ADDL. CIT, SPECIAL RANGE- 4, NEW DELHI vs. INTERGLOBE AVIATION LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “C”: NEW DELHI ] BEFORE MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER (Through Video Conferencing) ITA Nos. 432, 433 & 7695/Del/2018 (Assessment Years: 2013-14, 2014-15, & 2015-16) M/s. InterGlobe Aviation Ltd., JCIT, Ground Floor, Central Wing, Vs. Special Range : 4, Thapar House, 124 – Janpath, New Delhi. New Delhi – 110 001. PAN: AABCI2726B AND ITA Nos. 412 and 413/Del/2018 (Assessment Years: 2013-14 & 2014-15) JCIT, M/s. InterGlobe Aviation Ltd., Special Range : 4, Vs. Ground Floor, Central Wing, New Delhi. Thapar House, 124 – Janpath, New Delhi – 110 001. PAN: AABCI2726B (Appellants) (Respondents)

Assessee by : Shri Tarandeep Singh, Adv.; & Shri Pulkit Verma, Advocate. Department by : Ms. Sunita Singh [CIT] – D.R.; Date of Hearing 15/09/2021 Date of pronouncement 29/10/2021

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is the bunch of 5 appeals concerning the same assessee wherein for assessment year 13 – 14 and 14 – 15 cross appeals have been filed by the assessee and the revenue and further for assessment year 2015 – 16 assessee has filed appeal wherein identical issue is involved. Assessment year 2013 – 14 ITA number 412 Del 2018 (by AO) ITA number 432 Del 2018 (by assessee) 2. For assessment year 2013 – 14 the assessee has filed appeal in ITA number 432/Del/2018 against the order of the CIT (appeals) – 35, New Delhi dated 10/10/2017 wherein assessee has raised following grounds of appeal:-

“1. That on facts and in law the orders passed by the Commissioner of Income Tax (Appeals) {hereinafter referred to as “the CIT (A)”} and the Assessing Officer {hereinafter referred to as “the AO”} are bad in law and void-ab-initio. 2. That on facts and in law the CIT(A) erred in assuming jurisdiction to adjudicate upon issues not forming part of the grounds of appeal. 3. That on facts and in law the CIT(A) has erred in making a ad-hoc Disallowance u/s 37(1) of Lease Rental Payments to the tune of Rs.366,32,13,778/-. 3.1 That on facts and in law the CIT(A) erred in following his predecessor to conclude that credits of IAE are capital in nature and hence to the extent such credits are amortised and netted with Lease Rent payable in the P&L Account, the Lease Rent is to be disallowed as capital expenditure. 4. That on facts and in law the CIT(A) has erred in upholding disallowance u/s section 40(a)(i) of the Act on account of Supplementary Rent as under: (a) Supplementary Rent for lease agreements executed prior Rs 27,27,45,720/- to 01st April 2007 (b) Supplementary Rent for lease agreements executed after Rs 507,89,21,321/- 01st April 2007 Total Rs.535,16,67,041/- 4.1 That on facts and in law the CIT(A) has erred in upholding that payment of Supplementary Rent to Lessors in Ireland under Lease Agreements executed after 01st April 2007 attracts liability for Tax Deduction at Source. 4.2 That on facts and in law after accepting that character of Supplementary Rent “is nothing but for use of aircraft” the CIT(A) has erred in not allowing benefit under Article 12 of the Double Taxation Avoidance Agreements between India and Ireland.” 3. In ITA number 412/Del/2018 is filed by The Additional Commissioner Of Income Tax, Special Range – 4, New Delhi against the order of the learned CIT appeal for that year dated 10/10/2017 wherein the learned assessing officer has raised the following grounds:- i. whether on the facts and circumstances of the case and in law, the learned CIT – A erred in deleting the addition of ₹ 7,163,559,916/– made by the assessing officer in respect of supplier credits received from various supply of aircraft parts (mainly from International Aero engines, AG ) holding the same to be capital receipt and not as revenue receipts as held by the assessing officer ii. the learned CIT – A has erred in ignoring that the receipt of ₹ 7,163,559,916/– constituted receipts from exploitation of valuable commercial rights arising in the course of systematic in real business activity and such receipts would otherwise constitute income liable to be taxed Under the provisions of Section 28 (iv) of the income tax act, 1961. 4. The learned AO has raised an additional ground of appeal by letter dated 20 February 2018 as Under:- “without prejudice to the above, the CIT – A held that the receipts were in the nature of capital receipts or to have followed the order of predecessor in assessment year Page | 2

2012 – 13 that these capital receipts would enter into the capital gains chargeable to tax.” 5. The learned departmental representative submitted that this issue is arising out of the order of the learned and CIT – A and is an alternative ground therefore same may be admitted. 6. The learned authorised representative women clear objected to the admission of the additional ground however, he submitted that this issue is squarely covered in favour of the assessee by the decision of the special bench in case of the assessee dated 3 September 2021. Therefore, even if the same is admitted, it has already been decided in the favour of the assessee. 7. Briefly stated the facts shows that the assessee is a company engaged in the business of operating Airlines. It filed its return of income on 29.11.2013 declaring income of Rs. 2,32,97,58,440/-. The book profit was also shown u/s 115JB of the Act at Rs. 967,73,83,147/-. The case of the assessee was selected for scrutiny and order u/s 143(3) of the Act was passed on 06.12.2016 determining the total income of the assessee at Rs. 16,54,80,19,120/-. The ld AO made the following adjustments to the return of income of the assessee at Rs. 232,97,58,440/-:- a. Addition on account of credit received against purchase of engines amounting to Rs. 716,35,59,916/-. b. Disallowances u/s 40(a)(i) of the Act of Rs. 535,16,67,041/- c. Disallowance of claim of setting off of brought forward business loss and unabsorbed deprecation of Rs. 170,30,33,727/-. 8. The assessee is aggrieved with the order of the ld AO preferred an appeal before the ld CIT(A)-35, New Delhi. The ld CIT(A) with respect to the addition of Rs. 716,35,59,916/- followed the binding precedent decision of the coordinate bench in assesse’s own case for Assessment Year 2007-08 which has been followed by the coordinate bench for Assessment Year 2008-09 and 2009-10 and held that IEA credits received by the assessee against the purchase of the engines is in the nature of capital receipts and not revenue receipt. She further held that same also could not be taxed as commission income. She further held that as IEA credits are held to be capital in nature then lease rental paid by the assessee is also to be considered as capital expenditure. The assessee has amortized a sum of Rs. 366,32,13,778/- against the lease rentals. She confirmed that as the lease rent as capital expenditure. Thus, disallowance of Rs. 366,32,13,778/- was confirmed. With respect to the disallowance of supplementary lease rent for none deduction of tax at source disallowed u/s 40(a)(i) of the act of Rs. 535,16,67,041/-, She followed the decision of the Hon'ble jurisdictional High Court in assessee’s own case for earlier Assessment Year wherein, it has been held that payment of Page | 3

supplementary lease rent under lease agreement entered into before 31.03.2007 is exempt u/s 10(15A) of the Act and no disallowance u/s 40(a)(i) of the Act can be made. With respect to the lease agreement entered after 31.03.2007, she held that the article 12 of the Double Taxation Avoidance Agreement between India and Ireland exempts royalty or fee only which includes only regular lease rent paid and not supplementary lease rent. Accordingly, she confirmed the addition of Rs. 535,16,67,041/- upholding the order of the ld AO. Accordingly, appeal of the assessee is partly allowed. Thus, the ld AO is aggrieved with the order of the ld CIT(A) and is in appeal before us. 9. The ld AR submits that the Ground Nos. 1 and 2 of the appeal in ITA No. 432/Del/2018 of the assessee are general in nature. 10. With respect to ground No. 3 where disallowance u/s 37(1) of the lease rental payment of Rs. 366,32,13,778/- has been made. He submitted that it is covered in favour of the assessee by the decision of Special bench for Assessment Year 2012-13 which is pronounced on 03.09.2021. 11. With respect to ground No. 4 on account of deduction of tax at source on the supplementary lease rent executed prior to 1st April 2007 and also executed after 01.04.2007. He submitted that this issue has been also decided that the Special Bench in case of the assessee. He referred to the chart submitted by him. He also referred to the various pages and paragraphs where the identical issue is covered by the decision of the coordinate bench. 12. He did not press ground No. 5 of the appeal. 13. The ld DR submitted that now the Special Bench has decided the issue involved in this appeal of the assessee as well as appeal of the ld AO and therefore, same may be followed. 14. With respect to the appeal of the revenue the ld AR also submitted a details chart. He submitted that ground No. 1 of the appeal with respect to the taxability supplies credit from International Air Engines (IEA) has been held by the Special Bench in assessee’s own case for Assessment Year 2012-13 and therefore, ground No. 1 of the appeal of the ld AO is squarely covered in favour of the assessee. 15. With respect to ground No. 2 about taxability of the above sum received from IEA of Rs. 716,35,59,916/- chargeability to tax u/s 28(iv) of the Act. He submitted that same is also been decided by the Special Bench in favour of the assessee. 16. With respect to additional ground raised by the revenue vide letter dated 09.02.2018 stating that if the above receipts are held to be capital receipts then it should be chargeable to tax under the head capital gains. He submitted that this issue is already covered in favour of the assessee by the decision of the Special Bench in his favour. Therefore, the contention of both the parties was clear that issues involved in this appeal are covered by the decision of the Page | 4

Special Bench for Assessment Year 2012-13. The ld AR has also filed the copy of the decision of the Special Bench dated 03.09.2021. 17. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that all the issues covered in the appeal of the ld AO as well as the assessee has already been decided by the Special Bench. 18. Coming to the ground number 1 of the appeal of the learned AO which is against the order of the learned and CIT appeal deleting the addition of ₹ 7,163,559,916/– in respect of suppliers credit received from various suppliers of aircraft holding the same to be capital receipt and not as revenue receipt as held by the learned assessing officer. We find that this issue has been decided by the special bench in case of the assessee for assessment year 2012 – 13 in ITA number 3224/Del/2017 and 2977/Del/2017 in paragraph number 33 onwards as Under:-

“C. PURPOSE AND NATURE OF CREDITS RECEIVED BY ASSESSEE AND ITS TAXABILITY

inextricably linked to the operating lease of aircrafts. It is also the submission of the Revenue in the written synopsis that “no manufacturer of engine would ever grant any such benefit as given to the assessee, if it was a case of mere exercise of choice of engine not resulting in purchase or acquisition by other modes and in final delivery of the aircrafts to the assessee.”

33.1. We do not find any force in the above argument of the Ld. Special Counsel for the Revenue. It is an industry practice that the credits are received by airlines for selection of engines which is evident from Accounting guidelines and Airline Disclosure guide on Aircraft acquisition cost and depreciation issued by IATA, copy of which is placed at paper book page 1097 to 1127. We find relevant para at paper book page1104 reads as under:-

It is common for airlines to receive credits from aircraft or engine manufacturers to incentivise the purchase. These credits come in various forms including guaranteed trade-in values, spare parts support, marketing support, training support or introduction costs support. The accounting treatment will depend on the substance of the credit given. The vast majority of airlines indicate in their financial statements that they offset these credits, where they are in substance rebates of discounts, against the aircraft cost capitalised and do not recognise them in revenue in the income statement.

There may be additional complexity when credits are given to be used on future aircraft purchases based on a current purchase. Whether the credit is more accurately considered related to the current or future purchase needs to be evaluated. Credits may also be offered on future maintenance Page | 6

or other services, in these situations reducing the price of the aircraft may not be the appropriate treatment. The contract terms offered should be reviewed and the substance of the transaction considered to determine the appropriate accounting.

Credits may be monetary, such as a discount or reduction to the purchase price or non-monetary, such as services or future maintenance and both forms should be considered and recognised. Non-monetary credits are typically harder to value and allocate to components. How to allocate credits is discussed further in the Identification of individual components section”.

33.1.1 The Tax Department in our opinion cannot ignore commercial realities and that too premised only upon conjectures or surmises. It is not within their domain to do so. The commercial expediency should be best left to the wisdom of the businessmen. The Agreement Dated 18.11.2005 or Lease Agreements which are executed almost six years after Agreement Dated 19.10.2005 do not refer to the credits which were granted by IAE. The credits received from IAE, therefore, has nothing to do with the subsequent event of purchase of aircraft or its mode of acquisition. The credits received by the Assessee from IAE has nothing to do with the understanding reached by the Assessee with the Aircraft Manufacturer. These are two independent transactions. One does not affect the other. For acquisition of 100 Aircrafts from AIRBUS and the option to select the engine could have been exercised by the assessee only once and that was done in October, 2005. Thereafter, this right/ option got exhausted. We, therefore, hold that the credits received by the assessee from IAE are for selection of its engines. The credits given by the engine manufacturer had nothing with the mode of acquisition of the Aircraft by the assessee. Page | 7

33.2. The Learned Special Counsel for the Revenue has argued that the credits were open for adjustment either against the price of the firm aircraft from Airbus or purchase of engine spares parts, tooling and services or receivable as cash. It was his argument that since credits can be used against the price payable for the aircraft it is linked to the acquisition of the aircraft and is in form of a “discount”. He had first presumed that the engines were purchased by the assessee and then it is also presumed that credits were a “discount” for the purchase. However, the credits in the instant case in our opinion are not “discounts”. Discount means reduction of purchase price. For aircrafts acquired on operating lease there is no purchase of aircraft by the assessee who is only a lessee. Since, the assessee has not purchased the “installed engines” from IAE, the credits in our opinion are not in the nature of “discount”. Options given by IAE for utilisation of the credits post accrual will therefore not determine its character. The nature of receipt gets fixed at the time of its accrual and thus the taxability of the amount would depend on nature and character at the initial stage of accrual.

33.3. Once, the nature and purpose is clear, the next question that is required for our examination is the taxability of credits received under the provisions of the Income Tax Act. For this purpose, it is relevant to first consider the business carried on by the assessee. In the case of Van Den Berghs Ltd. Vs Clark, reported in 3 ITR 17(HL), which was relied on by the learned special counsel for the assessee, it has been held that nature of a receipt may vary according to the nature of the trade in connection with which it arises. It was held in that case that the price of the sale of a factory is ordinarily a capital receipt, but it may be an income receipt in the case of a person whose business it is to buy and sell factories. In the instant case, the Page | 8

assessee before us is engaged in the business of running a low cost airline. Its source of revenue is deriving income from passenger and cargo transportation. The assessee is not engaged in either business of trading of aircraft or business of receiving credits.

33.4. Once, this is made clear, the next question that requires for our examination is as to whether the credits were received towards fixed capital or circulating capital. We find the Hon’ble Supreme Court in the case of CIT vs Vazir Sultan & Sons reported in 36 ITR 175(SC) relied on by the learned senior counsel for the assessee has decided the case where the issue was as to whether the sum received as compensation for loss of agency was revenue or capital. We find the Hon’ble Apex Court following the ratio laid down in the case of Van Den Berghs Ltd. has observed as under:-

“We have therefore got to determine whether the agency in question before us was a capital asset of the assessee's business. One of the relevant considerations in the matter of such determination has been whether the asset was in the nature of fixed capital or constituted the circulating capital or stock-in-trade of the assessee's business. This question was thus dealt with by Viscount Haldane in John Smith & Sons v. Moore (2) :-

" But what was the nature of what the Appellant here had to deal with ? He had bought as part of the capital of the business his father's contracts. These enabled him to purchase coal from the colliery owners at what we were told was a very advantageous price, about fourteen shillings per ton. He was able to buy at this price because the right to do so was part of the assets of the business. Was it circulating capital ? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his " Wealth of Nations ", which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of

demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us the Appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that though they may have been of short duration, they were none the less part of his fixed capital ".

33.5. It is an admitted fact that the assessee in the instant case is in the business of operating a low cost airlines. Therefore, the aircrafts are capital assets and not circulating capital. It uses the aircraft to earn revenue. The credits received are not derived from its business activity which is to earn revenue from passenger and cargo transportation, which is a vital fact. Distinction is crucial as highlighted by the Hon’ble Supreme Court in the case of Van Den Berghs Ltd. wherein it has been observed as under: “The agreements formed the fixed framework within which their circulating capital operated; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the Appellants arose from manufacturing and dealing in margarine.......................”

33.6. In view of the above, the nature of the business carried on by the assessee is relevant. The submission of the Learned Special Counsel for the Revenue that since credits were related to the business of operation of aircraft and therefore, they are revenue in nature does not carry much force. In our opinion, for becoming part Page | 10

of circulating capital, it is not only necessary that the receipt should relate to the business but it should also be derived or inextricably linked to the business. For the above proposition, the decision of the Hon’ble Supreme Court in the case of Hosiarpur Electric Supply Co. Vs CIT reported in 41 ITR 608 (SC), which was relied upon by the learned Special Counsel for the assessee is relevant wherein the Hon’ble Supreme Court has observed as under:-

“The assessee is a licensee of an electricity undertaking. In the year of account, April 1, 1947 to March 31, 1948, the assessee received Rs.12,530 for new service connections granted to its customers. Out of this amount, Rs.5,929 were spent for laying the service lines, and Rs.1,338 were spent for laying certain mains. The Income Tax Officer treated the entire amount of Rs.12,530 as trading receipt. In appeal to the Appellate Assistant Commissioner, the cost incurred for laying service lines and mains was excluded and the balance was treated as taxable income. In appeal, the Appellate Tribunal agreed with the Appellate Assistant Commissioner and held that the service connection receipts were trading receipts and that the "profit element" therein was taxable income in the hands of the assessee. In a reference under s. 66(1) of the Income Tax Act, the High Court substantially agreed with the view of the Tribunal. The assessee has installed machinery for producing electrical energy and has also laid mains and distributing lines for supplying it to its customers. The assessee makes no charge to the consumers for laying service lines not exceeding 100 ft. in length from its distributing main to the point of connection on the consumer's property in accordance with cl. 6(1)(b) of the Schedule to the Indian Electricity Act, 1910. But where the length of a service line to be installed exceeds 100 ft., the cost is charged at certain rates by the assessee. The charge consists usually of cost of wiring copper as well as galvanised iron, service and other brackets, insulators, meter wiring, poles and appropriate labour and supervision charges. In the year of account, the assessee gave 229 new connections and received Rs.12,530 out of which Rs.5,929 have been regarded as taxable income. In the forms of account prescribed under the Indian Electricity Rules framed under Sec. 37 read with Sec. 11 of the Indian Electricity Act, the assessee credited service connection receipts to the revenue account and debited the Inc, corresponding cost of laying service lines to the capital account. But the classification of the receipts in the form of Page | 11

accounts is not of any importance in considering whether the receipt is taxable as revenue.”

33.7. The assessee in this case claimed that the amount received by it for service connection from its customers was capital receipt and the Hon’ble Supreme Court accepted the contention of the assessee by observing as under:-

“The assessee contended that the amount paid by the consumers for new connections is capital receipt and not liable to tax, because the amount is paid by the consumers towards expenditure to be incurred by the assessee in laying new service lines-an asset of a lasting character. This question falls to be determined in the light of the nature of the receipt irrespective of who remained owner of the materials of the service lines installed for granting electrical connections to new customers.

……………………. The assessee is undoubtedly carrying on the business of distributing electrical energy to the consumers. Installation of service lines is not an isolated or casual act; it is an incident of the business of the assessee. But if the amount contributed by the consumers for installation of what is essentially reimbursement of capital expenditure, the excess remaining after expending the cost of installation out of the amount contributed is not converted into a trading receipt. This excess-which is called by the Tribunal "profit element"-was not received in the form of profit of the business; it was part of a capital receipt in the hands of the assessee, and it was not converted into a trading profit because the assessee was engaged in the business of distribution of electrical energy, with which the receipt was connected.

In Commissioner of Income-tax v. Poona Electric Supply Co. Ltd. (1), it was held by a Division Bench of the Bombay High Court that the amount received from the Government of Bombay by the Poona Electric Company in reimbursement of expenses incurred for constructing new supply lines for supplying energy to new areas not previously served, was a capital receipt and not a trade receipt. The question of the taxability of the "profit element" in the contribution received from the Government was not expressly determined; but the court in that case held that the entire amount received by the Poona Electric Company from the Government as contribution was a capital receipt. Page | 12

In Monghyr Electric Supply Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa (2), it was held that the amount paid by consumers of electricity for meeting the cost of service connections was a capital receipt in the hands of the electricity undertaking and not revenue receipt and the difference between the amount received on account of service connection charges and the amount immediately not expended was not taxable as revenue.

The receipts though related to the business of the assessee as distributors of electricity were not inciden t nor in the course of the carrying on of the assessee's business; they were receipts for bringing into existence capital of lasting value. Contributions were not made merely for services rendered and to be rendered, but for installation of capital equipment under an agreement for a joint venture. The total receipts being capital receipts, the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the, receipts over the amount expended for installation of service lines by the assessee was a trading receipt.”

