Minda Corporation Ltd., New Delhi vs Assessee

M/s. Minda Corporation Limited, vs. DCIT, Circle 6 (1), 35A, Rajasthan Udyog Nagar, New Delhi. Delhi - 110 033.

(PAN : AAACM0344C)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Rohit Jain, Advocate and Ms. Deepashree Rao, CA REVENUE BY : Shri P. Dam Kanunjna, Senior DR

Date of Hearing : 27.07.2015 Date of Pronouncement : 31.07.2015

ORDER

PER GEORGE GEORGE K., JM :

This appeal, at the instance of the assessee, is directed against the

order of the Commissioner of Income-tax-IX, New Delhi dated

24.01.2012. The relevant assessment year is 2003-04.

2. The assessee in his grounds of appeal has raised two issues, namely,

(i) whether the reopening of assessment is valid in law; and (ii) whether

the CIT (A) is justified in upholding the disallowance of Rs.9,29,592/- on

account of lease payment made by the assessee.

2 ITA No.1962/Del./2012

3. Brief facts of the case are as follows. The assessee is a public

limited company engaged in the business of manufacturing of automobile

lock sets. The return of income for the relevant assessment year was filed

on 02.12.2003 declaring an income of Rs.2,78,95,579/-. The assessment

was taken up for scrutiny and scrutiny assessment u/s 143 (3) of the

Income-tax Act, 1961 was completed by order dated 28.03.2006 assessing

total income of Rs.3,18,14,069/-. The assessment was reopened u/s 147

and reassessment was completed by order dated 05.11.2007 fixing a total

income of Rs.4,16,49,460/-. Against the order completed u/s 147 read

with section 143 (3), assessee preferred an appeal to the CIT (A) and also a

writ petition to the Hon'ble Delhi High Court. The Hon'ble Delhi High

Court by judgment dated 26.09.2011 quashed the reassessment order on

the ground that the reasons recorded show only a change of opinion and

the reassessment proceedings are invalid.

3.1 Thereafter, a second notice dated 19.03.2010 was issued u/s 148 of

the Act. The reasons recorded for issuance of notice dated 19.03.2010

reads as under :-

" From the record it is found that the assessee, in its computation of income, had claimed and was allowed deduction of Rs.24,88,202/-, under section 37 of the IT Act. It is observed that this expenditure was incurred for acquiring fixed assets (Rs. 15,58,610/-) and vehicles (Rs. 9,29,592/-). As the expenditure claimed by the assessee was of capital nature, it should have been disallowed and added back to the total income of the assessee.

3 ITA No.1962/Del./2012 It is also found that during the relevant previous year assessee had increased the provisions towards employees retirement benefit amounting to Rs.7,75,629/- (58,85,695 - 51,10,06) to the balance sheet. As this amount was merely a provision and not ascertained liability, it was not an allowable deduction and should have been added back to the total income of the assessee.

It is also found that the assessee company in its computation of income deducted a sum of Rs.5,69,170/-, being income in respect of key man insurance policy. According to section 10 (10D), any sum received under a key man insurance policy will not be exempt from tax w.e.f, 1st October, 1996. Thus the deduction claimed by the assessee should have been disallowed and added to the total income of the assessee.

It is also found that the assessee company had claimed and was allowed managerial remuneration amounting to Rs.41,54,400/- during the previous year. This remuneration exceeds the limits prescribed in the Companies Act. Approval from the Central Government and share holders of the company was also pending. As the expenditure is not an authorized one, it should have been disallowed and added back to the total income of the assessee.

I, therefore, have reason to believe that the income of Rs.79,87,401/- has escaped assessment within the meaning of section 147 of the IT Act, 1961, due to omission on the part of the assessee to include this sum into its income for the relevant previous year."

3.2 Pursuant to the notice u/s 148 dated 19.03.2010, the reassessment

was completed by order dated 03.12.2010. In the reassessment order dated

03.12.2010, the AO had made a disallowance of Rs.9,29,592/- on account

of the lease payment made by the assessee and Rs.14,60,327/- on account

of the excess managerial remuneration. As regards the other additions

proposed in the reasons recorded for reopening, the same was dropped on 4 ITA No.1962/Del./2012

account of the explanation given by the assessee in the course of

reassessment proceedings.

4. Aggrieved by the reassessment order dated 03.12.2010, the assessee

preferred an appeal before the first appellate authority, challenging the

reassessment proceedings, as well as the issue on merits, namely,

disallowance u/s 37 of the Act and excess managerial remuneration paid.

