Court orders fresh hearing on car lease rental deductions after tribunal ignored Supreme Court ruling

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Case Name

Philips India Limited vs Principal Commissioner of Income Tax (High Court of Calcutta)

ITAT/238/2017 IA No.GA/1/2017 (Old No.GA/2214/2017)

Date: 17th November 2021

Key Takeaways

• Tribunals must consider and address relevant Supreme Court decisions, especially when they directly support a taxpayer’s case
• Ignoring a Supreme Court precedent without proper reasoning constitutes a “mistake apparent from records”
• Each assessment year should be treated as an individual unit, and consistency doesn’t mean blindly following previous decisions when new legal precedents emerge
• Taxpayers have the right to have their cases properly adjudicated based on current legal principles

Issue

The central legal question was: Whether the Income Tax Appellate Tribunal erred in denying the assessee’s claim for deduction of lease rental payments on cars taken on financial lease as revenue expenditure under Section 37(1) of the Income Tax Act, particularly when the tribunal failed to consider a favorable Supreme Court decision in ICDS Ltd. vs CIT.

Facts

1. Assessment Year 2004-05: Philips India filed their tax return claiming deduction for lease rental payments on cars taken on financial lease as business expenses
2. Scrutiny Assessment: The tax officer didn’t agree and disallowed the claim, completing assessment under Section 143(3) on December 29, 2006
3. First Appeal: The Commissioner of Income Tax (Appeals) sided with Philips and allowed the deduction on June 30, 2009
4. Revenue’s Appeal: The tax department appealed to the tribunal. During this hearing, Philips specifically relied on a Supreme Court decision in ICDS Ltd. vs CIT (350 ITR 527(SC)) which had similar facts
5. Tribunal’s Decision: On May 11, 2016, the tribunal rejected Philips’ case and allowed the revenue’s appeal, but here’s the problem - they completely ignored the ICDS Supreme Court decision and just followed their own earlier decision in Philips’ case for assessment year 2003-04
6. Miscellaneous Application: Philips filed an application under Section 254 pointing out this was a “mistake apparent from records”
7. Final Rejection: The tribunal dismissed this application on February 22, 2017, calling the issue “debatable”

Arguments

Philips India’s Arguments:

• They were entitled to deduct lease rental payments as revenue expenditure under Section 37(1)
• The Supreme Court decision in ICDS Ltd. vs CIT had identical facts and supported their position
• The tribunal’s failure to consider this Supreme Court decision was a “mistake apparent from records”
• They cited Assistant Commissioner of Income Tax vs Saurashtra Kutch Stock Exchange Ltd. (305 ITR 227) to support that non-consideration of Supreme Court decisions is a mistake apparent from records

Revenue’s Arguments:

• The tribunal should maintain consistency with its earlier decision in the assessee’s own case for assessment year 2003-04
• The issue was debatable and didn’t require reconsideration

Key Legal Precedents

The court referenced several important cases:

1. ICDS Ltd. vs CIT (350 ITR 527(SC)) - This Supreme Court decision had identical facts to Philips’ case regarding lease rental deductions
2. Assistant Commissioner of Income Tax vs Saurashtra Kutch Stock Exchange Ltd. (305 ITR 227) - Established that non-consideration of jurisdictional high court or Supreme Court decisions constitutes a mistake apparent from records

The court applied these precedents by emphasizing that tribunals cannot simply ignore relevant Supreme Court decisions, especially when they directly support a taxpayer’s case.

Judgement

The High Court ruled in favor of Philips India. Here’s their reasoning:

1. Tribunal’s Error: The court found that the tribunal made a fundamental error by not even referring to the ICDS Supreme Court decision, despite it being specifically relied upon by the assessee
2. No Proper Adjudication: The tribunal never actually considered the merits of the case in light of the Supreme Court precedent
3. Debatable Issue Argument Rejected: The court disagreed with the tribunal’s claim that the issue was “debatable” because there was no proper adjudication in the first place
4. Individual Assessment Years: The court emphasized that each assessment year is an individual unit, and the tribunal erred in blindly following consistency without considering new legal developments

Court’s Orders:

• Set aside both the tribunal’s main order dated May 11, 2016, and the miscellaneous application order dated February 22, 2017
• Remanded the matter back to the tribunal for fresh consideration
• Directed the tribunal to decide the claim on merits after hearing the assessee
• Left the substantial questions of law open

FAQs

Q1: What does this mean for Philips India?

