TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 317
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.... Income Tax (Appeals) {hereinafter referred to as "the CIT (A)"} and the Assessing Officer {hereinafter referred to as "the AO"} are bad in law and void-ab-initio. 2. That on facts and in law the CIT(A) erred in assuming jurisdiction to adjudicate upon issues not forming part of the grounds of appeal. 3. That on facts and in law the CIT(A) has erred in making a ad-hoc Disallowance u/s 37(1) of Lease Rental Payments to the tune of Rs. 366,32,13,778/-. 3.1 That on facts and in law the CIT(A) erred in following his predecessor to conclude that credits of IAE are capital in nature and hence to the extent such credits are amortised and netted with Lease Rent payable in the P&L Account, the Lease Rent is to be disallowed as capital expenditure. 4. That on facts and in law the CIT(A) has erred in upholding disallowance u/s section 40(a)(i) of the Act on account of Supplementary Rent as under: (a) Supplementary Rent for lease agreements executed prior Rs. 27,27,45,720/- to 01st April 2007 (b) Supplementary Rent for lease agreements executed after Rs. 507,89,21,321/- 01st April 2007 Total Rs. 535,16,67,041/- 4.1 That on facts and in law the CIT(A) has erred in upholding that pay....
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....ssessee is a company engaged in the business of operating Airlines. It filed its return of income on 29.11.2013 declaring income of Rs. 2,32,97,58,440/-. The book profit was also shown u/s 115JB of the Act at Rs. 967,73,83,147/-. The case of the assessee was selected for scrutiny and order u/s 143(3) of the Act was passed on 06.12.2016 determining the total income of the assessee at Rs. 16,54,80,19,120/-. The ld AO made the following adjustments to the return of income of the assessee at Rs. 232,97,58,440/-:- a. Addition on account of credit received against purchase of engines amounting to Rs. 716,35,59,916/-. b. Disallowances u/s 40(a)(i) of the Act of Rs. 535,16,67,041/- c. Disallowance of claim of setting off of brought forward business loss and unabsorbed deprecation of Rs. 170,30,33,727/-. 8. The assessee is aggrieved with the order of the ld AO preferred an appeal before the ld CIT(A)-35, New Delhi. The ld CIT(A) with respect to the addition of Rs. 716,35,59,916/- followed the binding precedent decision of the coordinate bench in assesse's own case for Assessment Year 2007-08 which has been followed by the coordinate bench for Assessment Year 2008-09 and 2009-10 and h....
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....ision of the coordinate bench. 12. He did not press ground No. 5 of the appeal. 13. The ld DR submitted that now the Special Bench has decided the issue involved in this appeal of the assessee as well as appeal of the ld AO and therefore, same may be followed. 14. With respect to the appeal of the revenue the ld AR also submitted a details chart. He submitted that ground No. 1 of the appeal with respect to the taxability supplies credit from International Air Engines (IEA) has been held by the Special Bench in assessee's own case for Assessment Year 2012-13 and therefore, ground No. 1 of the appeal of the ld AO is squarely covered in favour of the assessee. 15. With respect to ground No. 2 about taxability of the above sum received from IEA of Rs. 716,35,59,916/- chargeability to tax u/s 28(iv) of the Act. He submitted that same is also been decided by the Special Bench in favour of the assessee. 16. With respect to additional ground raised by the revenue vide letter dated 09.02.2018 stating that if the above receipts are held to be capital receipts then it should be chargeable to tax under the head capital gains. He submitted that this issue is already covered in favour of th....
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....submitted that credits are also inextricably linked to the operating lease of aircrafts. It is also the submission of the Revenue in the written synopsis that "no manufacturer of engine would ever grant any such benefit as given to the assessee, if it was a case of mere exercise of choice of engine not resulting in purchase or acquisition by other modes and in final delivery of the aircrafts to the assessee." 33.1. We do not find any force in the above argument of the Ld. Special Counsel for the Revenue. It is an industry practice that the credits are received by airlines for selection of engines which is evident from Accounting guidelines and Airline Disclosure guide on Aircraft acquisition cost and depreciation issued by IATA, copy of which is placed at paper book page 1097 to 1127. We find relevant para at paper book page1104 reads as under:- It is common for airlines to receive credits from aircraft or engine manufacturers to incentivise the purchase. These credits come in various forms including guaranteed trade-in values, spare parts support, marketing support, training support or introduction costs support. The accounting treatment will depend on the substance of the cre....
