DCIT, NEW DELHI vs. M/S SAHAR AIRLINES LTD.,, NEW DELHI

1. 1. Approval of letter from Government of India for operation of Air Taxi Service.

2. Lease agreement with M/s. Avia Export, Moscow.

3. Lease agreement with Palarise Hoarding Company. I shall discuss these documents one by one as under: 1. Assessee have produced a photocopy of the letter dated 3.10.91 from Civil Aviation Department, Government of India. This document has been issued by the Civil Aviation Department in the name of M/s. Sahara India and not in the name of Sahara India Airlines Ltd. Hence, assessee’s claim that they were granted permission for operating Air Taxi Operations is not correct. The assessee could have started Taxi operation only when certificate and permission is in their own name. If a passport of Mr. A is issued by mistake in some other name then Mr. A cannot claim that he is in a position to get a visa and leave country to any destination outside. He will be in a position to do so only after getting the necessary correction made in his passport. So is the case of assessee. It cannot be held that assessee was in a position to 4 start his business hence their claim that their business has setup on the basis of this certificate is not correct.

4. Assessee have also filed part document of contract no.76- 022/32202 dated 10.12.91. In these papers it is not at all clear as to who is the lesser and who is the lessee. Moreover, this contract was not final as the same was amended vide addendum dated 12.6.92, no. 2 of contract no. 76-022/32202 dated 10.12.91.

The above discussion makes it clear that assessee neither could start nor could set up its business during the period under consideration. There was not even No Objection Certificate to operate Air Taxi was available in assessee’s name. The availability of aircrafts, there was not even agreement finalized for leasing of aircrafts during the period under consideration. I fail to comprehend, how on what basis, assessee claims that setting up of business was complete. The case fully covered by decision of Hon'ble Bombay High Court decision in the case of M/s. Godi Lal Megh Raj & Co. Pvt. Ltd. vs. CIT 189 Income Tax Return 968.

Accordingly, loss of Rs.1138807/- claimed cannot be allowed during the period under consideration and assessment shall be completed at NIL income. Issue notice of demand and challan and issued notice of penalty under Section 271(1)(c).”

5. The assessee preferred an appeal before the learned CIT (Appeals) and the learned CIT (Appeals) considering the averments of the Assessing Officer and also submissions and evidences furnished before him, held that the assessee had commenced the business of car taxies/airlines services during the previous year and, therefore, the loss claimed by the assessee shall be allowed as business loss to be carried forward and set off against the business income in the succeeding assessment years observing as under:

2. As regard the renewal of NOC for Air Taxi Operators Permit date 20.10.1992 issued by the DGCA, the A.O. stated that although the renewal of NOC is addressed to the appellant but in its content; M/ Sahara India was mentioned by the DGCA.

3. As regard the letter dated 21.12.1992 issued by the DGCA, the A.O contented that it was addressed to the name of M/s Sahara India.

5. As regard letter dated 16.09.1992 addressed to the Manager, Bank of Baroda, Lucknow for the remittance of lease rent, the A.O. contented that in this letter, it is clearly mentioned that the appellant is in the process of acquiring aircrafts from M/s Avia Export, Moscow.

On the basis of the above, the A.O. concluded that the appellant could neither start nor set up its business during the year under consideration and hence, the loss claimed by the appellant cannot be allowed during the relevant assessment year.

7 The appellant submission in respect to the above-mentioned contentions of the A.O. is as under:- 1. As regard the observations/contentions of the A.O. in respect to NOC for Air Taxi Operators Permit dated 03.10.1991 issued by the DGCA, its renewal dated 20.10.1992 and letter dated 21.12.1992 issued by the DGCA, it is submitted as under:-

The facts of the matter are that on 03.10.1991, the DGCA issued the NOC for Air Taxi Operators Permit to the appellant for the period of one year from the date of its issue. It may be noted here that in the captioned assessment year, the name of the appellant was 'Sahara India Airlines Limited' but in common parlance, all its companies were commonly addressed as Sahara India. Therefore, the DGCA at the time of issuing NOC for Air Taxi Operators Permit addressed the appellant as Sahara India being the name via which it was popularly known. In the subsequent assessment year, the appellant vide its letter No. SIAL: DEL: 09- 92:463 dated 10.09.1992 applied to DGCA for renewal of the aforesaid NOC for Air Taxi Operators Permit. This time, the DGCA issued letter dated 28.10.1992 to the appellant wherein the appellant was addressed with its complete name i.e. Sahara India Airlines Limited and the validity of the above-mentioned NOC for Air Taxi Operators Permit was further extended for a period of one year with effect from 03.10.1992. However, in the content of the renewal letter, the DGCA mentioned Sahara India instead of complete name of the appellant since the NOC for Air Taxi Operators Permit was originally issued in the name of Sahara India. Subsequently, it was brought to the notice of DGCA by the appellant vide its letter No. SIAL/DEL/1-92/771 dated 17.11.1992 that a typographical mistake has occurred in the NOC for Air Taxi Operators Permit issued by the DGCA on 03.10.1991 and the appellant requested the DGCA to correct the NOC in favour of Sahara India Airlines Limited instead of Sahara India. The DGCA vide letter dated 21.12.1992 agreed to change the NOC for Air Taxi Operators Permit dated 03.10.1991 and its renewal dated 28.10.1992 from Sahara India to Sahara India Airlines Limited.

Since there was also a firm by the name of Sahara India under the Sahara Group, the A.O. has contended that the NOC for Air Taxi Operators Permit has not been issued by the DGCA in favour of appellant but in favour of Sahara India (firm). The said contention was made by the A.O. inspite of the fact that Sahara India is a firm under the Sahara Group which never carried on the business of domestic airlines. It is further submitted that as explained above, this was a typographical mistake made by the DGCA due to similarity in the first name of both Sahara India and Sahara India Airlines Limited.

In this regard, we would also like to draw your honour's attention to 'Guidelines for Air Taxi Operations' (File No. 3/2/95-AIS) issued by the DGCA wherein under Point No. 3 'Eligibility Requirements' for Air Taxi Operators have been provided (Copy of the Guidelines for Air Taxi Operations issued by the DGCA is attached as Annexure F). As per the said eligibility requirements, an Air Taxi Operators Permit can be granted only to: a) a citizen of India (including non-resident Indian); b) a company, registered under the companies Act, 1956, having its principal place of business within India and with or without foreign equity participation (excluding NRI equity) limited to 40%; c) Central Government or a State Government or an undertaking owned or controlled by either of the said Governments.

Hence, as per the guidelines for air taxi operations issued by the DGCA, Sahara India as a firm cannot be granted a NOC for Air Taxi Operators Permit by the DGCA. Moreover, under Point No. 4 of the aforesaid guidelines, it has been provided that Air Taxi Operators Permit shall not be transferable. Therefore, the fact that the DGCA agreed to change the name from Sahara India to Sahara India Airlines Limited; it proves beyond any doubt that 9 the NOC for Air Taxi Operators Permit was issued to the appellant and not to the firm and the DGCA has made a typographical mistake in writing of the name Sahara India in place of the complete name of the appellant i.e. Sahara India Airlines Limited. Moreover, it is well known to the masses that under the Sahara Group, it is only the Sahara India Airlines limited which is operating as the private domestic airlines not Sahara India (firm). Therefore, the allegation made by the A.O. that the appellant was not granted NOC for Air Taxi Operators Permit during the relevant assessment year is totally absurd, baseless and against the law and guidelines issued by the DGCA. It is further submitted that the NOC for Air Taxi Permit was originally issued to appellant on 03.10.1991 and the DGCA vide letter dated 28.10.1992, on an application made by the appellant, renewed the NOC for the further period of one year. It is pertinent to note here that through the renewal letter, no fresh NOC was issued by the DGCA but in fact, the NOC dated 03.10.1991 already issued was further renewed for a period of one year. The fact that the application for renewal of NOC was made by the Sahara India Airlines Limited and based on the application made by the appellant, the DGCA renewed the NOC by addressing in the said letter to the appellant is sufficient evidence that the original NOC was also issued in favour of the appellant. If the contention of the A.O. is considered then

- Firstly, it is not possible for the appellant to make an application to the DGCA for renewal of the NOC. - Secondly, the DGCA would not have granted the renewal of NOC based on the application filed by the appellant. - Finally, the DGCA would not have addressed the renewal letter to the appellant.

Hence, the entire contention of the A.O. is against the facts of the case, baseless and against the laws & guidelines issued by the DGCA.

2. As regard the observations / contentions of the A.O. regarding agreement signed by the appellant with M/s Avia Exports, Moscow for purchase of aircrafts and letter dated 16.09.1992 addressed to the Manager, Bank of Baroda, Lucknow for the remittance of lease rent, it is submitted as under:- The facts of the matter are that the appellant has entered into an agreement with M/s Avia Export, Moscow on 20.12.1991 (contract no. 76022/32202) for purchase of two Yak 42 aircrafts. Subsequently, the said contract was amended on 12.06.1992 for acquiring three Aircrafts instead of two Aircrafts as agreed earlier. This amendment was made in view of the Indo Russian Trade agreement signed between Government of India and Russian Authorities on 05.05.1992. Pursuant to the agreement entered by the appellant with M/s Avia Export, Moscow, the appellant wrote a letter dated 16.09.1992 to its banker namely Bank of Baroda, Lucknow for remittance of one month's lease rent to Avia Export, Moscow through their Escrow Account. As regard the above-mentioned documents submitted to the A.Ο., the A.O. contented that it is not clear in the part- documents of contract no. 76-022/32202 as to who is the lesser and who is the lessee and the said agreement was not final as the same was amended in the subsequent assessment year. Moreover, as regard to letter dated 16.09.1992 addressed to the Manager, Bank of Baroda, Lucknow for the remittance of lease rent, the A.O. contented that in this letter, it is clearly mentioned that the appellant is in the process of acquiring aircrafts from M/s Avia Export, Moscow.

As regard the contention of the A.O. that it is not clear in the part- documents of contract no. 76-022/32202 filed by the appellant as to who is the lesser and who is the lessee, it is submitted that in the letter dated 16.09.1992 issued by the appellant on its letter head to its banker namely Bank of Baroda, it has been clearly mentioned that the appellant has entered into

11 an agreement with M/s Avia Export, Moscow for purchase of Yak 42 aircrafts and further requested the bank for the remittance of lease rent. Hence, the said letter which was also provided to the A.O. is itself a sufficient evidence to conclude that the appellant was the lessee and M/s Avia Export, Moscow was the lessor. Therefore, the contention of the A.O. that it is not clear as to who is the lesser and who is the lessee is totally incorrect. As regard to other contention of the A.O. that the said agreement was not final as the same was amended in the subsequent assessment year, it is submitted a contract once entered it's binding on both the parties and any subsequent amendment in the contract does not render the original contract invalid or void. Further, an amendment to a contract can be made number of times subject to mutual consent of both the parties. The fact that the contract was amended in the subsequent assessment year does not in any way mean that the original contract was not final. Thus, the contention of the A.O. that the aforesaid contract was not final is totally incorrect.

Further, in respect to the A.O.'s contention that it is clearly mentioned in letter dated 16.09.1992 addressed to the Manager, Bank of Baroda, Lucknow that the appellant is in the process of acquiring aircrafts from M/s Avia Export, Moscow, it is submitted that the appellant contention before the A.O. is that it has received the NOC for Air Taxi Operators Permit and has entered into an agreement for the purchase of aircrafts from M/s Avia Export, Moscow. Once the aircraft will be acquired, the business of the appellant will get commenced. It was never the contention of the appellant that it has acquired an aircraft. It is pertinent to mention here that had the appellant acquired the aircrafts, it would have commenced its business. The A.O. has failed to differentiate between the setting up of business and commencement of business. Hence, the entire allegation of the A.O. was against the direction issued by the Hon'ble ITAT since the appellant's business has been set-up during the relevant assessment year although not commenced.

12 In view of the above discussion, it is clear that the appellant has obtained the NOC for Air Taxi Operators Permit and has entered into an agreement for the purchase of aircrafts from M/s Avia Export, Moscow during the relevant assessment year. The said fact is sufficient to justify the assessee's contention that the business of the appellant has been set-up during the relevant assessment year. Hence, the expenses incurred by the appellant on account of payment of salary, licence fee, travelling & conveyance, consultancy charges, meeting & conference etc. during the relevant assessment year are allowable expenses as revenue expenditure since the assessee's business was already set-up and it was necessary for the appellant to create the requisite infra-structure in the form of trained man power and requisite staff and establishment to actually commence the air transport services. Hence, we request your honour to kindly allow the loss claimed in the Return of Income by the appellant on account of revenue expenses incurred by the appellant during the relevant assessment year and oblige."

3.3 I have considered the orders of various authorities / courts and the submissions filed by the appellant. Setting up of any business entails different activities in various stages. These include, inter-alia, commissioning of feasibility project report, hiring of office/manpower, incorporating the entity which will carry out the business, raising of capital / finance, hiring / purchase of factory / equipment, commencement of production/trade/service, etc. It is clear from the application by the appellant for license to MCA, and grant thereof by the MCA to ne appellant during the PY itself, that even if the air-taxi service/airline had not commenced, the activity of putting the service / business into operation had already commenced. Therefore, the stand taken by the AO that expenses incurred y the appellant are of pre-operative nature is not factually correct and is not legally tenable. What is material is whether the appellant stood incorporated as a company during the PY itself or was incorporated after the end of PY. If the appellant was incorporated as a company during the PY, it would be entitled to claim the expenses as revenue expenditure for the reason that the 13 appellant had already taken several steps to put its business of air-taxi / airline service into operation and as such its business had commenced. However, if the appellant was incorporated as a company in the subsequent PY, the expenditure would be liable be treated as pre-operative expenses as held by the AO. From the copy of fresh certificate of incorporation consequent upon change of name filed by the appellant, it is seen that M/s Sahara Airlines Ltd was originally incorporated on 0.09.1991. Thus, as the appellant company was first incorporated as M/s Sahara India Airlines Ltd. during the PY, and the license was granted by MCA in the PY self, it must be held that the appellant had commenced the business of air-taxi/airline services during the PY. Accordingly, these grounds of appeal are allowed in view of the rulings of Hon'ble Apex Court cited above as applied to the facts of the case. The loss claimed by the appellant shall be allowed as business loss to be carried forward and set off against business income in the succeeding AYs as provided under the law.”