A: They get another chance to present their case before the tribunal, and this time the tribunal must properly consider the Supreme Court decision that supports their position.

Q2: Why was the tribunal’s approach wrong?

A: The tribunal completely ignored a relevant Supreme Court decision without any reasoning. Courts are bound to consider higher court precedents, especially when they directly apply to the case at hand.

Q3: What is a “mistake apparent from records”?

A: It’s an obvious error that can be seen from the case files without detailed investigation. Here, the tribunal’s failure to consider a directly relevant Supreme Court decision was such an obvious mistake.

Q4: Does this decision set any new legal principles?

A: It reinforces existing principles that tribunals must properly consider relevant precedents and that each assessment year should be treated individually, not just follow previous decisions blindly.

Q5: What happens next?

A: The case goes back to the tribunal, where Philips can present all their arguments again, including the ICDS Supreme Court decision. The tribunal must then make a proper decision based on the law and facts.

This appeal of assessee filed under Section 260A of the Income Tax Act (the ‘Act’ in brevity) is directed against the order dated 22nd February, 2017 passed by the Income Tax Appellate Tribunal, C-Bench, Kolkata (the ‘Tribunal’) in miscellaneous application in MA No.139/Kol/2016 arising out of ITA No.1545/Kol/2009 for the assessment year 2004-05.

The assessee has raised the following substantial questions of law for consideration :

“I. Whether on the facts and in the circumstances

of the case, the order of the Tribunal is erroneous having

been perverse for not allowing the claim of the petitioner

of lease rent paid as revenue expenditure under section

37(1) of the Act on the pretext that the issue was

debatable and that the case was not covered by the

decision of the Supreme Court in Re: ICDS Ltd. vs. CIT,

when on the contrary all evidences and materials were

present on record?

II. Whether on the facts and in the circumstances

of the case, the order passed by the tribunal is erroneous

in so far as it is perverse of having completely ignored

to abide by the well settled principle of law that no

party appearing before the Tribunal should suffer on

account of any mistake committed by the Tribunal?

III. Whether on the facts and in the

circumstances of the case, the order passed by the

Tribunal is erroneous as well as perverse in observing

that no express power of revenuw was conferred on the

Tribunal thereby ignoring the well settled principle of

law that when prejudice results from an order attributable

to the Tribunal’s mistake, error or omission, then it is

the duty of the Tribunal to set it right and such

atonement to the wronged party by the Tribunal has nothing

to do with the concept of inherent power to review?”

We have heard Mr. J.P. Khaitan, learned senior counsel for

the appellant/assessee and Mr. Bhowmick, learned standing counsel

for the respondent/revenue.

The assessee filed its Return of income tax for the

assessment year under consideration (2004-05) and in the return

amongst other claims the assessee made claim for allowing

deduction of lease rental paid on cars taken on financial lease as

a revenue expenditure. The return was selected for scrutiny and

notice under Section 143(2) was issued and subsequently the

respondent issued notice under Section 142(1) of the Act along

with a questionnaire seeking for certain clarifications. The

assessee submitted the requisite clarifications and sought to

sustain the claim for deduction as being revenue expenditure under

Section 37 of the Act. The assessing officer did not agree with

the assessee and completed the assessment under Section 143(3) of

the Act by order dated 29th December, 2006.

Aggrieved by such order, the assessee preferred appeal

before the Commissioner of Income Tax (Appeals) (CIT(A)). The

CIT(A) by an order dated 30th June, 2009 allowed the appeal and

held that the assessee is entitled for deduction. Aggrieved by

the same, the revenue preferred appeal before the tribunal. In

the revenue’s appeal, the assessee made a specific submission by

placing reliance on the decision of the Supreme Court in ICDS Ltd.

vs. CIT reported in 350 ITR 527(SC). The assessee submitted that

the facts of the case in ICDS were identical to that of the

assessee’s case and as the assessee had paid the lease rental

towards cars taken on financial lease, they were entitled to claim

deduction. The submissions made before the tribunal were in a

tabulated form where it was also specifically pointed out as to

how the facts in the case of ICDS were identical to that of the

assessee’s case. The tribunal by an order dated 11th May, 2016

rejected the case of the assessee and allowed the revenue’s appeal

following the earlier decision in the assessee’s own case for the

assessment year 2003-04. In fact, the submission of the assessee

before the tribunal was that there was a change of circumstances

in light of the decision of the Hon’ble Supreme Court in ICDS

which requires to be considered and the assessee was entitled to

relief.

