Case summary, Income Tax

Can the principal payment which has been made towards the finance lease be considered as revenue expenditure?

Case: M/s NIIT Limited v. The DCIT, New Delhi


Assessee is a public limited company engaged in the business of information technology education and knowledge solutions.
The assessee filed returns of income for the year 2009-2010 declaring INR 25.81Cr as income and claimed a deduction of INR 50,09,835 in respect of payment of the principal amount of finance lease, which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter IT Act). However, the assessing officer disallowed the above-claimed deduction and added the same to the income of the assessee. Thus, aggrieved by the same assessee filed the present appeal before the tribunal.

Assessee’s Arguments

The entire lease rent was towards the use of infrastructure for business therefore, allowable as a deduction in its entirety for the purpose of computing taxable income under the IT Act. Thus, be treated as revenue expenditure under section 37 of the IT Act.

Further reliance was put on the decisions of Supreme Court in the case of Sutlej Cotton Mills Ltd. CIT 116 ITR 1 (SC) and Kedarnath Jute Mfg, Co. Ltd v. CIT 82 ITR 363 (SC) where lease charges paid for the use of the asset without acquiring any ownership rights in the same was allowable as revenue expenditure. Further, relied on the case CBDT circular No. 8/2005 dated 29.08.2005 and case of Rajashree Roadways v. UOI (2003) 263 ITR 206 (Raj) wherein it was held that lease rent paid by assessee should be allowed as revenue expenditure.

Thus, the appeal should be allowed as the assessing officer has erred in its decision.

Revenue’s Arguments

The assessee made entries in the books of account of the amount as capital in nature and therefore the amount paid for the principal lease cannot be treated with interest and charges which is revenue in nature. Therefore, the appeal was liable to be dismissed.

ITAT’S Order

ITAT held that the assessee has rightly claimed the deduction as the same has been wholly and entirely used for the purpose of business and therefore can be claimed as revenue expenditure. Further, the Assessing Officer has erred by not following the rule of consistency when a similar claim for deduction was allowed to the assessee in the previous assessment year. Also, it is well-settled law that the liability is governed by the provisions of the Act and not the treatment followed for the same in the books of accounts. Thus, the deduction was allowed as revenue expenditure and appeal was allowed.

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