ITAT Ahmedabad Deletes Penalty u/s 271(1)(c) on Lease Rent Accounting Dispute

Background of the Dispute

The Ahmedabad Bench of the ITAT considered a batch of five penalty appeals filed by Axis Bank Limited for Assessment Years 2011-12 to 2015-16, all arising from orders passed under Section 271(1)(c) of the Income Tax Act 1961. The core controversy related to an additional deduction claimed towards lease rent expenditure due to a change in accounting methodology mandated by Accounting Standard-19 (AS-19).

For AY 2011-12, Axis Bank had:

  • Filed its return of income on 09.09.2011 declaring total income of Rs. 58,30,66,59,722/-.
  • Faced assessment u/s 143(3) completed on 21.11.2013 determining total income at Rs. 61,14,55,65,633/-.

During this assessment, the Assessing Officer (AO):

  • Disallowed an additional lease operating expenditure claim of Rs. 93,04,00,000/-.
  • Initiated penalty proceedings u/s 271(1)(c) for alleged furnishing of inaccurate particulars of income.

Subsequently, by order dated 29.06.2022, the AO levied:

  • Penalty of Rs. 30,90,55,620/- u/s 271(1)(c) on the disallowance of Rs. 93.04 crores, which had already been sustained in quantum proceedings by the ITAT.

The National Faceless Appeal Centre (NFAC), acting as CIT(A), upheld this penalty by separate orders dated 06.03.2025 for AYs 2011-12 to 2015-16. Axis Bank then approached the ITAT in second appeal.

Since all five years involved the same legal and factual matrix, the Tribunal passed a consolidated order, treating ITA No. 1121/Ahd/2025 for AY 2011-12 as the lead appeal.

Assessee’s Change in Lease Rental Accounting

Shift to Straight Line Method under AS-19

Represented by Senior Counsel Shri Tushar Hemani, the assessee explained that:

  • Until AY 2011-12, lease rent expenditure had been claimed on an actual payment basis.
  • The underlying lease agreements contained escalation clauses, providing for periodic increases in lease rentals during the lease tenure.
  • Accounting Standard-19 required that in such cases, lease rental expenditure should be recognised on a Straight Line Method (SLM) over the entire lease term, so as to spread the impact of escalations evenly and reflect consistent use of the leased asset.

In compliance with AS-19, the assessee:

  • Revised its accounting policy in AY 2011-12 for operating leases.
  • Recognised lease rent on SLM over the lease term rather than only on the actual payments schedule.
  • This revision led to an incremental lease rental expenditure of Rs. 93.04 crores for AY 2011-12.

The assessee also:

  • Continued to follow this SLM method in subsequent years, leading to corresponding reversals/reductions of lease rent in later years.
  • Provided a year-wise chart (referred to at page 48 of the assessment order) evidencing the tax-neutral effect over the lease period.

The AO, however, rejected the additional claim, holding that:

  • Recognition of lease rent on SLM did not, in his view, present the “real” income for tax purposes under the Act.
  • The additional Rs. 93.04 crores was not allowable as a deductible liability in that year.

This disallowance was ultimately affirmed in quantum by the CIT(A) and the ITAT.

Grounds Raised by the Assessee in Penalty Appeal

For AY 2011-12, the assessee challenged the penalty order primarily on three broad planks:

  1. No furnishing of inaccurate particulars – the lease rent claim was:

    • Fully backed by AS-19.
    • Completely disclosed in the audited accounts and Annual Report.
    • Based on judicial decisions allowing similar accounting of lease expenses.

  2. Debatable nature of the issue – several judicial precedents, including:

    • Bata India Ltd. vs. DCIT
    • HDFC Securities Ltd. vs. CIT(A)
      had accepted SLM-based lease rent deductions, signifying that the issue was at least arguable.

  3. Tax neutrality and bona fides – the assessee highlighted that:

    • The overall deduction for lease rent over the total tenure remained the same, merely re-phased between years.
    • The ITAT itself in quantum proceedings had acknowledged tax neutrality over the lease period.
    • Hence, the claim was a bona fide view on a debatable accounting/tax issue, not an attempt at concealment.

Additional legal objections were also raised regarding:

  • Limitation u/s Section 275 (time-bar for passing penalty order).
  • Jurisdiction and non-application of the Faceless Penalty Scheme 2021.