The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that entries in books of account not conclusive in determining income.
During the assessment proceedings, the assessee, J.M. Morgan Stanley Securities Pvt Ltd was asked to explain why lease rental on vehicles should not be disallowed. In response thereto, the assessee submitted that the assessee has used vehicles required under a finance lease. As per Accounting Standard 19, on ‘leases’ issued by the ICAI, the assessee has recognised this as an asset and a corresponding liability created as if the asset has been acquired on credit.
The principal amount embedded in the lease rentals is debited to the liability and the interest amount is debited to the profit and loss account. In the books of accounts, the assessee is also claiming depreciation in respect of the asset recognised for the leased vehicles. Accordingly, the lease rentals are claimed as a deduction, and depreciation and interest are added back in the computation of income.
The AO did not agree with the submissions of the assessee and held that the assessee itself has treated the principal amount as liability and lease vehicles as assets which is a correct position of law as taken by the assessee in its books of accounts as principal amount for acquiring ‘finance lease assets’ is capital expenditure and not eligible for deduction as revenue expenditure.
The Counsel for the assessee contended that lease rental on vehicles was allowed in the preceding assessment year and there is no change in facts and circumstances in the year under consideration and further submitted that the assessee is not the owner of the vehicles as the assessee has to deliver the lease vehicles to the lessor at the end of the lease period.
The claim of the assessee was denied by the Revenue on the basis that assessee’s treatment of assets and liability in its accounts was as per the law and the principal amount for acquiring financial lease asset is a capital expenditure. It is also the claim of the assessee that these assets are not owned by the assessee and at the end of the lease period the same are returned to the lessor.
A Bench comprising Prashant Maharishi, Accountant Member and Sandeep Singh Karhail, Judicial Member observed that “It is trite that entries in the books of account alone are not conclusive in determining the income of the assessee. Further, the Revenue has also not denied that such assets were acquired by way of lease and the same were not purchased by the assessee. Thus, we are of the considered view that the lease rental paid by the assessee is in Revenue nature.”
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