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.... The Learned Special Counsel for the Revenue has argued that the credits were open for adjustment either against the price of the firm aircraft from Airbus or purchase of engine spares parts, tooling and services or receivable as cash. It was his argument that since credits can be used against the price payable for the aircraft it is linked to the acquisition of the aircraft and is in form of a "discount". He had first presumed that the engines were purchased by the assessee and then it is also presumed that credits were a "discount" for the purchase. However, the credits in the instant case in our opinion are not "discounts". Discount means reduction of purchase price. For aircrafts acquired on operating lease there is no purchase of aircraft by the assessee who is only a lessee. Since, the assessee has not purchased the "installed engines" from IAE, the credits in our opinion are not in the nature of "discount". Options given by IAE for utilisation of the credits post accrual will therefore not determine its character. The nature of receipt gets fixed at the time of its accrual and thus the taxability of the amount would depend on nature and character at the initial stage of accr....
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....ecause the right to do so was part of the assets of the business. Was it circulating capital ? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his " Wealth of Nations ", which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us the Appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they ....
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....rading receipt. In appeal to the Appellate Assistant Commissioner, the cost incurred for laying service lines and mains was excluded and the balance was treated as taxable income. In appeal, the Appellate Tribunal agreed with the Appellate Assistant Commissioner and held that the service connection receipts were trading receipts and that the "profit element" therein was taxable income in the hands of the assessee. In a reference under s. 66(1) of the Income Tax Act, the High Court substantially agreed with the view of the Tribunal. The assessee has installed machinery for producing electrical energy and has also laid mains and distributing lines for supplying it to its customers. The assessee makes no charge to the consumers for laying service lines not exceeding 100 ft. in length from its distributing main to the point of connection on the consumer's property in accordance with cl. 6(1)(b) of the Schedule to the Indian Electricity Act, 1910. But where the length of a service line to be installed exceeds 100 ft., the cost is charged at certain rates by the assessee. The charge consists usually of cost of wiring copper as well as galvanised iron, service and other brackets, insu....
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.... received from the Government of Bombay by the Poona Electric Company in reimbursement of expenses incurred for constructing new supply lines for supplying energy to new areas not previously served, was a capital receipt and not a trade receipt. The question of the taxability of the "profit element" in the contribution received from the Government was not expressly determined; but the court in that case held that the entire amount received by the Poona Electric Company from the Government as contribution was a capital receipt. In Monghyr Electric Supply Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa (2), it was held that the amount paid by consumers of electricity for meeting the cost of service connections was a capital receipt in the hands of the electricity undertaking and not revenue receipt and the difference between the amount received on account of service connection charges and the amount immediately not expended was not taxable as revenue. The receipts though related to the business of the assessee as distributors of electricity were not inciden t nor in the course of the carrying on of the assessee's business; they were receipts for bringing into existen....
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....ion of capital. The Hon'ble Supreme Court has held as under:- "Whether in the facts and circumstances of the case the assessee had purchased the arrears of dividend ? If so whether the said sum of Rs. 43,925/- could at all be assessed either as dividend or as profit ?" It is manifest that dividends declared by Kedarnath Jute Manufacturing Co., between the years 1936 and 1945 were the property of the persons whose names stood on the share register on the relevant dates. When a company declares dividend the same can only be paid to the person who is then the registered holder. A purchaser of shares becomes entitled to all dividends declared since his purchase but not before. If the purchase is made on the eve of declaration of dividend but the purchaser does not get his name mutated in the records of the company in time to have the dividend-warrant issued in his own name he is entitled to call upon his vendor to make over the dividend to him if and when received. It is well settled that after a sale of the shares and so long as the purchaser does not get his name registered, the vendor is for certain purposes considered a trustee for the purchaser of the rights attaching to the s....
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....the arrear dividends which was inextricably connected with the purchase of the share scrips. In our opinion the High Court rightly held that the amount of Rs. 43,925/- was not income which could be assessed in the hands of the assessee." 33.10. From the above, we note that although a consolidated payment was made by the assessee for purchase of shares, yet the Hon'ble Supreme Court examined the intention/ purpose of this receipt and held that although the dividend was related to the transaction of purchase of shares which was stock in trade, however it was to be viewed separately and was capital in nature. 33.11. We further find merit in the arguments of the learned senior counsel for the assessee that there is no statutory definition under the Income Tax Act as to what is "capital receipt" or what is "Revenue receipt" and therefore one has to apply the settled legal principles which have been laid down by the Hon'ble Courts. From the decisions cited (supra), it is clear that mere fact that a receipt flows out of a commercial transaction is not determinative of its true nature or taxability. For example in case of non-compete fee, compensation received for the loss of agency, i....
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....Steel & Press Work's Ltd. 's case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character oj the receipt in the hands of the assesses has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point 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 loans taken by the assessee to set up new units or for substantial expansion 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 subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy way on capital account. Therefore, it is the ....
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....the cinema halls become functional. 33. The State Government had offered 100% tax exemptions for the first three years reduced to 75% in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject 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. Giver, 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 five 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 ....
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....nd for making it operational by installing the requisite apparatus. The flow of subsidy stops as soon as the expenditure on such account is met in entirety." In the above decision Hon'ble Delhi High Court solely applying the purpose test as propounded by Hon'ble Supreme Court has negated the arguments raised by tax department placing undue importance on facts such as subsequent use of subsidy and that the subsidy was not linked to a particular fixed asset. In our considered opinion the decision of Hon'ble Jurisdictional High Court in Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra) supports the 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....
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....n to Interglobe by Airbus for choosing the type of engine to be fitted in the aircraft, which Airbus will manufacture for Interglobe. Exercising this option Interglobe selected IAE engines giving them importance over competitors of IAE. In absence of any services been rendered by Interglobe to IAE we fail to appreciate how can receipt of credits in the present case be termed as a commission income. We therefore reverse the finding recorded by CIT in the impugned order and hold that the credits received by the appellant from IAE are capital in nature. 9.2. Ld. CIT(DR) in his submissions has placed reliance on the case of Gee Vee Enterprises vs. Addl. CIT and Ors. 99 ITR 375 (Del) to hold that proper enquiries had not been made and, therefore order was erroneous in as - much as prejudicial to the interest of Revenue. However, this judgment is wholly inapplicable since, as is evident from facts of present case, wherein the Ld. AO specifically directed the appellant to justify its claim for receipts being capital in nature considering the disclosure made by the appellant in clause I3(e) of the tax audit report. In reply vide submissions dated 24th December 2009 (copy enclosed at page....
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....a Devi Aggarwa] (supra) relied upon by the CIT(DR) is also irrelevant. We may make a reference here to the decision of Hon'ble Jurisdictional High Court in case of DG Housing reported in 343 ITR 329(Del) wherein the Hon'ble High Court has been pleased to hold as under: "12. Delhi High Court in Gee Vee Enterprises vs. Additional Commission of Income-Tax, Delhi-I & Ors.,(1975) 99 ITR 375 has observed as under : "The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out o....
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....line and its source of revenue is to earn income from passenger/cargo transportation. We have already held in the preceding paragraphs that the credits received are not derived from the business activity which is to earn revenue from passenger/cargo transportation. Therefore, the credits are Fleet Introductory Assistance (FIA) and were received as a consideration for selecting engines of IAE in preference to others. This is the purpose. 33.13. We find the Hon'ble Supreme Court in the case of CIT v. Ponni Sugar and Chemicals Ltd., 306 ITR 392 (SC) after considering the decision in the case of Sahney Steels and Press Work Ltd. and Ors. v. CIT, 228 ITR 253 (SC) has observed as under :- "The importance of the judgment of this Court in Sahney Steel & Press Work's Ltd.'s case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at wh....
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....ticular receipt is income or not depends on the nature/purpose of that receipt and the true scope and effect of the relevant taxing provisions. It is trite law that it is the quality of the receipt that is decisive of the Character of the Payment and not the Method of the Payment or its measure. It is to ascertain the quality and the character that purpose test has to be applied. Purpose test, therefore, remains a valid test for ascertaining the true nature of any receipt, be it unilateral, multilateral, grant of subsidy or otherwise. 33.16. So far as the arguments made by the learned special counsel for the Revenue that the aircraft have been acquired on lease and that the nature of the credit changes when acquisition mode is lease financing are concerned, we find the genesis of credits received is agreement dated 19.10.2005. However, the credits were payable only on delivery of aircraft. The assignment of rights to acquire the aircraft is post vesting of credits. When selection of IAE engines is done, the lessors were not even in the picture. Therefore, whether to purchase the aircraft or acquire the aircraft on lease is a later decision. Therefore, it will be incorrect to assu....
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..... T.V. Sundaram Iyengar & Sons Ltd. reported in 222 ITR 344 (SC) relied upon by the learned special counsel for the Revenue is concerned, we find the said decision is distinguishable on facts and not applicable to the case of the assessee. In that case, the amount was received by the assessee from its customers in the course of a trade transaction. Since, over the period of time these amounts were not claimed back by the customers, these amounts were transferred by the assessee to its profit & loss account. The AO held that surplus had arisen as a result of trade transactions. It was an amount having a character of income and had to be added as income. Therefore, the AO held that the amount received was revenue in nature. We find the Hon'ble Supreme Court first considered the legal principles arising from the case of Morley v. Tattersall, (1939) 7 ITR 316, has observed as under :- "......in the case of Morley (Inspector of Taxes) vs Tattersall [1939] 7 ITR 316 (CA), it was laid down by Lord Greene that the taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income acco....
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....e or on an operating lease. This was a commercial decision which the assessee takes on the delivery date depending upon its capital, market condition and other ground realities. The learned Senior Counsel for the assessee has filed before the Bench the details of 34 aircrafts which have been purchased by the assessee. The credits received for these aircrafts have been reduced from the cost of acquisition in accordance with the provisions of section 43(1). This has been accepted by the Revenue. The nature of receipt for 34 aircrafts is accepted to be capital. The character as capital will thus continue to remain same even when the asset is not purchased but acquired on lease. Subsequent mode of acquisition will not therefore change the nature of taxability. We, therefore, hold that the entire amount of credits of Rs. 7,59,39,25,444/- received by the assessee from IAE in the year under consideration for selection of its engines is a capital receipt." 19. Therefore, respectfully following the decision of the special bench we hold that the supplier's credit received by the assessee from various suppliers of aircrafts is a capital receipt. Accordingly, ground number 1 of the appeal of ....
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....ovisions of section 28(i) are not applicable. 36.3 Further, for applying Section 28(iv), the statutory requirement is that the value of any benefit or perquisite, whether convertible into money or not, must arise from the business or exercise of a profession. 36.4. We find, the Hon'ble Bombay High Court in the case of Mahindra & Mahindra (supra) reported in 261 ITR 501 (Bom.) has held that capital receipt do not come within the purview of section 28(iv) of the Act. The relevant observation of the Hon'ble High Court reads as under:- "10. At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by Section 28(iv), could accrue in numerous ways. The income which can be taxed under Section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, Section 28(iv) does not apply to benefits in cash or money (see CIT v. Alchemic Pvt. Ltd. ). Applying Section 28(iv) to the facts of this case, one finds that on June 18, 1964, the assessee entered into an agreement to purchase toolings from KJC. In 1964-65, In....
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.... case of Jindal Equipments Leasing & Consultancy Services Ltd., reported in 325 ITR 87 (Del.), following the above decision at Para-8 of the Order has observed as under :- "8. With this, we proceed to examine this aspect on its own merit, viz., whether provisions of s. 28 (iv) of the Act are attracted in the given case. Thus, what is to be seen is that as to whether the written off amount of Rs. 1,46,53,065 in its books of accounts by JSPL amounts to the value of any benefit or perquisite whether convertible into money or not can be treated as "profits and gains from business". The prerequisites for attracting the said provisions are : (i) Benefit or perquisite arising in the course of business is of the nature, other than cash or money. It is for this reason expression "whether convertible into money or not" is mentioned in cl. (iv). Bombay High Court has interpreted this very clause in the case of Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom) in the following manner : ".....The income which can be taxed under s. 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, s. 28(iv) does not a....
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....ofit gained as a consequence of the adventure would be chargeable to tax as business profits. It was accordingly submitted that the activity of the assessee of selecting engines has trappings of an adventure in the nature of trade, commerce or business and, therefore, would fall within the definition of "business" as appearing in Section 2(13) of the Income Tax Act, 1961. The Ld. Special Counsel for the Revenue drew our attention to Para-10.1 of the Order of Ld. CIT(A) wherein he has noted that the assessee has made further Aircraft acquisition in the year 2011 and 2015 and the total number of Aircrafts to which the assessee stands committed is 530. We have carefully considered the same. However, we do not find any force in the same. The A.O. in the instant year as well as in the orders passed in subsequent years in which additional acquisition of aircrafts was done has held that business of the assessee is only that of operation of aircrafts. This is a factual finding given in all assessment orders right upto the order passed for A.Y. 2018-2019. Therefore, in our opinion, the onus is on the Revenue to factually establish that there exists any other business activity other than tha....
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....gnment, the assessee transferred such right in favour of Lessors. Amounts paid by Lessors represent a consideration as the taking over of the liability amounts to a consideration. It was also submitted in his written submissions as under : "The cost of acquisition would comprise initial money paid to Airbus or engine manufacturer and the total purchase price of the aircraft minus the discounts appropriated by the Appellant (and not passed on to the Lessors). The balance amount being the difference between the amount paid lby the Lessors to Airbus (in discharge of the contractual obligation of the Appellant) and the cost of acquisition of rights so transferred would represent the amount of capital gains chargeable to tax as rightly explained by CIT(A) in Paragraph 10.2.1 on Page- 33. The capital gains arise not for any assignment of the right to choose engines as contended by the Appellant. The assignment is of the right to purchase the title of the aircraft which also includes the price of the engines separately and distinctively indicated in the Purchase Agreement itself". 37.1. The Learned Senior Counsel for the Assessee on the other hand refuted the above allegation. 38. A....
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....Aircraft is flowing to the Assessee. There is, therefore, no "Sale Consideration" received by the Assessee which could be held assessable to "__________Capital Gains Tax". We, therefore, hold that credits received by the Assessee are not taxable as capital gains." 23. Respectfully following the decision of the special bench which covers the above issue we dismiss additional ground raised by the learned assessing officer. 24. Accordingly appeal in ITA number 412/Del/2018 filed by the learned assessing officer for assessment year 2013 - 14 is dismissed. 25. Now we come to ITA number 432/Del/2018 filed by assessee. Ground number 1 and 2 are general in nature do not require any adjudication and hence dismissed. 26. Ground number 3 of the appeal is with respect to disallowance u/s 37 (1) of the lease rent payable to the tune of Rs. 3,663,213,778. This issue has been dealt with by the special bench wide paragraph number 39 as Under:- H DISALLOWANCE OF PROPORTIONATE LEASE RENTAL U/S 37(1) 39. The next issue that is to be decided is regarding disallowance of proportionate lease rentals u/s 37(1) of the Act, 1961. We find in the impugned order, Ld. CIT (A), in para 10.3 has taken an....
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....eld as under: "Nothing has been shown with reference to documents and agreement on record to support the submission that the grant was by way of recoupment or revenue expenditure incurred by the assessee. The Department's case as we see is that since the assessee initially acquired the capital equipment on lease finance basis, the lease rentals were allowed as revenue expenditure to the assessee. the assessee, however, had to pay on account of lease finance Rs. 4.8 crores as against the capital cost of Rs. 3.2 crores. Had the assessee acquired equipment on outright purchase basis, the assessee would have been entitled to the write off of capital costs by way of depreciation as revenue expenditure. If the assessee had borrowed funds for meeting the capital cost of the equipment, the capital cost would have been written off by way of depreciation over a period of years and interest on borrowed funds by way of depreciation over a period of years and interest on borrowed funds would have been allowed revenue deduction. We agree with the Ld. Counsel for the assessee that the accounting or tax treatment of the capital cost of the equipment has nothing to do with the sanction of the gra....
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....ra number 40 as Under:- I DISALLOWANCE OF SUPPLEMENTARY RENT (SR) 40. The next issue that it to be adjudicated is regarding disallowance of Supplementary Rent (SR). We find from the details filed in the paper book that during the year under consideration, assessee had incurred an expenditure of Rs. 338,09,64,412/- as SR paid to lessors for aircrafts acquired on operating lease. We have perused the lease agreements enclosed in the paper books filed before us. Assessee in its paper book has enclosed a copy of Lease Agreement Dated December 15, 2006 with M/s McR Aviation Ltd. Revenue in its paper book has submitted three lease agreements i.e., Agreement Dated 14th June, 2007 with Genesis Acquisition Ltd., Dated 04th July, 2007 with Lara Leasing Ltd. and Dated 10th August, 2010 with Crescent Leasing 9 Ltd. Under all these Agreements SR is a mandatory payment required to be made to the Lessors for use of aircrafts. Amount payable for SR is calculated based upon flying hours attributable towards critical parts of the aircraft i.e. aircraft body, auxiliary power unit, landing gear etc. We find the AO in the assessment order made disallowance under section 40(a)(i) of the I.T. Act, 196....
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....essor Obligation hereunder. 3.12.4 Lessor Maintenance Disbursements (1) If lessee submits to Lessor, within sixty (60) days after the completion of the applicable approved maintenance work (except if otherwise agreed between Lessor and Lessee, it being agreed that such time periods may be extended as determined in the reasonable discretion of Lessor, to the extent that Lessee notifies Lessor at or before the end of such sixty (60) day period that there are still outstanding invoices (which shall be specifically identified) for approved maintenance work), an invoice and supporting documentation evidencing performance of and payment for (each in reasonable reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, domestic object damae, operational or other mishandling, family maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance or which relates to convenience, premature or unscheduled shop visits or overhauls or Lessee effected operational modifications, Engine QEC, Engine accessories, removal / installation of Engines, removal / Installation . of APUs removal/installation of Landing Gear, ....
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....e and owing pursuant to Section 14.3.2 (ii) as expressly provided in this Section 3.12.4 and (in) as expressly provided in Exhibit H, and any remaining balances of the Maintenance Supplemental Rent following the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property, with the exceptions set forth in Exhibit H. To the extent any maintenance expenses exceed the amount available in the applicable Maintenance Supplemental Rent account, such expenses shall be for the account of the Lessee and the shortfall, if any shall not be carried forward or made the subject of any further claim for reimbursement. Lessee acknowledges that Lessor may commingle the Maintenance Supplemental Rent with its general funds and no interest shall accrue in favor of Lessee in respect of Maintenance Supplemental Rent held by Lessor. 8.1.1 During the Sublease Term and until the Aircraft is returned to Lessor in the condition required by this Sublease, Lessee alone has the obligation, at its expenses, to timely maintain, service, test, inspect, Overhaul and repair the Aircraft, Engines and all of the Parts (a) in accordance with the Maintenance program, (b) ....
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....rglobe's obligation to repair and keep the aircraft in worthy condition could have been discharged by it by either paying directly to the repair agency without the lessor having any role or in the manner as provided in Article 3.12 of the lease agreement. It was further submitted that for invoking the exclusionary clause as provided in section 10(15A) of the Act, it is mandatory for the authorities below to demonstrate that either the lessor had supplied certain spares or provided any facility or service in connection with the operation of the lease aircraft. Since no such fact has been brought on record by the Id CIT, it was submitted that the impugned action u/s 263 be quashed. It was also submitted by the learned senior counsel that recently Hon'ble Jurisdictional High Court has upheld the ratio propounded by this Bench of the Tribunal in the case of Sahara Airlines (supra) in orders reported in the name of M/s Jet Lite (India) Ltd. reported in 236 Taxmann 453 (Del). It was also submitted by the learned senior counsel that once an assessment order has been passed in consonance with the judicial wisdom of the superior court then the same cannot be termed as erroneous or p....
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.... 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 maintain the aircraft in good condition, then the lessor, in such cases, could get the aircraft repaired out of the reserves. Further, the quantum of reserve depends upon the period ....
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.... 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 already 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 within the ambit of original provisions of section 10(15A) then the onus is on the revenue to establish that such supplemental rent fell within the ambit of such exclusionary provisions. The Id. Sr. DR has not been able to....
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....nd 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 ITAT has rightly pointed out that the supplement rental was within the ambit of the original provision of Section 10(15A) 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, the supplemental rent did not fall within the ambit of the exclusionary provisions of Section 10(15A) of the Act. Since prior to 1st April 1996 such payments continued to be exempted under Section 10(15A) of the Act, they were not chargeabl....
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....ed further, SLP was filed by the Tax Department which has also been dismissed vide order dated 30.07.2018 and 10.09.2018. The issue is therefore no more res integra. 40.3 However, the learned CIT(A) in the instant case has held that the expenditure per se is not allowable as per provision of Section 37(1). We have perused the relevant agreements filed before us and are unable to uphold the disallowance made by Ld. CIT(A). Payment of SR is mandatory and failure to do so would result in civil consequences wherein the lessor will be entitled to take back the possession of the Aircraft. This is clearly apparent from the following clauses of lease agreement :- "Section 3.4 Supplemental Rent. Lessee hereby agrees to pay to Lessor or to any other Person designated by Lessor or otherwise entitled to receive such payment any and all Supplemental Rent and any other amounts due hereunder at the time the same shall become due and owing. In the event Lessee shall fail to pay any Supplemental Rent, or any other amounts due hereunder when due, Lessor and each other Person entitled to such amounts shall have all rights, powers and remedies provided for herein or in any other Operative Document....
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.... Term to cover the Landing Gear Overhaul ("Landing Gear Maintenance Supplemental Rent") The Airframe 40 Maintenance Supplemental Rent, the airframe 80 Maintenance Supplemental Rent, the Engine Refurbishment Maintenance Supplemental Rent, the Engine LLP Maintenance Supplemental Rent, the APU Maintenance Supplemental Rent, and the Landing Gear Maintenance Supplemental Rent are referred to collectively herein as the "Maintenance Supplemental Rent". The Maintenance Supplemental Rent for the Airframe 40 maintenance, the Airframe 8C maintenance, each Engine's refurbishment, each Engine's LLP replacements, the APU refurbishment and the Landing Gear overhaul shall each be deemed to be a separate account and shall, until paid out in accordance with the terms hereof, be and remain the property of the Lessor. Maintenance Supplemental Rent for the month in which the Expiry Date shall occur shall be determined as of and payable on the Expiry Date. The Maintenance Supplemental Rent in respect of the Airframe, each Engine and the APU may be adjusted on the Expiry Date in accordance with the terms of Exhibit H hereto 3.12.4. Lessor Maintenance Disbursements (1) If Lessee submits to lessor, wit....
