$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: September 15, 2015
Date of decision: November 04, 2015
+ ITA 204/2002
JET LITE (INDIA) LTD. ..... Appellant
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates.
versus
COMMISSIONER OF INCOME TAX-XVI ........ Respondent
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
WITH
+ ITA 86/2011
CIT ..... Appellant
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
Versus
JET LITE (INDIA) LTD. ........ Respondent
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates.
WITH
+ ITA 205/2002
ITA Nos. 204/2002 & batch matters Page 1 of 42
DIRECTOR OF INCOME TAX ..... Appellant
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
Versus
JET LITE (INDIA) LTD. ........ Respondent
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates.
WITH
+ ITA 128/2005
JET LITE (INDIA) LTD. ..... Appellant
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates
Versus
COMMISSIONER OF INCOME TAX-XII ........ Respondent
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
WITH
+ ITA 1206/2005
DIRECTOR OF INCOME TAX ..... Appellant
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
Versus
ITA Nos. 204/2002 & batch matters Page 2 of 42
JET LITE (INDIA) LTD. ........ Respondent
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates.
AND
+ ITA 1209/2005
DIRECTOR OF INCOME TAX ..... Appellant
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Junior Standing
Counsel.
Versus
JET LITE (INDIA) LTD. ........ Respondent
Through: Mr. S. Ganesh, Senior Advocate with
Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and
Mr. Himanshu Mehta, Advocates.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 04.11.2015
S. Muralidhar, J.
Introduction
1. These are appeals both by the Assessee and the Revenue, under Section
260A of the Income Tax Act, 1961 (,,Act). While ITA Nos. 204 of 2002 and
205 of 2002 by the Revenue are directed against the common order dated
12th February 2002 passed by the Income Tax Appellate Tribunal (,,ITAT)
in ITA Nos.950 to 954/Del/2001 for the Financial Years (,,FY) 1994-95 to
1998-99, ITA Nos. 128 of 2005 by the Assessee is directed against the
ITA Nos. 204/2002 & batch matters Page 3 of 42
impugned order dated 30th August 2004 passed by the ITAT in ITA No.
2753,3151, 3152 & 3153(Del)/1999 for the Assessment Years (,,AYs)
1996-97, 1995-96, 1996-97 & 1997-98. ITA Nos. 1206 of 2005 and 1209 of
2005 of the Revenue are directed against the common order dated 12th April
2005 passed by the ITAT in ITA Nos. l42&1143/Del/01 for the AYs 1998-
99 & 1999-2000. ITA No. 86 of 2011 by the Revenue is directed against the
impugned order dated 10th July 2009 passed by ITAT in ITA No.
682/All/2000 for the AY 1996-97.
2. At the outset it requires to be noticed that in these cases, the Assessing
Officers (AO), the Commissioner of Income Tax (Appeals [CIT (A)] have in
their respective orders and the ITAT in the order dated 12th February 2002
referred to FYs 1994-95 to 1998-99 whereas the subsequent orders of those
authorities including the orders dated 30th August 2004, 12th April 2005
and 10th July 2009 of the ITAT refer to AYs as mentioned hereinbefore.
3. Initially the name of the Assessee was Sahara Airlines Limited (,,Sahara).
Subsequently it was renamed as Jet Lite (India) Limited. Pursuant to the
orders passed by the Court on 23rd May 2012 and 31st July 2015 the name of
the Assessee in these appeals stood amended as such.
Background Facts
4. The background to the above appeals is that Sahara entered into an
Aircraft Parts Lease-Purchase Agreement (,,APLPA) dated 24th August
1993 with AAR Aviation Trading Inc. (,,AAR) in terms of which Sahara,
which was engaged in the business of running a schedule airline, agreed to
ITA Nos. 204/2002 & batch matters Page 4 of 42
take on hire certain aircraft parts on the terms and conditions set out in the
APLPA. Sahara was to pay AAR a rental of US dollars (,,USD) 199,370 on
a bi-annual basis. The lease was for a period of three years and in terms of
Clause 22 of the APLPA, Sahara had an option, on the termination of the
lease, to purchase all the parts at the price of USD 50,000.
5. During the FY 1994-95, Sahara paid USD 199,370 each on 22nd April
1994 (equivalent to Rs. 63,00,092) and on 14th November 1994 (equivalent
to Rs. 63,12,054) respectively. Admittedly, Sahara did not deduct tax at
source. It is stated that Sahara had applied to the Assistant Commissioner of
Income Tax, Company Circle 3(3), New Delhi (,,ACIT), who was at the
relevant time the AO having jurisdiction, to ascertain as to whether it was
under any obligation to deduct tax at source in respect of the said payments.
6. It is further stated that pursuant to the said applications, ACIT issued no
objection certificates (,,NOC) dated 24th February 1994 and 20th October
1994 permitting Sahara to remit the aforementioned gross sums of USD
199,370 under both the certificates. It is further stated that at the end of the
lease period, Sahara exercised the option under Clause 22 of the APLPA and
remitted a sum of USD 50,000 without deducting tax at source as the same
did not represent income chargeable to tax in India.
7. The AO raised objections on the grounds that the payments amounted to
royalty. Pursuant to the AO's orders requiring that TDS should be deducted
@ 10%, Sahara deducted the tax as directed and filed appeals against the
AO's order. The appeals before the CIT (A) being unsuccessful, further
ITA Nos. 204/2002 & batch matters Page 5 of 42
appeals were filed before the Tribunal. These were for AYs 1995-96 to
1997-98. After not succeeding before the ITAT on this issue, Sahara filed
ITA No. 128 of 2005 in this Court.
8. Sahara also entered into ,,Training Agreements on 30th January 1996 with
Hughes Flight Trading Limited (,,HFTL) in terms of which HFTL which
operated a flight crew training facility at Fleming Way Crawley West
Sussex England agreed to provide ground and flight simulator training to
Saharas flight crews on the terms and conditions set out in the said
agreement. HFTL was to make available to Saharas flight crews and
instructors, training equipment including a flight simulator appropriate to the
aircraft for use in flight simulator training. Sahara was to pay HFTL GBP
171 per hour for the use of the flight simulator without any instructor of
HFTL being present.
9. Sahara states that similar arrangements were entered into with other
companies based in the United Kingdom in terms of which flight crew was
provided with the facility of a simulator. The payments were made pursuant
to the said agreement made by Sahara without deducting tax at source
during the FYs 1994-95 to 1998-99 as such. Sahara was of the view that no
part of the payment made for the use of the flight simulator was chargeable
to tax in India.
