DCIT 5(2), MUMBAI vs. NATIONAL AVIATION COMPANY OF INDIA LTD ( FORMELRY KNOWN AS AIR INDIA LTD), MUMBAI

The first issue in this appeal of assessee is against the order of CIT(A), confirming the action of Assessing Officer (AO) in disallowing the claim of expenditure debited on account of penalty levied by foreign airports for not found in possession of proper or sufficient documents of the passengers on arrival at foreign airports, enabling them to enter in such foreign countries. The assessee-carrier aircrafts are accordingly levied penalties/fines in accordance with law of the corresponding foreign nations. For this, assessee has raised the following Ground No.1:

Briefly stated facts are that the assessee is engaged in the international transportation of passengers and cargo. The passengers carried by the assessee on its international carrier and if on arrival at the foreign airport, passengers are not found in possession of proper or sufficient documents for enabling them to enter in such foreign countries, the foreign countries/nations levy penalty on the assessee-carrier aircraft in accordance with their laws. The assessee has claimed such penalties/fines u/s.37 of the Act. But the AO, after examination of facts, came to the conclusion that the assessee’s claim of penalty/fines is hit by Explanation 1 of Sub-section (1) of Section 37 of the Act. Accordingly, the AO disallowed the claim of assessee for an amount of ₹1,20,27,531/-. Aggrieved, the assessee is in appeal before the CIT(A).

The CIT(A), relying on the decision of ITAT in earlier year i.e., for AY.2005-06 in dismissed the ground of assessee, wherein the Tribunal in AY.2005-06 has followed the earlier decision of assessee’s case and dismissed the Ground of assessee’s appeal in para 5, as under: - “5. After hearing the learned representatives of the parties and perusing the material on record, we find that similar issue came up before the ITAT in assessee’s own case for assessment year 2001-02 and 2002-03 wherein the ITAT held as under:- “16. We have considered the issue. First of all, as submitted these fines and penalties are paid by the assessee company on behalf of passengers/cargo and these are directly not levied on the assessee company. But the assessee company chose to discharge these as a part of commercial activity so as to avoid seizure of the aircraft. However, this argument was not placed before any lower authorities and the nature of penalty/fine had not been examined in detail at all. Considering that the COD has not permitted to agitate this issue in assessment year 2002-03 we are of the opinion that the amount cannot be allowed as business expenditure in the absence of any justification for payment of penalty or fine as a commercial expediency. In these circumstances, we are inclined to agree with the learned CIT(A)’s opinion. Consequently, the ground is rejected.”

Before us, Ld. Counsel for the assessee argued that in earlier years, the Tribunal has taken a view against assessee but he stated that recently, the Hon'ble Madhya Pradesh High Court in the case of CIT Vs. Khemchand Motilal Jain, Tobacco Products P. Ltd., [340 ITR 99] (MP) has considered the identical situation, wherein the assessee’s claim of business expenditure paid for un-lawful purpose i.e., kidnapping of Director of a company while on business tour and amount paid as ransom was held to be deducted. The Hon'ble High Court held that - Section 364A of the Indian Penal Code provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay, is liable to the punishment as provided in the section, but nowhere is it provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that the payment of ransom is prohibited by any law. In the absence of it, the Explanation to sub-section (1) of Section 37 would not be applicable. In this connection, the Ld. Counsel for the assessee relied on paras 13 and 14, as under:

Ld. Counsel for the assessee also relied on the decision of the Hon'ble Supreme Court in the case of Ramchandar Shivnarayan Vs. CIT [111 ITR 263] (SC), wherein it was held that – the loss occurred on account of theft to be a trading loss incurred in the ordinary course of business of purchasing Government securities. It was also held that – the loss by theft is connected directly with and incidental to the business of assessee. In this connection, Ld. Counsel for the assessee relied on para Nos.11 and 12 of the said order, as under:

In terms of the above, Ld.Counsel for the assessee stated that the Corporation has been engaged in the International Transportation of passengers and cargo. The passengers carried by the Corporation on its Aircraft, if on arrival at the foreign airport are not found in possession of proper or sufficient documents for enabling them entry in such foreign country, the Corporation becomes liable to transport such passengers back and may also become liable to penalty/fine in accordance with law of the foreign country. The documents carried by the passengers are checked by the staff of the assessee-carrier Aircraft at the time of departure from the Indian Airports and the documents are also checked by the immigration authority (Government of India) at the airport of departure. Sometimes, the passengers misplace or lose the travel documents carried by them or the immigration authority at foreign airport may not be satisfied fully with the travel documents and/or visa etc., carried by the passengers. In such event inspite of the assessee-carrier Aircraft at the airport of departure checking the documents, and the immigration authorities of Govt. of India having been duly satisfied about the passenger travelling abroad with proper travel documents etc., on account of reasons beyond the control of the airports and in such an event the assessee-carrier Aircraft is also required to transport such passengers back, who are refused entry in such foreign airport.

In terms of above, he argued that the penalty/fine levied by the corresponding foreign countries at the foreign aircraft and transport of such passengers back, who are refused entry of such airports, the expenses incurred are incidental to carry on its legal business and liability for expenses and penalty arises in the capacity of a trader for carrying on its legal business. He argued that such liability whether described as penalty/fine or otherwise, would be an expenditure incidental to the carrying on business and should be allowable u/s.37 of the Act.

On the other hand, Ld.CIT-DR heavily relied on the order of the lower authorities and also stated that the issue is squarely covered on the facts in earlier year’s Tribunal order in assessee’s own case.

We have heard rival contentions and gone through the facts and circumstances of the case. We noted that penalty or fine paid at the foreign airport is ordinarily an amount paid in settlement of charges in respect of offence/guilt on the part of the passenger which is neither accepted nor proved. Consideration for payment of such penalty or fine is in respect of any offence/guilt which is neither proved nor accepted and is in the nature damages paid for settlement of disputes to avoid bad reputation and safeguard business interest. In AY.1993-94 such disallowance was considered by CIT(A). However, unfortunately the CIT(A) erroneously considered the activity of the assessee as illegal and disallowed the same. In para 22, the CIT(A) has observed as under:

We noted that as such activity of the assessee is neither illegal nor illegitimate. The assessee's activity in the International Air Transport is carried on with due authority and licensed by the Govt. of India and also the respective countries to which it operates its flights. Penalty or fines are paid in foreign country by the assessee for default or mistake of the passengers and not on account of any violation or infraction of law by the assessee. However, under the International Air Transport laws, it is the obligation of the Airlines to bear such penalty/fines which arise in the ordinary course of carrying on its business. As stated above, the penalty/fine which is incurred by the assessee should be considered in the context of nature of business carried on by the assessee. In this case, the assessee's business is fully authorized and carried on legally. However, the assessee incurs the liability for payment of penalty/fine as the documents are misplaced or lost by the passengers for which the assessee cannot be held liable and over which the assessee has no control. The assessee had not made any contravention of law but inspite of the assessee exercising all care as explained above, the liability arises which is incidental and arises ordinarily in the course of paid on account of default/non-compliance of laws by the passengers and not by the assessee. We further note the following:

From the above it will be obvious that the assessee has neither carried on any illegal activity nor committed any breach of law. However, in accordance with the International Air Transport laws the assessee becomes liable to pay such penalties/fines to the Immigration Authority of foreign countries and such penalty or fines in the nature of expenses incurred wholly and exclusively for the purpose of business of the assessee and in the course of ordinarily carrying out its business activity.

We also noted the fact that the penalties/fines arise not on account of any infraction of law/non-compliance of the requirements of the Immigration Authorities by the assessee but the passengers and such penalties/fines borne by the assessee can also be considered in the nature of business loss allowable to the assessee u/s 28 of the Act itself while computing assessee's income from business.

It is further noted that infraction of law as such and that too not by the assessee but by the passengers carried by the assessee should not however be presumed for disallowance of such expenses which are normally incurred for carrying out the business of the assessee. In this connection, we invite attention to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. P.C.Tangal (184 1TR 88). In this case penalty was imposed by the Customs Authority on the ground that the assessee had under invoiced certain imports and thereby imported more goods than were authorized by the Import License. The penalty was reduced by the appellate authorities and the Hon'ble Bombay High Court held that such penalty was allowable as deduction u/s.37(1) of the Act as it could not be determined that the assessee has himself committed an infraction of law.