The CIT (A) rejected the plea of the assessee that the reassessment is bad

in law. As regards the issue on merits, the CIT (A) confirmed the

disallowance u/s 37 of the Act amounting to Rs.9,29,592/-. The CIT (A)

also confirmed the AO's action in disallowing excess managerial

remuneration paid. However, the CIT (A) accepted the alternative plea of

the assessee and directed the amount to be excluded from the income of

the assessee in the next assessment year. Since the alternative plea of the

assessee was accepted with reference to the addition of Rs.14,60,327/-, the

assessee did not challenge the same before us. As regards the rejection of

assessee's plea of reopening of reassessment and issue on merits, namely,

the disallowance of Rs.9,29,592/- on account of payment of lease amount,

the assessee is in appeal before us raising the following grounds :-

"1. That the CIT(A) erred on facts and in law in upholding the order passed by the assessing officer under section 143(3) read with section 147 of the Income-tax Act, 1961 ('the Act'), which is beyond jurisdiction, bad in law and void-ab-initio,

1.1 That the CIT(A) erred on facts and in law in not appreciating that the assessing officer failed to take requisite 5 ITA No.1962/Del./2012

approval in view of the provisions of section 151 of the Act, for which the re-assessment proceedings have been initiated, and consequently, the impugned order is illegal and bad in law.

1.2 That the CIT(A) erred on facts and in law in upholding the initiation of the impugned reassessment proceedings without appreciating that proceedings were initiated on mere change of opinion without forming a reasonable belief of escapement of income, which is sine qua non for assumption of valid jurisdiction.

1.3 That the CIT(A) erred on facts and in law in not appreciating that there being no failure on the part of appellant to disclose fully and truly all material facts necessary for assessment, the reassessment proceedings were initiated after four years from the end of the relevant assessment year were illegal and bad in law and the impugned order is, therefore, liable to be quashed.

2. That the CIT(A) erred on facts and in law in upholding the disallowance of Rs. 9,29,592 on account of lease payments made by the appellant."

4. Ld. AR reiterated the submissions made before the Income-tax

authorities. Ld. DR, on the other hand, supported the order of the CIT (A).

5. We have heard the rival submissions and perused the material on

record. We shall take up for consideration the issue on merits.

The brief facts in relation to the disallowance are as follows. The

assessee company acquired vehicles worth Rs.27,88,776/- on financial

lease. In terms of Accounting Standard 19 -"Leases" ('AS-19') issued by

the Institute of Chartered Accountants of India ('ICAI'), the assets acquired

under financial lease were capitalized in the books of accounts and

consequent liability thereon was also created. However, for the purposes of 6 ITA No.1962/Del./2012

the Act, the lease rental of Rs.9,29,592/- (apart from finance charges

already debited in the profit and loss account) paid by the assessee in the

year under consideration was claimed as deduction under section 37 of the

Act. The AO disallowed the aforesaid claim of deduction on the ground

that since the payments made by the assessee was in the nature of a

'finance lease', the same was required to be capitalized and not allowable

as deduction under section 37 of the Act. Further, depreciation was also

not allowed on the purported cost of the fixed asset.

5.1 After having heard rival submissions, we are of the view that AS-19

on accounting for "Leases" issued by the ICAI is only applicable for

accounting the lease transaction in the books of accounts. It is a settled law

that treatment in the books of accounts is not determinative of liability

towards income-tax for the purpose of the Act. The liability under the Act

is governed by provisions of the Act and is not dependent on the treatment

followed for the same in the books of accounts. For above proposition,

reference is made to Sutlej Cotton Mills Ltd. vs. CIT: 116 ITR 1 (SC) and

Kedarnath Jute Mfg. Co. Ltd. vs. CIT: 82 ITR 363 (SC). AS-9 on

accounting for leases classifies lease transactions for accounting purposes

as under:

(i) Finance Lease

(ii) Operating Lease 7 ITA No.1962/Del./2012

5.2 Finance Lease, in AS-19, is described as a lease that transfers

substantially all the risks and rewards in respect of ownership of an asset;

title may or may not be transferred under such lease. An operating lease,

on the other hand, is described as a lease other than a finance lease. The

aforesaid Accounting Standard provides that under the finance lease, the

lessee should recognize the asset in its books and should charge

depreciation on the same. In the case of operating lease, the Accounting

Standard provides that the lessee should recognize the lease payments as

an expense in the profit and loss account and the lessor should recognize

the asset given on lease and charge depreciation in respect of the same.

