TMI Blog2017 (2) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... pute the disallowance under Rule 8D in view of the ratio laid down by the Hon’ble High Court in the case of Bharti Overseas Private Limited (2015 (12) TMI 1423 - DELHI HIGH COURT ). - ITA Nos. 749 & 750/Del/2016 - - - Dated:- 18-11-2016 - SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Sh. Tarundeep, Adv. For The Respondent : Sh. Satpal Gulati, CIT (DR) ORDER PER O.P. KANT, A.M.: These two appeals by the assessee are directed against the orders passed by the learned Commissioner of Income-tax (Appeals) dated 08/01/2016 and 20/01/2016 for assessment years 2008-09 and 2009-10 respectively. In both the appeals, identical grounds have been raised, and thus both the appeals have been heard together and disposed of by this consolidated order for convenience. ITA No. 749/Del/2016 for AY: 2008-09 2. The grounds of appeal raised by the assessee in ITA No. 749/Del/2016 are as under: 1. That on facts and in law the Commissioner of Income-tax (Appeals) {hereinafter referred to as the CIT(A) } erred in holding that credit in the aggregate of ₹ 386,51,44,840/- (alleged to be subsidy) from supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring total loss of ₹ 314,14,79,060/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (for short the Act ) was issued and complied with. In the assessment completed under section 143(3) of the Act on 07/12/2010, after making additions/disallowances worth ₹ 165,57,79,824/- the loss was assessed at ₹ 148,56,99,240/-. The learned Commissioner of Income-tax (Appeals) allowed part relief to the assessee. Aggrieved with the finding of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 4. The grounds Nos. 1 to 1.2 relates to holding the credits of ₹ 80,10,81,828/- from suppliers of aircraft engine and other component by the Assessing Officer as capital receipt, which has been further enhanced by the learned Commissioner of Income-tax (Appeals) to ₹ 386,51,44,840/-. 4.1 Before us, the learned Authorized Representative of the assessee referring to pages 6 to 73 of the assessee s paper book, submitted that issue in dispute has been decided in favour of the assessee by the Tribunal for assessment year 2007-08 in ITA No. 2202/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,44,038/- as the capital receipt, however, the Commissioner of Income Tax, under section 263 of the Act revised the assessment order passed by the Assessing Officer and held the total receipt in respect of credit from suppliers of ₹ 160,66,36,009/- as revenue receipt. (viii) Following the finding of the Commissioner of Income Tax in order under section 263 of the Act for assessment year 2007-08, the learned Commissioner of Income-tax (Appeals), enhanced the addition towards credit from supplier to ₹ 386,51,44,840/- with following observations: Thus it is clear that to claim any subsidy etc. as capital receipt, it should be attributable to any capital asset acquired by the appellant. In this case the appellant does not own the capital asset as such, the aircrafts are owned by the lessor. If the appellant owned the aircrafts, the amount of so called subsidy would have been reduced from the actual cost of the aircraft for allowing the depreciation. Thus, by no stretch of imagination this receipt can be termed as capital receipt. In fact, this receipt from the manufacturer of aircraft is in that nature of commission which is paid to the appellant for fixing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since a conclusive finding on merits is being given by the learned CIT 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. CIT 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. CIT 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 imder 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 years reduced to 75% in the remainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Ltd. (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 nature. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature. Appellant s right to receive the credits got triggered when the appellant made a selection of IAE 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 manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired under section 195 of the Act and therefore the lease rent payment of ₹ 84,98,20,146/- was disallowed in terms of section 40(a)(i) of the Act. 6.4 We find that this issue has been discussed by the Tribunal in ITA No. 2202/Del/2012 on merit and following the decision of the coordinate bench of Delhi Tribunal in the case of Sahara Airlines, reported in 83 ITD 11 (Del.) and decision of the jurisdictional High Court of Delhi in the case of Jet Light (India) Ltd. reported in 236 taxmann 453 (Del), held that payment of supplementary lease rent was exempt under section 10(15A) of the Act and, therefore, the assessee was not required to deduct TDS thereon. The relevant finding of the Tribunal is reproduced as under: 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(15 A) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nough 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 provision of spares, 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 certain types of operational cost, it cannot be said that such payment was attributable to any faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hon ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. CIT 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(15 A) 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 iii Aggregate of Opening and Closing value of Investment (Average Value of Investment) % of above as per Rule 8D Average value of investment 10,42,90,000 @ 0.5% =5,21,450/- Total disallowance [Aggregate of (i), (ii) (iii)] 49,70,420/- 7.2 The learned Commissioner of Income-tax (Appeals) upheld the disallowance. 7.3 Before us, the learned Authorized Representative of the assessee submitted that the disallowance of ₹ 92,570/- was computed on a rational/reasonable basis by attributing 12.5% of salary expenses of an executive and one temporary staff on the basis of time that would have been spent in relation to investment activity and no additional expenses were incurred in making such investment or earning from the dividend income. It was also submitted that interest expenses of ₹ 19,19,97,909/-, out of ₹ 19,33,55,135/- incurred were in respect of specific purposes for purchase of equipment, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest cost incurred during the year 1,357,226 B = Average value of investment 52,144,842 C = Average value of Total Assets 7,939,710,718 Disallowance= A *B/C 8,914 II Aggregate of opening and closing value of investment. (Average Value of Investment)1/2% of the above as per Rule 8D 260,724 III Total disallowance [Aggregate of I and II] 269,638 IV Less : Amount already considered in the return of income 92,750 V Net Disallowance 176,888 The aforesaid working is being submitted without prejudice to the contention that no part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the total assets shall mean, total assets as appearing in the balance sheet exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only 'common interest expenditure' i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income. This is precisely what the ITAT has pointed out in Champion Commercial (supra). There the ITAT said that by not excluding expenditure directly relatable to taxable income, Rule 8D(2)(ii) ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income. This is contrary to the intention behind Rule 8D(2)(ii) read with Section 14A of (1) and (2) of the Act. 18. The following illustration provided by the ITAT in Champion Commercial (supra) demonstrates the incongruity: In the case of A Co. Ltd., total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as A in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example- any aspect of the assessee s business such as plant/machinery et.) .. The justification that has been offered in support of the rationale for R.8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no madness in the method . 20. Therefore the Court is unable to agree with the Revenue that in adopting the above interpretation the ITAT has on its own read down Rule 8D (2) (ii) of the Rules and therefore travelled beyond the scope of its jurisdiction and powers. 21. In the case in hand, in Note 4 of the computation of income submitted by the Assessee, the total interest debited to the profit and loss account was ₹ 5,52,83,131. There was an entry regar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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