J.M. Morgan Stanley Securities Pvt. Ltd Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that lease rental paid in respect of the vehicles used by its employees is revenue in nature and allowable as deduction.
Facts- The assessee paid lease rental of Rs. 14,61,606 in respect of vehicles used by its employees in the grade of VP and executive director. Since lease vehicles were used for the purpose of business, the assessee had claimed a deduction of lease rentals of Rs 40,61,606. During the assessment proceedings, the assessee 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 lease rentals paid by the assessee are broken up into the principal amount and the interest amount. 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.
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 learned DRP vide directions issued under section 144C(5) of the Act rejected the objections filed by the assessee against the aforesaid disallowance. Being aggrieved, the assessee is in appeal before us.
Conclusion- The interest amount in the lease rental was debited to the profit and loss account. However, in view of Circular No. 2 of 2001 dated 09/02/2001 issued by the CBDT, the entire lease rental was claimed as a deduction, and depreciation and interest were added back in the computation of income. The said 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. The Revenue has not brought anything on record to prove that the assessee is the owner of the leased assets.
Held 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. Before concluding it is also relevant to note that in the immediately preceding year the assessee has claimed lease rental paid in respect of the vehicles, which was allowed by the AO vide order dated 29/12/2008 passed under section 143(3) of the Act. Thus in absence of any change in facts and law, we find no merit in upholding the disallowance made by the AO on this issue. Accordingly, we direct the AO to delete the disallowance on account of the lease rental paid for the use of vehicles.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 27/08/2010, passed by the Assessing Officer (“AO”) under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (‘the Act’) pursuant to the directions dated 14/07/2010, issued by the learned Dispute Resolution Panel–II, Mumbai, (“learned DRP”) under section 144C(5) of the Act, for the assessment year 2006–07.
2. In its appeal, the assessee has raised the following grounds:
“1. On the facts and in the circumstances of the case, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) have legally erred in proposing and the Hon’ble Dispute Resolution Panel (DRP) further erred in confirming the proposed addition of Rs 22,99,91,344 on account of alleged lower commission charged to Associated Enterprises namely M/s. Morgan Stanley Dean Winter Mauritius Company Limited and M/s. Morgan Stanley & Co. International Limited, United Kingdom.
The Appellant therefore prays that the learned AO may be directed to delete the addition as mentioned above and modify the impugned assessment order, accordingly.
2. On the facts and in the circumstances of the case, the learned TPO and the learned AO have legally erred in proposing and the Hon’ble DRP further erred in confirming the proposed addition of Rs 3,71,74,349 on account of disallowance of Overseas Support Services fees paid.
The Appellant therefore prays that the learned AO may be directed to delete the addition as mentioned above and modify the impugned assessment order, accordingly.
3. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of depreciation of Rs, 6,78,988 on BSE/NSE card.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of the depreciation on BSE/NSE card and modify the impugned assessment order, accordingly
4. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of depreciation of Rs. 10,45,624 on other intangible assets.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of depreciation on other intangible assets and modify the impugned assessment order, accordingly.
5. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of Rs 90,65,400 under section 40A(2) of the Income-tax Act, 1961 (the Act) in respect of payments made to Ashith Kampani.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of the aforesaid expenses and modify the impugned assessment order, accordingly.
6. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of Rs. 69,04,902 under section 14A of the Act.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of the aforesaid disallowance and modify the impugned assessment order, accordingly.
7. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of Rs. 3,04,30,352 under section 40(a)(ia) of the Act for non-deduction of tax allegedly deductible at source on transaction charges of Rs. 2,71,09,628 paid to BSE/NSE and VSAT/WAN/leased line charges of Rs. 33,20,724.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of the aforesaid expenses and modify the impugned assessment order, accordingly.
8. On the facts and in the circumstances of the case, the learned AO has legally erred in proposing and the Hon ‘ble DRP further erred in confirming the proposed addition on account of disallowance of Rs. 14,61,606 on account of lease rentals paid for use of vehicles.
The Appellant therefore prays that the learned AO may be directed to delete the disallowance of aforesaid expenses and modify the impugned assessment order, accordingly.
9. On the facts and in the circumstances of the case, the learned AO has legally erred in initiating and the Hon’ble DRP further erred in confirming the initiation of penalty proceedings under section 271 (1)(c) of the Act on a mere difference of opinion on purely legal issues.
The Appellant prays that the learned AO be directed to drop the penalty proceedings initiated under section 271 (1)(c) of the Act.
Appellant craves leave to add to, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the earing of this appeal as per law.”
3. The assessee vide application dated 23/08/2022 seeks to modify the ground of appeal no.1. The said application and modified ground were taken on record. The modified ground of appeal no.1 reads as under:
“Based on the facts and circumstances of the case, in relation to the Ground of Appeal-1, the Appellant respectfully submits the following modified ground (containing sub grounds):
Ground of Appeal-1: Adjustment to the Arm’s Length Price (ALP) of the commission earned by the Appellant.
1. On the facts and circumstances of the case, the Additional Commissioner of Income-tax, Transfer Pricing II- (3), Mumbai (learned TPO) and the leaned Assessing Officer (AO) have legally erred in proposing and the Honourable Dispute Resolution Panel (DRP) further erred in confirming the proposed addition of Rs 22,99,91,344 on account of alleged lower commission charged to Associated Enterprises namely M/s Morgan Stanley Dean Writer Mauritius Company Limited and M/s Morgan Stanley & CO. International Limited, United Kingdom.
In this regard, on the facts and circumstances of the case, the learned AO/ TPO and the Hon’ble DRP erred on the following grounds:
1.1 In not determining the ALP of the aforesaid transaction in accordance with section 92CA(1) and section 92CA(2) of the Act as required under section 92CA(3) of the Act.
1.2 In not accepting the Appellant’s contention that the Transactional Net Margin Method is the most appropriate method for determining the ALP for the broking commission eamed on trades executed on behalf of the AES.
1.3 While applying the CUP method, by not granting an adjustment based on the comparability analysis, for:
