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Income Tax Appellate Tribunal, DELHI BENCH “D”, DELHI
Before: SHRI VIKAS AWASTHY & SHRI MANISH AGARWAL
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) आअसं.1493/िद�ी/2025(िन.व. 2022-23) (A.Y.2022-23) Einn Volant Aircraft Leasing Ireland 1 Ltd., Aviation House, Shannon Co Clare, Ireland C/o DMD Advocates, 30, Nizamuddin East, New Delhi 110013 ...... अपीलाथ�/Appellant PAN: AAGCE-3759-B बनाम Vs. Assistant Commissioner of Income Tax, International Taxation, Circle 1(2)(2), Civic Centre, ..... �ितवादी/Respondent Minto Road, New Delhi 110002 आअसं.1616/िद�ी/2025(िन.व. 2022-23) ITA No.1616/DEL/2025 (A.Y.2022-23) Celestial Aviation Trading 100 Ltd., Aviation House, Shannon Co Clare, Ireland C/o DMD Advocates, 30, Nizamuddin East, New Delhi 110013 ...... अपीलाथ�/Appellant PAN: AAICC-6623-Q बनाम Vs. Assistant Commissioner of Income Tax, International Taxation, Circle 1(2)(1), Civic Centre, ..... �ितवादी/Respondent Minto Road, New Delhi 110002 Assessee by : Shri Sachit Jolly, Sr. Advocate with Ms. Disha Jham, S/Shri Devansh Jain, Hardeep Singh Chawla, Sohum Dua & Soumya Singh, Advocates Department by : Ms. Prajna Paramita, CIT-DR सुनवाई क� ितिथ/ Date of hearing : 29/04/2025 घोषणा क� ितिथ/ Date of pronouncement : : 25/07/2025 आदेश/ORDER PER VIKAS AWASTHY, JM: These five appeals by different assessee's for AY 2012-13 are taken up together for adjudication as identical issues are involved in all these appeals.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) 2. For the sake of convenience, the appeal in is taken up as lead case and facts are narrated from said appeal. ITA No. 1478/Del/2025 for AY 2022-23 3. The facts of the case in brief as emanating from records are: The assessee company was incorporated in Ireland and is a Tax Resident of Ireland. The assessee is engaged in the business of leasing of aircrafts. During the period relevant to assessment year under appeal, the assessee had allegedly leased three aircrafts bearing Manufacturer Serial No. (MSN) 10689, 9382 & 9561 to M/s. Inter Globe Aviation Ltd. (Indigo) on an operating lease basis. The assessee filed its return of income for the impugned assessment year with residential status of ‘Non-Resident’ declaring NIL income. The case of the assessee was selected for scrutiny on the basis of CASS and notice u/s. 143(2) of the Income Tax Act, 1961(hereinafter referred to as the 'the Act') dated 31.05.2023 was issued and served upon the assessee. 3.1. During the Financial Year ended on 31.03.2022, the assessee had received lease rentals amounting to Rs.74,37,77,694/- from Indigo for use of aircrafts . The assessee claimed that since lease rentals received by the assessee are in respect of operating lease, the lease rents received are covered under Article 8 of India- Ireland DTAA, hence, not taxable in India. The assessee in support of its submissions placed on record copy of Aircraft Specific Lease Agreement (in short ‘ASLA’) dated 15.04.2021. The Assessing Officer (AO) after examining the lease agreement, the contract with Airbus, the Original Equipment Manufacturer (OEM) and Aircraft Bill of Sale issued by Airbus held that it is not an operating lease but a finance lease. Hence, the income received by the assessee in the form of lease rentals is liable to be taxed in India at the rate of 10% of the gross amount and 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) thus, made addition of Rs.74,37,77,694/-. Aggrieved by the Draft Assessment order dated 29.03.2024 passed u/s. 144C(1) of the Act, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 29.12.2024 upheld the view of Assessing Officer and rejected assessee's objections. Thus, the AO in compliance with the DRP directions passed Final Assessment Order dated 29.01.2025 confirming addition of Rs.74,37,77,694/- on account of interest on borrowings covered under Article 11 of India-Ireland DTAA and taxable in India at the rate of 10% of the gross amount. Hence, present appeal by the assessee.