10. Sahara had taken two aircrafts on lease for a period of six years from
International Lease Finance Corporation (,,ILFC) and separate agreements
were entered into in respect of each aircraft. In terms of Article 1.6 read with
ITA Nos. 204/2002 & batch matters Page 6 of 42
Article 5.3 thereof, Sahara was required to pay lease rent @ US Dollars
('USD') 240,000 per month with effect from 31st December 1995 and USD
241,000 with effect from 1st January 1995. In terms of Article 1.7 read with
Article 5.4, Sahara was also required to pay supplemental lease rent in the
form of reserves @ USD 234 per hour. These reserves were categorised as
'airfreight reserves', 'engine reserves' and 'landing gear reserves' and were
created to meet the cost of expenditure incurred by the lessee in respect of
the deficiencies and work specified inn Articles 13.1 and 13.2. In terms of
Article 13.3 the lessee (i.e. Sahara) was entitled to reimbursement from such
reserves after the work was completed and the airframe or engine had left
the repair agency by submitting invoices and proper documentation in
respect thereof. In terms of Article 13.6, on the termination date of the
agreement if any balance was left in the said reserve, it would be retained by
the lessor. Similar payments on account of supplemental lease rent were also
made by Sahara to other non-resident foreign companies i.e. AMTEC,
Malaysian Airlines and Lufthansa during the FYs 1997-98 to 1998-99.
11. Sahara also entered into an agreement dated 8th/9th May 1996 with
Sochata, France, which was engaged in the business of maintaining and
operating certain facilities for the repair, maintenance, overhaul,
modification and functional testing of aircraft engine including accessories,
parts and components. Pursuant to the said agreement Sahara paid, on 25th
September 1996, a sum of Rs. 3,08,60,702 (equivalent to USD 8,63,719.63)
and, on 24th January 1997, a sum of Rs. 2,89,19,958 (equivalent to USD
8,04,002.18) respectively in the FY 1996-97. Again it was of the view that
the amount did not represent income chargeable to tax in India and no
ITA Nos. 204/2002 & batch matters Page 7 of 42
deduction of tax at source was made.
12. It is further stated that as a result of the flying operation, several parts of
the aircrafts were required to be repaired/replaced. The spares were acquired
in three modes. The first was an outright purchase, the second was exchange
involving sending of the defective part to the non-resident company which
in turn sent a part in lieu thereof. The non-resident company would raise a
bill on a proforma basis for the part replaced as well as levy a charge. The
third mode was by sending the defective part for repairs and Sahara used to
pay a charge for the repair carried out. According to Sahara, it was advised
that no tax was required to be deducted in respect of the parts purchased,
exchanged or repaired and therefore, it remitted the amounts without
deducting tax at source.
Facts concerning subscription to share capital
13. From the balance sheet filed by the Assessee along with return it was
noted by the AO that for the AY 1996-97 Sahara raised share capital of Rs.
10,87,89,090 and received premium amount of Rs. 44,60,35,269 and share
application money of Rs. 7,50,000. Sahara claimed to have mobilized the
above amount by way of private placement of shares from 65,285 persons
through a network of establishments maintained by its sister concern M/s.
Sahara India (Firm). Against the face value of Rs. 10 per share, a sum of Rs.
41was collected as premium. Sahara was asked by the AO to furnish the
details of shares issued during the year of Rs. 25,000 or more by a notice
dated 10th September 1998 under Section 142 (1) of the Act. Sahara filed a
reply on 23rd October 1998. It was thereafter asked to furnish the basis of
ITA Nos. 204/2002 & batch matters Page 8 of 42
working out the premium of shares and the method of allotment of shares to
such a large number of persons by way of private placement. Sahara was
also asked to furnish the addresses of the top 100 share holders who were
allotted shares during the year.
14. In response thereto Sahara furnished the addresses of 92 such persons.
Notices under Section 133 (6) were issued to 92 such persons, but notice to
the remaining 8 persons could not be sent as their addresses were not
indicated in the list furnished by Sahara. These notices were sent on 17th
February 1999 and 23rd February 1999. Only 17 of those notices sent were
replied to, while 25 notices were returned unserved with the remarks ,,not
known, ,,refused, ,,incomplete address, ,,dead, ,,left indefinitely etc. 50
persons to whom notices were sent did not reply. Notice dated 18th March
1999 was sent to Sahara under Section 142 (1) of the Act requiring it to
explain why the entry share capital with premium should not be treated as its
unexplained income under Section 68 of the Act. Sahara was called upon to
substantiate the identity, genuineness and creditworthiness of the
shareholders.
15. Sahara filed two replies dated 24th March 1999 stating that the
shareholders were spread all over the country and requisitions had to be sent
to the Zonal Managers placed in the different zones. Sahara enclosed
photocopies of the share applications filed in 1996 to prove the identity of
the subscribers. The Department took upon itself to verify the genuineness
of the transactions and replies were received only in about 20% of the cases.
The AO noticed from the share application forms that the shareholders were
ITA Nos. 204/2002 & batch matters Page 9 of 42
allotted only 25% of the shares and 75% of the shares were retained by the
collecting agent on the plea of getting the shares listed in the stock
exchanges. The AO was of the opinion that since 75% of the shares were not
handed over to the subscribers the transactions themselves appeared to be
suspicious. Further it was noticed that those who had replied stated that they
had invested the money in cash. This also gave the transaction a dubious
colour. All the persons who replied claimed to have sold their shares back to
Sahara.
The order of the AO
16. The AO was not convinced by the statement of Sahara and it was found
evasive as the shares were not quoted in the stock exchange and hence were
not transferable in the market. Observing that it appeared that the Assessee
had concealed some very vital facts with regard to the issue and transfer of
the shares, the AO treated the sum of Rs. 55,55,89,359 as unexplained credit
in the books of the Assessee under Section 68 of the Act and consequently
as undisclosed income of the Assessee which was attributable to the total
income of the Assessee.
Orders of the CIT (A) and the ITAT
17. On appeal, the Commissioner of Income Tax (Appeals) [,,CIT (A)] by
order dated 3rd March 2000 held that since the AO has chosen to enquire
only into the genuineness of 100 shareholders, no additions could have been
made in respect of the other 65,185 shareholders. The CIT(A) noticed that
out of these 100 persons, the AO himself had stated that 17 shareholders had
furnished replies and 50 of persons to whom notices were served, did not
ITA Nos. 204/2002 & batch matters Page 10 of 42
respond. However, as the notices sent were duly received, the existence of
these 50 persons was duly proved. The CIT (A), therefore, directed the AO
to delete the additions with respect to these 67 persons. With respect to the
group of 25 persons in relation to whom the notices were returned with
comments such as "refused", "dead" , "left indefinitely", etc, the CIT(A)
held that they certainly "were in existence and their identity is duly proved ."
With respect to those persons who, according to AO, were not traceable and
the 8 other persons to whom the AO had not issued notices for want of
addresses, the CIT (A) restored the matter back to the AO and also directed
the Assessee to furnish necessary evidence to prove their identity.
18. The ITAT by its order dated 10th July 2009 confirmed the said order
passed by the CIT (A) thereby deleting the addition made by the AO on this
account. The ITAT upheld the order of the CIT (A) and held that the
Assessee had proved identity of the shareholders.
Questions of law
19. At the time of admission of ITA Nos. 204 of 2002 and 205 of 2002,
which pertained to FYs1994-95 to 1998-99, this Court by orders dated 28th
February 2003 framed separate questions for determination in each of these
appeals. In ITA No. 204 of 2002, which is the Assessees appeal, the
following questions were framed:
(i) Whether the Tribunal was right in law in holding that the Assessee
could be regarded as Assessee in default for failing to deduct tax at
source in respect of payments made to AAR Aviation Trading Inc as
required under Section 195 of the Income-tax Act, 1961?
