Facts of the Case

The Revenue challenged the common order passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2006-07, 2007-08, 2008-09 and 2009-10 in favour of Indian Railway Finance Corporation Ltd. (IRFC).

The principal dispute concerned the allowability of lease equalisation charges, being capital recovery of leased assets relating to railway rolling stock owned by IRFC and leased to Indian Railways.

Additionally, in one appeal, an issue arose regarding prior period interest expenditure, where the Assessing Officer had disallowed an amount on the ground that it pertained to an earlier period.

The ITAT allowed relief to the assessee by following its own earlier orders.

Issues Involved

  1. Whether lease equalisation charges claimed by IRFC were allowable deductions under the Income Tax Act?
  2. Whether the Revenue could challenge the ITAT’s order when the issue was already covered by earlier judgments?
  3. Whether prior period interest expenditure was allowable in the year in which the liability crystallized?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that lease equalisation charges were not allowable deductions and should not reduce taxable income.
  • It contended that the accounting treatment adopted by the assessee was not permissible under the Act.
  • Regarding prior period interest expenditure, the Revenue argued that such expenditure related to earlier years and could not be claimed in the current year.

Respondent’s Arguments (Assessee)

  • The assessee submitted that the issue of lease equalisation charges had already been settled in its favour in earlier assessment years.
  • The assessee relied upon previous ITAT orders and Delhi High Court’s earlier judgment in its own case.
  • Regarding prior period interest expenditure, the assessee argued that due to retrospective revision of interest rates, the liability crystallized during the relevant assessment year and hence was allowable.

Court Findings / Order

The Delhi High Court dismissed the Revenue’s appeals and held:

1. Lease Equalisation Charges

The Court observed that the issue was already covered by its earlier judgment in the assessee’s own case for AY 2001-02.

The ITAT had rightly followed its earlier decision and there was no reason for interference.

Thus, no substantial question of law arose.

2. Prior Period Interest Expenditure

The Court upheld the ITAT’s direction restoring the matter to the Assessing Officer to verify the year of crystallization of liability.

The Court held that if liability crystallized during the relevant year, deduction may be allowed accordingly.

No substantial question of law arose even on this issue.

Accordingly, all appeals were dismissed. (Indian Kanoon)

Important Clarification

This judgment reiterates that:

  • Lease equalisation charges in finance lease transactions are allowable where consistent accounting treatment is followed and supported by precedent.
  • Once an issue is conclusively settled in earlier years in the assessee’s own case, Revenue cannot repeatedly re-agitate the same issue without fresh grounds.
  • Prior period expenditure is allowable in the year in which liability crystallizes, even if it pertains to earlier periods.

Sections Involved

  • Section 145 – Method of Accounting
  • Section 37(1) – Allowability of Business Expenditure
  • Section 28 – Business Income Computation
  • Principles relating to Lease Equalisation Charges
  • Principles relating to Prior Period Expenses / Crystallization of Liability

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:2750-DB/RKG23032015ITA1062015.pdf 

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