The assessee in appeal has inter alia assailed findings of the AO in making addition of Rs.74,37,77,694/- by re-characterizing the nature of lease agreement between assessee and Indigo as financial lease as against assessee's claim of operating lease. The assessee in appeal has raised as many as six grounds with sub grounds. The ground no. 1, 3, 4, 5 are in respect of addition made by the AO on merits. In ground no. 2 of appeal, the assessee has assailed the validity of final assessment order on the ground of limitation and in ground no. 6 of appeal, the assessee has assailed levy of interest u/s. 234B of the Act and initiation of penalty u/s. 270A r.w.s. 274 of the Act. The ld. Counsel for the assessee at the outset made statement at Bar that he is not pressing ground no. 2 of appeal.
In respect of grounds of appeal
raised on merits, the ld. Counsel submits that the assessee had entered into Aircraft Specific Lease Agreement dated 15.04.2021 with Indigo in respect of aircraft bearing MSN 10689, the agreement as at pages 162 to 209 of the paper book. Identical agreements have been entered into between the assessee and Indigo for other Aircrafts as well on different dates; The ld. Counsel pointed that a perusal of Clause 3 of the ASLA 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) would show that the lessor (Celestial Aviation Trading
15. Ltd. i.e. the assessee) would be the owner of aircraft. He further pointed that as per Clause 8 of the agreement, the term of lease would be 120 months with an option to extend the term of lease for a further period of up to 48 months. He referred to Clause 10 of the agreement to show that as per the agreement lessee (Indigo) shall pay a deposit in cash or in the form of Letter of Credit prior to delivery. The said deposit/letter of credit is returnable on occurrence of any of the following events: “(a) Aircraft suffers any event of loss prior to delivery; (b) The aircraft suffers and event of loss after delivery; (c) On completion of the return occasion; & (d) The aircraft is not delivered to the lessee on or prior final delivery date and the Aircraft Specific Lease Agreement is terminated in accordance with Clause 12.”
The ld. Counsel pointed that all the above conditions set out in the ASLA clearly indicate that it is a case of operating lease, where the ownership of the aircraft remains with the assessee and the aircraft is handed over to Indigo only for the limited purpose of operations. There is no covenant in the agreement which lays down the condition that the ownership of the aircraft at the end of lease period or at any point of time shall be transferred to the lessee i.e. Indigo.
The ld. Counsel further pointed that as per Reserve Bank of India Circular No. 24 dated 01.03.2002 (at page 234 of the paper book) there are different conditions for remittance of payment of lease where the such payments are made in respect of operating lease basis. Wherever, financial lease transactions are undertaken prior approval from the RBI is mandatory. The ld. Counsel further referred to Aircraft Lease Common Terms Agreement (in short CTA) entered into between GE Commercial Aviation Services Ltd. and Indigo. The said agreement is at page 534 to 635 of the paper book. He pointed that as per Common Terms 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) Agreement, the expression owner means the persons identified in the ASLA as owner or subject to Clause 14.3, such other person as Lessor may notify Lessee from time to time. Thus, on the joint reading of ASLA and Common Terms Agreement it would be clear that owner of the aircraft is the lessor i.e. the assessee. He further referred to Clause 8.4 of the Common Terms Agreement, which restricts the Lessee to sub lease, wet lease or otherwise give possession of aircraft to any other person except under certain conditions. The primary being prior return consent of lessor. Likewise, he referred to various other conditions in the Common Terms Agreement to substantiate that Lessor is the owner of the aircraft and not the lessee during the currency of lease period and at no point of time, the ownership in the aircraft is passed on to the lessee.
The ld. Counsel for the assessee further referred to the definition of ‘Financial Lease’ as defined under the Securitization and Reconstruction of Financial Assets and Enforcement Security Interest, Act (SARFAESI) 2002. He pointed that the definition of ‘Financial Lease’ is defined u/s. 2(ma) of the SARFAESI Act. He pointed that as per the said definition the lessor is under an obligation to transfer rights of ownership to the Lessee after the expiry of lease term or on payment of an agreed residual amount. He submitted that in the instant case at no point of time the ownership in the aircraft is transferred to the Lessee. In fact at the end of lease term either the lease agreement is further extended or the aircraft is returned back to the lessor. To further buttress his argument the ld. Counsel referred to the definition of financial lease as defined u/s. 2(ha) of the Act of the Recovery of Debts and Bankruptcy Act, 1993. He asserted that, even the said definition imposes a condition of transfer of ownership of leased assets at the expiry of lease term to the lessee.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) 9. The ld. Counsel referring to the DRP directions pointed that the DRP has erred in holding that the Economic-Life of an aircraft is 8 years and since the aircraft lease period covers substantial Economic Life of the asset even though ownership not eventually transferred, the lease would be in the nature of Financial Lease. The ld. Counsel assailing findings of the DRP, asserted that it is not the length of lease period that defines nature of lease but terms and conditions which inter alia includes, whether the ownership of the leased asset is to be transferred to the lessee at the end of lease term which determines the nature of lease.