On a perusal of the order passed by the tribunal dated 11th

May, 2016, more particularly from paragraphs 23, 24 and 25, we

find that the tribunal has not referred to the decision but

proceeded solely based upon the order in the assessee’s own case

for the assessment year 2003-04. Subsequently, the assessee filed

a miscellaneous petition under Section 254 of the Act stating that

there was a mistake apparent from the records and the same

requires to be rectified. It was specifically pointed out that

the assessee had submitted a summary of its arguments in course of

hearing on the grounds raised in the revenue’s appeal and the

arguments were regarding the issue of allowability of payments

towards the lease rental and stated that they specifically placed

reliance on the decision of the Hon’ble Supreme Court in the case

of ICDS. The assessee placed reliance on the decision of the

Hon’ble Supreme court in Assistant Commissioner of Income Tax vs.

Saurashtra Kutch Stock Exchange Ltd. 305 ITR 227 for the

proposition that non-consideration of a decision of the

jurisdictional high court or the Hon’ble Supreme Court is a

mistake apparent from records. Those were the contentions raised

by the assessee before the tribunal. The tribunal was not

inclined to accept the same and dismissed the miscellaneous

application. Thus, aggrieved by both the orders passed in the

main appeal by the tribunal dated 11th May, 2016 and the order

passed in the miscellaneous application dated 22nd February, 2017

which stood merged with the main order, the assessee is before us.

The tribunal while rejecting the miscellaneous application, has made an observation in paragraph 5.3 of its order dated 22nd February, 2017 that the issue which is raised by the assessee by placing reliance on the decision of the Hon’ble Supreme Court in ICDS is a debatable issue. We do not agree with

the findings arrived at by the tribunal because there was no

adjudication by the tribunal at the first instance when it allowed

the revenue’s appeal by an order dated 11th May, 2016. In fact, we

find that the said decision was not even referred to though relied

upon by the assessee. Therefore, only after the issue was

considered on merits, the tribunal can take a stand that the issue

is debatable and for doing so the tribunal should record the

reasons as to what are the other decisions on the very same point

which may not support the case of the assessee. Therefore, we

find that the order rejecting the miscellaneous application filed

by the tribunal is incorrect and calls for interference.

Going back to the correctness of the order passed by the

tribunal dated 11th May, 2016 by which the revenue’s appeal was

allowed, as pointed out earlier, the tribunal has not examined the

facts of the case qua the applicability of the decision of the

Hon’ble Supreme Court in ICDS (supra). This was required to be

done by the tribunal because the said decision of the Hon’ble

Supreme Court came to be delivered after the order was passed by

the tribunal in assessee’s own case for the assessment year 2003-

04. Therefore, the tribunal committed an error in observing that

they need to take a consistent approach in the matter. The rule

of consistency requires to be interpreted on facts bearing in mind

the legal principle that each assessment year is an individual

unit. Therefore, we are of the view that the matter requires to

be remanded to the tribunal to decide the issue relating to the

claim on account of allowability of deduction on the amount of

lease rental paid by the assessee to the lessor.

For the above reasons, the appeal is allowed and the order

passed by the tribunal dated 22nd February, 2017 in MA

No.139/Kol/2016 is set aside and consequently, the order passed by

the tribunal dated 11th May, 2016 is set aside in so far as the

subject issue is concerned and the matter stands remanded to the

tribunal to decide the claim of allowability of deduction.

The assessee is at liberty to place all facts and legal

submission before the tribunal. After hearing the assessee, the

tribunal shall take a fresh decision on merits and in accordance

with law. The substantial questions of law are left open.

The connected application stands closed.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)