In the case under consideration, it is observed that the assesses had not committed any infraction of law but the assessee is required to bear the amount of such penalty/fine levied at foreign airports for certain deficiencies in the records/passports/visa of the passengers carried by the assessee made any infraction of law. At this juncture, a distinction is justified between the case of a deliberate violation of law and one which is innocent and unintended. Where a trader has not been at fault and has not been carrying on his business unlawfully or in contravention of the rules but discovering that the goods purchased by him are liable to be confiscated as unauthorisedly imported, saves them from being confiscated by paying a penalty and such penalty may be viewed as part of the purchase price of the goods as laid down by the Hon'ble Bombay High Court in the case of C1T Vs. Pannalal Narottamdas & Co. (1968) (67 1TR 667) and allowable as deduction. Applying the ratio of above case, it will be obvious that the case of the assessee for allowance of payment of penalty/fines is on a very strong footing as in the assessee's case the assessee had neither committed any violation of law nor any breach or infraction of the law. As noted earlier the expenses incurred by the assessee on fines/penalties at foreign airport is also in the nature of loss incurred in the carrying on assessee's business and it is incidental to carrying on of such business of International Air transportation of passengers.

From the above stated facts, it will be obvious that the penalty/fine paid by the assessee has been incurred on carrying out an operation of the assessee's business and it is incidental to the business operations. Reliance in this case is placed on the decision of CIT Vs. Howrah & Co. Pvt. Ltd. (1989) 44 Taxman 409 (Cal).

Further in the case of Ramchand Shrinarayan Vs. CIT

The next issue in this appeal of assessee is against the order of CIT(A), confirming the action of AO, treating the income derived from interest as ‘income from other sources’ instead of income declared by assessee as ‘business income’. For this, assessee has raised the following Ground No.2:

At the outset, Ld. Counsel for the assessee stated that this issue is covered by the Tribunal’s decision in assessee’s own case for the AY.2001-02 and further, the Department’s appeal against the ITAT’s order were decided by the Hon'ble Bombay High Court vide order dt.14-06-2012, confirming order of ITAT stating that the interest income is taxable as ‘business income’.

We noted that the assessee has earned interest income of short term deposit amounting to ₹74,37,00,000/- declared as ‘business income’. However, the AO treated this interest income under the head ‘income from other sources’, whereas the Tribunal in AYs.2001-02 & 2002-03 in dated 31-10-2008 has considered this issue and held the same as ‘business income’ by observing as under:

This was affirmed by the Hon'ble Bombay High Court and answered this issue in favour of assessee vide paras 7 and 8 as under:

When these facts were confronted, Ld. CIT-DR, he fairly agreed that there is no difference in facts in this year, what was in AY.2001-02 and he could not controvert or could not distinguish the decision of Hon'ble Bombay High Court or of the Tribunal. We noted that this issue is squarely covered in favour of assessee and against the Revenue and respectfully following the view taken in AY.2001-02 by the Hon'ble Bombay High Court, we reverse the order of lower authorities and allow this issue of assessee’s appeal.

The next issue in this appeal is as regards the order of CIT(A), confirming the action of AO in holding that the provisions of Section 14A of the Act are applicable to the dividend income received by assessee. For this, assessee has raised the following Ground No.3: “3(i) On the facts and circumstances of the case and in law the learned C.I.T.(A) erred in confirming action of the A.O. that provisions of Sec. 14A were applicable to dividend received by the appellant on "Trade Investments".

We noted that this issue is also covered by the Tribunal’s decision in assessee’s own case for AY.2007-08. Ld. Counsel for the assessee before us stated that total dividend received by assessee is as under:

He stated that this foreign dividend is not exempt and assessee has not claimed any exemption u/s.14A of the Act. Hence, he stated that once there is no exempt income, the issue is covered by the decision of the Hon'ble Bombay High Court in the case of Pr.CIT Vs. Ballarpur Industries Limited in Income Tax Appeal No.51 of 2016, wherein this issue has been considered following the judgment of Hon’ble Delhi High Court in the case of Chem invest Limited vs. CIT (2015) 378 ITR 33 (Delhi) held as under: - “On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.”

