Facts of the Case

The Revenue filed appeals against the common order of the Income Tax Appellate Tribunal (ITAT) concerning Assessment Years 2006-07, 2007-08, 2008-09, and 2009-10.

The principal dispute related to the allowability of lease equalisation charges, being capital recovery arising from leased assets, particularly rolling stock owned by the assessee and leased to Indian Railways under a lease finance arrangement.

In one of the appeals (ITA 104/2015), an additional issue concerned the allowability of prior period interest expenditure amounting to ₹1,10,10,874, claimed due to retrospective revision of interest rates during the relevant assessment year.

Issues Involved

  1. Whether lease equalisation charges claimed by the assessee were allowable as deduction under the Income Tax Act.
  2. Whether prior period interest expenditure, arising due to retrospective revision of interest rates, could be claimed in the relevant assessment year on crystallization basis.

Petitioner’s Arguments (Revenue’s Arguments)

  • The Revenue challenged the ITAT’s order allowing deduction in respect of lease equalisation charges.
  • It contended that such charges were in the nature of capital recovery and required disallowance.
  • In relation to prior period interest expenditure, the Revenue argued that the liability pertained to earlier years and therefore should not be allowed in the current year.

Respondent’s Arguments (Assessee’s Arguments)

  • The assessee submitted that the issue of lease equalisation charges had already been decided in its favour for Assessment Year 2001-02.
  • It relied on earlier ITAT orders, which had been affirmed by the Delhi High Court.
  • Regarding prior period interest expenditure, it argued that the liability crystallized during the relevant assessment year due to retrospective revision of interest rates and was therefore allowable in that year.

Court Order / Findings

1. Lease Equalisation Charges

The Court noted that the issue had already been conclusively decided in favour of the assessee for earlier assessment years.

The ITAT had followed its previous order for AY 2001-02, and the same had been affirmed by the Delhi High Court in:

Commissioner of Income Tax, Large Taxpayers Unit vs Indian Railway Finance Corporation Ltd. (362 ITR 548, Delhi High Court)

The Revenue conceded that the issue was covered.

Accordingly, the Court held that no substantial question of law arose on this issue.

2. Prior Period Interest Expenditure

The Court observed that the ITAT had restored the matter to the Assessing Officer for examining the year of allowability based on evidence and crystallization of liability.

The High Court held that such directions were proper and did not raise any substantial question of law.

The Revenue’s appeals were dismissed.

Important Clarification

  • Lease equalisation charges, when consistently allowed in earlier years and supported by judicial precedent, cannot be reopened in absence of a new legal issue.
  • Prior period expenses may still be allowable in the year in which liability crystallizes, even if related to an earlier period, subject to factual verification.
  • Mere disagreement on factual determination does not constitute a substantial question of law for appeal under Section 260A.

Sections Involved:

  • Section 37(1) – General deduction of business expenditure
  • Section 145 – Method of accounting
  • Principles relating to crystallization of liability
  • Treatment of Lease Equalisation Charges under accounting and tax law  

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:2748-DB/RKG23032015ITA1032015.pdf

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