Principal Component of Lease Rental can be treated as Revenue Expenditure u/s 37: ITAT [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that the principal component can be treated as revenue expenditure u/s 37 of the Income Tax Act 1961.

Shri S. Sridhar represented the appellant and Shri S. Palani Kumar represented the respondent.

The assessee engaged in leasing marine containers where the assessee obtains the containers on lease from the lessor and sub-leases the same to various customers. The lease rentals so earned are considered as its income and the same is credited to Profit & Loss Account. The leased containers are treated as part of fixed assets in the Balance Sheet and the assessee charges depreciation on the same as per the Companies Act in the books of accounts. The lease rental payable by the assessee is shown as liabilities.

The lease payments made by the assessee would have two components i.e., the principal portion and the finance portion. The finance portion is debited to the Profit & Loss Account which is allowed by AO. The assessee added back the book depreciation and claim the gross lease rentals as a deduction from the profits. The AO disallowed the deduction as per the principal repayment and held that the assessee would be entitled to depreciation as well as finance charges only.

The assessee contended that there was no distinction between an operating lease and a finance lease under the Income Tax Act. The assessee claimed a foreign exchange loss of Rs.328.90 Lacs in respect of the outstanding balance of lease rental payable. Further contended that the assessee as a lessee would be entitled to the deduction of lease rentals under the Income Tax Act irrespective of the nature of the lease.

It was viewed that whatever the nature of the lease, only the lessor is entitled to depreciation as per the decision in ICDS Limited Vs CIT (350 ITR 527). It was observed that under the provisions of the Act, depreciation is admissible under section 32 of the Act only to the 'owner' of the asset. Lease charges paid for the use of the asset, without acquiring any ownership rights in the same, are allowable as revenue expenditure under Section 37 of the Act.

Shri Mahavir Singh, vice president and Shri Manoj Kumar Aggarwal, AM held that the principal component of lease rental shall be allowed as revenue expenditure and the issue of forex loss was remitted back to the file of AO for re-adjudication. The Tribunal ordered to brought to tax the profit on the sale of containers and the appeal was partly allowed.

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