TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 630
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....eceipt (in the nature of commission) and taxable as such. 1.1 That on facts and in law the CIT(A) erred in assuming / exercising jurisdiction to enhance the Income assessed by the Additional Commissioner of Income-tax {hereinafter referred to as "AO"}. 1.2 That on facts and in law the CIT(A) erred in not adjudicating upon the objection to the assumption of jurisdiction to enhance income assessed by the AO by Rs. 306,40,63,012/-. 2. That on facts and in law the orders passed by the CIT(A) and the AO are inter alia void-ab-initio and bad in law. 2.1That on facts and in law the CIT(A) erred in not complying with the principles of natural justice rendering the impugned order as bad in law. 2.2That on facts and in law the CIT(A) erred in upholding disallowance of Supplementary Lease Rent of Rs. 84,98,20,146/-. 3.1 That on facts and in law the AO/CIT(A) erred in not appreciating that payments made for Supplementary Lease Rents are not liable for Tax Deduction at Source under section 195 of the Income-tax Act, 1961 {hereinafter referred to as "the Act"}. 4. That on facts and in law the AO/CIT(A) erred in not appreciating that: (a) Payments made by the assessee on account ....
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....s) has also followed the order of the Commissioner of Income Tax in assessment year 2007-08, thus, issue being covered, the addition made by the lower authorities might be deleted. 4.2 On the other hand, learned Commissioner of Income Tax (Departmental Representative) relied on the orders of the authorities below. 4.3 We have heard the rival submissions and perused the relevant material on record. The facts emanating from the orders of the lower authorities are as under: (i) In financial year 2005-06, the assessee entered into an agreement with Airbus SAS, France ('Airbus') for purchase of hundred aircrafts with the option to choose the engines fitted in such aircrafts. (ii) The assessee selected V-2500 engines manufactured by IAE International Aero Engines AG, Switzerland ('IAE'). On delivery of aircrafts fitted with the engines supplied by the IAE, the assessee was allowable to get some credits from IAE. Similarly, suppliers of other components of aircrafts also extended credits to the assessee. (iii) The assessee assigned its interest in purchase agreement to other parties i.e. Genesis Acquisition Ltd, Lare Leasing Ltd. etc. and the assessee acquired the aircrafts on operat....
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....he lessor, before hand or afterwards, and the assignment of these agreements by the lessee to the lessor, the crux of the matter remains that appellant is not the owner of the aircrafts, and does not claim depreciation on these aircrafts. Therefore, the refund w.r.t. the aircrafts is a revenue receipt and not a capital receipt and this revenue receipt is nothing but a commission received for fixing the bulk sales between manufacturer and the lessor. These non-refundable refunds received from aircraft manufacturer are first paid to the lessee and not to the lessor who is the actual buyer. These refunds are also not to be returned back to the manufacturer or any other person. I am sorry to say that such ah imagination by the appellant is nothing but defrauding the revenue in a way. It's like insisting on saying that two plus two is equal to five, just because it is the industry practice and is being done by ail the airlines, does not make it right and come to their rescue. It also does not matter as to what is the accounting policy adopted by the appellant the principles of ' Companies Act and IT Act have to prevail as far as the working of right taxable Income is concerned. ....
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....oint of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loam taken by the assessee to set up new units or for substantial expamion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subs idy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. " 9.1 The learned senior counsel Shri Syali in his arguments has relied upon the decision of Hon'ble Delhi High Court in case of Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra). The importance of this judgment is that in this case after ....
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....ct to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the year period. 34. Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade. 35. The facts that the subsidy granted through deemed deposit o....
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....r fixed asset. In our considered opinion the decision of Hon'ble Jurisdictional High Court in Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra) supports die claim made by the appellant that the receipt of credits from IAE are capital in nature. Shri Syali has highlighted the sequence of events starting right from Letter of Intent dated 01.06.2005 to the execution of lease agreement dated 15.12.2006. Ironically these agreements were also on records of the authorities below, however, the Ld. CIT instead of appreciating and giving importance to the purpose for which the credits were granted to the appellant, has given undue importance to the fact that ultimately the aircrafts were only taken on lease by the appellant and that the appellant itself credited these receipts by deducting the same from the expense of 'aircraft lease rental' in its Profit and Loss Account. Decision of Bougainvillea Multiplex Entertainment (supra) clearly holds that subsidy need not be linked to a particular asset. Similarly netting off of the proportionate credits with the amount of lease rentals in the profit and loss account of the appellant is a mere utilization of the receipt. Merely beca....
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....n the impugned order and hold that the credits received by the appellant from IAE are capital in nature." 4.5 We find that the learned Commissioner of Income-tax (Appeals) in the impugned order has followed the finding of the learned Commissioner of Income Tax in order under section 263 of the Act, which has been reversed by the Tribunal, thus respectfully following the finding of the Tribunal, we reverse the finding of the learned. Commissioner of Income-tax (Appeals) on the issue in dispute and the addition is accordingly deleted. The grounds of the appeal from 1 to 1.2 are allowed. 5. The grounds No. 2 to 2.1 are general in nature and not argued by the learned Authorised Representative and, hence, dismissed as infructuous. 6. In grounds No. 3 to 3.1 and 4, the assessee has challenged upholding disallowance of supplementary lease rents of Rs. 84,98,20,146/- under section 40(a)(ia) of the Act for non-deduction of tax at source under section 195 of the Act. 6.1 Before us, the learned Authorized Representative of the assessee referring to page 56 to 61 of the assessee's paper book submitted that the issue in dispute has been decided by the Tribunal in ITA No. 2202/Del/2012 in f....
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....l of the above covenants of the agreement reveals that lessee was responsible to bear all the expenses in the course of the term of the lease on account of operational cost, repair and replacement, losses and other expenditure which were required to keep the aircraft in air-worthy condition. So the lessor was under no obligation to meet any expenditure or bear any loss in respect of the leased aircraft. Complete maintenance of the aircraft was the absolute responsibility of the lessee. The lessor was interested only in receiving the basic lease rent which could be utilised by them in the manner it liked and therefore, was income of the lessor which was exempt under section 10(15A) of the Act. But the supplemental rent was to be reimbursed in accordance with the terms of Article 13 of the agreement. The obligation to repair and keep the aircraft in the airworthy condition was that assessee and such obligation could be discharged either by paying directly to the repair agency without involving the lessor or by the manner as provided in Article 13 of the agreement. Such agreement was made only to ensure that the leased aircraft is kept in airworthy condition. If the lessee fails to ma....
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....e, it was experienced by the Government that the nod-resident companies were receiving payments in consideration of facilities or services provided/rendered by the lessors such as training to the pilots or other crew men, providing technicians etc, in the guise of leased rent. It is this mischief which was suppressed by the substitution of section 10(15A) w.e.f. 1- 4-1996. This is manifest from the memo explaining the proposed Finance Bill, 1995. The relevant portion is quoted below (212 ITR (St.) 351): ............... .......... ......... From the above, it is crystal clear that the intention of the Legislature was to tax the payment made for spares, facility or services provided by the recipient. Therefore, the change in the law has to be understood in that context. So if any payment has to be brought within the exclusionary portion of section 10(15A) of the Act, then it must be established (i) that lessor either had supplied the spares or provided any facility or service in connection with operation of the leased aircraft, and (ii) the payment has been made by the lessee in consideration of such spares/facilities/services. Once it is agreed that the supplemental rent was w....
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....39;D' check level structural inspections carried out during a 'C' check if the aircraft is on a phased 'D' check system under Lessee's Maintenance Programme), 'with any other partial structural overhauls and work performed for all other causes excluded, including those causes set forth in Article 13.4. Reimbursement will be made up to the amount in the Airframe Reserve.'' 48. The ITAT has examined the object behind amending Section 10(15A) with effect from 1st April 1996. If any payment had to be brought within the exclusionary portion of Section 10(15A) of the Act, then it must be shown (i) that the lessor either had supplied the spares or provided any facility or service in connection with operation of the- leased aircraft; and (ii) the payment has been made by the lessee in consideration of such spares/facilities/services. The 1TAT has rightly pointed out that the supplement rental was within the ambit of the original provision of Section 10(15 A) of the Act. 49. On facts the Revenue was unable to point out any clause in the agreement that required the lessor to provide facilities or services in connection with the leased aircraft. Therefore....
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.... year under consideration while arriving at the above decision. In our opinion the issue has already been considered by the Tribunal in decision (supra), thus respectfully following the above decision we hold that the assessee was not required to deduct TDS on supplementary lease rental being exempt under section 10(15A) of the Act. Accordingly, the disallowance made under section 40(a)(i) of the Act is deleted and grounds of the appeal from 3 to 3.1 and 4 are allowed. 7. The grounds No. 5 to 5.1 are related to upholding by the learned Commissioner of Income Tax (Appeals), the disallowance of Rs. 48,77,850/- made by the Assessing Officer under section 14A of the Act. 7.1 The facts in respect of issue in dispute are that the Assessing Officer observed dividend income of Rs. 3,09,10,261/- but found that the disallowance of Rs. 92,570/- computed by the assessee was not correctly determined. The Assessing Officer computed the disallowance as under: Clause Particulars Amount 1. Expenditure directly related to exempt income Nil Nil Nil Ii Disallowance of interest expenditure A. Interest expenditure (A)19,33,60,000 &....
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....be determined by obtaining the mean of total investments, as appearing in the balance sheet as on the first day and the last day of the previous year, income from which does not form part of the total income. Similarly, the average total assets would be determined by calculating the simple arithmetic mean of the opening value of assets and the closing value of assets. It is respectfully submitted, that the assessing officer has while applying the above Rule, wrongly considered the closing value of investments and assets as on 31.03.2008, instead of the average value of the investments and assets as appearing in the balance sheet on the first day and the last day of the previous year 2007-08. Taking into consideration, the overage value of investment and total assets, as mandated by the above Rule, the disallowance under section 14A of the Act read with Rule 80, works out to Rs. 176,888 as below: S. No. Particulars Amount(Rs) 1 Disallowance of interest expenditure A= Interest cost incurred during the year 1,357,226 B = Average value of investment 52,144,842 C = Average val....
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....ure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the asse....
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.... there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to "allocate" some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only 'common interest expenditure' i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income. This is precisely what the ITAT has pointed out in Champion Commercial (supra). There the ITAT said that by not excluding expenditure directly relatable to taxable income, Rule 8D(2)(ii) ends up allocating "expenditure by way of interest, which is not directly attributable to any particular income or receipt, plu....
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....ided of the rationale underlying Rule 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to R.8D(2) (ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example- any aspect of the assessee's business such as plant/machinery et.)..... The justification that has been offered in support of the rationale for R.8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method". 20. Therefore the Court is unable to agree with the Revenue that in adopting the above interpretation the ITAT has on its o....