allowed deductible. The AO in the assessment order without pointing out anything on this issue disallowed the amount by merely stating that the amount is paid for lunch, tea and coffee and gift items to employees on the annual day of the company. Therefore, the amount is spent on the employees on the occasion of annual day. No reason has been given whatsoever to make addition on the same. The details itself proved that the assessee incurred the expenses on account of annual day of business upon the employees. Such action would always strengthen the relation between the employees and the employer and for the betterment of the business institution. The same is, therefore, laid down wholly and exclusively for the business of the assessee. We accordingly set aside the orders of the authorities below. The addition is, therefore, deleted and the appeal of the assessee is allowed. 16. ITA Nos. 922/Asr/1995 and 536/Asr/1996 (Asst. yrs. 1992-93 and 1993-94 Departmental appeals): Both the Departmental appeals are filed against deleting the additions of Rs. 13,32,024 and Rs. 15.17,851 on account of lease r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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