The ld. Counsel finally placed reliance on the decision of Special Bench in the case of Inter Globe Aviation Ltd.(Indigo) vs. ACIT reported as 2021 TIOL 1607, ITAT-Del-SB. The ld. Counsel submitted that the issue for consideration before the Special Bench was whether the credit received by Indigo from Equipment Manufactures is a Capital or Revenue receipt. While examining this issue the Special Bench examined Lease Agreements. The Special Bench after considering the purchase assignment agreement executed between Indigo and Howth Aircrafts Leasing Ltd. came to the conclusion that the lease agreement is in the nature of operating lease and not financial lease.
Per contra, Ms. Prajna Paramita representing the department vehemently defended the impugned order. The ld. DR referred to Purchase Agreement Assignment between Indigo and the assessee dated 20.11.2020 at page 633 of the paper book. The ld. DR pointed that the recital of the said agreement would show that Indigo/assigner and Airbus have entered into the purchase agreement. Subsequently, the assigner i.e. Indigo with the consent of Airbus assigned rights to the assignee (the assessee) for purchase of aircraft. In fact, the real transaction is 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) the assessee had entered into an agreement with OEM i.e. Airbus for purchase of aircraft. Thereafter, an agreement was entered into between Indigo, and the assessee, as per said agreement the assessee would make payment for aircraft and thereafter would lease aircraft to Indigo. This circuitous transaction is in the nature of Financial Lease, where the aircraft is purchased by the Indigo and purchase consideration is paid by the assessee. The ld. DR submitted that the operating lease is a make believe arrangement, in fact the lease agreement and period of lease has characteristics of Financial Lease. She pointed that the aircraft was leased for substantial period of its Economic Life to Indigo with a further condition to extend the period of lease. She prayed for examining the transaction considering substance over form. The ld. DR in particular referred to findings of the AO in para 9 of the assessment order. Referring to the Aircraft Bill of sale, the ld. DR submitted that the title in the aircraft was subsequently transferred to the Lessor.
We have heard the submissions made by both sides in extenso, perused the orders of authorities below and have considered the documents and decisions referred to during the course of submissions by the rival sides. The assessee in appeal has primarily assailed the addition of Rs.74,37,77,694/- on account of interest income taxable at the rate of 10% holding lease rentals received by the assessee out of Financial Lease. Undisputedly, the assessee is tax resident of Ireland and is engaged in the business of Leasing of Aircrafts. During the period relevant to assessment year under appeal, the assessee leased out three aircrafts bearing MSN 10689, 9382 and 9561 to Indigo. The case of the assessee is that the lease entered into between the assessee and Indigo is operating lease. Hence, the lease rentals received by the assessee from said lessee are not exigible to tax in India. The AO has re-characterized the nature of lease agreement and has held 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) the lease to be finance lease and the lease rentals received by the assessee in the nature of interest taxable at the rate of 10% in accordance with Article 11 of India-Ireland DTAA.