33.8. In view of the ratio laid down by the Hon’ble Supreme Court in the case cited (supra), it is clear that there is a clear distinction between the amounts received which are “related to the business” and amounts received which are “incidental to the business”. It is relevant to note that the amounts received as part of service connection in Hosiarpur Electric Supply Co. were arising out of a commercial transaction yet the Hon’ble Apex Court applied the above distinction to examine the purpose. Only amounts which are “incidental to the business” were held taxable as business receipts. In the instant case, credits are received for selection of engines and are understood by the parties in the agreement that the credits were Fleet Introductory Assistance (FIA). The purpose is to provide support for aircraft

acquisition. Therefore, the credits received are not incidental to or derived from the business of operation of commercial aircraft.

33.9. We find that Hon’ble Supreme Court in the case of CIT vs India Discount Co. Ltd.(supra) has also decided an identical issue. In this case, the business of the assessee was to deal in shares and securities. It purchased shares and the purchase price of shares included an amount paid for dividend which was not claimed by the previous owner. When dividend was received, the assessee did not adjust the price and it was claimed before the AO that the value of the shares which represented the stock in trade of the assessee remained the same both in the opening and the closing stock. It was claimed that the dividend received were arrear dividends pertaining to the year 1936 to 1945 and therefore such arrear dividend received was not in the nature of income liable to tax as it was merely a realization of capital. The Hon’ble Supreme Court has held as under:-

"Whether in the facts and circumstances of the case the assessee had purchased the arrears of dividend ? If so whether the said sum of Rs. 43,925/- could at all be assessed either as dividend or as profit ?"

It is manifest that dividends declared by Kedarnath Jute Manufacturing Co., between the years 1936 and 1945 were the property of the persons whose names stood on the share register on the relevant dates. When a company declares dividend the same can only be paid to the person who is then the registered holder. A purchaser of shares becomes entitled to all dividends declared since his purchase but not before. If the purchase is made on the eve of declaration of dividend but the purchaser does not get his name mutated in the records of the company in time to have the dividend-warrant issued in his own name he is entitled to call upon his vendor to make over the dividend to him if and when received. It is well settled that after a sale of the shares and so long as the purchaser does not get his name registered, the vendor is for certain purposes considered a trustee for the purchaser of the rights attaching to the shares or accruing thereon,including the voting rights. In the present case there was a contract between the assessee and Page | 14

the registered shareholders to sell the shares to the assessee with arrear dividends. In other words the assessee entered into the contract with the registered shareholders not only to purchase share scrips but the dividends which had been declared but not collected by him or paid over to shareholders. As the dividends had been declared long ago there was no uncertainly as to the exact amount receivable in respect of them. It is. therefore, Clear that both the purchaser and the vendor knew exactly what sum of money would come to the vendor by way of such dividend. In other words the purchase consideration included the amount of the arrear dividends and as the dividends had been declared long ago, there was no uncertainty as to the exact amount receivable in respect of them. The existence of a contract binding the vendors to make over to the purchaser the arrear dividends clearly implied that the price paid by the purchaser was not only for the value of the share scrips but also for the sum of Rs. 43,925/- which was going to be realised in the form of arrear dividends by the purchaser. The High Court held upon an examination of the evidence that such an arrangement implied that the value of Rs. 9-8-0 and Rs. 9-4-0 per share as settled into the broker's bills was not the real value of the share scrips alone but also included the element of the arrear dividends agreed to be receivable by the purchaser. The legal position, therefore, is that the arrear dividends were not claimable by the purchaser by virtue of his right as such purchaser and could not become his income from the shares. He was to get the same because the vendor had contracted to pass the arrear dividends on to him. They were the income of the vendors, i.e., the registered holders but they could not become the income of the purchaser. In fact the assessee had purchased the amount of arrear dividends for a price which was included in the total consideration of Rs. 1,12,575/-. What the assessee acquired in the form of share scrip represented its stock-in-trade, which consisted of the shares and the dividends potential which had to be realised.

In this state of facts it is manifest that the assessee paid the amount of Rs.1,12,575/- not only for the share scrips but also for the arrear dividends which was inextricably connected with the purchase of the share scrips. In our opinion the High Court rightly held that the amount of Rs. 43,925/- was not income which could be assessed in the hands of the assessee.”

33.10. From the above, we note that although a consolidated payment was made by the assessee for purchase of shares, yet the Hon’ble Supreme Court examined the intention/ purpose of this receipt and held that although the dividend was related to the transaction of purchase of shares which was stock in trade, however it was to be viewed separately and was capital in nature.

33.11. We further find merit in the arguments of the learned senior counsel for the assessee that there is no statutory definition under the Income Tax Act as to what is “capital receipt” or what is “Revenue receipt” and therefore one has to apply the settled legal principles which have been laid down by the Hon’ble Courts. From the decisions cited (supra), it is clear that mere fact that a receipt flows out of a commercial transaction is not determinative of its true nature or taxability. For example in case of non-compete fee, compensation received for the loss of agency, it has been held to be revenue receipt whereas the compensation attributable to a negative/restrictive covenant is held to be a capital receipt as held in Guffic Chem (P) Ltd. vs CIT, reported in 332 ITR 602 (SC). Therefore, in order to determine the true nature and taxability of the receipt, we have to take into consideration the nature of business and agreements between the parties and then examine the purpose/object of receipt. It is only then that we examine whether a particular receipt is incidental to the main business or not. In effect, we have to see the purpose/object for which the payment is received. In our opinion, purpose test is to be applied in the hands of the recipient when taxability of receipt is in dispute and when allowability of expenditure is in dispute, the test is to be applied in the hands of the payer. Once these settled legal principles are taken into consideration, then we have no doubt over the correctness of views expressed by the Division Bench of the Tribunal in assessee’s own case in Assessment Year 2007-08. We therefore

concur with the view taken by the Division Bench of the Tribunal in the order passed for Assessment Year 2007-08, where the Tribunal has observed as under:-

“9. We have considered the arguments advanced by the parties and have gone through the material available on record as well as the decisions relied upon by both the parties. Since a conclusive finding on merits is being given by the learned C1T in the impugned order, it is relevant for us to examine the issue in dispute on merits. A perusal of the impugned order shows that it is accepted by the Ld. C1T that credits are being received by the appellant from IAE as a consideration for selection of the IAE engines to be fitted in aircraft. Ld. C1T however holds that these receipts are revenue in nature premised upon facts that ultimately the aircrafts were only taken on lease by the appellant and that the appellant itself credited these receipts by deducting the same from the expense of ‘aircraft lease rental’ in its Profit and Loss Account. It would first be relevant to consider the well-settled purpose test, which we need to keep into consideration while opinion upon the issue under consideration. In this regard Hon’ble Apex Court in case of Ponni Sugars & Chemicals (supra) has held as under: , -

" The importance of the judgment of this Court in Sahney Steel & Press Work's Ltd. ’s case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character oj the receipt in the hands of the assesses has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid-is not relevant. The source is immaterial, The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy way on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is

irrelevant.”

9.1 The learned senior counsel Shri Syali in his arguments has relied upon the decision of Hon’ble Delhi High Court in case of Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra). The importance of this judgment is that in this case after considering the Hon’ble Supreme Court’s decisions in the cases of Ponni Sugars (supra) and Sahney Steel (supra) and after applying the purpose test as laid down in these decisions, the Hon’ble Delhi High Court has been pleased to hold as under:

“31. The Revenue, however, argues in the matters at hand that the assessee cannot be allowed to treat the entertainment tax subsidy as capital receipts because the U.P. scheme leaves it at liberty to utilize the funds in the manner it likes. In this context, it craves reference to following further observations of Supreme Court (appearing in Para No.16 in the case of Ponni Sugars & Chemicals Ltd. (supra):-

"16. One more aspect needs to be mentioned. In Sahney Steel & Press Works Ltd.'s case (supra) this Court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. (supra) assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business." [Emphasis supplied]

years reduced to 75% in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Giver, the uncertainties of a business of this nature, it is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the five year period.

in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations.

In the above decision Hon’ble Delhi High Court solely applying the purpose test as propounded by Hon’ble Supreme Court has negated the arguments raised by tax department placing undue importance on facts such as subsequent use of subsidy and that the subsidy was not linked to a particular fixed asset. In our considered opinion the decision of Hon’ble Jurisdictional High Court in Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra) supports the claim made by the appellant that the receipt of credits from IAE are capital in nature. Shri Syali has highlighted the sequence of events starting right from Letter of Intent dated 01.06.2005 to the execution of lease agreement dated 15.12.2006. Ironically these agreements were also on records of the authorities below, however, the Ld. CIT instead of appreciating and giving importance to the purpose for which the credits were granted to the appellant, has given undue importance to the fact that ultimately the aircrafts were only taken on lease by the appellant and that the appellant itself credited these receipts by deducting the same from the expense of ‘aircraft lease

rental’ in-its Profit and Loss Account. Decision of Bougainvillea Multiplex Entertainment (supra) clearly holds that subsidy need not be linked to a particular asset. Similarly netting off of the proportionate credits with the amount of lease rentals in the profit and loss account of the appellant is a mere utilization of the receipt Merely because a capital receipt is utilized for incurring revenue expenditure it will not change the nature of capital receipt into a revenue item. As an example proceeds received. from issuance of shares by a company may be utilized for daily working capital purposes, but the nature of receipts from issuance of shares will still be Capital in nature. In the case under "consideration for a better accounting purposes the proportionate credits were netted off against the recurring lease rentals. Acceptably .as pointed out by the appellant the accounting policy followed was in spirit with the AS-12 issued by ICA1. Ld C1T after having accepted that the credits were given to the appellant as a consideration for selection of IAE engines to be "fitted in aircrafts manufactured by Airbus, which were also acquired by the appellant, should have held that the receipts are Capital in nature. Appellant’s right to receive the credits got triggered when the appellant made a selection of LAE engines, giving them a preference to the engines manufactured by other competitors of IAE. This right got crystallized when agreement date 19th'October 2005 was executed between Interglobe and IAE. Once choice of engine was made thereafter purchase agreement dated 18th November 2005 was executed between Interglobe and Airbus, We concur with submissions of Shri Syali and that under no circumstance could have Interglobe escape with its liabilities to take delivery of Aircrafts from Airbus as per the agreed schedule. Assignment of right to purchase the aircraft by triggering Article 21 therein was only a modus operandi of acquiring the aircraft with a finance option Ld. CIT(DR) Dr. Prabhakant has merely reiterated the arguments taken by learned CIT in the impugned order. In his written note he has characterized the credits received from IAE as commission income. We do not concur with this submission of Ld. CIT(DR). As per letter of intent an option was given to Interglobe by Airbus for choosing the type of engine to be fitted in the aircraft, which Airbus will manufacture for Interglobe. Exercising this option Interglobe selected IAE engines giving them importance over competitors of IAE. In absence of any services been rendered by Interglobe to IAE we fail to appreciate how can receipt of credits in the present case be termed as a commission income. We therefore reverse the finding recorded by CIT in the impugned order and hold that the credits received by the appellant from IAE are capital in nature. Page | 21

9.2. Ld. CIT(DR) in his submissions has placed reliance on the case of Gee Vee Enterprises vs. Addl. CIT and Ors. 99 ITR 375 (Del) to hold that proper enquiries had not been made and, therefore order was erroneous in as - much as prejudicial to the interest of Revenue. However, this judgment is wholly inapplicable since, as is evident from facts of present case, wherein the Ld. AO specifically directed the appellant to justify its claim for receipts being capital in nature considering the disclosure made by the appellant in clause I3(e) of the tax audit report. In reply vide submissions dated 24th December 2009 (copy enclosed at pages 46 to 55 of paper book) appellant relying upon the decisions of Hon'ble Supreme Court in cases of Sahney Steel (supra) and Ponni Sugar (supra) submitted a detailed reply as under :

“Reverting to the facts of the present case, it is submitted that credit was allowed by IAE to Interglobe on account of Interglobe preferring the engines manufactured by IAE to be fitted in the aircrafts being acquired by Interglobe. The credit given by IAE was meant to reduce the cost of the engine to befitted in the aircraft. The credit, so allowed by IAE, was not given to the assessee for assisting him carrying out the business operations but was in the capital filed, being inextricably linked with the purchase of engines, viz a capital asset. The credit was not for meeting the recurring expenses of the assessee but as an incentive for acquisition of the engines to be fitted in the aircrafts ordered from IAE . At any rate, the manner and method of utilization of an incentive/credit allowed by IAE to Interglobe in this case] does not, in our submission, alter the character of such incentive. Such credit, therefore, in our respectful submission, in-on capital account inextricably linked with engines supplied by IAE and fitted in the aircrafts supplied by Airbus and hence a capital receipt not eligible to tax”

9.3. While examining the case on merits above, we have upheld the applicability of the purpose test narrated by the appellant in its submission dated 24.12.2009 and in its applicability to the peculiar facts of the present case in our considered opinion the AO was justified in holding that the receipts from IAE were capital in nature. The view adopted by the AO was therefore in accordance with legal mandate. Similarly in the case of Kavadi Narsimha (supra) re]led-upon by the Ld GIT(BR) it was held by Delhi ITAT „ that the relevant assessment order was passed without any enquiry, hence this decision is also distinguishable factually. In the case of Enter)’ Stone Mfg Co. (supra) relied upon by the LD C1T(DR) assessment order Page | 22

was held to be erroneous as applicability of section 43(1) which on admitted facts of that case being relevant was not examined by the' AO. We have already upheld the arguments of appellant in the present case that on facts section 43(1) is totally irrelevant for an adjudication of the issue in dispute before us. Similarly the decision of Tara Devi Aggarwa] (supra) relied upon by the CIT(DR) is also irrelevant. We may make a reference here to the decision of Hon’ble Jurisdictional High Court in case of DG Housing reported in 343 ITR 329(Del) wherein the Hon’ble High Court has been pleased to hold as under:

“12. Delhi High Court in Gee Vee Enterprises vs. Additional Commission of Income-Tax, Delhi-I & Ors.,(1975) 99 ITR 375 has observed as under : “The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. "

'These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return."

9.2 We are, therefore, not convinced by the submissions made by the Ld. CIT(BR), who -has vehemently tried to support the action of-Ld. CIT on this issue, Even on the jurisdictional aspect we fail to convince ourself to uphold the action of Ld CIT in invoking proceedings u/s 263 of the Act. Action u/s. 263 is therefore held to be bad. in law. Ground Nos. 1 to 1.5 are therefore allowed in favour of the appellant.”

33.12. As held above, the lower authorities accept that the assessee is engaged in the business of operating of low cost airline and its source of revenue is to earn income from passenger/cargo transportation. We have already held in the preceding paragraphs that the credits received are not derived from the business activity which is to earn revenue from passenger/cargo transportation. Therefore, the credits are Fleet Introductory Assistance (FIA) and were received as a consideration for selecting engines of IAE in preference to others. This is the purpose.

33.13. We find the Hon’ble Supreme Court in the case of CIT v. Ponni Sugar and Chemicals Ltd., 306 ITR 392 (SC) after considering the decision in the case of

Sahney Steels and Press Work Ltd. and Ors. v. CIT, 228 ITR 253 (SC) has observed as under :-

“The importance of the judgment of this Court in Sahney Steel & Press Work’s Ltd.’s case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”

33.14. It was this purpose test which was applied and accepted by the Tribunal in assessee’s own case for Assessment Year 2007-08, wherein it was held that purpose for which credits have been received is relevant and form/mode or manner is irrelevant. We find merit in the arguments of the learned senior counsel for the assessee that purpose test can be applied and accepted not only in subsidy cases but also in case relating to commercial transactions. The Hon’ble Supreme Court in the case of Hosiarpur Electricity (supra) had followed a subsidy case i.e. Poona Electric Supply Co. Ltd., reported in 14 ITR 622 (Bom.) to examine the nature of a Page | 25

commercial transaction. We therefore find merit in the submission of the learned senior counsel for the assessee that it is erroneous on the part of the Revenue to submit that there is patent error or perversity in the order of the Tribunal for Assessment Year 2007-08 when it applies “Purpose Test”. The Hon’ble Supreme Court has laid down the proposition in the case of Sahney Steels and Press Work Ltd. (supra) and Ponni Sugar and Chemicals Ltd. (supra), that purpose is to be seen for which the amount is received and not the manner or form in which money is provided.

33.15. The doctrine of precedent also requires us to follow the statement of principles in law as laid down by the higher Courts. It is the settled proposition of law that under the provisions of the Act all receipts are not taxable. Whether a particular receipt is income or not depends on the nature/purpose of that receipt and the true scope and effect of the relevant taxing provisions. It is trite law that it is the quality of the receipt that is decisive of the Character of the Payment and not the Method of the Payment or its measure. It is to ascertain the quality and the character that purpose test has to be applied. Purpose test, therefore, remains a valid test for ascertaining the true nature of any receipt, be it unilateral, multilateral, grant of subsidy or otherwise.

33.16. So far as the arguments made by the learned special counsel for the Revenue that the aircraft have been acquired on lease and that the nature of the credit changes when acquisition mode is lease financing are concerned, we find the genesis of credits received is agreement dated 19.10.2005. However, the credits were payable only on delivery of aircraft. The assignment of rights to acquire the aircraft is post vesting of credits. When selection of IAE engines is done, the lessors were not even in the picture. Therefore, whether to purchase the aircraft or acquire the aircraft on lease is a later decision. Therefore, it will be incorrect to assume that there was Page | 26

preconceived modus decided for aircraft acquisition on 19.10.2005 when choice of the engines was made. We therefore find merit in the argument of the learned senior counsel for the assessee that the assignment of rights to acquire the aircrafts is post vesting of credits. To purchase or acquire on lease was a commercial decision taken by the assessee on a later date when aircraft delivery became due. Subsequent acquisition of aircraft on lease, therefore has no impact on the nature and character of credits which became due in October, 2005.

33.17. In our opinion, the nature of receipt is to be judged in the hands of the recipients. We find the Hon’ble Allahabad Court in the case of CIT vs Shiv Nath Prasad, (1970) 77 ITR 378, 382 (All.) has held that if the amount initially received partakes of the character of a trading receipt, the amount would necessarily be taxable as such. However, if the amounts are initially not taxable, they cannot be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit subsequently.

33.18. We find the Hon’ble Supreme Court in the case of P.H. Divecha v. CIT reported in 48 ITR 222(SC) has observed as under:-

“If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as “pay” “remuneration”, etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring Page | 27

income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period.”

33.19. So far as the decision in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. reported in 222 ITR 344 (SC) relied upon by the learned special counsel for the Revenue is concerned, we find the said decision is distinguishable on facts and not applicable to the case of the assessee. In that case, the amount was received by the assessee from its customers in the course of a trade transaction. Since, over the period of time these amounts were not claimed back by the customers, these amounts were transferred by the assessee to its profit & loss account. The AO held that surplus had arisen as a result of trade transactions. It was an amount having a character of income and had to be added as income. Therefore, the AO held that the amount received was revenue in nature. We find the Hon’ble Supreme Court first considered the legal principles arising from the case of Morley v. Tattersall, (1939) 7 ITR 316, has observed as under :-

“……in the case of Morley (Inspector of Taxes) vs Tattersall [1939] 7 ITR 316 (CA), it was laid down by Lord Greene that the taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income account as his own did not alter that character. This principle of law is the basis of several judgments delivered on this issue by our Courts. In some cases, the principle laid down by Lord Greene has not been followed because of special facts, but the principle as such has not been doubted.”

33.20. And thereafter it has held as under:-

“22 The principle laid down by Atkinson, J., applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson, J. pointed out that in Morley's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee.”

33.21. Therefore, in that case, the amounts received to start with was of the Revenue character but not an income at the stage of receipt. However, the subsequent event was of such that a different quality was imprinted on the receipt. In the present case, the assessee is engaged in the business of providing aircraft passenger services. It has already been held by us in preceding paragraph that the aircrafts are part of its fixed capital. At the time of acquisition of aircraft there were options available to the assessee. It may purchase the aircraft out rightly or it may acquire it on a financial lease or on an operating lease. This was a commercial decision which the assessee takes on the delivery date depending upon its capital, market condition and other ground realities. The learned Senior Counsel for the assessee has filed before Page | 29

the Bench the details of 34 aircrafts which have been purchased by the assessee. The credits received for these aircrafts have been reduced from the cost of acquisition in accordance with the provisions of section 43(1). This has been accepted by the Revenue. The nature of receipt for 34 aircrafts is accepted to be capital. The character as capital will thus continue to remain same even when the asset is not purchased but acquired on lease. Subsequent mode of acquisition will not therefore change the nature of taxability. We, therefore, hold that the entire amount of credits of Rs.7,59,39,25,444/- received by the assessee from IAE in the year under consideration for selection of its engines is a capital receipt.”

Corporation of India Ltd. vs. CIT, 187 ITR 688 (SC), we admit the additional ground raised by the Revenue for adjudication.

36.1. Now, coming to the applicability of the provisions of section 28(i) and 28(iv), we would like to first reproduce the said provisions which read as under :-

“28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ; ................. (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;”

36.2. Once a receipt is capital it is not an income which arises from business. The A.O. in the instant case has also noted in the order of assessment that assessee-company has been engaged in the business of operating of low cost airline in India. The assessee is neither a trader of aircrafts nor its engines and is also not engaged in any business of selecting aircraft engines. For the applicability of provisions of Section 28(i), it is necessary that “business is carried on.......at any time during the previous year.” Since, there is no business of selection of engines was carried-on by the assessee-company, therefore, the provisions of section 28(i) are not applicable.

36.3 Further, for applying Section 28(iv), the statutory requirement is that the value of any benefit or perquisite, whether convertible into money or not, must arise from the business or exercise of a profession.

36.4. We find, the Hon’ble Bombay High Court in the case of Mahindra & Mahindra (supra) reported in 261 ITR 501 (Bom.) has held that capital receipt do not come within the purview of section 28(iv) of the Act. The relevant observation of the Hon’ble High Court reads as under:-

“10. At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by Section 28(iv), could accrue in numerous ways. The income which can be taxed under Section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, Section 28(iv) does not apply to benefits in cash or money (see CIT v. Alchemic Pvt. Ltd. ). Applying Section 28(iv) to the facts of this case, one finds that on June 18, 1964, the assessee entered into an agreement to purchase toolings from KJC. In 1964-65, India was facing foreign exchange crunch. In the circumstances, around June 7, 1965, the Government of India and the Reserve Bank of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ 6,50,000 to the assessee for ten years bearing interest at the rate of 6 per cent., free from income-tax. KJC was later on taken over by AMC and as a part of take-over, AMC agreed to waive the principal amount of the loan and not the interest. In the circumstances, as stated in the above three undisputed facts, the assessee paid interest at 6 per cent. per annum, for ten years, being the contractual period. According to the Assessing Officer, the loan arose from business dealings. According to the Assessing Officer when AMC Page | 32

waived the loan, the credits became part of business income ; that prior to such waiver, the credits represented liability. In the circumstances, the Assessing Officer has taxed such credits as business income. However, in this connection, there are two important facts which are verlooked by the Assessing Officer. Firstly, the assessee has continued to pay interest at 6 per cent. for a period of ten years on the loan amount. In this case, the Assessing Officer has not gone behind the loan agreement. In this case, the approval by the Government of India and the Reserve Bank of India are on record. In this case, the agreement for purchase of toolings was entered into, much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan arrangement, in its entirety, was not obliterated by such waiver. Secondly, in this case we are concerned with the purchase consideration relating to capital asset. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, Section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of take-over arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income.”

36.5. We find, the Hon’ble Delhi High Court in the case of Jindal Equipments Leasing & Consultancy Services Ltd., reported in 325 ITR

87 (Del.), following the above decision at Para-8 of the Order has observed as under :-

“8. With this, we proceed to examine this aspect on its own merit, viz., whether provisions of s. 28 (iv) of the Act are attracted in the given case. Thus, what is to be seen is that as to whether the written off amount of Rs. 1,46,53,065 in its books of accounts by JSPL amounts to the value of any benefit or perquisite whether convertible into money or not can be treated as "profits and gains from business". The prerequisites for attracting the said provisions are : (i) Benefit or perquisite arising in the course of business is of the nature, other than cash or money. It is for this reason expression "whether convertible into money or not" is mentioned in cl. (iv). Bombay High Court has interpreted this very clause in the case of Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom) in the following manner : "…..The income which can be taxed under s. 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, s. 28(iv) does not apply to benefits in cash or money [see CIT vs. Alchemic (P) Ltd. (1981) 20 CTR (Guj) 83 : (1981) 130 ITR 168 (Guj)] ….." (ii) Benefit or perquisite must be one arising in the course of business.”

36.6. Moreover, we find, the credits received by the Assessee from IAE, in the present case, are in the form of money. The Supreme Court in the case of Mafatlal Gangabhai & Co. Pvt. Ltd., reported in 219 ITR 644 (SC) and the Hon’ble Delhi High Court in the case of Ravinder Singh, reported in 205 ITR 353 (Del.) and the Hon’ble Bombay High Court in the case of Mahindra & Mahindra (supra), have held that “provisions of section 28(iv) are applicable only when benefit or perquisite is received in a non-monetary form”.

36.7 Therefore, we hold that the provisions of section 28(i) and 28(iv) are not applicable to the facts of the present case and the credits received are not taxable as business income.

36.8. So far as the argument of the Ld. Special Counsel for the Revenue that the credits received are taxable as commission income is concerned, we find such argument was rejected by the Division Bench in the A.Y. 2007-2008 with which we concur. The submission of the Ld. Special Counsel for the Revenue now that the assessee only helped IAE in making bulk sale of their engines through the purchase of aircrafts from AIRBUS and, therefore, this would amount to facilitating the sale of 100 aircrafts without apparently making any purchase is concerned, we do not find any force in the same. In absence of any services being provided by the assessee to IAE, we do not find any merit in the argument of the Ld. Special Counsel for the Revenue on this issue. Moreover, the nature of the receipt is to be examined in the hands of the assessee and not IAE. For the above proposition, we rely on the decision of the Hon’ble Supreme Court in the case of Empire Jute Company, reported in 124 ITR 1 (SC) where it has been held that “a receipt may be revenue in the hands of the payer, but, capital in the hands of the recipient”.

36.9. The Ld. Special Counsel for the Revenue also made an argument for the first time before us that the term ‘Business’ as defined in Section 2(13) includes “any adventure or concern in the nature of trade, commerce or manufacture”. It was his submission that even a single adventure in the nature of trade, commerce or business would amount to “business” and the profit gained as a consequence of the Page | 35

adventure would be chargeable to tax as business profits. It was accordingly submitted that the activity of the assessee of selecting engines has trappings of an adventure in the nature of trade, commerce or business and, therefore, would fall within the definition of “business” as appearing in Section 2(13) of the Income Tax Act, 1961. The Ld. Special Counsel for the Revenue drew our attention to Para-10.1 of the Order of Ld. CIT(A) wherein he has noted that the assessee has made further Aircraft acquisition in the year 2011 and 2015 and the total number of Aircrafts to which the assessee stands committed is 530. We have carefully considered the same. However, we do not find any force in the same. The A.O. in the instant year as well as in the orders passed in subsequent years in which additional acquisition of aircrafts was done has held that business of the assessee is only that of operation of aircrafts. This is a factual finding given in all assessment orders right upto the order passed for A.Y. 2018-2019. Therefore, in our opinion, the onus is on the Revenue to factually establish that there exists any other business activity other than that of operation of aircrafts. It has not been demonstrated, how acquisition of Aircrafts or selection of engines was a business activity by itself. We find, the A.O. in the impugned assessment year holds that the assessee is a company engaged in the business of operating low cost airline in India under the name and brand of ‘INDIGO’. It is also an admitted position that for purchase of 34 aircrafts, credits received are capital in nature. There is also no dispute that these 34 aircrafts are fixed assets and not stock-in-trade. Aircrafts are thus part of fixed capital. Since the assessee has acquired aircrafts which are it’s commercial assets forming part of its fixed capital and

these commercial assets are used by it to earn income by operation of aircrafts, therefore, we are of the opinion that there is no adventure in the nature of trade when aircrafts acquisition is made or engines are selected. We, therefore, reject the arguments advanced by the ld. Special Counsel for the Revenue on this issue.”

as the taking over of the liability amounts to a consideration. It was also submitted in his written submissions as under :

“The cost of acquisition would comprise initial money paid to Airbus or engine manufacturer and the total purchase price of the aircraft minus the discounts appropriated by the Appellant (and not passed on to the Lessors). The balance amount being the difference between the amount paid lby the Lessors to Airbus (in discharge of the contractual obligation of the Appellant) and the cost of acquisition of rights so transferred would represent the amount of capital gains chargeable to tax as rightly explained by CIT(A) in Paragraph 10.2.1 on Page- 33. The capital gains arise not for any assignment of the right to choose engines as contended by the Appellant. The assignment is of the right to purchase the title of the aircraft which also includes the price of the engines separately and distinctively indicated in the Purchase Agreement itself”. 37.1. The Learned Senior Counsel for the Assessee on the other hand refuted the above allegation.

value” then, there is no consideration received for such assignment. Although right to acquire Aircraft from IAE is a “Capital Asset”, however, for applicability of provisions of Section 48 which deals with computation of capital gains, there has to be a “Full value of consideration received or accruing” as a result of the transfer of the capital asset. Therefore, there should be a sale consideration flowing to the Assessee from the Lessors for transfer of a “Capital Asset” which in this case is the right to acquire an Aircraft from AIRBUS. We find merit in the submissions of the Learned Senior Counsel for the Assessee that under the Purchase Agreement the assessee was under an obligation to only take delivery of Aircrafts. There was no compulsion on the Assessee to mandatorily purchase the Aircraft. The Learned Special Counsel for the Revenue, in our opinion, has erroneously presumed that “amount paid by Lessors represents a consideration as the taking-over of a liability amounts to a consideration”. We find in the year under consideration the Lease Agreements are in the nature of Operating Lease. The A.O. in the Order has also mentioned that the Lessors are the owners and are claiming depreciation. Therefore, consideration paid by Lessors to AIRBUS is not on account of the Assessee. The transaction of payment of purchase price by Lessors to AIRBUS is a separate transaction, under which, no right to the Aircraft is flowing to the Assessee. There is, therefore, no “Sale Consideration” received by the Assessee which could be held assessable to “Capital Gains Tax”. We, therefore, hold that credits received by the Assessee are not taxable as capital gains.”

39.1. It is the submission of the learned Senior Counsel for the assessee that the learned CIT(A) has erroneously presumed that “lease rentals are partly attributable to the earning of credits by the appellant from engine manufactures.”

39.2. We have considered the rival submission made by both the sides on this issue. We have already upheld the findings of Divisions Bench for AY 2007-08 that assessee’s right to receive credits “crystallized when agreement dated 19th October 2005 was executed”. Subsequent transaction of obtaining lease Page | 40

finance in the form of operating lease has no connection with the right to receive credits from IAE which got crystallized in October 2005. These are separate transactions. We, therefore, hold that there is no connection between transaction of payment of lease rentals and transaction of receipt of credits from IAE.

39.3. We find somewhat identical issue had come up before the Coordinate Bench of the Tribunal in the case of Bharat Seats Ltd. vs JCIT reported in 120 Taxman 210(Del.(Mag.). In that case, necessary equipment was acquired by the assessee on a lease finance arrangement. Assessee applied for a grant to meet the capital cost. The authorities below did not accept the contention of the assessee that the grant was a capital receipt. Since the capital equipment was acquired by the assessee initially on lease finance basis, the authorities below held that the grant was given to recoup the revenue expenditure incurred by the assessee on acquiring the asset on lease finance basis. The Tribunal however held as under:

“Nothing has been shown with reference to documents and agreement on record to support the submission that the grant was by way of recoupment or revenue expenditure incurred by the assessee. The Department’s case as we see is that since the assessee initially acquired the capital equipment on lease finance basis, the lease rentals were allowed as revenue expenditure to the assessee. the assessee, however, had to pay on account of lease finance Rs.4.8 crores as against the capital cost of Rs.3.2 crores. Had the assessee acquired equipment on outright purchase basis, the assessee would have been entitled to the write off of capital costs by way of depreciation as revenue expenditure. If the assessee had borrowed funds for meeting the capital cost of the equipment, the capital cost would have been written off by way of depreciation over a period of years and interest on borrowed funds by way of depreciation over a period of years and interest on borrowed funds would have been allowed revenue deduction. We agree with the Ld. Counsel for the assessee that the accounting or tax treatment of the capital cost of the equipment has nothing to do with the sanction of the grant to the appellant. The grant was only of a sum of Rs.1.84 crores (US $ 514,000) as apprised by the technical reviewer of the world Hank, as against the Rs.3.2 crores Page | 41

cost of the plant. There was no correlation whatsoever between lease rentals paid by the assessee and the grant The grant was made in public interest, to protect the environment from ozone depleting substances. The grant had nothing to do with the settling up of the industry or its economics or profitability. On these facts, we agree with the Id. Counsel for the assessee that the ratio of the Supreme Court decision in the case of Sahaney Steel conclusively covers the issue in favour of the assessee. their Lordships of the Supreme Court held that, to determine the nature of the subsidy or grant, the purpose of the grant had to be looked at. The grant, as per their lordships of the Supreme Court, was rightly a capital receipt when the main purpose of the grant was for instance relief from unemployment. It was also capital receipt when the grant was given as an aid to construction of dry dock and not as operational subsidy. Their Lordships of the Subsidy court had also endorsed the full Bench of Kerala High Court decision in the case of Ruby Rubber Works, where the grant was for held as of capital nature because the same was given for planting high yielding variety of rubber plants. ”

39.4. In the present case also we find there is no connection between credits received and the payment of lease rentals. We have already adjudicated in the preceding paragraphs that credits received under agreement dated 19.10.2005 and payment of lease rentals under lease agreements executed much after are separate transactions not related to each other. Therefore, there cannot be any disallowance of proportionate lease rentals.”

Supplementary Rent (SR). We find from the details filed in the paper book that during the year under consideration, assessee had incurred an expenditure of Rs.338,09,64,412/- as SR paid to lessors for aircrafts acquired on operating lease. We have perused the lease agreements enclosed in the paper books filed before us. Assessee in its paper book has enclosed a copy of Lease Agreement Dated December 15, 2006 with M/s McR Aviation Ltd. Revenue in its paper book has submitted three lease agreements i.e., Agreement Dated 14th June, 2007 with Genesis Acquisition Ltd., Dated 04th July, 2007 with Lara Leasing Ltd. and Dated 10th August, 2010 with Crescent Leasing 9 Ltd. Under all these Agreements SR is a mandatory payment required to be made to the Lessors for use of aircrafts. Amount payable for SR is calculated based upon flying hours attributable towards critical parts of the aircraft i.e. aircraft body, auxiliary power unit, landing gear etc. We find the AO in the assessment order made disallowance under section 40(a)(i) of the I.T. Act, 1961 alleging that owing to non-deduction of tax, the expenditure is disallowable. However, the Ld. CIT(A) held that payment of SR is reimbursable and hence the expenditure is not allowable under section 37(1) of the I.T. Act, 1961.

40.1. We find an identical issue came up before the Division Bench in assessee’s own case in AY 2007-08, wherein the Tribunal held as under:-

“10.2 It was submitted by the learned senior counsel that the learned CIT has erroneously compared payment of supplementary lease rent in the present case with payments for providing spares, facilities or services in connection with the operation of lease aircraft. In support of this, the learned senior counsel referred to the lease agreement executed between M/s McR Aviation Limited and Interglobe dated 15.12.006, copy of which is enclosed at pages 76 to 175 of the Paper Book. It was submitted by the learned senior counsel that the terms & conditions of the lease agreement executed by Interglobe were identical to those, which were considered by Delhi Bench of IT Page | 43

AT in the case of Sahara Airlines (supra). To draw parity between the two cases, the learned senior counsel referred to following clauses of the lease agreement:-

"Rent" means collective, Base Rent and and Supplemental "Supplemental Rent" means, without duplication, all Maintenance Supplemental Rent, all expenses and all other amounts, liabilities, indemnities and obligations (other than Base Rent) that Lessee assumes or becomes obligated to or agrees to pay under any Operative Document to or on behalf of Lessor or any other Person, including without limitation, payments of Total Loss Proceeds, interest at the Default Rate and payments of indemnities under Article 12 of this Sublease.

Payment by Lessor any Lessor maintenance Disbursement 3.12.3 under Section 3.12.4 (the "Lessor Obligations") shall be subject to Lerssor having approved the applicable work scope and maintenance provider (such approval not to be unreasonably withheld) for the related maintenance work prior to the commencement thereof. Lessee agrees to provide Lessor with the planned work scope and maintenance provider for any such maintenance work no later than 45 days prior to the scheduled commencement thereof. Any failure by the Lessee to obtain lessor's approval in respect of any such maintenance work as aforesaid shall relieve the Lessor of the related Lessor Obligation hereunder.

3.12.4 Lessor Maintenance Disbursements (1) If lessee submits to Lessor, within sixty (60) days after the completion of the applicable approved maintenance work (except if otherwise agreed between Lessor and Lessee, it being agreed that such time periods may be extended as determined in the reasonable discretion of Lessor, to the extent that Lessee notifies Lessor at or before the end of such sixty (60) day period that there are still outstanding invoices (which shall be specifically identified) for approved maintenance work), an invoice and supporting documentation evidencing performance of and payment for (each in reasonable reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, domestic object damae, operational or other mishandling, family maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance or which relates to convenience, premature or unscheduled shop visits or overhauls or Lessee effected operational modifications, Engine QEC, Engine accessories,

removal / installation of Engines, removal / Installation . of APUs removal/installation of Landing Gear, structural and non- structural components including but not limited to nacelle structures, the thrust reversers, cowlings and engine mounts, or shipping charges, and (ii) no Material Default or Event of Default is continuing, promptly pay to Lessee the following amounts ("Lessor Maintenance Disbursements") from the respective Maintenance Supplemental Rent account.

(i) Airframe 4C/6Y Checks: with respect to a scheduled heavy structural 4C/6Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 4C Maintenance Supplemental Rent received by Lessor at the time of payment;

(ii) Airframe 8C/12Y Checks: with respect to a scheduled heavy structural 8C/12Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 8C Maintenance Supplemental Rent received by Lessor at the time of payment;

(iii)Engine Refurbishment: with respect to any Overhaul for an Engine, the lesser of (i) the amount of such invoice and (ii) the net balance of Engine Refurbishment Maintenance Supplemental Rent received by Lessor in respect of such Engine at the time of payment;

(i) Engine LLP Replacement: with respect to any LLP replacement for an Engine that is replaced due to expiration of its life limit, the lesser of (i) the amount of such invoice (with any credits for installation of LLPs with less life than the originally installed LLP offsetting any charges for installation of longer life remaining LLPs) and (ii) the net balance of Engine LLP Maintenance Supplemental Rent received by Lessor in respect of such Engine at the time of payment;

(v) APU: with respect to any scheduled APU Overhaul, the lesser of (i) the amount of such invoice and (ii) the net balance of APU Maintenance Supplemental Rent received by Lessor at the time of payment;

(vi) Landing Gear: with respect to a scheduled Landing Gear Overhaul if it comes during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of the Landline Gear Maintenance Supplemental Rent Page | 45

received by Lessor at the time of payment.

(2) For the avoidance of doubt, Lessee has no right to payment of any Lessor maintenance Disbursement except (i) following the occurrence of a Total Loss following payment of all moneys due and owing pursuant to Section 14.3.2 (ii) as expressly provided in this Section 3.12.4 and (in) as expressly provided in Exhibit H, and any remaining balances of the Maintenance Supplemental Rent following the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property, with the exceptions set forth in Exhibit H. To the extent any maintenance expenses exceed the amount available in the applicable Maintenance Supplemental Rent account, such expenses shall be for the account of the Lessee and the shortfall, if any shall not be carried forward or made the subject of any further claim for reimbursement. Lessee acknowledges that Lessor may commingle the Maintenance Supplemental Rent with its general funds and no interest shall accrue in favor of Lessee in respect of Maintenance Supplemental Rent held by Lessor.

8.1.1 During the Sublease Term and until the Aircraft is returned to Lessor in the condition required by this Sublease, Lessee alone has the obligation, at its expenses, to timely maintain, service, test, inspect, Overhaul and repair the Aircraft, Engines and all of the Parts (a) in accordance with the Maintenance program, (b) in accordance with the rules and regulations of the Aviation Authority, (c) in accordance with Manufacturer's type design, (d) so as to ensure that the Aircraft meets the requirements of its type certificate data sheets in accordance with all Aviation Authority requirements, (e) so as to keep the Aircraft in as good an operating condition as when delivered to Lessee (ordinary wear and tear excepted) and in accordance with any other regulations or requirements necessary in order to maintain a valid Certificate of Airworthiness for the Aircraft and meet the requirements at all times during the Sublease Term and upon return of the Aircraft to Lessor for issuance of a standard Certificate of Airworthiness for transport category aircraft issued by the Aviation Authority in accordance with applicable laws (except during those periods when the Aircraft is undergoing maintenance or repairs as required or permitted this Sublease) and (f) in the same mariner and with the same care as used by lessee with respect of similar aircraft and engines operated by Lessee and without in any way discriminating against the aircraft. Page | 46

8.1.2 No Engine will remain in an unserviceable condition for more than : (i) thirty (3) days before such Engine is delivered to an Approved Maintenance Performed for repair; and (ii) one-hundred twenty 9120) days (or such longer period as may be mutually agreed by the parties) after such Engine is removed from an Aircraft for repair.

8.1.3. Lessee shall not make any material change to its Maintenance Program or make any material deviations from the Manufacturer’s approved maintenance program (including the MPD) (in each case excluding changes or deviaitions made mandatory by the Aviation Authority or Manufacturer) without the prior written consent of Lessor."

10.3 Explaining the nature of the transactions farther it was submitted by the learned senior counsel Shri Syali that payment of supplementary lease rent is an industrial norm which ensures that the lessor is compensated for regular wear & tear of the critical components of the aircrafts. It was submitted by the learned senior counsel that as per the lease agreement the primary responsibility of maintenance of the aircraft is that of the lessee and the lessor was under no obligation to meet any expenditure or bear any loss in respect of the lease aircraft. It was submitted that the Interglobe's obligation to repair and keep the aircraft in worthy condition could have been discharged by it by either paying directly to the repair agency without the lessor having any role or in the manner as provided in Article 3.12 of the lease agreement. It was further submitted that for invoking the exclusionary clause as provided in section 10(15A) of the Act, it is mandatory for the authorities below to demonstrate that either the lessor had supplied certain spares or provided any facility or service in connection with the operation of the lease aircraft. Since no such fact has been brought on record by the Id CIT, it was submitted that the impugned action u/s 263 be quashed. It was also submitted by the learned senior counsel that recently Hon'ble Jurisdictional High Court has upheld the ratio propounded by this Bench of the Tribunal in the case of Sahara Airlines (supra) in orders reported in the name of M/s Jet Lite (India) Ltd. reported in 236 Taxmann 453 (Del). It was also submitted by the learned senior counsel that once an assessment order has been passed in consonance with the judicial wisdom of the superior court then the same cannot be termed as erroneous or prejudicial to the interest of revenue. In support of this proposition, learned senior counsel relied upon the decision of Hon'ble Page | 47

Delhi High Court in case of Honda Siel Power Products Ltd. reported in 333 ITR 547 (Del). It was further clarified by him that in reply to show cause notice u/s 263 of the Act issued by the learned CIT the appellant had specifically pointed out that as per the decision of this Bench of the IT AT in the case of Sahara Airlines (supra) payment for supplementary lease rent is exempt u/s 10(15A) of the Act, however, the learned CIT in this order has completely ignored the same and premised upon mere suppositions held that supplementary lease rentals were paid to lessor as reimbursement of expenses incurred towards providing facilities or services in connection with the operation of these aircrafts. Alternatively it was also claimed by the learned senior counsel that the payment of supplementary lease rents is also not liable to tax in India as per the provisions of Article 12 of the DTAA between India and Ireland.

"10. The perusal of the above covenants of the agreement reveals that lessee was responsible to bear all the expenses in the course of the term of the lease on account of operational cost, repair and replacement, losses and other expenditure which were required to keep the aircraft in air-worthy condition. So the lessor was under no obligation to meet any expenditure or bear any loss in

respect of the leased aircraft. Complete maintenance of the aircraft was the absolute responsibility of the lessee. The lessor was interested only in receiving the basic lease rent which could be utilised by them in the manner it liked and therefore, was income of the lessor which was exempt under section 10(15A) of the Act. But the supplemental rent was to be reimbursed in accordance with the terms of Article 13 of the agreement. The obligation to repair and keep the aircraft in the airworthy condition was that assessee and such obligation could be discharged either by paying directly to the repair agency without involving the lessor or by the manner as provided in Article 13 of the agreement. Such agreement was made only to ensure that the leased aircraft is kept in airworthy condition. If the Lessee fails to maintain the aircraft in good condition, then the lessor, in such cases, could get the aircraft repaired out of the reserves. Further, the quantum of reserve depends upon the period of use of the aircraft and the right of reimbursement is only limited to the extent of reserve only. If the cost of repair exceeds the reserve, then such liability has to be borne by the assessee only.

certain types of operational cost, it cannot be said that such payment was attributable to any facility or service by the lessor.

………………….

…………………….

From the above, it is crystal clear that the intention of the Legislature was to tax the payment made for spares, facility or services provided by the recipient. Therefore, the change in the law has to be understood in that context. So if any payment has to be brought within the exclusionary portion of section 10(15A) of the Act, then it must be established (i) that lessor either had supplied the spares or provided any facility or service in connection with operation of the leased already and (ii) the payment has been made by the lessee in consideration of such spares/facilities/services. Once it is agreed that the supplemental rent was within the ambit of original provisions of section 10(15A) then the onus is on the revenue to establish that such supplemental rent fell within the ambit of such exclusionary provisions. The Id. Sr. DR has not been able to point out any of the terms of the agreement on the basis of which it can be said that lessor was required to provide for spares, facility or services in connection with the operation of the leased aircraft. He has also not brought any material or evidence to suggest that lessor in fact supplied any spare or provided any facility or service whatsoever in connection with the operation of the leased aircraft. Therefore, we are in complete agreement with the contention of the learned counsel for the assessee that the supplemental rent did not fall within the ambit Page | 50

of the exclusionary provisions of section 10(15A) of the Act. Since prior to 1-4- 1996 such payments were covered by the main provisions, as originally inserted, it can be said that such payments continued to be exempt under section 10(15A) of the Act. Consequently, the same was not chargeable to tax and, therefore, 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, does not arise. Accordingly, we set aside the orders of C1T(A) on this issue and delete the demands raised for financial years 1996-97 to 1998-99 with reference to the payments made to ILFC. "

12.1 The above decision has thereafter also been upheld by the Hen'bie jurisdictional High Court of Delhi in the case of Jet Lite (India) Ltd. (supra), wherein Hon'ble Court has been pleased to hold as under:-

"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 Lessee's Maintenance Programme or 'D' check level structural inspections carried out during a 'C check if the aircraft is on a phased V check system under Lessee’s Maintenance Programme), with any other partial structural overhauls and work performed for all other causes excluded, including those causes set forth in Article 13.4. Reimbursement will be made up to the amount in the Airframe Reserve."

has rightly pointed out that the supplement rental was within the ambit of the original provision of Section 10(15A) of the Act.

12.2 The learned senior counsel is thus justified is drawing parity of facts between the present case and the case of Sahara Airlines (supra) as we observe that both the lease agreements are similar in terminology and intent. We further observe that even the Ld. CAT in the impugned order accepts that primary responsibility to maintain the aircraft is that of Interglobe. However thereafter no facts have been brought on record to demonstrate that payment for Supplementary Rent is towards provision of either spares, facilities of services in connection with operation of leased aircraft by the lessor. The learned CIT relies upon order of assessment for AY 2008-09, however, even in that order no such material has been brought on record by the AO. As held by coordinate bench in case of Sahara Airlines (supra) to fall within the exception of section 10(15A) there must exist an inextricable link between the expenditure regarding supply of spares or for use of any facility or for rendering of any service by the lessor and operation of the leased aircraft. This clearly has not been demonstrated by the learned CIT in the impugned order or by the AO in his order of assessment for AY 2008-09. Facts of the present case being similar to that of Sahara Airlines (supra), respectfully following the decision of Hon'ble Jurisdictional High Court

we hold that payment of Supplementary Lease rent was exempt u/s 10(15A) of the Act and the appellant was not required to deduct TDS thereon …………………”

40.2. Thereafter, this issue again came up before the Tribunal in A.Ys. 2008-09 and 2009-10 wherein decision for AY 2007-08 was followed. Being aggrieved, the revenue filed an appeal before the Hon’ble Delhi High Court which has been dismissed vide orders dated 07th July, 2017 and 31st October, 2017. Aggrieved further, SLP was filed by the Tax Department which has also been dismissed vide order dated 30.07.2018 and 10.09.2018. The issue is therefore no more res integra.

40.3 However, the learned CIT(A) in the instant case has held that the expenditure per se is not allowable as per provision of Section 37(1). We have perused the relevant agreements filed before us and are unable to uphold the disallowance made by Ld. CIT(A). Payment of SR is mandatory and failure to do so would result in civil consequences wherein the lessor will be entitled to take back the possession of the Aircraft. This is clearly apparent from the following clauses of lease agreement :-

“Section 3.4 Supplemental Rent. Lessee hereby agrees to pay to Lessor or to any other Person designated by Lessor or otherwise entitled to receive such payment any and all Supplemental Rent and any other amounts due hereunder at the time the same shall become due and owing. In the event Lessee shall fail to pay any Supplemental Rent, or any other amounts due hereunder when due, Lessor and each other Person entitled to such amounts shall have all rights, powers and remedies provided for herein or in any other Operative Document or by Law or equity or otherwise in the case of non-payment of Base Rent.”

40.4. In our opinion, the Ld. CIT(A) has erroneously held that SR is reimbursable. In case of an operating lease the lessor is the owner of the aircraft.

Aircrafts are enormously expensive and to ensure timely maintenance of the aircraft SR is determined and paid. When the scheduled maintenance becomes due the lessee incurs the maintenance expense and this expense is reimbursed by the lessor to the extent of SR fund maintained by the lessor. This ensures that on redelivery of the aircraft when lease term expires the aircraft is in good condition. The lease agreement provides for reimbursement of maintenance expense and not of SR. This is clearly apparent from the following clauses: Section 3.12 Maintenance Supplemental Rent

On the twelfth (12th) day of each calendar month following the 3.12.1 Delivery Date during the Sublease Term and on the Expiry Date, Lessee will pay to Lessor, as Supplemental Rent, Maintenance Supplemental Rent for the Airframe, Engines, Landing Gear and APU in respect of the hours and cycles flown in the previous calendar month during the Sublease Term (as evidenced in the related Monthly Report) in the following amounts:

(i) in respect of the Airframe, US$45 for each Airframe Flight Hour operated by the Aircraft to cover scheduled heavy structural/4C/6Y checks of the Airframe ("Airframe 4C Maintenance Supplemental Rent”);

(ii) in respect of the Airframe, US$22.50 for each Airframe Flight Hour operated by the Aircraft to cover scheduled heavy structural/8C/12Y checks of the Airframe (“Airframe 8C Maintenance Supplemental Rent”);

(iii) in respect of each Engine, an amount determined in accordance with Exhibit G attached hereto for each Engine Flight Hour, in each case operated by that Engine to cover such Engine’s Overhauls (as to each Engine, “Engine Refurbishment Maintenance Supplemental Rent”);

(iv) in respect of each Engine, US$111 for each Engine Cycle, in each case relating to that Engine to cover such Engine's LLP replacements (as to each Engine, “Engine LLP Maintenance Supplemental Rent”);

(v) in respect of the APU, US$20 for each Airframe Flight Hour to cover APU Overhauls (“APU Maintenance Supplemental Rent”); and Page | 54

(vi) in respect of the Landing Gear, US$2,700 for each calendar month (pro- rated for partial months) during the Sublease Term to cover the Landing Gear Overhaul (“Landing Gear Maintenance Supplemental Rent”)

The Airframe 40 Maintenance Supplemental Rent, the airframe 80 Maintenance Supplemental Rent, the Engine Refurbishment Maintenance Supplemental Rent, the Engine LLP Maintenance Supplemental Rent, the APU Maintenance Supplemental Rent, and the Landing Gear Maintenance Supplemental Rent are referred to collectively herein as the “Maintenance Supplemental Rent”. The Maintenance Supplemental Rent for the Airframe 40 maintenance, the Airframe 8C maintenance, each Engine’s refurbishment, each Engine’s LLP replacements, the APU refurbishment and the Landing Gear overhaul shall each be deemed to be a separate account and shall, until paid out in accordance with the terms hereof, be and remain the property of the Lessor. Maintenance Supplemental Rent for the month in which the Expiry Date shall occur shall be determined as of and payable on the Expiry Date. The Maintenance Supplemental Rent in respect of the Airframe, each Engine and the APU may be adjusted on the Expiry Date in accordance with the terms of Exhibit H hereto

3.12.4. Lessor Maintenance Disbursements (1) If Lessee submits to lessor, within sixty (60) days after the completion of the applicable approved maintenance work (except if otherwise agreed between Lessor and Lessee, it being agreed that such time periods may be extended as determined in the reasonable discretion of Lessor, to the extent that Lessee notifies Lessor at or before the end of such sixty (60) day period that there are still outstanding invoices (which shall be specifically identified) for approved maintenance work) an invoice and supporting documentation evidencing performance of and payment for (each in reasonable detail) the following work by or on behalf of Lessee, lessor shall, provided that (i) no reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, domestic object damage, operational or other mishandling, faulty maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance or which relates to convenience, premature or unscheduled shop visits or overhauls or Lessee effected operational modifications, Engine QEC, Engine accessories, removal/installation of Engines, removal/installation of APUs, Removal/installation of Landing Gear, structural and non-structural components Page | 55

including but not limited to nacelle structures, the thrust reversers, cowlings and engine mounts, or shipping charges, and (ii) no Material Default or Event of Default is continuing, promptly pay to lessee the following amounts (“Lessors Maintenance Disbursements”) from the respective Maintenance Supplemental Rent account. (i) Airframe 4C/6Y Checks : with respect to a scheduled heavy structural 4C/6Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 4C Maintenance Supplemental Rent received by Lessor at the time of payment;

(ii) Airframe 8C/12Y Checks : with respect to a scheduled heavy structural 8C/12Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 8C Maintenance Supplemental Rent received by Lessor at the time of payment;

(iii)Engine Refurbishment : with respect to any Overhaul for an Engine, the lesser of (i) the amount of such invoice and (ii) the net balance of Engine Refurbishment Maintenance Rent Received by Lessor in respect of such Engine at the time of payment; (iv) Engine LLP Replacement: with respect to any LLP replacement for an Engine that is replaced due to expiration of its life limit, the lesser of (i) the amount of such invoice (with any credits for installation of LLPs with less life than the originally installed LLP offsetting any charges for installation of longer life remaining LLPs) and (ii) the net balance of Engine LLP Maintenance Supplemental Rent received by Lessor in respect of such Engine at the time of payment; (v) APU : with respect to any scheduled APU overhaul, the lesser of (i) the amount of such invoice and (ii) the net balance of APU Maintenance Supplemental Rent received by Lessor at the time of payment; and (vi) Landing Gear: with respect of a scheduled Landing Gear Overhaul if it comes during the Sublease Term, the amount of such invoice and (ii) the net balance of APU Maintenance Supplemental Rent received by Lessor at the time Page | 56

of payment; and (ii) the net balance of the Landing Gear Maintenance Supplemental Rent received by Lessor at the time of payment. (2) For the avoidance of doubt, Lessee has no right to payment of any Lessor Maintenance Disbursement except (i) following the occurrence of a Total Loss following payment of all moneys due and owing pursuant to Section 14.3.2 (ii) as expressly provided in this Section 3.12.4 and (Hi) as expressly provided in Exhibit H, and any remaining balances of the Maintenance Supplemental Rent following the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property, with the exceptions set forth in Exhibit H. To the extent any maintenance expenses exceed the amount available in the applicable Maintenance Supplemental Rent account, such expenses shall be for the account of the Lessee and the shortfall, if any, shall not be carried forward or made the subject of any further claim for reimbursement. Lessee acknowledges that Lessor may commingle the Maintenance Supplemental Rent with its general funds and no interest shall accrue in favor of Lessee in respect of Maintenance Supplemental Rent held by Lessor.

40.5. Therefore, clearly the Supplemental Rent is a permanent outflow from the coffers of the assessee and post payment of that sum assessee retains no control over the amount paid. SR once paid is “retained by Lessor as its sole property”. As per the lease agreement post incurring of scheduled maintenance expenditure the assessee is entitled to reimbursement of the expense incurred on maintenance. Amount of reimbursement is lesser of actual expense or the SR Fund maintained by the lessor. Expense incurred for SR in thus not contingent. It is determinative and due as per lease agreement. Contingency if at all is attached to the expenditure incurred on maintenance of aircraft and its reimbursement from the lessor.

40.6. Assessee has also demonstrated before us that when actual maintenance expenditure is incurred by it then only the net amount (i.e., net of reimbursement received from the lessor) is debited by it to its P&L Account and

therefore there is no double deduction claimed. This was also demonstrated before the Ld. CIT(A).

40.7. The Ld. CIT(A), in our opinion, has not properly understood the facts of the case. The fact that Supplemental Rent is determinable as per the terms of the Agreement and is mandatory payment demolishes the presumption of the Ld. CIT(A) that it is reimbursable. Reimbursement of actual maintenance expenditure if at all is a future contingent event, but, Supplemental Rent is a determined expenditure which is not at all contingent. We, therefore, agree with the submission of the learned Senior Counsel for the assessee that once a business liability is ascertained it has to be allowed as deduction under the mercantile system of accounting. We, therefore, hold that Supplemental Rent in the instant case is an allowable expenditure u/s 37(1) of the I.T. Act, 1961.

determined taking into consideration the number of flying hours. Supplementary Rent, in our opinion, is a payment made for lease of aircraft. The Lease Agreement defines “Rent” as “means collectively Base Rent and Supplementary Rent”. Therefore, respectfully following the decision of Tribunal for A.Y. 2007- 2008 which has also been followed in subsequent years, we hold that payment of Supplementary Rent of Rs.61,81,04,551/- is exempt from tax in hands of Lessors as per provisions of section 10(15A) and hence, disallowance under section 40(a)(i) is not called for. However, the above figure is subject to verification by the AO.

42.1. Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. Act. However, a sunset clause was introduced by Finance Act, 2005 to provide that this exemption shall not be available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the tax liability of the lessor is to be governed by the provisions of bilateral tax treaties. Learned Senior counsel for the assessee submitted that as per provisions of section 90 of the Act, Page | 59

provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, mere leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also no such allegation made by the lower authorities in the present case. It is his submission that the definition of royalty under the Income Tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category of equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from the scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- “1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State.

(b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.

the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.”

42.2. In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income Tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(a) of India-Ireland DTAA, the term “Royalty” is specifically defined to exclude from its scope payment of any kind for use of “Aircraft”. We further find the tax treaty also incorporates a separate provision in Article-8 on profits from shipping and air transport. Article 8(1) reads as under :

“Profits derived by an enterprise of a contractor state from the operation of rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that contractor State.”

42.3. This Article states that profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12 and 8 of the Tax Treaty with Ireland, profits derived by an

enterprise of a contracting State from rental of Aircraft are taxable “only” in Ireland. Supplementary Rent of Rs. 276,28,59.821/- paid for Lease Agreements executed after 01.04.2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification by the A.O. “

assessing officer and confirmed by the learned CIT – A Under the provisions of Section 40 (a) (i) of the income tax act. Ground number 4 (b) of the act which is related to the disallowance of supplementary rent for lease agreement executed after 1 April 2007 wherein such lease rent is paid of 638,06,22,760 on which no tax has been deducted by the assessee and therefore the learned assessing officer disallowed the same for non-deduction of tax which is been upheld by the learned CIT – A. Both these aspects are identical to the grounds of appeal 4 (a) and 4 (b) for assessment year 2013 – 14 wherein following the decision of this special bench in assessee’s own case for assessment year 2012 – 13 we have allowed those grounds for that year. Therefore, for similar reasons we allow these grounds. 44. Ground number 5 of the appeal was not pressed by the assessee and therefore it is dismissed. 45. Thus, appeal filed by assessee in ITA number 433/del/2018 for assessment year 2014 – 15 is partly allowed. 46. Accordingly, for assessment year, 2014 – 15 appeal filed by the learned assessing officer in 413 Del 2018 is dismissed and appeal filed by the assessee in 413 Del 2018 is partly allowed.

Assessment Year 2015-16 ITA number 7695 Del 2018 (by assessee)

agreements executed after 1 April 2007 which was disallowed by the learned assessing officer and confirmed by the learned CIT – A Under the provisions of Section 40 (a)(i) of the income tax act. This ground is identical to the issue decided in grounds of appeal 4 (a) and 4 (b) for assessment year 2013 – 14 wherein following the decision of this special bench in assessee’s own case for assessment year 2012 – 13 we have allowed those grounds for that year. Therefore, for similar reasons we allow these grounds. 51. Accordingly, appeal filed by the assessee for assessment year 2015 – 16 is allowed. Order pronounced in the open court on : 29/10/2021.

Sd/- Sd/- (SUCHITRA KAMBLE) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated : 29/10/2021 *MEHTA* Copy forwarded to 1. Appellants; 2. Respondents; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi

Date of dictation 29.10.2021 Date on which the typed draft is placed before the dictating member 29.10.2021 Date on which the typed draft is placed before the other member 29.10.2021 Date on which the approved draft comes to the Sr. PS/ PS 29.10.2021 Date on which the fair order is placed before the dictating member 29.10.2021 for pronouncement Date on which the fair order comes back to the Sr. PS/ PS 29.10.2021 Date on which the final order is uploaded on the website of ITAT 29.10.2021 date on which the file goes to the Bench Clerk 29.10.2021 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order