The next issue in this appeal of assessee is against the order of CIT(A), confirming the action of AO in disallowing the Programme. For this, assessee has raised the following Ground No.4:

Brief facts are that the AO noticed that the assessee- company has made provision under Frequent Flyer Programme of ₹118.1 Million. The AO required the assessee to justify as to how such provision is deductible and also to furnish the working of such claim. The assessee explained vide letter dated 25-10- 2010 and noted that the assessee in a view to encourage the passengers to prefer travelling by the same air-line over flights of other air-lines, introduced the reward programme styled as ‘Mileage Accumulation Programme/Frequent Flyer Scheme’ over the customers. Accordingly, a provision was made for Frequent Flyer Programme of ₹115.90 Million as outstanding in the Balance Sheet as on 31-03-2008. Ld. Counsel for the assessee explained that the AO inferred that out of the provisions of Frequent Flyer Programme, a sum of ₹118.1 Million, the assessee actually incurred expenses of ₹2.2 Million only during the FY.2007-08 relevant to AY.2008-09. According to the AO, the excess provision has been made on this account of ₹115.90 Million. Ld. Counsel for the assessee stated that such excess provision of ₹115.90 Million was contingent in nature and this view was taken in earlier assessment years also and since the disallowed. Assessee filed the complete details of Frequent Flyer Programme in assessee’s Paper Book at Pages 43 to 48 and reconciled the entire provision made of ₹11,81,12,010/-. Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for AY.2007-08 in dt.01-04-2016, vide para 6, as under:

As the issue is covered in favour of assessee, respectfully following the decision of the Co-ordinate Bench decision, we allow this issue of assessee.

The next issue in this appeal of assessee is against the order of CIT(A), confirming the addition made to income in respect to disputed bills, amounting to ₹116.3 Million. For this, assessee has raised the following Ground No.5:

Briefly stated facts are that the AO noticed from the Government’s Auditor’s note qualifying remark that the amount of ₹116.3 Million is income actually accrued during the FY.2007- 08, relevant to AY.2008-09. The AO reproduced the relevant note, which is being again reproduced herein for the sake of clarity, which reads as under:

In view of the above qualifying remark by the Government Auditor, the AO charged this amount of ₹116.3 Million as taxable in this year. Aggrieved, assessee preferred an appeal before the CIT(A), who also confirmed the action of AO. Aggrieved, now the assessee is in appeal before the Tribunal.

Ld. Counsel for the assessee before us argued that the disputed bill relates to claim of reimbursement of expenses from the lessors of Air-craft, obtained on lease by the assessee and in respect of which, assessee has raised provisional bills amounting to ₹116.3 Million. He explained that this fact was explained even to Comptroller and Auditor General (CAG) and narrated that since the matter has been crystalised in October, 2008, accounting action could not be taken in FY.2007-08 relevant to AY.2008-09. For this, assessee’s Counsel placed reliance on the decision of Hon'ble Supreme Court in the case of CIT Vs. Gajapathy Naidu (1964) [53 ITR 114] (SC). The assessee before us now claimed that the authorities have rejected the entire invoice value for overhaul of engine to the extent of ₹105.90 Million and settled such invoices towards ferry cost only partly to the extent of ₹4.53 Million for the FY.2008-09, relevant to AY.2009-10. It was also explained that on settlement of claim in October, 2008, such amount of ₹4.53 Million was accounted in the year 2008-09. When these facts were asked to file in details, Ld. Counsel for the assessee as well as the Ld. CIT-DR agreed that this matter can be restored back to the file of AO for fresh verification and adjudication. In terms of concession given by both the sides, we restored this issue back to the file of AO, who will consider the issue as per law. This issue is accordingly treated as allowed for statistical purposes.

The only issue in Revenue’s appeal is as regards the order of CIT(A), confirming the addition made by the AO on account of excess provision for obsolescence or write back the provisions, amounting to ₹358.50 Crores. For this, Revenue has raised following Ground Nos. 1 & 2:

At the outset, Ld. Counsel for the assessee stated that this issue has been adjudicated by the CIT(A) in AY.2007-08 and the Department has accepted the decision and not filed any appeal in any higher forums regarding the disallowance of exclusion of provisions for obsolescence transfer to credit of Profit and Loss A/c while computing business income. When this fact was pointed out, Ld. Counsel for the assessee stated that the Tribunal can take a view. The assessee has filed complete details for AYs.2004-05, 2005-06 and 2006-07, wherein excess provision for obsolescence transferred amount to the credit of Profit and Loss A/c and exclusion by assessee while computing business income was not added by the AO. The relevant details are as under: