Lease rent for vehicle used by employees is revenue in nature

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.

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