DIRECTOR OF INCOME TAX vs. JET LITE (INDIA) LTD.

ITA Nos. 204/2002 & batch matters Page 1 of 42

$~ * 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 2015:DHC:9144-DB

ITA Nos. 204/2002 & batch matters Page 2 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

2015:DHC:9144-DB

ITA Nos. 204/2002 & batch matters Page 3 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

J U D G M E N T %

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 2015:DHC:9144-DB

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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.

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 2015:DHC:9144-DB

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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.

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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.

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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.

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deduction of tax at source was made.

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 2015:DHC:9144-DB

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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.

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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 2015:DHC:9144-DB

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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.

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 Assessee‟s 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?

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(ii) Whether the Tribunal‟s conclusion that the fee paid by the Appellant for use of flight simulator in terms of agreement dated 30th 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?

(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?

"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?"

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“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?”

“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?”

(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 2015:DHC:9144-DB

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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? 2015:DHC:9144-DB

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(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?

Unexplained cash credit under Section 68 of the Act 26. The Court first proposes to examine the issue concerning unexplained 2015:DHC:9144-DB

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cash credits under Section 68 of the Act.

(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 2015:DHC:9144-DB

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creditor/subscriber the genuineness of the transaction and veracity of the repudiation.

“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.”

(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 2015:DHC:9144-DB

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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.”

“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.”

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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.”

(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 2015:DHC:9144-DB

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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.

“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.” 2015:DHC:9144-DB

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(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.”

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„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.

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(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.

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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.

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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%.

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(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.

Training and manpower development 51. The issue concerning payments made for training and manpower 2015:DHC:9144-DB

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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.

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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.

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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.

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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.

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.

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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.”

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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.

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(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 Assessee‟s 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 2015:DHC:9144-DB

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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 2015:DHC:9144-DB

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constituted entertainment expenses. The CIT (A) reversed the AO‟s 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).

(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 2015:DHC:9144-DB

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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.

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 24th 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.

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liabilities side or of “adding back” and deleted the addition.

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.

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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.

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. 2015:DHC:9144-DB

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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 2015:DHC:9144-DB

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traceable and whose addresses had not been furnished is upheld.

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answered in the affirmative i.e. in favour of the Assessee and against the Revenue.

S. MURALIDHAR, J

VIBHU BAKHRU, J NOVEMBER 04, 2015 Rk 2015:DHC:9144-DB