The aforesaid distinction between finance lease and operating lease is not

recognized under the Act. 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.

5.3 The Circular No.2 of 2001 dated 09.02.2001 (247 ITR (St.) 53)

issued by the Central Board of Direct Taxes (CBDT) has opined that the

aforesaid accounting standard issued by ICAI creating distinction between

finance lease and operating lease will have no implications under the

provisions of the Act. The relevant excerpt of the said Circular are

reproduced herein below:-

8 ITA No.1962/Del./2012

"Under the Income-tax Act, in all leasing transactions, the owner of the asset is entitled to the depreciation if the same is used in the business, under section 32 of the Income-tax. The ownership of the asset is determined by the terms of the contract between the lessor and the lessee..........

It has come to the notice of the Board that the New Accounting Standard on 'Leases' issued by the Institute of Chartered Accountants of India require capitalization 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 Act."

5.4 Thus, the CBDT's view on the treatment of finance lease is not

aligned to the accountant's perspective of a finance lease. For accounting

purposes, although the lessee shows the asset in his balance sheet, charges

depreciation in accounts and even makes impairment provision, yet the

assessee is not eligible to claim depreciation under the Act, which is

allowed to the legal owner of the asset. Furthermore, not only the interest/

finance/ other charges component in the lease payments, but the entire

lease payments are treated as a deductible expense and no deduction is

allowed for the impairment provision. In the hands of the lessor, the entire

'lease rentals' and not merely the finance charges component thereof is

taxed as income. The lessor, who is the legal owner of the asset, is entitled

to claim depreciation under the provisions of the Act.

5.5 The aforesaid legal position finds support from the decision of the

Hon'ble Supreme Court in the case of ICDS Ltd. vs. CIT - 350 ITR 527,

wherein the Hon'ble Court held that the lessor is the owner of the leased 9 ITA No.1962/Del./2012

property in case of finance lease, entitled to depreciation of the same. The

pertinent observation of the Hon'ble Court is reproduced hereunder :

" The revenue's objection to the claim of the assessee is founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding one per cent of the original cost of the vehicle, making the assessee in effect a financier.

However the revenue's contention cannot be accepted. As long as the assessee has a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eye of law. A scrutiny of the sale agreement cannot be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly point in favour of the assessee"

5.6 The Hon'ble Rajasthan High Court in the case of Rajshree

Roadways vs. Union of India - [2003] 129 Taxman 663 upheld the

assessee's claim of allow ability of lease rentals paid as lessee of the

Trucks as a revenue expenditure under section 37(1) of the Act, even

though the lease was categorized as finance lease.

5.7 The other relevant judgments are as follows :-

(i) The decision of the Hon'ble Rajasthan High Court in the case

of CIT vs. Banswara Synthetic Ltd. - 216 Taxman 113,

wherein the High Court while following its earlier decision in

the case of Rajshree Roadways (supra) observed that lease

rentals paid by an assessee in case of a finance lease is 10 ITA No.1962/Del./2012

allowable as an revenue expenditure under section 37(1) of

the Act.

(ii) The decision of the Karnataka High Court in the case of

Banashankari Medical & Oncology Research Centre Ltd -

[2009] 316 ITR 407 is also to the same effect. In that case, the

assessee had taken certain equipments on lease for which it

had paid a certain sum as deposit which was to be adjusted

against the lease rentals and besides that, the assessee was

also paying finance/interest charges to the owner of

equipment. The entire amount of lease rentals paid during the

year, was claimed by the assessee as revenue expenditure

under section 37(1) of the Act, which was upheld by the High

Court.

(iii) The decision of the Jharkhand High Court in the case of CIT

vs. Tata Robins Fraser Ltd - 253 CTR 227, wherein it was

held that a lease agreement providing lessee a right to

purchase an asset is not Hire Purchase Agreement until such

right is exercised by the lessee.

5.8 In view of the aforesaid reasoning and the judicial precedents, we

hold that disallowance of Rs.9,29,592/- is not justified on facts and

circumstances of the case. It is ordered accordingly. 11 ITA No.1962/Del./2012

6. Since issue has been decided on merits in favour of the assessee, the

legal issue of reopening of assessment by issuance of notice u/s 148 of the

Act is not adjudicated. It is ordered accordingly.

7. In the result, the appeal of the assessee is partly allowed as indicated

above.

Order pronounced in open court on this 31ST day of July, 2015.

SD/- SD/- (N.K. SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 31st day of July, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-IX, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.