ITA Nos. 204/2002 & batch matters Page 11 of 42
(ii) Whether the Tribunals conclusion that the fee paid by the
Appellant for use of flight simulator in terms of agreement dated 30 th
January 1996, was to be regarded as a payment by way of fee for
technical services and accordingly, chargeable to tax in India is
correct in law?
(iii) Whether the Tribunal was justified in holding that the payments
made to M/s. Sochata France in terms of the agreement dated 8th
March 1996/9-5-1996, were to be regarded as fee for technical
services?
20. In ITA No. 205 of 2002, which is the Revenues appeal, the following
questions were framed:
(i) Whether the Tribunal was correct in law in holding that the order
by the AO under Section 201 of the Income Tax Act, 1961 in respect
of financial year 1994-95 was barred by limitation?
(ii) Whether the Tribunal was right in law in holding that since the tax
had not been deducted at source by the Assessee, the question of
grossing up under Section 195-A of the Income Tax Act, 1961, by the
Income-tax Officer did not arise?
(iii) Whether the Tribunal was correct in law in holding that the
payments made by the Assessee towards reserve funds in respect of
financial years 1996-97 to 998-99 were exempt under Section 10
(15A) of the Income tax Act, 1961?
21. As regards the Assessee's appeal ITA 128 of 2005 for AY 1995-96 to
1996-98 is concerned, this Court by order dated 25th February 2005 framed
the following question of law:
"Whether the Tribunal was right in law in holding that the assessee
could be regarded as assessee in default for failing to deduct tax at
source in respect of payments made to AAR Aviation Trading Inc as
required under Section 195 of the Income-Tax Act, 1961?"
ITA Nos. 204/2002 & batch matters Page 12 of 42
22. As far as the Revenue's appeal ITA 1209 of 2005 for AY 1998-99 is
concerned, this Court by order dated 14th December 2005, framed the
following question of law:
"Whether the Tribunal was correct in law in holding that the
payments made by the Assessee towards reserve funds in respect of
financial year 1998-99 were exempt under Section 10(15A) of the
Income Tax Act, 1961?"
23. As far as the Revenue's appeal ITA 1206 of 2005 for AY 1999-2000 is
concerned, this Court by order dated 31st January 2006, framed the
following question of law:
"Whether the Tribunal was correct in law in holding that the
payments made by the Assessee towards reserve funds in respect of
financial year 1999-2000 were exempt under Section 10(15A) of the
Income Tax Act, 1961?"
24. As far as the Revenue's appeal ITA No. 86 of 2011 is concerned, it arises
from the Revenue's appeal before the ITAT being ITA No. 682/All/2000 for
AY 1996-97. Although in the said appeal before the ITAT, the Revenue had
raised fourteen questions, at the time of admission of the appeal before this
Court being ITA 86 of 2011, the Court framed only the following eleven
questions of law, on 27th August 2012:
(i) Whether the ITAT was justified in the eyes of law in upholding
the deletion of the addition of Rs. 55,40,38,959 made by the AO
under Section 68 of the Income Tax Act, 1961, on account of the
unexplained cash credit, ignoring the material fact that the Assessee
had failed to substantiate the credit worthiness of the shareholders and
the genuineness of the transactions?
(ii) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs. 4,74,13,470 made under Section 195
ITA Nos. 204/2002 & batch matters Page 13 of 42
read with Section 40 (a) (i) of the Income Tax Act, 1961, by the AO,
on account of the non-deduction of tax at source (TDS) on the amount
paid by the assessee to the non-resident company towards the
maintenance reserve for leased Aircraft?
(iii) Whether the ITAT was correct in the eyes of law in not
adjudicating the issue of inadmissibility of expenses of Rs. 52,47, 225
towards the training and manpower development, paid to foreign
companies u/s 40 (a) (i) of the Act for being paid without deducting
the TDS?
(iv) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs. 1,77,82,789 made under Section 40
(a) (i) of the Income Tax Act, 1961, by the AO, for non-deduction of
TDS on payment to the non-residents of computerized reservation
system?
(v) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs. 30,40,170 made by the AO on account
of disallowance of 50% of total expenditure incurred by the Assessee
in issuing the free tickets was a business expenditure, claimed as
business expenditure, when the said expenditure had not been
incurred wholly and exclusively for the purpose of business and hence
is not allowable under Section 37 (1) of the Income Tax Act, 1961?
(vi) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs.1,42,76,535 made by the AO on account
of disallowance of the interest paid on borrowed capital, when the
said interest is not allowable under Section 36 (1) (iii) of the Income
Tax Act, 1961, on account of substantial interest-free funds advance
to the sister concerns?
(vii) Whether the ITAT was correct in the eyes of law in upholding
the deletion of addition of Rs. 35,97,812 made by the AO, on account
of disallowance of the 1/5th of the foreign travel total expenses
claimed under Section 37 (l) of the Income Tax Act, 1961, when the
same are inadmissible for want of genuineness to prove that the
expenditure was incurred wholly and exclusively for the business
purposes?
ITA Nos. 204/2002 & batch matters Page 14 of 42
(viii) Whether ITAT was correct in the eyes of law in upholding the
deletion of addition of Rs. 21,60,000 made by the AO, on account of
disallowance of consultancy expenses, paid by the assessee to M/s.
Sahara India International Corporation Limited, invoking the
provisions of Section 40A (2) of the Income Tax Act, 1961, when the
said expenditure is excessive and unreasonable and the services,
which have been claimed to have been rendered have not been
substantiated for genuineness?
(ix) Whether the ITAT was justified in the eyes of law in upholding
the deletion of addition of Rs.54,06,701 made on account of
disallowance of the claim made by the Assessee as staff welfare,
when the same were considered as the entertainment expenses in the
absence of any corroboratory evidence to substantiate the genuineness
and reasonableness of expenditure?
(x) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs.10,37,367/- made on account of the
disallowance of advertising and publicity expenses, as the same being
not related to the year under consideration i.e. AY 1996-97?
(xi) Whether the ITAT was correct in the eyes of law in upholding the
deletion of the addition of Rs.10,17,553/- made on account of
disallowance of the Air Travel Tax paid by the assessee, when the
same is covered under Section 43B of the Income Tax Act, 1961 and
for which no proof of payment has been furnished?
25. This Court has heard the submissions of Mr. S. Ganesh, learned Senior
counsel for the Assessee as well as Mr. Rahul Chaudhary and Mr. Rohit
Madan, learned Standing counsel for the Revenue respectively.
Unexplained cash credit under Section 68 of the Act
26. The Court first proposes to examine the issue concerning unexplained
ITA Nos. 204/2002 & batch matters Page 15 of 42
cash credits under Section 68 of the Act.
27. A Full Bench of this Court in CIT v. Sophia Finance Limited (1994)
205 ITR 98 [FB, (Delhi)] held that in the context of Section 68 of the Act
that:
(i) The Assessee has to prima facie prove "(1) the identity of the
creditor/subscriber; (2) the genuineness of the transaction, namely, whether
it has been transmitted through banking or other indisputable channels; (3)
the creditworthiness or financial strength of the creditor/subscriber".
(ii) If the relevant details of the address of PAN identity of the
creditor/subscriber are furnished to the Department along with copies of the
Shareholders Register, Share Application Forms, Share Transfer Register
etc., it would constitute acceptable proof or acceptable explanation by the
Assessee.
(iii) The Department would not be justified in drawing an adverse inference
only because the creditor/subscriber fails or neglects to respond to its
notices.
(iv) The onus would not stand discharged if the creditor/subscriber denies or
repudiates the transaction set up by the Assessee nor should the AO take
such repudiation at face value and construe it, without more, against the
Assessee.
(v) The AO is duty-bound to investigate the creditworthiness of the
ITA Nos. 204/2002 & batch matters Page 16 of 42
creditor/subscriber the genuineness of the transaction and veracity of the
repudiation.
28. In CIT v. Steller Investment Limited (1991) 192 ITR 287 (Del) it was
observed:
"Even if it be assumed that the subscribers to the increased share
capital were not genuine, nevertheless, under no circumstances, can
the amount of share capital be regarded as undisclosed income of the
assessee. It may be that there are some bogus shareholders in whose
names shares had been issued and the money may have been provided
by some other persons."
29. Both the aforementioned decisions were again considered by the
Division Bench of this Court in CIT v. Lovely Exports Limited 299 ITR 268
(Del). Thereafter, in CIT v. Nova Promoters and Finance (P) Limited
(2012) 342 ITR 169 (Del) it was observed as under:
"38. The ratio of a decision is to be understood and appreciated
in the background of the facts of that case. So understood, it
will be seen that where the complete particulars of the share
applicants such as their names and addresses, income tax file
numbers, their creditworthiness, share application forms and
share holders' register, share transfer register etc. are furnished
to the Assessing Officer and the Assessing Officer has not
conducted any enquiry into the same or has no material in his
possession to show that those particulars are false and cannot be
acted upon, then no addition can be made in the hands of the
company under sec. 68 and the remedy open to the revenue is to
go after the share applicants in accordance with law. We are
afraid that we cannot apply the ratio to a case, such as the
present one, where the Assessing Officer is in possession of
material that discredits and impeaches the particulars furnished
by the assessee and also establishes the link between self-
confessed "accommodation entry providers", whose business it
ITA Nos. 204/2002 & batch matters Page 17 of 42
is to help assessees bring into their books of account their
unaccounted monies through the medium of share subscription,
and the assessee. The existence with the Assessing Officer of
material showing that the share subscriptions were collected as
part of a premeditated plan-a smokescreen-conceived and
executed with the connivance or involvement of the assessee
excludes the applicability of the ratio."
30. In CIT v. Nipun Builders and Developers (2013) 350 ITR 407 (Del) it
was held that the point at which the initial onus on the Assessee to prove the
unexplained discredit would stand discharged depends upon the facts and
circumstances of each case. It was pointed out that where there is private
placement of shares
"the Assessee cannot simply furnish details and remain quiet even
when summons issued to shareholders under Section 131 return
unserved and uncomplied. This approach would be unreasonable as a
general proposition as the Assessee cannot plead that they had
received money, but could do nothing more and it was for the
Assessing Officer to enforce share holders attendance. Some cases
might require or justify visit by the Inspector to ascertain whether the
shareholders/subscribers were functioning or available at the
addresses, but it would be incorrect to state that the Assessing Officer
should get the addresses from Registrar of Companies' website or
search for the addresses of shareholders and communicate with them.
Similarly, creditworthiness was not proved by mere issue of a cheque
or by furnishing a copy of statement of bank account. Circumstances
might require that there should be some evidence of positive nature to
show that the said subscribers had made a genuine investment, acted
as angel investors, after due diligence or for personal reasons. Thus,
finding or a conclusion must be practicable, pragmatic and might in a
given case take into account that the Assessee might find it difficult to
unimpeachably establish creditworthiness of the shareholders."
31. In Commissioner of Income Tax v. N.R. Portfolio Pvt. Ltd. 206 (2014)
ITA Nos. 204/2002 & batch matters Page 18 of 42
DLT 97 (DB) the Court reiterated the need of the Assessee to satisfy the AO
about the "identity, creditworthiness and genuineness" of the creditors. It
was pointed out that
"mere production of incorporation details, PAN Nos. or the fact that
third persons or company had filed income tax details in case of a
private limited company may not be sufficient when surrounding and
attending facts predicate a cover up. These facts indicate and reflect
proper paper work or documentation but genuineness,
creditworthiness, identity are deeper and obtrusive. Companies no
doubt are artificial or juristic persons but they are soulless and are
dependent upon the individuals behind them who run and manage the
said companies. It is the persons behind the company who take the
decisions, controls and manage them."
32. Turning the facts on hand, the Court notes that only 17 cases of 92
noticees whose addresses and share application forms were provided elicited
a response. 25 notices were retuned unserved by the postal authorities with
the remarks namely, "not known" , "refused", "incomplete address", "dead",
"Left indefinitely", etc." The balance 50 noticees who were served did not
respond.
33. The AO concluded that the credit entries were of doubtful nature for the
following reasons:
(i) The shareholders were allotted only 25% of the shares and 75%
shares were retained by the collecting agent on the plea of getting the
shares listed in the stock exchanges. The fact that 75% of the shares
were not handed to the shareholders rendered the genuineness of the
transactions doubtful.
(ii) All the persons who replied stated that they made the investment
ITA Nos. 204/2002 & batch matters Page 19 of 42
in cash.
(iii) Almost all the persons in their replies stated that they are
agriculturists and their source of income was from agricultural
activities. Excepting one, none of them were income tax assessees.
(iv) Although there was no provision enabling a company to buy-back
shares, at least two persons had categorically stated that they had sold
the shares back to Sahara. If the purchase of the shares by Sahara was
made through cheque this made the transactions dubious.
(v) Sahara has concealed some very vital transactions relating to issue
and transfer of the shares and had not come clean with all the relevant
facts and documents for the purpose of ascertainment of the exact
nature of the transactions.
34. The CIT (A), however, disagreed and held that once the identity of the
persons was fully established before the AO, "there was no occasion to treat
the share capital as unexplained". The CIT (A) concluded that the fact that
the AO had required the Assessee to furnish the addresses of top 100
shareholders only meant
"that AO was not at all interested in verifying the share capital
invested by 65185 shareholders and I am really surprised that even
with respect to these large numbers of shareholders, without
conducting any enquiry of any sort, the share capital invested by them
has also been treated as unexplained. This action of the AO by no
stretch of imagination can be sustained and I, therefore, direct the AO
to delete the addition in respect of the share capital invested by these
persons."
ITA Nos. 204/2002 & batch matters Page 20 of 42
35. The CIT (A) then took up the case of the 100 shareholders in respect of
whom the AO tried to conduct certain enquiries. Of the 92 persons whose
addresses had been furnished, 17 persons had filed replies. Even in respect
of the 50 others who were served, but had not replied, their existence was
held to be duly proved. the CIT (A), therefore, directed the AO to delete the
addition in respect of the share capital introduced by the 17+ 50 persons. Of
the balance 25, some had died or had left for an indefinite period or had
refused to receive the notices. Their existence and identity were held to be
duly proved and, therefore, the AO was directed to delete the share capital
introduced by the said persons also. Of the balance 8 persons plus some part
of the 25 persons who were unserved, the AO himself noted that notice was
not sent to them since addresses were not furnished. In this regard the CIT
(A) noted the contention of Sahara that it had furnished their complete
addresses and it was prepared to furnish the confirmations of those persons.
The CIT (A) then directed, in respect of the 8 persons plus some part of the
25 persons the notices to were returned with the remark ,,not traceable, as
under:
"I, therefore, in respect of this category of persons only i.e. who
according to the AO, were not traceable or whose addresses
were not furnished, restore the matter back to the AO and the
Appellant is directed to furnish the necessary evidence in this
regard before the AO to prove their identity."
36. The ITAT has upheld the deletion by the CIT (A) of the additions made
by the AO on the ground that the existence and identity of the shareholders
had been established; that retaining of 75% not unusual in light of
ITA Nos. 204/2002 & batch matters Page 21 of 42
,,DEMAT provisions; that Companies Act does not debar share subscription
by cash hence payments in cash were not dubious per se; that there was no
buy back since there was a separate custodial agreement under which a
shareholder could entrust his shares to be kept in the custody of Sahara India
who were the managers of the issue of shares by way of private placement.
37. Having perused the documents placed on record, the Court is of the view
that there was no justification for the CIT (A) to have deleted the addition
made by the AO in respect of the 65,185 shareholders on the ground that the
AO did not conduct any enquiry. When the AO sought details of
shareholders who invested Rs. 25,000 or more, the Assessee was able to
furnish the addresses of only the top 100 shareholders. The only conclusion
that was possible in this regard was that reached by the AO, viz., that the
Assessee was unable to establish the identities of the 65,185 persons in
respect of an amount of Rs. 55,55,89,359. The onus on the Assessee of
providing some prima facie material to establish the identity, genuineness
and creditworthiness of the said 65,185 persons was not discharged by the
Assessee.
38. It was then urged by Mr. Ganesh, learned Senior counsel for the
Assessee, that in respect of the above 65,185 persons, the matter should be
sent back to the AO for fresh consideration as has been done in respect of
those persons whose addresses were purportedly not furnished. With the
Assessee even now not coming forth with any further details, no purpose
would be served in remanding the matter for determining the identity of the
said 65,185 shareholders.
ITA Nos. 204/2002 & batch matters Page 22 of 42
39. Consequently, the Court sets aside the orders of the CIT (A) and the
ITAT as regards the deletion of the addition ordered by the AO in the sum of
Rs. Rs. 55,55,89,359 under Section 68 of the Act on the ground of the
failure by the Assessee to establish the identity of the 65,185 shareholders
who are stated to have contributed the aforementioned sum.
40. However, as regards the 100 shareholders in whose cases some details
were furnished by the Assessee, it is seen that 17 shareholders filed their
replies and 50 others did not respond despite receiving the notice. The CIT
(A) came to the conclusion that their existence or identity was duly proved.
It is noticed that the persons who responded stated that they were
agriculturists and not income tax assessees. Pradeep Kumar Sinha of
Bhagalpur and Masood Ahmed of Madhubani, Bihar stated that they had
sold their shares back to Sahara, but under the Companies Act that was not
permissible.
41. The Court is of the considered view that the order of the CIT (A) as
affirmed by the ITAT regarding the deletion of the addition made by the AO
with regard to the share capital introduced by the said 50+17 persons does
not call for interference as, on facts, it was a possible view to take. Even as
regards the 8 shareholders and those other shareholders who were
untraceable, the order of the CIT (A) remanding the matter to the AO does
not call for interference.
42. The net result is that the orders of the CIT (A) and ITAT deleting the
ITA Nos. 204/2002 & batch matters Page 23 of 42
addition made by the AO of the sum corresponding to 65185 shareholders
are set aside. The said sum will stand added to the income of the Assessee.
However, the orders of the CIT (A) as confirmed by the ITAT deleting the
addition made in respect of the amount brought in by 50 + 17 shareholders
are upheld. Also, the order of the CIT (A), affirmed by the ITAT, remanding
the matter to the AO in respect of 8 persons and some part of 25 persons
who were not traceable and whose addresses had not been furnished is
upheld.
Payment of supplemental lease rent
43. The next issue that is taken up for consideration is the disallowance of
Rs. 4,74,13,470 made by the AO under Section 195 read with Section 40 (a)
(i) of the Act for non-deduction of tax at source from payment to non-
residents for maintenance reserve (supplemental lease rent). In the case of
AMTEC, Malaysian Airlines and Lufthansa, the CIT (A), deleted the
addition, and concluded that the supplementary rent paid by the Assessee
was not taxable as the agreement in question was entered into after the
amendment to Section 10 (15A) of the Act. This was upheld by the ITAT by
holding that there should be an inextricable link between expenditure for
spares/facility and operation of aircraft and that the payment was exempt
under Section 10 (15A) of the Act.
44. As regards the payments to ILFC, the AO was of the view that after 1st
April 1996, the above payments of supplemental rent were for operating the
aircraft and not for acquiring it. Therefore, they fell within the exclusionary
provision of Section 10 (15A) of the Act and were chargeable to tax in the
ITA Nos. 204/2002 & batch matters Page 24 of 42
hands of the recipient and Sahara was, therefore, liable to deduct tax at
source under Section 195 from such payments. It was held that the AO who
had issued a no objection certificate (NOC) to Sahara for remitting the
payments without deductions of TDS had no jurisdiction to do so and
therefore such NOC was null and void. The ITAT, however, agreed with
Sahara that the supplemental rent did not fall within the ambit of the
exclusionary provisions of Section 10 (15A) of the Act. Prior to 1st April
1996 the payments were covered by the main provision and thereafter they
continued to be exempt under Section 10 (15A) of the Act. The payments of
supplemental rent to AMTEC, Malaysian Airlines and Lufthansa were also
dealt with likewise. Therefore, the question of holding Sahara to be an
assessee in default under Section 201 (1) of the Act did not arise. The ITAT
also disapproved the action of the AO in determining the tax liability by
applying the grossed up rate of 122%.
45. It is submitted by the Revenue that by way of amendment to Section 10
(15A) of the Act, the payment for providing spares, facilities or services in
connection with the operation of lease aircraft was specifically excluded.
Prior to 1st April 1996 such payments were exempted and the approval given
by the CBDT related back to 31st January 1995, i.e., AY 1995-96 during
which exemption was available. It is pointed out that under the agreement in
question the lease payment for the aircraft was separately mentioned and the
payment for maintenance reserve was separately mentioned. In these
circumstances, it is submitted that the ITAT erred in holding that the
maintenance reserve was in the nature of the lease.
ITA Nos. 204/2002 & batch matters Page 25 of 42
46. A perusal of Section 10 (15A) of the Act as existed with effect from 21 st
January 1989 and substituted with effect from 1st April 1996 shows that
prior to 1st April 1996 payments made for acquisition of an aircraft or an
aircraft engine on lease, were exempted from taxation but from 1 st April
1996, the Legislature has excluded the payments made for providing spares,
facilities or services in connection with the operation of the leased aircraft
from the ambit of the exemption under Section 10(15A) of the Act.
47. Clause 13 of the Agreement between Sahara and ILFC shows that the
lessor was not under 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. Clause 13.1 talks of Airframe Reserves.
It states that the Lessor will reimburse Lessee from the Airframe Reserves
for the actual cost of the completed scheduled major structural inspection
and rectification of structural deficiencies (overhauls) of the Airframe (i.e.,
the complete ,,D check or equivalent if the aircraft is on a block ,,D
maintenance system under Lessees Maintenance Programme or ,,D check
level structural inspections carried out during a ,,C check if the aircraft is on
a phased ,,D check system under Lessees 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
ITA Nos. 204/2002 & batch matters Page 26 of 42
(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 chargeable to
tax. Consequently, there was no obligation on the Assessee to deduct the tax
at source under Section 195 of the Act. The question of holding the Assessee
as an Assessee in default under Section 201 (1) of the Act, therefore, did not
arise.
50. Consequently, the Court affirms the order of the ITAT deleting the
additions made by the AO under Section 195 read with Section 40 (a) (i) of
the Act on account of the non-deduction of tax at source for the payment of
supplemental lease rent to the various lessors, i.e., ILFC, AMTEC,
Malaysian Airlines and Lufthansa.
Training and manpower development
51. The issue concerning payments made for training and manpower
ITA Nos. 204/2002 & batch matters Page 27 of 42
development arises in the Assessee's appeal ITA 204 of 2002 arising out of
the decision dated 12th February 2002 of the ITAT in ITA Nos.950 to
954/Del/2001 for FYs 1994-95 to 1998-99 and in the Revenue's appeal ITA
86 of 2011 arising out of the decision dated 10th July 2009 of the ITAT in
ITA No. 682/All/2000 for AY 1996-97.
52. There are two periods during which the question arises. One relates to
the payments for FYs 1994-95 to 1998-99 and the other in relation to AY
1996-97. For FYs 1994-95 to 1998-99, the AO by order dated 10th May
2000 under Section 201 of the Act held that the payments were in the nature
of fees for technical services as defined under Section 9(1)(vii) of the Act
and hence tax was deductible under Section 195(1). For FYs 1994-95 to
1998-99 the CIT (A) by order dated 5th December 2000, upheld the order of
the AO. The ITAT too by order dated 12th February 2002 in ITA Nos. 950-
954/Del/2001 (Sahara Airlines Ltd. v. CIT [2002] 83 ITD 11) held that the
payments were in the nature of fees for technical services chargeable to tax
in the hands of recipient under Section 9 (1 )(vii) as well as under provisions
of the agreement. Aggrieved by the said order, the Assessee has filed ITA
204 of 2002.
53. As regards AY 1996-97, the AO by order dated 26th March 1999 held
on an examination of the copy of the agreements with M/s Crown Mart Ltd.
(CML), U. K. and J. T. P. Aircraft Training Services (P) Ltd., Australia
(JTP) furnished by the Assessee on 10th March 1999, that the said foreign
entities were to impart training in India by deputing their personnel and not
in a foreign country. The income accruing to the said companies by way of
ITA Nos. 204/2002 & batch matters Page 28 of 42
fees to be paid to them in accordance with the agreement was in fact income
through and from a source of income in India as defined in Section 9(1)(vii)
of the Act. It was taxable and tax was deductible in respect thereof under
Chapter XVII B i.e Section 195 (1) of the Act. It was held that the fees paid
to the said foreign agencies were indeed fees for technical services, as was
evident from the agreement in question and came under the purview of
Article 13 of the DTAA and was as such taxable.
54. For AY 1996-97, the CIT by order dated 3rd March 2000 held that no
payments were made to CML; that the addition of Rs. 46,77,491/- paid to
HFTL was deleted as the training agreement dated 30th January 1996 clearly
provided that the flight crew training facility was located in England. The
addition of Rs. 5,69,734/- paid to JPT was deleted as the Assessee stated that
tax had already been deducted in relation to the said payment. The addition
by the AO was accordingly deleted by the CIT (A).
55. In the appeal for AY 1996-97, the ITAT noted its decision dated 12th
February 2002 but omitted to say that it was following the said decision and
was, therefore, sustaining the addition. This is one of the grounds on which
the Revenue has preferred ITA 86 of 2011.
56. The agreement dated 30th January 1996 between Sahara and HFTL has
been discussed in the order dated 12th February 2002 of the ITAT. It has
referred to the submissions of the learned counsel for the Assessee to the
effect that what was provided to Sahara's personnel was the facility of
training on a simulator without an instructor. A higher rate of 256 pounds
ITA Nos. 204/2002 & batch matters Page 29 of 42
per hour was charged for providing training on the simulator with an
instructor whereas Sahara was charged 171 pounds per hour which was the
rate applicable for providing a simulator without an instructor. The ITAT
however appears to have in its order dated 12th February 2002 gone by
Clause 14 of the said agreement which talked of HFTL providing free
training to the instructors of the Assessee. Although the ITAT states that the
invoice showed the payment "for use of the simulator alone" it held that it
did not mean that "technical knowledge was not provided by UK company."
What was perhaps missed was that the payment had to be for providing such
technical knowledge and not merely for use of the simulator. The personnel
of HFTL having experience is one thing but the question of payment for
such technical services is another. The other aspect which has not be
sufficiently been examined by the ITAT is the purport of the expression
"make available" occurring in Article 13 (4) (c) of the DTAA. In
interpreting a similar clause occurring in the DTAA with Netherlands the
Karnataka High Court in CIT v. De Beers India Minerals (P.) Ltd. [2012]
346 ITR 467 (Kar) held that "payment of consideration would be regarded
as 'fee for technical/included services' only if the twin test of rendering
services and making technical knowledge available at the same time is
satisfied." The decision of this Court in DCIT v. Guy Carpenter & Co Ltd.
[2012] 346 ITR 504 (Del)is also relevant in this regard.
57. As regards AY 1996-97, the ITAT has indeed abruptly ended its
discussion after extracting a passage from its order dated 12th February
2002 and has not rendered any opinion. Apart from the fact that the said
order of the ITAT, for the reasons discussed above, is found not to have
ITA Nos. 204/2002 & batch matters Page 30 of 42
addressed certain important aspects, the issues highlighted by the CIT (A) in
the order dated 3rd March 2000 have not been addressed. For e.g., the fact
that no payment was made to CML and that tax was deducted by the
Assessee while making payment to JPT was not dealt with by the ITAT.
Further the insertion of an Explanation below Section 9 (2) of the Act with
retrospective effect from 1st June 1976, making the place of rendering
services redundant, has not been considered. Again, it is necessary for the
ITAT to consider, in the context of the agreement with HFTL and the
Article 13 (4) (c) of the DTAA with UK, whether any technology was 'made
available' to the Assessee and whether there was payment for such services.
58. Consequently on the issue of payment for payment for training and
manpower development the Court remands the matter for both periods i.e.
FYs 1994-95 to 1998-99 and AY 1996-97 to the ITAT for a fresh decision
in accordance with law.
Payment for the computerised reservation system
59. On the issue of disallowance of Rs. 1,77,82,789 for non-deduction of
TDS from payment to non-residents for computerized reservation system,
the Court finds that no objection was raised in AY 1995-96 with respect to
the certificates issued by ITO (TDS). The ITAT also confirmed that the said
certificate issued by ITO (TDS) was valid. The Revenue has not able to
persuade this Court to hold that the said decision is perverse. The Assessee
has made the payment after obtaining the said certificates. The issue is
decided in favour of the Assessee and against the Revenue.
ITA Nos. 204/2002 & batch matters Page 31 of 42
Free tickets
60. The next ground concerns the addition on account of expenditure
incurred for allowing free tickets in the sum of Rs. 30,40,170. The AO
noticed that these tickets were issued to a large number of persons including
the following persons:
"(i) spouses of certain persons accompanying their
husbands/wife, (ii) minors including infants, (iii) relatives of
the Directors, (iv) persons with names only but without any
surname or surname without any initial, whose identities were
ambiguous, including one Swamiji."
61. It was held that 50% of the above expenses were disallowed by the AO
which worked out to Rs. 30,40,170. The ITAT following its order dated 8th
August 2008 in the case of the Assessee in ITA No. 470/Del/99 accepted the
submission of the Assessee that the free charged tickets were being issued
on account of business promotion to various persons and merely because
they have been issued to spouses or infants or where full names had not been
given it cannot be presumed that they were not for business purposes. It was
held that "this discretion of the management at the time of issue of FOCs is
of the issuance thereof and the Department to the best of our understanding
has no right to question the prudency of the decision." There was no basis
for disallowance of 50% of such expenses.
62. The view taken by the CIT (A) as concurred with by the ITAT appears
to be plausible. The disallowance of 50% of these expenses appears to be
not based on any material. Accordingly, the said issue is answered in favour
ITA Nos. 204/2002 & batch matters Page 32 of 42
of the Assessee and against the Revenue.
Interest on borrowed capital
63. The next issue concerns disallowance of interest on borrowed capital of
Rs. 1,42,76,535. The case of the Revenue was that the interest bearing funds
were being diverted as interest free advances to sister concerns. The
Assessee had paid interest to two sister concerns, namely, M/s. Sahara India
Mutual Benefits Co. Ltd. at 24% and M/s. Sahara India Corporation
Limited. The case of the Revenue was that while the Assessee had to borrow
funds from its sister concerns for carrying on its business on which interest
has been claimed under Section 36 (1) (iii), the Assessee had allowed its
other sister concerns to retain interest bearing funds without charging any
interest. Therefore, the proportionate interest relatable to the funds retained
by the sister concerns was stated to be not for the purpose of business.
64. The CIT (A) allowed the claim of the Assessee after observing that the
AO did not hold the interest payment to be excessive or unreasonable and it
was found factually that "not a single paisa has been advanced to the four
sister concerns out of the borrowed funds" and that the AO has himself
accepted that "the outstanding amounts were on account of the trading
connections." Accordingly, the addition of Rs. 1,42,76,534 made by the AO
was deleted. The ITAT accepted the factual finding that the Assessee had
allowed its sister concerns to retain the amount as a result of the trading
transactions. Further the entire amount was taken by the Assessee for the
business purpose. Therefore, there could be no disallowance of interest.
ITA Nos. 204/2002 & batch matters Page 33 of 42
65. The Court finds that the ITAT has concurred with the finding of the CIT
(A) which turned on facts. The Court is not persuaded that the said decision
is perverse or suffers from any legal infirmity. Accordingly, the issue is
decided in favour of the Assessee and against the Revenue.
Foreign travel expenses
66. The next issue concerns the addition made by the AO on account of
foreign travel expenses. The Assessee had claimed foreign travelling
expenses amounting to Rs. 2,21,33,253. According to the Assessee, these
expenses were incurred for the purpose of training of the pilots abroad.
Further the training was imparted by technical experts for the purposes of
the business of the Assessee. The AO disallowed the above expenses in the
sum of Rs. 44,26,650. The CIT (A) found that the decision of the AO was ill
founded, without proper appreciation of the facts of the Assessees case and
that the entire foreign travelling expenses were incurred after obtaining
approval from the R.B. I. for purchase of foreign currency from the market
which can never be done as an afterthought. It was observed that the
agreement of the Assessee with Hughes Flight Training Ltd. clearly
provided that the latter was not to give training to the flight crews in India.
The CIT (A) demarcated the expenditure incurred on travel of relatives of
the directors and confirmed an addition to that extent in the sum of Rs.2200.
The expenditure on travel in which the destination of the journeys were not
mentioned was also separated and this expenditure in the sum of
Rs.8,26,638 was restored the matter back to the AO for a fresh
determination so as to give an opportunity to the Assessee to produce the
necessary evidences. The addition of the remaining expenditure in the sum
ITA Nos. 204/2002 & batch matters Page 34 of 42
of Rs.35,97,812 was deleted. The ITAT did not interfere with the said order.
The Court finds no reason to interfere with the decision of the ITAT on this
aspect.
Consultancy charges
67. The next issue concerns the disallowance of consultancy charges of
Rs.21,60,000 on the ground that no reliable documentary evidence has been
furnished by the Assessee. On this aspect the ITAT, for the AY 1995-96
held that the services rendered by Sahara India International Corporation
Limited (,,SIICL) to the Assessee was in connection with the lease of two
aircrafts and the payment made to it for the services rendered. The Revenue
had been unable to show as to how such payment should be treated as
unreasonable. The Court finds that even in the present appeal the Revenue
has been unable to show that the said payment has been excessive or
unreasonable. The issue is decided in favour of the Assessee and against the
Revenue.
Staff welfare expenses
68. The next issue concerns the deletion of Rs. 54,06,701 on account of
claim made by the Assessee as staff welfare. The Assessee categorised the
expenditure under two heads meetings and conveyance expenditure and
staff welfare expenditure. Observing that it was unclear that the staff welfare
expenditure was actually incurred for the staff of the Assessee itself and that
the expenditure claimed under both heads was excessive, the AO treated the
entire expenses claimed as entertainment expenses under Section 37 (2) and
added the same to the income of the Assessee on the basis that the amount
ITA Nos. 204/2002 & batch matters Page 35 of 42
constituted entertainment expenses. The CIT (A) reversed the AOs order on
the ground that it was not clear what kind of evidence the AO was
expecting. The ITAT has upheld the order of the CIT (A).
69. Having perused the documents produced as evidence, the Court finds
that the CIT (A) was right in observing that it was not necessary for every
employee to sign a voucher and that the AO has erred in treating the staff
welfare expenses as entertainment expenses. However, the CIT (A) found
that the expenses claimed as conveyance expenses were in the nature of
entertainment expenses as defined by Section 37(2)(iii) and directed the AO
to restrict the disallowance insofar as conveyance expenses of Rs. 7,31,324.
70. The Court is unable to find any illegal infirmity in the order of the CIT
(A) as upheld by the ITAT. The issue is decided in favour of the Assessee
and against the Revenue.
Advertisement and publicity expenses
71. The next issue concerns the addition of Rs. 10,37,367 on account of
disallowance of advertisement and publicity expenses as they were not
related to AY 1996-97. As rightly pointed out by the ITAT, as per the
mercantile system of accounting, bills received by the Assessee in respect of
advertisement services pertaining to the previous year and continued during
the year was booked only when it was crystallized. The issue has been
answered in favour of the Assessee by the decision of the Gujarat High
Court in Saurashtra Cement and Chemical Industries v. CIT 213 ITR 523
which observed that merely because the expenditure relates to an earlier
ITA Nos. 204/2002 & batch matters Page 36 of 42
year, it does not become a liability payable in the earlier year unless it can
be said that the liability was determined and crystallized in the year in
question on the basis of maintaining accounts on the mercantile basis.
72. Consequently, the issue is answered in favour of the Assessee and
against the Revenue.
Air travel tax
73. The next issue concerns the addition of Rs. 10,17,553 made on account
of disallowance of the air travel tax (or passenger service fee) incurred by
the Assessee. The question was whether the said expenditure is covered
under Section 43 B of the Act. The payment challans were filed by the
Assessee along with its reply dated 24 th March 1999. The AO held that since
evidence for payment of the amount in the sum of Rs 10,17,553 could not be
produced, the same was to be disallowed under Section 35B and added the
said amount back to the income of the Assessee. The CIT (A), following its
earlier order dated 23rd March 1999 for AY 1994-95 and order dated 29th
December 1999 for A. Y. 1995-96 in AY, held that Section 43B does not
apply.
74. The ITAT followed its order dated 8th August 2008 in ITA No.
294/Luc/2000 which held that Section 43B is only attracted when the
Assessee claims deduction for any sum payable by way of tax or duty under
any law for the time being in force, and, where, as in the case of the
Assessee, no charge is claimed or made to the profit or loss account, there
was no question of disallowing the amount taken to the balance sheet on the
ITA Nos. 204/2002 & batch matters Page 37 of 42
liabilities side or of "adding back" and deleted the addition.
75. Consequently, the Court upholds the order of the ITAT which affirmed
the order by the CIT (A) deleting the above addition. The issue is decided in
favour of the Assessee and against the Revenue.
Limitation under Section 201 of the Act
76. The other issue that requires to be decided in ITA Nos. 204 and 205 of
2002 concerns limitation under Section 201 of the Act. The ITAT came to
the conclusion that the order under Section 201 of the Act for the FY 1994-
95 was barred by limitation since it was not issued within four years from
the end of the said AY. The order for AY 1994-95 was passed on 10th May
2000. The other orders in respect of AY 1995-96 to 1998-99 were within the
period of limitation.
77. The Court has heard the submissions of Mr. Rohit Madan, learned
counsel for the Revenue at length. The payment in question for the AY
1995-96 pertained to the payment made to Jeppson & Co. for navigational
data. It is noticed that the issue is covered by the decision in CIT v. Mak
Japan Broadcasting (2007) 305 ITR 222 and it is answered in favour of the
Assessee and against the Revenue. This amendment to Section 210 of the
Act with effect from 1st April 2010 provided for an extended limitation
period of seven years. However, that amendment was prospective as held in
Bhura Exports Limited v. The Income Tax Officer (TDS) (2014) 365 ITR
548 (Cal).
ITA Nos. 204/2002 & batch matters Page 38 of 42
78. Consequently, the said issue is decided in favour of the Assessee and
against the Revenue.
Payment to Sochata France
79. The Court is informed that pursuant to the remand of the issue to the AO
as directed by the ITAT, the Assessee succeeded before the AO. Therefore
the said issue is not pressed.
Summation and answers
80. The questions framed in the appeals are answered as indicated hereafter.
ITA 204 of 2002
81. Question (i) regarding payments to AAR Aviation Inc is answered in the
negative i.e. in favour of the Assessee and against the Revenue.
82. Question (ii) regarding payment for use of flight simulator is remanded
to the ITAT for a fresh decision in accordance with law.
83. Question (iii) regarding payments to M/s. Sochata France is disposed of
as not pressed in view of the subsequent development whereby on remand
the Assessee has succeeded.
ITA 205 of 2002
84. Question (i) regarding the order under Section 201 of the Act for FY
1994-95 being barred by limitation is answered in the affirmative i.e. in
favour of the Assessee and against the Revenue.
ITA Nos. 204/2002 & batch matters Page 39 of 42
85. Question (ii) regarding grossing up under Section 195-A of the Act is
answered in the affirmative, i.e. in favour of the Assessee and against the
Revenue.
86. Question (iii) regarding payment towards reserve funds is answered in
the affirmative, i.e. in favour of the Assessee and against the Revenue.
ITA 128 of 2005
87. The sole question regarding payment to AAR Aviation Inc is answered
in the negative i.e. in favour of the Assessee and against the Revenue.
ITA 1206 and 1209 of 2005
88. The sole question in both these appeals regarding payment towards
reserve funds is answered in the affirmative, i.e. in favour of the Assessee
and against the Revenue.
ITA 86 of 2011
89. Question (i) regarding additions under Section 68 of the Act is answered
partly in favour of the Revenue by setting aside the orders of the CIT (A)
and ITAT deleting the addition made by the AO of the sum corresponding to
65185 shareholders and directing the corresponding addition of the said sum
to the income of the Assessee for AY 1996-97. However, the orders of the
CIT (A) as confirmed by the ITAT deleting the addition made in respect of
the amount brought in by 50 + 17 shareholders and remanding the matter to
the AO in respect of 8 persons and some part of 25 persons who were not
ITA Nos. 204/2002 & batch matters Page 40 of 42
traceable and whose addresses had not been furnished is upheld.
90. Question (ii) regarding payment towards maintenance reserve for leased
aircraft is answered in the affirmative i.e. in favour of the Assessee and
against the Revenue.
91. Question (iii) regarding payment towards training and manpower
development is remanded to the ITAT for a fresh decision in accordance
with law.
92. Question (iv) regarding payments for computerised reservation system in
the affirmative i.e. in favour of the Assessee and against the Revenue.
93. Question (v) regarding disallowance of 50% of expenditure incurred on
issue of free tickets as business expenditure is answered in the affirmative
i.e. in favour of the Assessee and against the Revenue.
94. Question (vi) regarding disallowance of interest on borrowed capital is
answered in the affirmative i.e. in favour of the Assessee and against the
Revenue.
95. Question (vii) regarding disallowance of 1/5th of foreign travel expenses
is answered in the affirmative i.e. in favour of the Assessee and against the
Revenue.
96. Question (viii) regarding disallowance of consultancy expenses is
ITA Nos. 204/2002 & batch matters Page 41 of 42
answered in the affirmative i.e. in favour of the Assessee and against the
Revenue.
97. Question (ix) regarding disallowance of staff welfare and entertainment
expenses is answered in the affirmative i.e. in favour of the Assessee and
against the Revenue.
98. Question (x) regarding disallowance of advertisement and publicity
expenses is answered in the affirmative i.e. in favour of the Assessee and
against the Revenue.
99. Question (xi) regarding disallowance of Air Travel Tax is answered in
the affirmative i.e. in favour of the Assessee and against the Revenue.
100. The appeals are disposed of in the above terms with no order as to
costs.
S. MURALIDHAR, J
VIBHU BAKHRU, J
NOVEMBER 04, 2015
Rk
ITA Nos. 204/2002 & batch matters Page 42 of 42
|