To begin with, it would be relevant to refer to the Lease Agreement entered into between the assessee, the lessor and Indigo, the lessee. The assessee has placed on record Aircraft Specific Lease Agreement (in short 'ASLA) dated 15.04.2021 at page 162 to 209 of the paper book in respect of aircraft bearing MSN 10689. The assessee has also placed on record a copy of Aircrafts Lease Common Terms Agreement (CTA) dated 20.06.2006 entered into between GE Commercial Aviation Services Ltd. and Indigo. To understand the issue, both agreements have to be read together. Aircraft Specific Lease Agreement as the name suggests is in respect of a particular aircraft, whereas, the terms and conditions spelled out in Aircraft Lease Common Terms Agreement is the standard agreement which would be applicable to all the aircrafts taken on lease by Indigo. A perusal of ASLA would show that the assessee is the Lessor and Indigo is the Lessee. The duration of agreement is for a period of 120 months extendable at the option of Lessee to be conveyed in writing to the Lessor before the expiry of 18 months prior to the original scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the ‘Lessor’. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership in aircraft shall be transferred to the lessee or the lessee at any point of time can exercise option to purchase the aircraft. Clause 10 of ASLA requires the Lessee to pay deposit in cash or in the form of Letter of Credit prior to delivery of aircraft. The Lessor shall return such deposit to the Lessee upon occurrence of the events specified in ASLA which 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) includes, ‘on completion of the Return Occasion. “Return Occasion” is defined in Schedule-I of CTA as: “Return Occasion means the date on which the Aircraft is redelivered to Lessor in accordance with Clause 12”. Clause 12 of CTA reads as under: “12. RETURN OF AIRCRAFT 12.1 RETURN On the Expiry Date or redelivery of the Aircraft pursuant to Clause 13.2 or termination of the leasing of the Aircraft under the Lease, Lessee will, unless an Event of Loss has occurred, redeliver the Aircraft and the Aircraft Documents and Records at Lessee's expense to Lessor at the Redelivery Location, in accordance with the procedures and in compliance with the conditions set out in Schedule 6, free and clear of all Security Interests (other than Lessor Liens) and in a condition suitable for immediate operation under FAR Part 121 or as otherwise agreed by Lessor and Lessee and, in any case, qualifying for and having a valid and fully effective certificate of airworthiness issued by the Air Authority. If requested by Lessor, Lessee shall thereupon cause the Aircraft to be deregistered by the Air Authority Lessor shall reasonably cooperate (and shall procure that the Owner reasonably cooperates) with the Lessee in order to effect such deregistration.” The above clause makes it unambiguously clear that at the end of Lease period, Lessee is under obligation to return aircraft to the lessor. And on the return of aircraft the lessor shall refund the deposit.
14. Some of the vital covenants of the CTA are examined to determine the nature of lease as under:- (i) Schedule-I to CTA contains definitions. “Owner” has been defined as under:
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) “Owner means the Person identified in the Aircraft Specific Lease Agreement as Owner or, subject to clause 14.3, such other person as Lessor may notify Lessee from time to time.” The owner as per ASLA is the assessee. (ii) Clause 8.4 of CTA deals with sub-leasing. “8.4 Subleasing (a) At no time prior to the Return Occasion will Lessee sub-lease, wet- lease or otherwise give possession of the Aircraft to any Person except: (i) when the prior written consent of Lessor has been obtained (not to be unreasonably withheld or delayed); or (ii) where the Aircraft is delivered to a manufacturer or maintenance facility for work to be done on it as required or permitted under the Lease; or (iv) to a Permitted Sub-Lessee as set forth in Clause 8.4(b); or (v) on a wet lease complying with the provisions of the following of this clause 8.4(a).” Clause 8.4 of the CTA restricts the lessee to sub-lease, wet lease or otherwise give possession of aircraft to any person except under certain conditions with prior consent of lessor. (iii) Clause 8.6 of CTA explains Ownership; Property Interest; Related matters. The relevant extract of the same is reproduced as under: “8.6 Ownership; Property Interests; Related Matters (a) Lessee will: (i) fix and maintain Nameplates in a prominent position in the cockpit or cabin of the Aircraft and on each Engine stating "This Aircraft/Engine is owned by (insert name of Owner and is leased to [insert name of Lessee] and may not be or remain in the possession of or 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) be operated by, any other person without the prior written consent of linsert name of Lessor]"; and (ii) take all reasonable steps to make sure that other relevant Persons know about the interests of Owner and Lessor as owner and lessor respectively in the Aircraft, including (without limitation) ensuring that wherever necessary as a matter of applicable Law in the State of Registry or in the jurisdiction of incorporation of any Permitted Sub-Lessee or the State of Incorporation, the interests of Lessor and Owner are duly registered in the International Registry. (b) Lessee will not: (i) represent that it is the owner of the Aircraft or that it has an economic interest (equivalent to ownership) in the Aircraft for Tax treatment or other purposes; (ii) take any action or fail to take any action if it might reasonably be expected to put Owner's and / or Lessor's rights at risk; (iii) represent to others that Owner or Lessor is associated with or responsible for the business activities and / or flight operations of Lessee; or (iv) allow the Aircraft or Owner's or Lessor's interest in it to become or remain subject to any Security Interest (other than a Permitted Lien); nor (v) consent to any interests conflicting with (whether or not taking priority over) the interests of Lessor or Owner to be registered at the International Registry without the prior written consent of Lessor or Owner (as the case may be).” The aforesaid covenant ensures that the name of the owner at all times is displayed on the aircraft. The reason for having this clause is obviously to display the name of owner and lessee during the period of Lease Agreement which is substantially less than the Economic Life of the Aircraft.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) (iv) In Clause 8.13 Aircraft Lease Common Terms Agreement deals with title on equipment change, the same reads as under:- “8.13 Title on an Equipment Change Title to any equipment that becomes a Part or an Engine after the Delivery Date (whether by way of replacement, as the result of an Equipment Change or otherwise) shall, save as otherwise provided in a bill of sale or similar instrument delivered by Lessee in favour of Owner) vest in Owner solely by virtue of its attachment to the Airframe or an Engine and it shall then be subject to the Lease as if it were attached to the Aircraft at Delivery. If so requested by Lessor, Lessee will provide a properly executed bill of sale or similar instrument to evidence the vesting of title to any such equipment, free and clear of all Security Interests, in Owner.” A perusal of aforesaid Clause shows that in case of change in any equipment which is part of engine. The ownership in that equipment shall solely vest with the owner by virtue of its attachment of the airframe to the engine. The Clause 9 of the CTA lays down the condition and responsibility on (v) lessee to get the aircraft insured. A perusal of Clause 9.1 reveals that it is the responsibility of lessee to maintain the insurance in full force during the term of lease only. After the expiry of lease, the lessee is not responsible for the insurance of the aircraft. (vi) Clause 10 of CTA binds the lessee to indemnify the lessor. The relevant extract from the said clause is reproduced herein under:- 10. INDEMNITY 10.1 General (a) Lessee agrees to assume liability for and indemnifies each of the Indemnitees against and agrees to pay on demand Losses which an Indemnitee may suffer at 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) any time whether directly or indirectly as a result of any act or omission in relation to: (i)the ownership (but only to the extent arising out of the use, possession, leasing, operation or maintenance of the Aircraft by Lessee or any Permitted Sub-Lesse), maintenance, repair, possession, transfer of ownership or possession, import, export, registration, storage, modification, leasing, insurance, inspection, testing, design, sub-leasing, use, condition or other matters relating to the Aircraft; or (ii) any breach by Lessee of its obligations under the Lease. ‘Indemnity’ has been defined in Schedule-I as under:- Indemnitee means each of Lessor, Owner, GECC, GECAS, the Financing Parties and each of their respective successors and assigns, shareholders, subsidiaries, affiliates, partners, contractors, directors, officers, representative, servants, agents and employees. 13.4 Sale or Re-lease of Aircraft If an Event of Default occurs and is continuing, Lessor may sell or re-lease or otherwisde deals with the Aircraft at such time and in such manner and on such terms as Lessor considers appropriate in its absolute discretion, free and clear of any interest of Lessee, as if the Lease had never been entered into. Thus, in the event of default the Lessee has to return aircraft to the Lessor and thereafter, the Lessor can sale or re-lease the aircraft.
From perusal of above terms and conditions it can be deduced that the ownership in the aircraft vest with the assessee/lessor at all the time during the period of lease. From conjoint reading of the terms and conditions of CTA and ASLA it emerges that there is no change in the ownership of the aircraft during the currency of lease agreement and at the end of agreement, the lessor 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) continues to be the owner and the Lessee shall pay lease rentals to the assessee/lessor during lease period.
Now to understand the difference between financial lease and operating lease, we need to refer to the definition of ‘Financial Lease’ under other Acts as the expression financial lease and operating lease are not defined under the Income Tax Act. Section 2(ma) of the SARFAESI Act, 2002 defines ‘financial lease’ as under:- “financial lease” means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where the lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be” The Recovery of Debts & Bankruptcy Act, 1993 defines financial lease as under:- ““financial lease" means a lease under a lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be” From the aforesaid definitions a subtle trait of financial lease can be identified i.e. "At the end of the lease period, lessee becomes the owner of the leased asset."
In the instant case although the AO and the DRP have characterized the nature of lease as financial lease but both the authorities have ignored the fact 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) that at no point of time, ownership in the asset i.e. aircraft is transferred to the lessee, which is the hallmark of financial lease.
The assessee has drawn our attention to RBI Circular No. 24 dated 01.03.2002 at page 234 of the paper book which deals with Import of Aircraft/Aircraft engine/Helicopter on lease basis. A perusal of RBI Circular No. 24 dated .01.02.2022 would show that there are separate conditions to be satisfied for acquiring aircraft on operating lease basis and under financial lease. For the sake of ready reference relevant excerpts from the said Circular are reproduced herein below:- “To All Authorized Dealers in Foreign Exchange Madam/Sirs, Import of Aircraft/Aircraft Engine/ Helicopter on lease basis Authorised dealers are aware that the Reserve Bank is considering applications from airline companies and air taxi operators for payment of the lease rentals for import of aircraft/aircraft engine/helicopter on lease basis, based on the approval issued by the Director General of Civil Aviation (DGCA), Government of India.
It has been decided that authorised dealers may allow remittance of payment of lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/aircraft engine/helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities, like Ministry of Civil Aviation/Director General of Civil aviation, Government of India has been obtained. In this connection attention is also invited to paragraph 8 of Annexure I to A.D.(M.A. Series) Circular No.11 dated May 16, 2000.
It is clarified that financial lease transaction i.e. the lease transaction containing option to purchase the asset at the end of the lease period will continue to require prior approval from the Reserve Bank of India.”
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) The contention of the assessee is that the lessee is paying lease rentals in accordance with aforesaid RBI Circular and for the financial lease transaction where the ownership in the asset is transferred to the lessee, the lessee was required to take prior approval from the RBI, no such approval has been taken by the lessor in the present case. This fact remains un-rebutted. No material is available on record to suggest that the above RBI Circular has been violated by the lessor or the lessee.
Further, the ld. Counsel for the assessee has drawn our attention to the observations of the DRP in para 17.3 (ii) of the Directions, where the DRP has determined economic life of the Aircraft as 8 years. Referring to DGCA Circular issued in 1993 the DRP concluded that since lease of the aircraft covers substantial commercial life, therefore, the lease should be termed as financial lease. We find above observations of the DRP contrary to the facts on record and the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of 120 months i.e. for 10 years, in other cases the lease period is for lesser period i.e. 72 months as is in the case of MSN 9382 (at page no. 210 to 275 of the paper book) and for MSN 9561 (at pages 276 to 341 of the paper book). Substantial economic life of the aircraft is still left after the end of lease period. Therefore, observations of the DRP on Economic Life of the aircraft being utilized under lease agreement is without any basis, hence, the conclusion to re-characterize nature of lease agreement is erroneous.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) 19. The ld. DR has vehemently argued that the lessee (Indigo) had originally entered into an agreement for purchase of aircraft with Airbus and it was subsequently that the present assessee stepped in at the time of delivery of aircraft and financed Indigo for acquiring the aircraft from Airbus. The ld. Counsel for the assessee to counter argument of the Revenue has brought to our notice the decision of Special Bench in the case Inter Globe Aviation Ltd. (Indigo) vs. ACIT (supra). Similar arguments were raised by the Revenue in said case. The questions for consideration before the Special Bench was: “(1) Whether FIA (Fleet Introductory Assistance) credit received by the Assessee from IAE and other equipment manufacturers is a Capital or revenue receipt arising out of the transaction? (2) Whether credits so received are taxable under section 28(i) or 28(iv) of the I.T. Act, 1961 or as a "Commission" income or "Income from capital gains"? (3) Whether the Ld. CIT(A) is right in making disallowance of Rs.268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961? (4) Whether payment of Supplementary Lease Rent of Rs.328,09,64,412 l-is an allowable business expenditure and TDS is not deductible thereon?”
While answering the aforesaid questions the Special Bench took note of the agreement between Indigo and Howth Aircraft Leasing Ltd., assignee and observed that Indigo is not the owner of Aircraft and the Revenue failed to demonstrate that the lease is in the nature of operating lease. The Special Bench further observed that the lower authorities have admitted the fact that ownership of the aircraft is with the lessor and depreciation on these aircraft is claimed by the lessor. The relevant extracts of findings of the Special Bench on this issue are reproduced herein below:-
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) “31.4. It is relevant to note under this agreement that there is no consideration flowing from the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the assessee has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease i) agreement dated 15.12.2016 with M/s MeR. Aviation Limited (ii) agreement dated 14.06.2007 with M/s Genesis Acquisition Limited (paper book pages 481 to 589) (iii) agreement dated 04.07.2007 with Lara Leasing Ltd. (Paper book pages 590 to 600). It is the submission of the learned senior counsel for the assessee that all these agreements are in the nature of operating lease and that generally the terms of the agreement are for six years. This fact is also not disputed by the lower authorities. Learned Special Counsel for the Revenue has filed copies of the 03 Lease Agreements before us in his paper book. However, he was not able to demonstrate from any of these 03 Agreements that the nature of lease is Finance Lease and not Operating Lease. The Hon’ble Supreme Court in the case of Asea Brown Boveri Limited vs Industrial Finance Corporation of India Ltd., reported in 154 Taxman 512 (SC) and Association of Leasing & Financial Services vs Union of India reported in [2011] 2 scc 362 has differentiated and highlighted characteristics of both Operating Lease and Finance Lease. The Learned Special Counsel for the Revenue has not been able to demonstrate how the nature of present lease are not Operating Lease in accordance with the ratio highlighted in the above decisions cited (supra). The Assessing Officer also in his order accepts that the ownership of the aircraft is with the lessor and that the depreciation on these aircrafts, where the engine supplied by the lAE is fitted, is claimed by the lessor. We find the learned CIT(A) has also not disputed this fact and have held that "since, the delivery schedule of Aircraft spread-over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of lease period which is usually six year." [Emphasized by us] 21. Further, the Special Bench on plea taken by the Revenue that lease rents are taxable in India as interest in accordance with Article 11 of India-Ireland DTAA, held as under:- 44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease Rent of Rs.673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent." In our 1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The Id. Special Counsel for the Revenue has filed copies of 3 lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the Id. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterized as "interest." We, therefore, find no merit in the above submissions raised by the Revenue.” [Emphasized by us] Once in the case of Indigo, the Revenue accepts that ownership in the Aircraft is with the lessor, the Revenue on similar set of agreements cannot take a reverse position in the case of lessee and argue that lessee is the owner. The Revenue cannot be allowed to approbate and reprobate on the same set of documents and re-characterize the nature of lease agreement to be a financial lease.
Before the Special Bench in the case of Indigo, the Revenue had vehemently argued that the lease rentals paid by Indigo to the lessee are in the nature of interest, hence, the provisions of Article 11 of India-Ireland DTAA would operate. The Special Bench negating the arguments of the Revenue held that the lease rentals paid by Indigo are in the nature of rent and not interest as the Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) 23. Thus, in light of our above findings and the decision of Special Bench, the assessee succeeds on ground no. 3 to 5 of appeal.
In ground no. 2 of appeal, the assessee has assailed validity of assessment order. The ld. Counsel for the assessee made statement at Bar that he has not pressing ground no. 2 of appeal. Thus, in light of statement made by ld. Counsel for the assessee, ground no. 2 of appeal is dismissed as not pressed.
In ground no 6 of appeal, the assessee has assailed charging of interest u/s. 234B of the Act. The charging of interest under section 234B of the Act is consequenital, hence, ground no. 6 of appeal is dismissed.
In ground no. 6.1 of appeal, the assessee has assailed initiation of penalty proceedings u/s. 270A r.w.s. 274 of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground no. 6.1 is dismissed as premature.
In the result, appeal of the assessee is partly allowed. 1477, 1493 & 1616/Del/2025 AY 2022-23 Both sides unanimously stated that the issues raised by the assessees in 28. these appeals germinate from identical set of facts and the grounds of appeal
are identical to the one raised in ITA No. 1478/Del/2025. Thus, the submissions already made would equally apply to the instant appeals.
29. The issues in these appeal are identical to the one adjudicated by us in therefore, the findings given by us while adjudicating said appeal would mutatis mutandis apply to the instant appeals as well. Hence, for parity of reasons the instant appeals are partly allowed.
1477, 1478, 1493 & 1616/Del/2025 (AY 2022-23) To sum up, appeals in 1476, 1477, 1493 & 1616/Del/2025 30. are partly allowed. Order pronounced in the open court on Friday the 25th day of July, 2025. Sd/- Sd/- (MANISH AGARWAL) (VIKAS AWASTHY) लेखाकार सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER िद�ी/Delhi, �दनांक/Dated 25/07/2025 NV/- �ितिलिप अ�ेिषतCopy of the Order forwarded to : अपीलाथ�/The Appellant , 1. 2. �ितवादी/ The Respondent.