Tristar Container Services (Asia) Private Limited v. The Assistant Commissioner Of Income Tax, Corporate Circle Iii(1),Chennai – 600 034

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 26.11.2018 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MR.JUSTICE N.SATHISH KUMAR Tax Case Appeal Nos. 3 to 8 of 2018 Tristar Container Services (Asia) Private Limited, No. 18,Swamy Sivananda Salai, Chepauk, Chennai – 600 005. ...Appellant in all the appeals -vs- The Assistant Commissioner of Income Tax, Corporate Circle III(1),Chennai – 600 034. ...Respondent in all the appealsTax Case Appeals filed under Section 260A of the Income TaxAct, 1961 against the common order of the Income Tax AppellateTribunal Chennai 'B' Bench, dated 29.03.2017 in ITA Nos. 937 to942/Mds/2016, for the Assessment years 2007-08 to 2012-13arising against the order of the Commissioner of Income Tax(Appeals II) Chennai 34 in I.T.A. Nos. 96, 97/15-16/CIT(A) IIdated 10.02.2016, I.T.A. No. 563/2013-2014 & 247/2014-2015/CIT(A) 11, dated 22.02.2016, I.T.A. Nos. 98 & 99/CIT(A) 11/2015-2016 dated 22.02.2016 respectively, arising upon the assessmentorders of the Assistant Commissioner of Income Tax (OSD),Corporate Circle 3, Assistant Commissioner of Income Tax,Company Circle III(2), Deputy Commissioner of Income Tax,Company Circle III(2) dated 25.03.2015, 28.03.2013, 30.03.2014respectively for the assessment year 2007-2008, 2008-2009, 2009-2010, 2010-2011, 2011-2012 & 2012-2013, respectively(PAN.AAA.C74043K) For Appellant:M/s.R.Sankara Narayanan(in all the appeals)Senior Counselfor Mr.N.P.Vijay KumarFor Respondent:Ms.V.Pushpa for Mr.M.Swaminathan(in all the appeals) JUDGMENT [Judgement of the Court was delivered by These appeals filed by the assessee under Section 260Aof the Income Tax Act, 1961 (for brevity 'the Act') are directedagainst the common order of the Income Tax Appellate TribunalChennai 'B' Bench, dated 29.03.2017 in ITA Nos.937 to942/Mds/2016, for the Assessment years 2007-08 to 2012-13. 2.These Appeals have been filed raising the followingSubstantial Questions of Law:"(i)Whether or not lease rentals paid bythe appellant under the Lease Agreementconstitute revenue expenditure an therefore anallowable expenditure under the Income Tax Act,1961?(ii)Whether or not the findings renderedby the Tribunal on the treatment of accountsrelating to containers and lease expenditurecontrary to materials made available before theTribunal?” 3.The assessee filed the return of income for the relevantyears, and by way of illustration, we take up the facts relatingto the return of income for the assessment year 2007-08. Thisreturn was filed on 29.10.2007 returning an income ofRs.64,73,426/-. The return was taken up for scrutiny by issue ofnotice under Section 143(2) of the Act. The assesseeparticipated in the assessment proceedings, details were calledfor and books of accounts and other records were produced. Theassessment was completed under Section 143(3) of the Act. 4. Subsequently, assessment was re-opened by issue of anotice under Section 148 of the Act. The assessee objected tothe re-opening by filing their objections. One of the issueswhich was subject matter of the assessment proceedings was, withregard to the lease rental payments for containers. The asssseeclaimed that the whole of lease rental as revenue expenditure.The Assessing Officer disallowed the same on the ground that thelease is financial lease and principal component of the leaserentals are capital expenditure in nature. It appears that analternate submission was made and the Assessing Officer allowedthe same as a claim for depreciation. 4. Subsequently, assessment was re-opened by issue of anotice under Section 148 of the Act. The assessee objected tothe re-opening by filing their objections. One of the issueswhich was subject matter of the assessment proceedings was, withregard to the lease rental payments for containers. The asssseeclaimed that the whole of lease rental as revenue expenditure.The Assessing Officer disallowed the same on the ground that thelease is financial lease and principal component of the leaserentals are capital expenditure in nature. It appears that analternate submission was made and the Assessing Officer allowedthe same as a claim for depreciation. 5. The assessee carried the matter by way of appeals beforethe CIT(A)-XI. The Commissioner confirmed the findings of theAssessing Officer holding that the financial lease is the leasethat substantially transfers all the risks and rewards incidentto the ownership of an asset. Against the said order, theassessee filed appeal before the Tribunal. One of the groundsraised before the Tribunal was that CIT(A) failed to appreciatethat the Act does not differentiate leases as Finance andOperating and in all cases of lease, the lease rentals areconsidered as revenue both in the hands of Lessor and Lessee. 6. Further, it was submitted that CIT(A) failed to note thatthe resident lessors have offered lease rental as income forincome tax purpose and have been accordingly assesssed in theirtax assessments. Further, it was contended that the CIT(A)failed to note that the direction given by him in his orderwould result in double taxation in respect of lease rental inquestion. The Tribunal by the impugned order, dismissed theassessee's appeal. The finding rendered by the Tribunal inparagraph 7 reads as follows:- “We have considered the rival submissions on eitherside and perused the relevant material available onrecord. The assessee claims that the containers weretaken as lease. A copy of the agreement available atpaper-book shows that it is a lease-cum-purchasecontainers. It is not clear from the agreementwhether it is a finance lease or operating lease.The fact remains that the assessee treated thecontainers as capital asset and alternativelyclaimed depreciation also. The alternative claim ofdepreciation was allowed by the Assessing Officer.Therefore, this Tribunal do not find any reason tointerfere with the order of the lower authority andaccordingly the same is confirmed.” 7. We have heard Mr.R.Sankara Narayanan, learned SeniorCounsel for Mr.N.P.Vijay Kumar, learned counsel for the assesseeand Ms.V.Pushpa for Mr.M.Swaminathan, learned Counsel for therespondent/Revenue. 8.The assessee's case is that, they being a companyregistered under the Companies Act are bound to maintain itsbooks of accounts for compliance with Accounting Standards andas per Accounting Standard 19, the assessee treats thecontainers taken on finance lease as assets in its books ofaccount and depreciates these assets over a period of time inits books of account even though it is not the legal owner ofthe containers. https://hcservices.ecourts.gov.in/hcservices/ 9. It is the further case of the assessee that AccountingStandard 19 was introduced in the year 2001 and requirement ofcapitalising the assets taken under Finance lease was brought infrom the said year. Till then even for accounting purpose allthe lease rentals were charged as revenue expenditure and thequestion of capitalising the assets does not arise. It wasfurther contended that for income tax purposes, the assessee hasclaimed the whole lease rentals as revenue expenditure. https://hcservices.ecourts.gov.in/hcservices/ 9. It is the further case of the assessee that AccountingStandard 19 was introduced in the year 2001 and requirement ofcapitalising the assets taken under Finance lease was brought infrom the said year. Till then even for accounting purpose allthe lease rentals were charged as revenue expenditure and thequestion of capitalising the assets does not arise. It wasfurther contended that for income tax purposes, the assessee hasclaimed the whole lease rentals as revenue expenditure. 10. The learned counsel on the either side referred to therelevant conditions in the agreement. The learned counsel forthe assessee referred to the business conditions dated15.08.2001, more particularly, Clause 3(b), which deals with thelessee's liability to the lessor for all damage to or loss ordestruction of the containers. Reference was made to Clause 6(b), which deals with default remedies and Clause 10, whichdeals with subleasing and assignment. These clauses werereferred to by the learned Senior Counsel to emphasize asregards the ownership rights. 11.Ms.V.Pushpa, the learned Counsel for the Revenue referredto the rate schedule and in particular Clause B, which statesthat the term of the agreement shall be 5 years commencing onthe day of pick-up by the lessee and expires on 14.08.2006. Thelearned counsel also referred to the other conditions containedin paragraph IV(C) which deals with casualty and paragraph E,which deals with Security Interest. Thus, the interpretationgiven by the assessee and the revenue wholly revolves around theinterpretation of terms and conditions of lease agreement.Parallelly, what is to be borne in mind is the stand taken bythe assessee that they are bound under the provisions of theCompanies Act to follow Accounting Standard 19. 12.The other issue would be whether the alternate claim ofdepreciation can be made by the assessee can be the sole reasonfor rejecting the other grounds. Bearing in mind the abovegrounds raised by the parties, if we peruse the order passed bythe Tribunal, we find that the Tribunal has not examined thefactual position which it was bound to do as the last factfinding body. The Tribunal having rendered a finding that it isnot clear from the agreement, whether it is finance lease oroperating lease, could not have rendered the finding in the nextline with regard to how the assessee treated the containerswhile claiming depreciation. We find that the claim fordepreciation was an alternate plea and it is settled legalposition that the assessee under the Provisions of Income Tax Act can raise alternate plea despite the fact, the alternativepleas may be in conflict with each other. 13.We may refer to Accounting Standard 19 issued in the year2001 and in particular, the Chapter relating to classificationof leases and in Clause 8 of the said Chapter, it has beenstated that whether a lease is a finance lease or an operatinglease depends on the substance of the transaction rather thanits form. Illustrations have been given pointing out theexamples of situation which would normally lead to a lease beingclassified as finance lease. However, the Tribunal did not makeany endeavour to appreciate the documents examining the effectof Accounting Standard 19 as projected by the assessee.Therefore, we are of the considered view that the matter has tobe decided afresh by the Tribunal by examining the documents,effect of Accounting Standard 19 as pointed out by the assesseeand then take a decision on merits and in accordance with law. 14. As we are convinced that the Tribunal did not undertakeany exercise to examine the factual aspect, we are welljustified in interfering with the order passed by the Tribunaland remanding the matter for fresh consideration. Having come tosuch a conclusion, there would be no necessity of answering theSubstantial Questions framed for consideration. 14. As we are convinced that the Tribunal did not undertakeany exercise to examine the factual aspect, we are welljustified in interfering with the order passed by the Tribunaland remanding the matter for fresh consideration. Having come tosuch a conclusion, there would be no necessity of answering theSubstantial Questions framed for consideration. 15. In the result, the appeals are allowed; the order passedby the Tribunal is set aside and the matter is remanded forfresh consideration to examine all factual and legal issues andproceed in accordance with law and the Substantial Questions ofLaw framed for consideration are left open. No costs. -s/d- Assistant Registrar True Copy Sub-Assistant Registrar mrm/svkiTo 1.The Assistant Commissioner of Income Tax, Corporate Circle III(1), Chennai – 600 034. Income Tax, Corporate Circle III(1), Chennai – 600 034. 2. The Income Tax Appellate Tribunal Madras 'B' Bench. 3. The Commissioner of Income Tax (Appeals II) Chennai 34. 4. The Deputy Commissioner of Income Tax Company Circle III(2) +1 CC to Mr.M.Swaminathan, Advocate sr 80263. +3 Ccs to Mr.N.P.Vijayakumar, Advocate sr 80801. Tax Case Appeal Nos. 3 to 8 of 2018 PVS(CO)SP(13/02/2019)