ITAT Delhi Rules in Favour of NIIT Deduction on Finance Lease Principal Repayment

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has allowed the deduction of the principal component of finance lease payments under the National Interest Income Tax (NIIT) provisions.

Background:

The assessee, engaged in leasing activities, had entered into a finance lease agreement and claimed a deduction for the principal portion of lease payments. However, the Assessing Officer disallowed the claim, treating the principal repayment as a capital expenditure, which is typically not allowable as a deduction under standard income tax rules.

Tribunal’s Observations:

The ITAT took a pragmatic approach, emphasizing the substance over form principle. It held that in a finance lease, the arrangement is effectively akin to a loan transaction rather than a mere rental agreement. As such, the principal repayment, though technically a capital payment, can be considered for deduction under NIIT, since the nature of the lease closely mirrors a financed purchase.

Impact:

This ruling may set a precedent for businesses utilizing finance leases, offering clarity on the tax treatment of lease payments. Companies may now re-evaluate their existing finance lease arrangements to explore potential tax benefits under NIIT provisions.