Wet leasing of aircraft remains leasing, not aircraft operation, while Indian business connection can justify tax on full receipts.

Wet leasing of aircraft with crew and operational support was treated as leasing, not as the business of operating aircraft, so section 44BBA did not apply. The arrangement remained a lease because the airline operated the flights under its own banner and retained commercial responsibility for carriage. The receipts were also held to accrue in India through a business connection, so the entire lease consideration was taxable in India rather than only a proportionate part. Where no books or supporting particulars were produced, income could be estimated on a reasonable evidentiary basis, and the 29.7 per cent estimate was upheld as not arbitrary.

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Issues: (i) whether the assessee, who wet-leased aircraft to an airline with crew and related operational support, was engaged in the business of operation of aircraft so as to fall within section 44BBA; (ii) whether the whole of the lease receipts were taxable in India under section 9(1)(i) or only a proportionate part attributable to Indian operations; and (iii) whether estimation of income at 29.7 per cent of gross receipts was erroneous or arbitrary.

Issue (i): whether the assessee, who wet-leased aircraft to an airline with crew and related operational support, was engaged in the business of operation of aircraft so as to fall within section 44BBA.

Analysis: Section 44BBA applies only where the non-resident is engaged in the business of operation of aircraft. The nature of wet leasing, even with crew, maintenance and navigational responsibilities, did not change the basic character of the transaction, which remained leasing. The flights were operated under the airline's banner, tickets were issued by the airline, and the commercial responsibility for carriage of passengers, mail and goods rested with the airline.

Conclusion: The assessee was not engaged in the business of operation of aircraft for purposes of section 44BBA, and the claim to assessment under that provision failed.

Issue (ii): whether the whole of the lease receipts were taxable in India under section 9(1)(i) or only a proportionate part attributable to Indian operations.

Analysis: Income accruing through or from a business connection in India is deemed to accrue or arise in India. The revenue stream arose from the assessee's business connection with the Indian airline, and the receipts were the basis of earning in India. On that footing, the entire payment made under the arrangement was taken as the relevant base for Indian taxation rather than a proportionate attribution.

Conclusion: The entire receipts were rightly treated as income deemed to accrue or arise in India, and proportionate attribution was rejected.

Issue (iii): whether estimation of income at 29.7 per cent of gross receipts was erroneous or arbitrary.

Analysis: The assessee had not maintained or produced books of account or other supporting particulars. In that situation, the Assessing Officer was required to estimate income, and the estimate adopted was based on an arbitration award that had evidentiary value. The estimate was therefore not shown to be arbitrary or perverse.

Conclusion: The estimation of income at 29.7 per cent was upheld.

Final Conclusion: The appeals failed on the substantive issues and the additions were sustained.

Ratio Decidendi: Wet leasing of aircraft, even with operational support and crew, remains leasing unless the assessee itself carries on the business of operating aircraft, and where income arises through a business connection in India and no reliable books are produced, the Assessing Officer may tax the full receipts and estimate profits on a reasonable evidentiary basis.

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