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.... payment; (iv) Engine LLP Replacement: with respect to any LLP replacement for an Engine that is replaced due to expiration of its life limit, the lesser of (i) the amount of such invoice (with any credits for installation of LLPs with less life than the originally installed LLP offsetting any charges for installation of longer life remaining LLPs) and (ii) the net balance of Engine LLP Maintenance Supplemental Rent received by Lessor in respect of such Engine at the time of payment; (v) APU : with respect to any scheduled APU overhaul, the lesser of (i) the amount of such invoice and (ii) the net balance of APU Maintenance Supplemental Rent received by Lessor at the time of payment; and (vi) Landing Gear: with respect of a scheduled Landing Gear Overhaul if it comes during the Sublease Term, the amount of such invoice and (ii) the net balance of APU Maintenance Supplemental Rent received by Lessor at the time of payment; and (ii) the net balance of the Landing Gear Maintenance Supplemental Rent received by Lessor at the time of payment. (2) For the avoidance of doubt, Lessee has no right to payment of any Lessor Maintenance Disbursement except (i) following the occurrence ....
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....tingent. We, therefore, agree with the submission of the learned Senior Counsel for the assessee that once a business liability is ascertained it has to be allowed as deduction under the mercantile system of accounting. We, therefore, hold that Supplemental Rent in the instant case is an allowable expenditure u/s 37(1) of the I.T. Act, 1961. 41. As regards the issue relating to disallowance u/s 40(a)(i) is concerned, we find from the details furnished by the Learned Senior Counsel for the Assessee that during the year under consideration, the assessee had incurred an expenditure on account of Supplemental Rent of Rs. 61,81,04,551/- in respect to lease agreements executed prior to 1st April, 2007. The assessee had also incurred an expenditure on account of Supplementary Rent of Rs. 276,28,59,861/- in respect of Lease Agreements executed after 1st April, 2007. We find the Tribunal in assessee's own case for A.Y. 2007-2008 had examined the nature of Supplementary Rent and it was held that payment of Supplementary Rent is nothing different than the character of basic rent which is also payable under the Lease Agreement to the Lessors. It was held that Supplementary Rent is not a paym....
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....ase. It is his submission that the definition of royalty under the Income Tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category of equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from the scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- "1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State. 2. Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right....
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....having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." 42.2. In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income Tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(a) of India-Ireland DTAA, the term "Royalty" is specifically defined to exclude from its scope payment of any kind for use of "Aircraft". We further find the tax treaty also incorporates a separate pr....
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....ssing officer is with respect to the deletion of the addition of Rs. 6,149,302,546 made by the assessing officer in respect of supplier credits received from various suppliers of air parts holding the same to be capital receipt and not as a revenue receipt as held by the learned assessing officer. Both the parties confirm that this ground is identical to the ground number one of the appeal of the learned assessing officer. We have already decided this ground of appeal in the appeal of the assessee for assessment year 2013 - for 14 following the order of the special bench in case of the assessee for assessment year 2012 - 13. For the similar reasons we dismiss this ground of appeal. Accordingly, ground number 1 of the appeal of the learned AO is dismissed. 38. Ground number 2 is with respect to the order of the learned CIT - A that he has erred in ignoring that the receipt of Rs. 6,149,302,546 constituted receipt from the exploitation of valuable commercial rights arising in the course of systematic in real business activity and such receipts would otherwise constitute income liable to tax Under the provisions of Section 28 (iv) of the act. This ground is identical to ground number....
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.... was the learned this by the learned assessing officer and confirmed by the learned CIT - A Under the provisions of Section 40 (a) (i) of the income tax act. Ground number 4 (b) of the act which is related to the disallowance of supplementary rent for lease agreement executed after 1 April 2007 wherein such lease rent is paid of 638,06,22,760 on which no tax has been deducted by the assessee and therefore the learned assessing officer disallowed the same for non-deduction of tax which is been upheld by the learned CIT - A. Both these aspects are identical to the grounds of appeal 4 (a) and 4 (b) for assessment year 2013 - 14 wherein following the decision of this special bench in assessee's own case for assessment year 2012 - 13 we have allowed those grounds for that year. Therefore, for similar reasons we allow these grounds. 44. Ground number 5 of the appeal was not pressed by the assessee and therefore it is dismissed. 45. Thus, appeal filed by assessee in ITA number 433/del/2018 for assessment year 2014 - 15 is partly allowed. 46. Accordingly, for assessment year, 2014 - 15 appeal filed by the learned assessing officer in 413 Del 2018 is dismissed and appeal filed by the ass....