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
Date of pronouncement 15/09/2021
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:-

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“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

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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

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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

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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

33. The next issue to be decided by us is the purpose and nature of credits received by
the assessee and their taxability. We have already analysed the relevant agreements
above and have come to the conclusion that from Clause-A of Agreement Dated
19th October, 2005, it is clear that credits have been received by the assessee from
IAE as a consideration for selection of its engines in preference to others. This fact
is also accepted by the A.O. at Page-2 of his Order when he observes that “as a
consideration for selection of the IAE engines to be fitted in the aircraft to be
purchased by the Company, certain credited allowable to the assessee-company
from IAE on the delivery of such Aircraft.” The credits are also agreed to be Fleet
Introductory Assistance (FIA). We find, right upto A.Y. 2018-19 which is accepted
and so noted in the orders by all the authorities below that the causa causans for the
credit is the option to choose an engine. However, for the first time before the
Tribunal in A.Y. 2012-13, it is submitted by the Ld. Special Counsel for the
Revenue that the credits do not relate to the choice of the engine, but, are for the
purchase of aircrafts with the engine. It is also submitted that credits are also
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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
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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.

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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

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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

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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
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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
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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.

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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

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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

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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.”

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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

Page | 16
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

Page | 17
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]

32. The UP Scheme under which the assessee claims exemption to the extent of
entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to
promote the investors in the cinema industry encouraging establishment of new
multiplexes. A subsidy of such nature cannot possibly be granted by the Government
directly. Entertainment tax is leviable on the admission tickets to cinema halls only
after the facility becomes operational. Since the source of the subsidy is the public at
large which is to be attracted as viewers to the cinema halls, the funds to support
such an incentive cannot be generated until and unless the cinema halls become
functional.

33. The State Government had offered 100% tax exemptions for the first three

Page | 18
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.

34. Seen in the above light, we are of the considered view that it 'was

unreasonable on the part of the Assessing Officer to decline the claim of the

assessee about the subsidy being capital receipt. Such a subsidy by its very nature,

was bound to come in the hands of the assessee after the cinema hall had become

functional and definitely not before the commencement of production. Since the

purpose was to offset the expenditure incurred in setting up of the project, such

receipt (subject, of course, to the cap of amount and period under the scheme) could

not have been treated as assistance for the purposes of trade.

35. The facts that the subsidy granted through deemed deposit of entertainment

tax collected does not require it to be linked to any particular fixed asset or that is

accorded "year after year" do not make any difference. The scheme makes it clear

that the grant would stand exhausted the moment entertainment tax has been

collected (and retained) by the multiplex owner meeting the entire cost of

construction (apparatus, interiors etc. included), even if it were "before completion

of five years ".

36. As held by the Supreme Court in the case of Sahney Steel & Press Works Ltd

(supra), the character of the subsidy is to be determined „ having regard to the

purpose for which it is granted. The "purpose test", referred to in Ponni Sugars &

Chemicals Ltd. (supra) when applied to the case at hand, leaves no room for doubt

that the assistance in the form of entertainment tax exemption is shown to have come

Page | 19
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.

37. The factual matrix in Ponni Sugars & Chemicals Ltd. (supra) is nearer home

to the case at hand which is distinguishable from the case of Sahney Steel & Press

Works Ltd. (supra). In Sahney Steel & Press. Works Lid. (supra), the incentives

were linked to production which is the prime reason why the subsidy of sales tax

was held to be operational subsidy or revenue in nautre

38. Indeed, in Ponni Sugars & Chemicals Ltd. (supra), the fact that the

amount received as subsidy was required necessarily to be utilized only for

repayment of term loans for setting up of the new unit was one of the important

factors taken into account for treating it to be capital receipt. The case at hand is

not very different. As observed earlier, the subsidy is meant to liquidate the cost

incurred in setting up of the multiplex cinema hall and for making it operational by

installing the requisite apparatus. The flow of subsidy stops as soon as the

expenditure on such account is met in entirety.”

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

Page | 20
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. "

13. In the said judgment, Delhi High Court had referred to earlier decisions of the
Supreme Court in Rampyari Devi Sarogi vs. CIT (1968) 67 ITR 84 (SC) and Tara
Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC), wherein it has been held that where
Assessing Officer has accepted a particular contention/issue without any enquiry or
evidence whatsoever the order is erroneous and prejudicial to the interest of the
Revenue. After reference to these two decisions, the Delhi High Court observed.

Page | 23
'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."

14. The aforesaid observations have to be understood in the factual background and
matrix involved in the said two cases before the Supreme Court. In the said cases,
the Assessing Officer had not conducted any enquiry, or examined evidence
whatsoever. There was total absence of enquiry or verification. These cases have to
be distinguished from other cases (i) where there is enquiry but the findings are
incorrect/erroneous; and (ii) where there is failure to make proper or full
verification or enquiry. ”

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

Page | 24
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:-

Page | 28
“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.”

19. Therefore, respectfully following the decision of the special bench we hold that the supplier’s
credit received by the assessee from various suppliers of aircrafts is a capital receipt.
Accordingly, ground number 1 of the appeal of the learned assessing officer is dismissed.

20. Similarly ground number 2 is with respect to the argument that whether the above receipt
constituted receipt from exploitation of valuable commercial rights and chargeable to tax u/s
28 ( iv) of the act, has also been decided by the special bench as Under:-
“F. APPLICABILITY OF SECTIONS 28(i) and 28(iv) :

36. The next question that is to be decided is the applicability of
section 28(i) and 28(iv) as raised by the Revenue in the additional
grounds. We have heard the rival arguments made by both sides for
admission of the additional grounds. We do not find any force in the
argument of the Ld. Sr. Counsel for the Assessee that since this issue
was not raised before the authorities below, the Tribunal should not
admit the additional ground. Since the material facts are already
available on record and the additional grounds raised by the Revenue are
purely legal, therefore, following the decisions of the Hon’ble Supreme
Court in the cases of NTPC Ltd., reported in 229 ITR 383 (SC) and Jute

Page | 30
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.

Page | 31
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

Page | 33
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”.

Page | 34
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

Page | 36
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.”

21. In view of the above findings of the special bench that credit receives are also not taxable
either u/s 28 (i) or u/s 28(iv) of the act we dismiss ground number 2 of the appeal of the
learned AO.

22. The additional ground raised by the learned assessing officer wherein it has been contended
that as the learned CIT – A held that these receipts are capital receipts and therefore it would
be computed Under the head capital gains chargeable to tax has also been dealt with the
special bench as Under:-

“G. CAPITAL GAINS :

37. The next issue that is to be decided is taxability of the income

as “capital gains.” As per the provisions of Income Tax Act, 1961 capital

receipts are chargeable to tax as income from “Capital Gains” provided the

conditions stipulated in Section 45 read with Section 48 are satisfied. In the

impugned order, the Ld. CIT(A) has held that credits received from IAE are

taxable as income from “Capital Gains” as per Para-10.2.1 of his Order which

was heavily relied on by the Learned Special Counsel for the Revenue.

According to the Learned Special Counsel, the consideration for assignment

less cost of right to purchase, is assessable as capital gains. It is also his

submission that by entering into Purchase Agreement with AIRBUS, Assessee

has acquired a valuable right which would be a capital asset being a

commercial right. By the Deed of Assignment, the assessee transferred such

right in favour of Lessors. Amounts paid by Lessors represent a consideration

Page | 37
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.

38. After hearing both sides we find Article-21 of the Agreement

Dated 18.11.2005, which has already been reproduced earlier, shows that

AIRBUS has allowed the assessee to assign its rights to acquire aircraft for

purposes of obtaining finance. There is no consideration paid by the Lessors to

the Assessee when such an assignment is made which is also apparent from the

Paper Book filed by the Revenue. As noted earlier the credits were received by

the Assessee from IAE. It has already been held by us earlier that these were

separate transactions. We are, therefore, unable to uphold the findings of the

Ld. CIT(A) as per Para-10.2.1 of his Order relied on by Learned Special

Counsel for the Revenue. The findings of the Ld. CIT(A), in our opinion, are

based on conjectures and surmises when he wrongly views the Agreements

with IAE, AIRBUS and Lessors as an amalgamation. When the Ld. CIT(A)

himself noted that right to acquire Aircraft has been assigned to Lessor at “par

Page | 38
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.”

23. Respectfully following the decision of the special bench which covers the above issue we
dismiss additional ground raised by the learned assessing officer.

24. Accordingly appeal in ITA number 412/Del/2018 filed by the learned assessing officer for
assessment year 2013 – 14 is dismissed.
Page | 39
25. Now we come to ITA number 432/Del/2018 filed by assessee. Ground number 1 and 2 are
general in nature do not require any adjudication and hence dismissed.

26. Ground number 3 of the appeal is with respect to disallowance u/s 37 (1) of the lease rent
payable to the tune of ₹ 3,663,213,778. This issue has been dealt with by the special bench
wide paragraph number 39 as Under:-

H DISALLOWANCE OF PROPORTIONATE LEASE RENTAL U/S 37(1)

39. The next issue that is to be decided is regarding disallowance of

proportionate lease rentals u/s 37(1) of the Act, 1961. We find in the impugned

order, Ld. CIT (A), in para 10.3 has taken an alternative stand that the lease rentals

have a direct nexus with the price of the aircraft that the Lessors have to pay for.

According to him, the higher the sale price the higher is the amount of lease

rentals. It is alleged by him that the assessee has received credits for the purchase

of engines and such credits have not been transferred to Lessors. He, therefore,

held that the lease rentals got determined at a price higher than the one which

would have been determined if the credits would have been passed on to the

Lessors. The learned CIT(A) therefore held that the expense of lease rentals is

partly attributable to the credits received by the assessee. According to him,

expenditure incurred for earning a capital receipt assumes the character of a capital

expenditure and ought to be disallowed u/s 37(1) of the Act.

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.”

27. Therefore respectfully following the decision of the special bench we allow ground number 3
of the appeal of the assessee holding that no disallowance u/s 37 (1) of the lease rent
payments could be made. Accordingly, the AO is directed to delete the same.

28. Ground number four is with respect to the disallowance u/s 40 a (i) on account of payment of
supplementary rent for non-deduction of the tax. The fact shows that supplementary rent for
lease agreement executed prior to 1 April 2007 amounting to ₹ 272,745,720 has also been
dealt with by the special bench in its order wide para number 40 as Under:-

I DISALLOWANCE OF SUPPLEMENTARY RENT (SR)

40. The next issue that it to be adjudicated is regarding disallowance of

Page | 42
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.

3.12.3 Payment by Lessor any Lessor maintenance Disbursement

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,

Page | 44
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.

11. Per contrary, the learned CIT(DR) Dr. Prabhakant vehemently opposed the
above arguments. It was submitted by the Id. CIT(DR) that the teamed CIT had
for just reasons assumed jurisdiction to revise the assessment and no prejudice is
being cause to the appellant as the issue has merely been set aside for a fresh
assessment.

12. We have considered the arguments advanced by the parties and also have
gone through the material available on record as well as the decisions relied
upon. As rightly submitted by the learned senior counsel that the claim for
supplementary lease rent being exempt as per provision of section 10(15A) of the
Act was inquired upon by the Assessing Officer during the course of original
assessment proceedings. Thus this is not a case of lack of enquiry. We agree with
the submissions made by the appellant that the payment of supplementary lease
rent in the present case is not for provision of spares, facilities or any such
services being rendered by the lessor in the present case. A coordinate bench of
Delhi ITAT in the case of Sahara Airlines (supra) had considered identical issue
and had held as under:-

"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

Page | 48
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.

11. In view of the above discussion, it is clear that the supplemental rent was
paid and kept in the form of reserves only for meeting the expenditure which was
to be incurred by the lessee to keep the aircraft in airworthy condition.
Therefore, we are in agreement with the contention of the Id. Sr. DR that the
payment by the lessee by way of supplemental rent was in connection with the
operation of the leased aircraft. But that is not enough for holding that such
payment fall within the exclusionary provisions of section 10(15A) of the Act. In
order to fall within the ambit of such exclusionary provisions, there must exist
the 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. Article 13 of the agreement does not provide for utilisation of
reserve either for the supply of any spare parts or for utilisation of any facilities
or for rendering of any services by the lessor. On the other hand, the terms of the
lease clearly provide that it is the absolute responsibility of the lessee to bear all
the expenses and the losses during the operation of the leased aircraft. It is not
the case of the department that the lessor provided any spares to the lessee
against such payments. Further, there is no material/evidence to suggest that the
lessor ever provided for any of facility or service to the lessee against such
payments. Merely because that the payment of supplemental rent was to meet

Page | 49
certain types of operational cost, it cannot be said that such payment was
attributable to any facility or service by the lessor.

………………….

13. So the question that arises is as to what was intended to be excluded by the
Legislature by amendment made by Finance Act, 1995 w.e.f. 1-4-1996. From the
perusal of the memorandum explaining the provisions of Finance Bill, 1995, it
appears that after the insertion of section 10(15A) in the statute, it was
experienced by the Government that the non-resident companies were receiving
payments in consideration of facilities or services provided/rendered by the
lessors such as training to the pilots or other crew men, providing technicians
etc. in the guise of leased rent. It is this mischief which was suppressed by the
substitution of section 10(15A) w.e.f. 1/4/1996. This is manifest from the memo
explaining the proposed Finance Bill, 1995. The relevant portion is quoted
below (212 ITR (St.). 351):

…………………….

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."

48. The ITAT has examined the object behind amending Section 10(15A) with
effect from 1st April 1996. If any payment had to be brought within the
exclusionary portion of Section 10(15A) of the Act, then it must be shown (i) that
the lessor either had supplied the spares or provided any facility or service in
connection with operation of the leased aircraft; and (ii) the payment has been
made by the lessee in consideration of such spares/facilities/services. The ITAT

Page | 51
has rightly pointed out that the supplement rental was within the ambit of the
original provision of Section 10(15A) of the Act.

49. On facts the Revenue was unable to point out any clause in the agreement
that required the lessor to provide facilities or services in connection with the
leased aircraft. Therefore, the supplemental rent did not fall within the ambit of
the exclusionary provisions of Section 10(15A) of the Act. Since prior to 1st April
1996 such payments continued to be exempted under Section 10(15A) of the Act,
they were not chargeable to tax. Consequently, 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, did not arise.

50. Consequently, the Court affirms the order of the IT AT deleting the additions
made by the AO under Section 195, read with Section 40(a)(i) of the Act on
account of the non-deduction of tax at source for the payment of supplemental
lease rent to the various lessors, i.e., ILFC, AMTEC, Malaysian Airlines and
Lufthansa."

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

Page | 52
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.

Page | 53
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

3.12.1 On the twelfth (12th) day of each calendar month following the

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

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(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

Page | 57
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.

41. As regards the issue relating to disallowance u/s 40(a)(i) is concerned,

we find from the details furnished by the Learned Senior Counsel for the

Assessee that during the year under consideration, the assessee had incurred an

expenditure on account of Supplemental Rent of Rs.61,81,04,551/- in respect to
lease agreements executed prior to 1st April, 2007. The assessee had also

incurred an expenditure on account of Supplementary Rent of
Rs.276,28,59,861/- in respect of Lease Agreements executed after 1st April,

2007. We find the Tribunal in assessee’s own case for A.Y. 2007-2008 had

examined the nature of Supplementary Rent and it was held that payment of

Supplementary Rent is nothing different than the character of basic rent which is

also payable under the Lease Agreement to the Lessors. It was held that

Supplementary Rent is not a payment made for use of spares, facilities or any

services, whereas Basic Rent is a fixed amount. Supplementary Rent is
Page | 58
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.

29. In view of the above decision of the special bench, respectfully following it we allow ground
number 4 (a) of the appeal of the assessee with similar direction.

30. Coming to disallowance of supplementary rent for lease agreements executed after 1 April
2007 amounting to ₹ 5,078,921,321/- , special bench has dealt with this issue at paragraph
number 42 as Under:-

“42. For Lease Agreements executed after 1st April, 2007, a

claim was made by the assessee before the lower authorities that the

income is not chargeable to tax in hands of Lessor under Article 12 of the

DTAA between India and Ireland. We find the AO has not accepted this

the reasons of which has already been reproduced at para 1.5 of the order.

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,
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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.

2. Contracting State in which they arise, and according to the laws of
that State, but if the recipient is the beneficial owner of the royalties or fees
for technical services, the tax so charged shall not exceed 10 per cent of the
gross amount of the royalties or fees for technical services.

3. (a) The term "royalties" as used in this Article means payments of

any kind received as a consideration for the use of, or the right to use, any

copyright of literary, artistic or scientific work including cinematograph

film or films or tapes for radio or television broadcasting, any patent, trade

mark, design or model, plan, secret formula or process or for the use of or

the right to use industrial, commercial or scientific equipment, other than

an aircraft, or for information concerning industrial, commercial or

scientific experience;

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(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.

4. The provisions of paragraphs 1 and 2 shall not apply if the

beneficial owner of the royalties or fees for technical services, being a

resident of a Contracting State, carries on business in the other

Contracting State in which the royalties or fees for technical services arise

through a permanent establishment situated therein, or performs in that

other State independent personal services from a fixed base situated

therein, and the right or property in respect of which the royalties or fees

for technical services are paid is effectively connected with such permanent

establishment or fixed base. In such case the provisions of Article 1 or

Article 14, as the case may be, shall apply.

5. Royalties or fees for technical services shall be deemed to arise in

a Contracting State when the payer is that State itself, a political sub-

division, a local authority or a resident of that State. Where, however, the

person paying the royalties or fees for technical services, whether he is a

resident of a Contracting State or not, has in a Contracting State a

permanent establishment or a fixed base in connection with which the

liability to pay the royalties or fees for technical services was incurred, and

such royalties or fees for technical services are borne by such permanent

establishment or fixed base, then such royalties or fees for technical

services shall be deemed to arise in the State in which the permanent

establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and
the beneficial owner or between both of them and some other person, the
amount of the royalties or fees for technical services, having regard to the
use, right or information for which they are paid, exceeds the amount
which would have been agreed upon by the payer and the beneficial owner
in the absence of such relationship, the provisions of this Article shall
apply only to the last-mentioned amount. In such case, the excess part of

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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

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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. “

31. Therefore, respectfully following the decision of the special bench we allow ground number
4 (b) of the appeal of the assessee.

32. Ground number 5 was not pressed and therefore it is dismissed.
33. Accordingly, ITA number 432/Del/2018 filed by the assessee for assessment year 2013 – 14

is partly allowed.
34. Thus for assessment year 2013 – 14 ITA number 432/Del/2018 filed by the assessee is partly

allowed and ITA number 412/Del/2018 filed by the learned assessing officer is dismissed.
Assessment year 2014 – 15

ITA number 413/Del/2018 by the learned assessing officer
And

ITA number 433/Del/2018 filed by the assessee
35. Now we come to the appeals of the assessee and the revenue for assessment year 2014 – 15.

ITA number 433 Del 2018 is filed by the assessee and ITA number 413 Del 2018 is filed by
the additional CIT special range – 4, New Delhi against the order of the Commissioner of
income tax – A – 35, New Delhi dated 10/10/2017. In both these appeals, the grounds are
identical as ground is in appeal of both the parties for assessment year 2013 – 14. Both the
parties confirmed that there is no change in the facts and circumstances of the case and the
issue is squarely covered by the order of the special bench for assessment year 2012 – 13.
36. We first deal with ITA Del 2018 filed by the learned assessing officer.
37. The first ground in appeal of the learned assessing officer is with respect to the deletion of
the addition of ₹ 6,149,302,546 made by the assessing officer in respect of supplier credits
received from various suppliers of air parts holding the same to be capital receipt and not as a
revenue receipt as held by the learned assessing officer. Both the parties confirm that this
ground is identical to the ground number one of the appeal of the learned assessing officer.
We have already decided this ground of appeal in the appeal of the assessee for assessment
year 2013 – for 14 following the order of the special bench in case of the assessee for
assessment year 2012 – 13. For the similar reasons we dismiss this ground of appeal.
Accordingly, ground number 1 of the appeal of the learned AO is dismissed.

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38. Ground number 2 is with respect to the order of the learned CIT – A that he has erred in
ignoring that the receipt of ₹ 6,149,302,546 constituted receipt from the exploitation of
valuable commercial rights arising in the course of systematic in real business activity and
such receipts would otherwise constitute income liable to tax Under the provisions of Section
28 (iv) of the act. This ground is identical to ground number 2 of the appeal of the learned
assessing officer for assessment year 2013 – 14. This ground is been dismissed buyers
following the order of the special bench in case of the assessee for assessment year 2012 –
13. As both the parties confirmed that there is no change in the facts and circumstances of
the case for the similar reasons given by has while deciding ground number 2 of the appeal of
the learned assessing officer for assessment year 2012 – 13 we also dismiss this ground i.e.
ground number 2 of the appeal of the learned assessing officer.

39. The learned AO has raised the additional ground of appeal while latter dated 9/2/2018
wherein it has been contested that without prejudice to the above two grounds the learned
CIT – A having held that the receipts were in the nature of capital receipts he ought to have
followed the order of the predecessors CIT in assessment year 2012-13 that these capital
receipts would enter into the capital gains chargeable to tax. This ground is identical to the
additional ground raised by the learned assessing officer for assessment year 2013 – 14,
which has been admitted by us and adjudicate. Accordingly we also admit this ground of
appeal and adjudicate based on the decision of the special bench in assessee’s own case for
assessment year 2012 – 13, as we have dismiss the additional ground for assessment year
2013 – 14. Accordingly, additional ground raised by the learned assessing officer is
dismissed.

40. Now we come to the appeal of assessee in ITA number 433 Del 2018 for assessment year
2014 – 15.

41. Ground number 1 and 2 are general in nature, no specific arguments were advanced, and
therefore those are dismissed.

42. Ground number 3 of the appeal is against the order of the learned CIT – A who has upheld
the disallowance u/s 37 (1) of lease rental payment to the tune of ₹ 392,05,55,831. This is
identical to ground number three of the appeal of the assessee for assessment year 2013 – 14.
This ground of appeal is been allowed by us in assessment year 2013 – 14 by following the
decision of the special bench. For the similar reasons we allow ground number three of the
appeal of the assessee.

43. Ground number 4 (a) is with respect to the non-deduction of tax at source on a sum of ₹
6,388,959,731 with respect to the supplementary rent paid by the assessee for these
agreements executed prior to 1 April 2007 which was the learned this by the learned

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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)

47. This appeal is filed by assessee against the order passed by the Commissioner of income tax
(A) – 35, New Delhi dated 20/9/2018. The assessee has raised identical grounds of appeal,
which were raised before us for assessment year 2013 – 14 and 2014 – 15. Both the parties
confirmed that there is no change in the facts and circumstances of the case as compared to
the facts of the case of the assessee for assessment year 2013 – 14 and 2014 – 15. Both the
parties also confirmed that their arguments also remain the same.

48. Ground number 1 and 2 of the appeal is general in nature and therefore those are dismissed.
49. Ground number 3 of the appeal is against the order of the learned CIT – A who has upheld

the disallowance u/s 37 (1) of lease rental payment to the tune of ₹ 4,092,472,976/–. This is
identical to ground number three of the appeal of the assessee for assessment year 2013 – 14.
This ground of appeal is been allowed by us in assessment year 2013 – 14 by following the
decision of the special bench. For the similar reasons we allow ground number 3 of the
appeal of the assessee.
50. Ground number 4 is with respect to the non-deduction of tax at source on a sum of ₹
741,91,82,347/– with respect to the supplementary rent paid by the assessee for lease

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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 ASSISTANT REGISTRAR
ITAT, New Delhi
*MEHTA*

Copy forwarded to

1. Appellants;
2. Respondents;
3. CIT
4. CIT (Appeals)
5. DR: ITAT

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Date of dictation 29.10.2021
Date on which the typed draft is placed before the dictating member 29.10.2021
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 29.10.2021
29.10.2021
Date on which the fair order comes back to the Sr. PS/ PS
Date on which the final order is uploaded on the website of ITAT

date on which the file goes to the Bench Clerk
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

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