While clarifying that lease rentals paid in case of a finance lease are allowable as revenue expenditure, the New Delhi Income Tax Appellate Tribunal (ITAT) held that for accounting purposes, although the lessee shows the asset in his balance sheet, charges depreciation in accounts and even makes impairment provision, yet the taxpayer is not eligible to claim depreciation under the Income Tax Act, which is allowed to the legal owner of the asset.
Furthermore, the Tribunal explained that 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.
Thus, in the hands of the lessor, the entire ‘lease rentals’ and not merely the finance charges component thereof is taxed as income, and the lessor, who is the legal owner of the asset, is entitled to claim depreciation under the provisions of the Income Tax Act, added the Tribunal, while allowing the benefit of lease rentals to be treated as revenue expenditure in the hands of Vodafone Idea Ltd.
The Division Bench comprising Yogesh Kumar U.S. (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that when the Vodafone (appellant) has paid lease rent as a finance lease and accordingly capitalised the same by following the AS 19, then as far as the Income Tax Act is concerned, those lease payments are to be considered as revenue expenditure, irrespective of the fact whether they are operating or finance lease.
The Bench accepted the submission that the substance of the transaction clearly suggests that the beneficial ownership remained with IBM and not the appellant, and, hence, it has rightly claimed the entire lease rent paid to IBM as a revenue expenditure.
Accordingly, the Bench concluded that mere classification of a payment as ‘finance lease’ from an accounting perspective is not determinative of the tax treatment of the payment, and allowed the appeal in favour of Vodafone Idea Ltd.
Briefly, the appellant, a telecom operator, working as a joint venture between the Aditya Birla Group and Vodafone Group for providing voice and data services on 3G, 4G, and 5G networks across the country, had claimed a deduction of Rs. 96.71 crores with respect to the service charges for provision of services and hardware paid to IBM. The AO, however, proposed disallowance to an extent of Rs. 49.74 crores and held that the same should be amortised over the period of the contract of 5 years. The AO categorised the payments to IBM as one related to IT services and one related to hardware, both of which were to be capitalised.
When the matter reached the DRP, it directed the AO to treat it as capital expenditure. At the same time, the DRP held that the entire amount of Rs. 96.71 crores should be considered as capital in nature and should be amortised over a period of 5 years.
Case Relied On:
Minda Corporation Ltd. vs. DCIT, Circle 6(1), New Delhi [(2016) 69 taxmann.com 317 (Delhi Tribunal)]
Appearances:
Advocates Salil Kapoor and Soumya Singh, for the Appellant/ Taxpayer
CIT S.K. Jadav, for the Respondent/ Revenue
