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Facts
India Flysafe Aviation Ltd. filed its return of income for AY 2013-14, which the AO adjusted by making additions. These additions included disallowing full depreciation on a new aircraft, citing it was used for less than 180 days, disallowing deferred revenue expenditure for leased helicopter maintenance, capitalizing certain repair and maintenance costs, and disallowing prior period expenses and interest on TDS. The CIT(A) deleted the capital expenditure disallowance but upheld the remaining additions.
Held
The tribunal allowed full depreciation on the aircraft, emphasizing that 'ready for use' is sufficient for claiming depreciation, regardless of active use or revenue generation within 180 days. Issues related to deferred revenue expenditure, prior period expenses, and certain repair and maintenance expenses were restored to the AO or CIT(A) for fresh consideration and verification of evidence. However, the disallowance of interest on TDS was upheld, as it is not an allowable expenditure.
Key Issues
Whether full depreciation is allowable on an aircraft 'ready for use' for business purposes even if not actively used for 180 days; the deductibility and treatment of deferred revenue expenditure and prior period expenses; classification of various repair and maintenance expenses; and the allowability of interest on TDS.
Sections Cited
Income Tax Act, 1961 Section 143(3), Income Tax Act, 1961 Section 32
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Income Tax Appellate Tribunal, DELHI BENCHES : C : NEW DELHI
Before: SHRI M. BALAGANESH & SHRI ANUBHAV SHARMA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : C : NEW DELHI
BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.1582/Del/2019 Assessment Year: 2013-14
India Flysafe Aviation Ltd., Vs DCIT, NTH Building, 3rd Floor, Circle-12(1), Qutub Institutional Area, New Delhi. A/2, Shaheed Jeet Singh Marg, Near Katwaria Sarai, USO Road, New Delhi. PAN: AAHCS8618Q (Applicant) (Respondent) Assessee by : Shri Salil Kapoor, Advocate, Shri Tarun Chanana, Adv., Ms. Ananya Kapoor, Adv. & Shri Sumit Lalchandani, Adv. Revenue by : Ms Meenakshi Dohare, Sr. DR Date of Hearing : 09.11.2023 Date of Pronouncement : 12.01.2024
ORDER PER ANUBHAV SHARMA, JM: The appeal is are preferred by the Assessee against the orders dated 29.11.2018 of the Commissioner of Income Tax (Appeals)-22, New Delhi, (hereinafter referred to as the Ld. First Appellate Authority or ‘Ld. FAA’, for
India Flysafe Aviation Ltd. vs. DCIT ITA Nos.1582/Del/2019
short) in appeal Nos.69/17-18/CIT(A)-22 arising out of the appeal before it against the order dated 26.02.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the DCIT, Circle 12(1), New Delhi (hereinafter referred to as the Ld. AO).
The assessee is engaged in the business of providing aircrafts on charter basis to the VVIPs, State governments, corporate houses, travel agents, etc. During the previous year relevant to the assessment year 2013-14, the appellant filed the return of income declaring a loss of Rs.44,60,60,034/- and the assessment order was passed u/s 143 of the Act at a loss of Rs.36,79,91,729/- by making the following additions:-
i) Firstly, the ld. AO observed that the fixed assets on which depreciation is claimed has in its block a new aircraft purchased during the year. The assessee had claimed that this aircraft was purchased during the year and put to use while the ld. AO taking into consideration the certificate of airworthiness, issued by the Director General of Civil Aviation, concluded that the aircraft was put to use for a period of less than 180 days and, thus, instead of depreciation @ 40%, the assessee was allowed depreciation @ 20% only. In this context, the ld. AO observed that the Director General of Civil Aviation had issued a certificate dated 21.09.2012 mentioning that the certificate of airworthiness of this aircraft shall be for a period from 18.10.2012 to 17.10.2015 and, therefore, the 2
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AO concluded that the aircraft was put to use only after 18.10.2012 and that made the aircraft put to use for a period less than 180 days. Accordingly, the addition was made by way of disallowance of depreciation. ii) The ld. AO observed that the assessee has claimed deferred revenue expenditure written off amounting to Rs.31,21,556/- which the assessee explained that the assessee company had taken on lease a helicopter in the earlier years and incurred expenditure amounting to Rs.2.6 crores on account of engine improvement, repair & overall check and compliance of DGCA guidelines during F.Y. 2009-10. Since the asset was taken on lease, the expenditure was amortized over the remaining lease period of the helicopter. Rs.31,21,556/- being the remaining amount has been amortized during the relevant financial year. The ld. AO was not satisfied with the same and concluded that in the assessment year 2012- 13 also, the disallowance was made by the then AO and considered this expenditure to be incurred in earlier years. iii) The ld. AO then considered the fact that an amount of Rs.108.55 lakhs has been debited on account of repair and maintenance. The ld. AO considered an amount of Rs.75,31,952/- towards purchase of new equipments and disallowed the same as a capital expenditure. The assessee had claimed that this expenditure was on account of main router blade purchase for a leased aircraft and the blade was changed of a 3
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leased asset, thus, it was treated as revenue expenditure. The same was not accepted by Ld. AO iv) Further, the AO examined certain expenditures under the head ‘Repair and maintenance’ to be prior period expenses and, accordingly, disallowed Rs.8,81,697/-. v) The ld. AO made a disallowance of Rs.9,35,472/- on account of expenses on repair and maintenance on the basis of what the AO alleged was a proforma invoice and there was proper bill/invoice in support of such expenditure. vi) Lastly, the ld. AO made a disallowance of Rs.36,912/- on account of interest on TDS holding that the same is not allowable as an expenditure.
In appeal preferred by the assessee, the addition of Rs.45,19,175/- on the allegation of being capital expenditure was deleted as the ld.CIT(A) considered it to be a revenue expenditure and an allowable deduction. However, the remaining additions were sustained for which the assessee is in appeal raising the following grounds:- “1. That the assessment order dated 26.02.2016 and the CIT(A) order dated 29.11.2018 upholding the assessment order and the additions made therein are illegal, bad in law and without jurisdiction. The CIT(A) erred in not deleting the additions made by the AO. 2. That the AO/CIT(A) has grossly erred on facts and in law in making/upholding the disallowance of Rs 6,85,73,493/- on account of depreciation claimed by the Appellant on the aircrafts acquired by the Appellant. This disallowance is illegal and should be deleted. 4
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That the AO/CIT(A) has grossly erred on facts and in law in making/upholding the disallowance of Rs 31,21,556/- on account of alleged prior period expenses. This disallowance is illegal and should be deleted. 4. That the AO/CIT(A) has failed to appreciate that on the given facts and circumstances, the claim of expenses on deferred basis is allowable and permissible under the law. 5. That the AO/CIT(A) has grossly erred on facts and in law in making/upholding the disallowance of Rs.8,81,697/- on account of prior period expenses that got crystallized during the year. This disallowance is illegal and should be deleted. 6. That without prejudice to the above, the aforementioned prior period expenses in ground no. 3 and 5 should be allowed as expenses to the year to which they relate. Disallowance of prior period expenses will lead to unjust enhancement of income and unjust enrichment of the State. 7. That the AO/CIT(A) has grossly erred on facts and in law in making/upholding the disallowance of Rs 9,35,472/- on account of expenses of repair and maintenance. This disallowance is illegal and should be deleted. 8. That the AO/CIT(A) has grossly erred on facts and in law in making/upholding the disallowance of Rs 36,912/- on account of interest on TDS. This disallowance is illegal and should be deleted. 9. That the AO and CIT(A) have passed the orders without giving a reasonable and a proper opportunity to the Appellant to be heard and present all evidences in its favor. The orders have been passed in violation of principles of natural justice. 10. That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially examined and the same do not justify the addition made. 11. That the additions made are based on mere surmises and conjunctures and the same cannot be justified by any material on record and against the principle of natural of justice. 5
India Flysafe Aviation Ltd. vs. DCIT ITA Nos.1582/Del/2019
The Appellant craves leave to add, amend, alter and/or delete any of the above grounds of appeal at or before the time of hearing.”
Heard and perused the record. The ground-wise findings are as follows:-
4.1. Ground No.2; After taking into consideration the findings of ld. tax authorities below, it appears that the certificate of airworthiness issued by the Director General of Civil Aviation prevailed upon their minds to hold that in the absence of certificate of airworthiness issued by the competent authority, the aircraft could not be used for flying. So, there cannot be any question of using the aircraft for the purpose of business of the assessee.
4.2 The ld. AR has established the fact that this aircraft was acquired by the assessee company in July, 2012 and it was brought to India at the owner’s base at New Delhi, after due clearances and a ferry flight in this regard was arranged for which even insurance cover was taken from the New India Assurance Company Ltd., on 06.08.2012. The ld. AR has submitted that invoice dated 04.08.2012 was raised for 6650 USD for pilot fee for three days, SIC fees for 3 days and professional service charges for Titan Aviation for providing ferry pilot support services to the assessee between 5th August to 7th August, 2012. It is submitted that these expenses are allowed by the AO. We are of the considered view that this establishes that even before the certificate of 6
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airworthiness was issued by the Director General of Civil Aviation on 21.09.2012 for a period from 18.10.2012 to 17.10.2015, the assessee was de facto and de jure owner of the aircraft. The aircraft certainly was not allowed to fly to carry passengers or cargo in the absence of this certification by the competent authority, but, that did not stop the assessee from holding it in its own name for the purpose of its business. The phrase, ‘used for the purpose of business’ in section 32 of the Act does not mean that the use should be by way of generating revenue only. The use here is in the context of the direct connection of the asset with the purpose of business which is initiated in the relevant year. Then Ld. AR is right to point out that the expense which were incurred for making the aircraft functional and ready to use during the year from India, when stand allowed, the same also establish that the certificate of airworthiness issued by the Director General of Civil Aviation, was only for the statutory compliances and to avoid legal liability, which is part of the business activity.
4.3 In this context we can take note of the Mumbai Bench order in case of JCIT vs. Essar Shipping [2006]102 ITD 71(MUM) wherein it was held:- “26. It is also a settled position of law that the 'user' of an asset need not be an 'active user' of the asset. The courts have held in a number of cases that it is sufficient that the assessee makes the asset ready for putting it to use. The Delhi High Court in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 has held that where an assessee puts assets ready for use that amounts to passive user and in such a case depreciation must be allowed, if claimed by the assessee. The Supreme Court has held in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 that 7
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the term 'owner' has different meaning in different contexts and in certain circumstances, even a lessee may be considered as the owner of the property leased to him. The Kerala High Court has held in the case of Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 that 'use' means kept ready for use and not actual use. The Court has held that allowance for normal depreciation does not depend upon the actual working of the machinery. It is sufficient that the machinery in question is employed by the assessee for the purpose of the business and for no other purpose and has kept ready for actual use of the profit-making apparatus, the moment a need arises.”
4.4 Similarly, in the case of CIT vs. M/s E.I.H Ltd. 2011 SCC Online Cal 839, the facts were similar as there also the dispute was with regard to the use of an aircraft for which the depreciation was denied and wherein the Hon’ble High Court made the following observations:- “After hearing the learned counsel for the parties and after going through the materials on record, we find that the phrase "used for the purpose of business" should be interpreted to mean that such plant or machinery must be "open to use" for business and the proof of actual user is not necessary. For instance, if a person starts business and purchases various types of machinery for the purpose of the said business with a plan for manufacturing different types of articles but for want of demand from its customers for manufacture of a particular type of articles in a particular Assessment Year, if any particular machinery which is utilized for manufacture of that particular type of article is not actually used, the assessee should nevertheless be entitled to the benefit of depreciation notwithstanding the fact that such particular machinery was not at all used for the simple reason that the assessee made it ready for use but could not use for no fault on his part and over which he had no control. In the case before us, it has been established that the said aircraft was purchased for the business in the latter half of the Assessment Year and thus, the assessee became the owner and it was actually delivered to the assessee and landed at the New Delhi Airport Authority and the same was also made ready for use by insuring the same by the concerned insurance company. Thus, the assessee has proved that it was made ready for the use of business. In such a case, the authority below rightly granted depreciation @ 50% for the part use of the said aircraft in accordance with law.”
India Flysafe Aviation Ltd. vs. DCIT ITA Nos.1582/Del/2019
4.5 Thus, the findings of the ld. tax authorities below on the issue are liable to be set aside and the ground is accordingly decided in favour of the assessee.
4.6. Ground No.3 and 4; The issue arises out of the deferred revenue expenditure incurred on account of leased aircraft engine improvement, repair and overall check up which have been considered by the coordinate Bench in the case of the assessee for AY 2012-13 vide ITA No.969/Del/2017, order dated 30.09.2020 wherein the issue has been restored to the AO for re-examining the same. It will be appropriate to reproduce the relevant findings of the said order in para 3 as follows:- “3.0 The Ld. Authorized Representative (AR) submitted that Ground No.1 challenges the disallowance of Rs.92,63,156/- made on account of deduction for deferred revenue expenditure in respect of maintenance and overall check-up of helicopter EC145 taken on lease. It was submitted that this helicopter had been taken on lease India and the assessee had incurred an amount of approximately 2.6 Crores on account of maintenance and repairs carried out in compliance with the DGCA guidelines. It was submitted that during the Assessment Year 2010-11 both the engines of the helicopter had got damaged and, therefore, the engines were repaired and a major change was done on the recommendation of the manufacturer of the Aircraft. It was submitted that in view of the quantum of expenditure, it was felt necessary to amortize the expenditure over the unexplained lease period. It was submitted that the accounting treatment adopted for booking the expenditure by spreading the expenses over the remaining period of lease was justified not only because of the huge amount involved, but also because of the benefit accruing for the remaining period of lease. Reliance was placed on the judgment of Hon'ble Kolkata High Court in the case of Hindustan Aluminum Corporation Ltd. vs. CIT reported in [1983] 144 ITR 474 (Kol.) and also on the judgment of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT reported in [1997] 225 ITR 802 (SC) to supplement the assessee's argument that where the revenue expenditure incurred is of a considerable magnitude and its benefit can be spread over a number of years, the same has to be allowed on a deferred basis over the period of benefit thereof. It was also brought to the notice of the Bench that the said expenditure was incurred 9
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in Assessment Year 2010-11 and the same had been allowed as deferred revenue expenditure in Assessment Years 2010- 11 and 2011-12 by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter called the 'Act'). The Ld. Authorized Representative also submitted that the Ld. CIT (A) had erred in confirming the disallowance by making the observation that the lease agreement and invoices had not been furnished by the assessee without appreciating that the said documents had not been requisitioned by the Ld. CIT (A) during the course of appellate proceedings. 3.1 With respect to Ground No.2, it was submitted by the Ld. Authorized Representative that this ground challenges the action of the Ld. CIT (A) in upholding disallowance of Rs.11,45,026/- made on account of regular repairs and maintenance of Aircraft after capitalizing the same and allowing depreciating thereon. The Ld.Authorized Representative submitted that an amount of Rs.19,08,376/- had been incurred on repairs and maintenance of Aircrafts which had been disallowed by the Assessing Officering by treating the same as being capital in nature and capitalizing the same under the head on 'Aircrafts' and, thereafter, allowing depreciation @ 40% thereon. The Ld. Authorized Representative submitted that the repairs had been in the nature of repairing the 'Primary Adaptive Display', and 'Tail Rotor Blade Assembly'. The Ld. Authorized Representative submitted that the repairs of these two components parts do not increase the useful life of the Aircraft and that their replacement is in the nature of revenue expenditure. It was submitted that both these units were found faulty and were not required to be replaced as per the DCGA guidelines and therefore the same was not a capital expenditure. Reliance was placed on the judgment of the Hon'ble Apex Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd. vs. CIT [1956] 30 ITR 338 (SC) and also in the case of Mr. Ballimal Naval Kishore vs. CIT reported in [1997] 224 ITR 414 (SC). Reliance was also placed on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Jagatjit Industries Ltd. reported in [2000] 241 ITR 566 for the proposition that the replacement of parts of existing machinery will be revenue expenditure. 3.2 With respect to Ground No.3 challenging the addition of Rs.3,41,268/- made on account of interest on Income Tax Refund, the Ld. Authorized Representative submitted that the assessee had never received the said interest. The Ld. Authorized Representative submitted that the Assessing Officer may be directed to verify the fact and allow relief to the assessee after such verification.”
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4.7 There is no distinction on facts and, accordingly, this ground is decided in favour of the assessee for statistical purposes and the issue is restored to the file of the ld. AO to proceed in terms of the directions issued for AY 2012-13.
4.8 Ground No.5 and 6: In regard to prior period expenses of Rs.8,81,697/-, the ld.CIT(A) has sustained the addition observing that before the AO, the assessee had accepted the fact that these were the prior period expenses. The ld. AR has pointed out that while referring to pages 74 and 75 of the paper book that by invoice dated 12.04.2012 for an amount of Rs.6,69,546/-, maintenance fee royalty was payable to Delhi International Airport Pvt. Ltd. and the bill for the same was received in the relevant assessment year and, as the same were crystallized in the present year, it is not a prior period expense. Thus, we do not agree with the findings of the ld.CIT(A) that there was no material on record and the ld.CIT(A) had erroneously concluded that the assessee had accepted that these are prior period expenses without appreciating that the same had crystallized in the present year. Thus, this issue is restored to the files of ld.CIT(A) to give a fresh opportunity of hearing to the assessee and consider the evidences of the assessee establishing that bills were received in the relevant assessment year and payments were made in the present assessment year.
4.9 Ground No.7: This issue arises out of disallowance of Rs.9,35,472/- on account of expense of repair and maintenance for which the AO has observed
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that supporting invoice were not filed. The ld.CIT(A) has also observed that in the absence of supporting evidence, no interference is called for in the findings of the ld.AO. In this regard also the ld.AO has relied on the bills made available at page 71 of the paper book being submissions before the AO wherein it is mentioned that original invoices are being produced in support of the claim. At pages 78 and 79, the assessee has brought on record the invoice and the copy of cheque showing the payment against this invoice. In the light of the aforesaid facts, we are of the considered view that the ld.CIT(A) has fallen in error in not sustaining the argument of the assessee that relevant evidences were filed before the AO which he had failed to take into consideration. Accordingly, this issue is also restored to the files of the ld.CIT(A) for taking into consideration the evidences of the assessee, after giving an opportunity of hearing and decide the issue afresh.
4.10. Ground No.8 : In regard to this ground arising out of the disallowance on account of interest on TDS, nothing substantial was argued by the ld. AR. We find that ld. CIT(A) observed that before the AO the assessee had surrendered this amount submitting that the interest on TDS has not been disallowed in the computation of income. It is also settled proposition of law that interest on TDS is not an allowable expenditure and, thus, there is no error in the findings of ld. tax authorities below. The ground is decided against the assessee.
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Since ground No.2 is decided in favour of the assessee and grounds No.3 and 4 are restored to the files of AO in terms of coordinate Bench decision in AY 2012-13 and the issues involved in grounds No.5 to 7 are restored to the files of the ld.CIT(A) and ground no. 8 is decided against the assessee, the appeal of the assessee is allowed partly with consequences to follow as per the aforesaid determination of grounds.
Order pronounced in the open court on 12.01.2024. Sd/- Sd/- (M. BALAGANESH) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 12th January, 2024. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi