Aircraft used in own business is used for ‘commercial purposes’- not a taxable asset

[CA DEV KUMAR KOTHARI]

Aircraft used in own business is used for ‘commercial purposes’- not a taxable asset- A case of un-necessary litigation by revenue

Relevant links and references:

Wealth Tax Act – section 2 (ea) definitions of asset at different times.

Income-tax Act 1961 -Section 2(13) – definition of business, S. 44AE – special provisions for computation of income from business of plying, hiring or leasing goods carriage, Appendix to Income Tax Rules (depreciation rates) etc.

COMMISSIONER OF WEALTH TAX versus JAY PEE VENTURES LTD [2013 (8) TMI 808 - DELHI HIGH COURT]

Garware Wall Ropes Ltd. Vs. Additional Commissioner of Income-tax [2003 (1) TMI 655 - ITAT MUMBAI]  

Amalgamated Electricity Co. Ltd. v. State of Rajasthan [1982 (11) TMI 168 - RAJASTHAN HIGH COURT]

Summary:

In case of jaypee (supra.) revenue disallowed exemption of aircraft used for company’s business taking view that it is not used for purpose of commerce. To get exemption , the aircraft should be used in business of carrying passengers or goods or hiring or leasing etc. The exemption in respect to aircraft is on its use for commercial purposes and not like in case of vehicles where exemption on specified use. The scope of use for ‘commercial purposes’ is much wider and the AO was not justified to impose conditions of specific use and denying use in own business. The CIT(A) allowed claim of assessee, Tribunal confirmed his order and then revenue went in appeal before High court. The High Court dismissed appeal but without cost. In this case assessee was compelled to contest the matter by filing appeal before CIT(A) and contesting the same. Thereafter assessee was compelled to contest appeals filed by revenue first before Tribunal and then before High Court. Though the legal issue is well settled as undisputed vide case of Garware (supra.). Thus, this is a case of unnecessary litigation by revenue.  

Preliminary studies of commerce:

Recalling initial studies of commerce in 9^th class, in year 1970, author believe that the concept of “commercial purposes” was well known even at that time, to him and his class fellows. As student of commerce, we student of class thought that the scope of commerce is very wide and it includes any type of activities for the purpose of dealing with other persons for any goods, services, facilities etc. in any manner and also any activity for earning income or dealing with resources are part and parcel of commercial activities . Therefore, concept of ‘commercial purposes’ will also be wider.

Not a case suitable to dispute by revenue:

There should not be dispute on the aspect of use of any asset for ‘commercial purposes’, when asset is used in own business. Such litigation ,should not take place even at initial stage of any matter like assessment stage. However, when disputes on such matter can be carried to High Courts ( with approval of senior authorities and recommendations of senior counsels of revenue), we cannot blame the Assessing Officer, who is junior most officer in process of tax determination.

Wealth Tax Act- definition of ‘asset’:

In the definition itself, different expression have been used in relation to some items as ‘used for commercial purposes’ used for business  and used in particular type of business like plying, hiring, leasing etc. clearly shows that the expression ‘for commercial purposes’ is different and wider and not restricted to other classes of uses.

Separate activities:

Business of plying, hiring, leasing etc. of vehicles or other plant or machinery are recognized as such as a separate nature of business in various provisions of direct taxes for deductions by way of depreciation and other allowances, exemptions, presumptive tax etc. Such activities are part of 'commercial purpose'. It is not that hiring, plying of vehicles are only commercial purposes. Besides in the definition of asset, under WT Act itself, both these activities find different treatment in respect of different type of vehicles some are liable to WT and some are exempted assets.

Aircrafts are generally used for business purposes:

Aircrafts are generally used for the purposes of business or profession. In case of privately owned aircrafts for own use also aircraft are used for business because persons who own them are very high net worth / or very high resource full persons. Such very high net worth status itself is indicative of ground reality that they are very busy in business and vocation. There can be some element of personal use, but that is also to save time for business purposes.

Business vis a vis commerce:

Business is defined in inclusive manner in section 2 (13) of ITA. It specifically includes adventure in nature of trade, commerce, manufacture and industry etc. We know that commerce is wider and commerce includes trade, manufacture, industry, services etc. For finding commercial activity even element or objective of profit making is not necessary. Time saving by use of fast communication and transportation means itself can be considered as for commercial purposes. Thus even vehicles, aircrafts, telephones etc. are used for some personal matter, still it will be for the purpose of commerce, because time saved is used for business purposes.

Settled legal position:

Long ago, more than ten years ago on 21.03.2003 the Tribunal has held that use of aircraft for purpose of own business is use for commercial purposes and aircraft so used is not an asset liable to wealth tax. The Tribunal held that it is not necessary that aircraft should be used in business of carrying goods or passengers or using it for others. Own business use is also for the purpose of commerce.

Judgment in case of Garware (supra.) was rendered on 21.03.2003 and was reported during 2004 as [2004] 89 ITD 221 (MUM.). There is no dispute pending on behalf of revenue against this ruling. Therefore, WT Act being a Central enactment, a legal view taken by Tribunal and accepted by revenue is a settled legal position. Therefore, this must be followed even by AO all over India. This judgment is more than ten years old, there is no further dispute by revenue in that case and there was no contrary judgment. Hence admittedly accepted by revenue.

No justification of appeal before Tribunal and then before High court:

There was no justification of CIT (Judicial) and other officers proposing appeal first before Tribunal , and then before the High Court in the year 2013 (WT Appeal no. 1 of 2013). The counsel of revenue was also not justified in recommending filing of appeal before High Court when Tribunal has followed settled precedence.

There is a system of finding out settled legal position before moving in appeal.

A fit case for awarding costs:

In the case of Jaypee (supra.) settled legal position was not followed by the AO. So assessee had to file appeal before CIT(A) who followed settled legal position and allowed appeal. Therefore, there should not be appeal before Tribunal and then before High court. The assessee was compelled to contest unnecessary litigation initiated by revenue authorities. Assessee had to pay appeal filing fees for appeal before CIT(A) and has to contest appeal of revenue before Tribunal and High Court. Thus this was a fit case for awarding costs in favour of assessee. Tribunals and High courts can impose costs in such cases as a measure to reduce un-necessary litigation. However, rarely costs are awarded in favor of tax payer.

Counsels of revenue should not advise to file appeal in such cases:

In such cases, even the counsels of revenue, who are generally senior standing counsels practicing as Advocate, must concede and in a responsible manner should not argue just on instruction of his client. Hearing arguments from a senior counsel that ‘ commercial purpose’ means only plying, hiring or lease and that use in business of assessee himself is not commercial purpose is really indicative of fact that the counsels are also interested only in getting business by increasing litigation and not in avoiding un-necessary disputes and litigation.  

Unnecessary litigation:

Though the AO was not at all justified in this case to initiate un-necessary litigation by not excluding aircraft from taxable wealth, however, the way in which revenue carried matter before High Court is not at all justified. Particularly when the CIT(A) and Tribunal have concurrently allowed appeal and that too on the basis of clear, plain and unambiguous language use in provisions and when the matter is already settled in favors of assessee as revenue has not challenged earlier judgment of Tribunal.

Let us hope that senior counsels of revenue will not recommend and revenue will not file appeal before the Supreme court. However, when judgments of two Supreme Court Judgments can be disputed before three judges, we should not be shocked if revenue appeal against judgment of High Court to treat impugned aircraft as taxable asset because unnecessary litigation is common for revenue.

Readers can read some other articles about unnecessary litigation by revenue by searching articles with unnecessary litigation on www.taxmanagementindia.com

Professionals like advocates, CA and other tax practioners should also make some efforts to reduce un-necessary litigation.