TMI Blog2011 (8) TMI 749X X X X Extracts X X X X X X X X Extracts X X X X ..... n was not in accordance with the law and, in such, circumstances, the powers u/s 263 could not be invoked. Eligibility of Expense for Exempt Income - Relevant A/y 07-08 - CIT(A) upheld disallowances on retrospective applicability of Rule 8 - Held That:- In case of Godrej & Boyce Mfg. (P.) Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) matter referred back to Assessing Officer to reconsider and re-adjudicate the same after giving the assessee a reasonable opportunity of hearing. Applicability of 40A(2) - Commission paid 2.3% of turnover paid to the directors but no supporting evidence has been placed on record by the assessee to substantiate that such payment was supported by the resolution - held that: - it is not the case of the assessee that section 40A(2)(b) is not applicable. Under the provisions of section 40A(2)(a), the Assessing Officer has an authority to disallow any part of expenditure which is paid to the persons described in section 40A(2)(b) if he is of the opinion that such expenditure paid by the assessee is excessive or unreasonable - case remanded back. Cash payment in excess of Rs. 20,000/ - Section 40A(3) - Airport Authority of India (AAI) towards Rout Navi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. 2. That the learned CIT(A) has erred in interpreting the law and confirmed the disallowance of Rs.1,75,009.00 u/s 14A ignoring the facts, circumstances and evidence on records. 3. That the learned CIT(A) has further erred in directing the A.O. to allow the payment of commission to Directors as per last year by ignoring the facts of the case and business necessities. 4. Any other ground at the time of hearing." ITA No.3824/Del/2010 "1. In the facts and circumstances of the case, Ld. Commissioner of Income-tax (Appeals) erred in law as well as on merits in allowing the disallowance of Rs.14,40,228 made by the A.O. u/s 40A(3) of the IT Act. 2. The appellant craves to amend modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal." 4. All these appeals were argued together by both the parties. Hence, for the sake of convenience, all these appeals are being disposed of by this consolidated order. ITA Nos.1557 1558/Del/2010. 5. Ld. CIT has invoked his powers u/s 263 in the case of the assessee on the ground that depreciation @ 40% has been claimed by the assessee on the 'Beechcraft Super King Air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roplane.' He observed that aircraft owned by the assessee cannot be an 'aeroplane' since it is much smaller, lighter and less powerful than an aeroplane. 6. Ld. CIT also referred to the Appendix-I of Income-tax Rules, 1962 which are applicable for assessment years 1984-85 to 1987-88 which describe the term 'aeroplane-aircrafts' and which are included in the block of 'Machinery and plant' being eligible for depreciation @ 30%. At the same time, it also provides depreciation for 'aeroplanes-aeroengines' under the same block of assets, namely, 'Plant and machinery' and these are eligible for depreciation @ 40%. Taking recourse to such segregation, ld. CIT has observed that the intention of the legislature is to differentiate between 'aircraft' and 'aeroplane' and as old Appendix-I has differentiated between the 'aeroplane-aeroengines' and 'aeroplane-aircraft' and different rates of depreciation have been prescribed, therefore, the contention of the assessee cannot be accepted that the aircraft owned by the assessee is an 'aeroplane', hence, eligible for higher depreciation. According to ld. CIT, these two terms have different meanings and are eligible for different rates of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 2005-06 2006-07 Dy. Commissioner, Income-tax, Hisar. 2. 4th June, 2010 Alchemist Airways Pvt. Ltd. NIL ACIT, Cir.1(1), Chandigarh. 3. 3rd June, 2010 M/s Universal Airways Pvt. Ltd. NIL ITO, Ward 18(1), New Delhi. 4. 4th June, 2010 SKB Infractions Pvt. Ltd. NIL ITO, Ward 8(4), New Delhi. 5 5th Feb., 2010 Air India NIL ACIT, Circle 2, Mumbai. 8. To further support the contention that during the course of original assessment proceedings, the Assessing Officer had inquired this point. The assessee had placed on record a copy of letter dated 1st October, 2007 in which the assessee had given the explanation to the Assessing Officer regarding depreciation being eligible @ 40% in place of 25%. When such copy of letter was placed before us, the same was given to the learned DR to take the comments of Assessing Officer as in the assessment order it was not pointed out that whether or not such letter was filed by the assessee. During the course of hearing the learned DR has placed before us copy of correspondence received from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has also placed before us the literature showing the pictures and specifications of the aircraft owned by the assessee to show that the aircraft owned by the assessee has fixed wings and it was informed that the aircraft owned by the assessee is a nine-seater. Therefore, it is the case of the learned AR of the assessee otherwise is eligible for depreciation @ 40% and powers u/s 263 have wrongly been exercised by ld. CIT. The order passed by him u/s 263 should be quashed. 10. On the other hand, relying upon the findings recorded by ld. CIT, which have been described in the above part of this order, it is the case of the learned DR that powers u/s 263 have rightly been exercised by ld. CIT and his order should be upheld. 11. We have carefully considered the rival submissions in the light of the material placed before us. Ld. CIT while invoking the power u/s 263 has mainly relied upon the earlier description of depreciation rate which was applicable for assessment years 1984-85 to 1987-88 in which the aeroplane as aircraft and aeroplane as aero-engines were treated differently for the purpose of computing depreciation. From such description of different rates of depreciation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x-I is only one and aeroplanes consisted of aircrafts having specific specifications, then, it cannot be said that aeroplane or species thereof will fall under the general head, namely, 'Machinery and plant' which has described the rate of depreciation of 25% for assessment year 2005-06 and 15% for Assessment Year 2006-07. It may be mentioned here that Item 3 under the head 'Machinery and Plant' of Appendix-I read as under:- "Machinery and plant other than those covered by sub-items (ii), (iii) and (viii) below." 15. Therefore, the general rate as described in the relevant Appendix-I create exceptions about the items described under Items (ii), (iii) and (viii). Item (iii) describe 'aeroplanes-aeroengines'. Thus, it will mean that any aeroplanes owned by the assessee will be eligible for depreciation @ 40% as applicable to the relevant assessment years. If the vessel owned by the assessee falls under the broad head 'aeroplane', then, it will be eligible for depreciation @ 40%. For that purpose, we have to analyze whether the aircraft owned by the assessee falls under the head 'aeroplane' and simply if it falls within the species of 'aeroplane' and it is an aircraft whether it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- " All aircraft fall into two general categories - lighter-than- air or heavier-than-air. Several distinct types are recognized within each group. Each may perform a variety of missions calling for modifications for special usage. Lighter-than-air craft rise and float because they displace a volume of air the weight of which is equal to or greater than the total weight of the aircraft. Such aircraft include balloons and airships. Heavier-than-air craft derive their flight capability (lift) from the dynamic reaction of air flowing around suitably shaped surfaces (wings or airfoils). Such craft include gliders and sailplanes, conventional airplanes, short takeoff and landing (STOL) airplanes, and vertical takeoff and landing (VTOL) aircraft." 16.2. The International Civil Aviation Organisation (ICAO) in its Aviation Glossary Terms Definitions has defined 'Aircraft' and "Aeroplane' as under:- "Aircraft - An aircraft is any machine that can derive support in the atmosphere from the reactions of the air other than the reactions of the air against the earth's surface (ICAO Annex.1, Annex 6 Part I). Aeroplane - A power driven heavier than air aircraft, deriving its lift in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances, the powers u/s 263 could not be invoked. 19. In view of the above discussion, we are of the opinion that powers u/s 263 have been wrongly exercised by the ld. CIT to hold that the assessee is eligible for depreciation on its aircraft @ 25% in place of 40% claimed by it. Therefore, we set aside the order passed by the ld. CIT for both the years and allow the appeals filed by the assessee. ITA No.2215/Del/2010 20. The effective grounds in this appeal are ground Nos.2 and 3. 21. Apropos ground No.2, it was noticed by the Assessing Officer that the assessee had declared exempted income of Rs. 14,75,201 which was in the shape of dividend income from Indian companies. He found that no expenses were allocated towards the said exempted income and he required the assessee to explain as to why disallowance should not be made u/s 14A of the Income-tax Act, 1961. After calling for such explanation from the assessee and relying upon the decision of Special Bench in the case of ITO v. Daga Capital Management Ltd. [2009] 117 ITD 169/[2008] 26 SOT 603 (Mum.) and also the decision of Delhi ITAT in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi) (SB) made disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate the same after giving the assessee a reasonable opportunity of hearing. We direct accordingly. 24. Apropos ground No.3, the facts as noted by the Assessing Officer are that the assessee during the year had paid excessive remuneration, bonus and commission to the directors which was representing unprecedented increase in percentage of 1460% as compared to the immediate preceding year and as compared to the percentage of increase in the receipts. The Assessing Officer has worked out such calculation in the shape of charts in the assessment order which, for the sake of convenience, are reproduced below:- Receipts A.Y. 04-05 A.Y. 05-06 A.Y. 06-07 A.Y. 07-08 % age increase over last year Professional receipts 3,72,60,962 5,42,06,171 6,49,48,474 7,57,92,344 Air charter receipts - 1,10,22,017 1,49,89,727 4,13,23,540 Total receipts 3,72,60,962 6,52,28,188 7,99,38,201 11,71,15,884 46.5% Payments A.Y.04-05 A.Y.05-06 A.Y.06-07 A.Y. 07-08 %age increase over last year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as compared to the increase in the receipts only of 46.5%. Therefore, he submitted that the disallowance has rightly been upheld by the CIT (A) and his order should be confirmed. 28. We have carefully considered the rival submissions in the light of the material placed before us. Though it is the submission of the assessee that the directors have been paid commission @ 2.3% of the turnover (each director), but no supporting evidence has been placed on record by the assessee to substantiate that such payment was supported by the resolution. It is also the case of the assessee that such payments made by the assessee to the directors are in accordance with the market rates. However, to support such contention, no documentary evidence has been placed on record to show that the payments made by the assessee to its directors were neither excessive nor unreasonable. For the applicability of the provisions of section 40A(2), the directors of the assessee falls within the category described in that section. Therefore, the section is very much applicable and it is not the case of the assessee that section 40A(2)(b) is not applicable. Under the provisions of section 40A(2)(a), the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, as per rules of Government of India, Ministry of Civil Aviation must be paid in cash because before hand the exact amount of payment cannot be known. The amount is dependent on several factors such as rout as per air traffic control briefing, the deviation that may occur due to weather, VIP movement, Defense Service sorties, etc. It was submitted that flight take off at odd hours and no flight can take off without clearing the dues of AAI. It was also claimed that these payments are made on behalf of operators of the non-scheduled aircraft/airlines and are reimbursed to the assessee through billing. However, the Assessing Officer rejected such submissions of the assessee and has held that there is no specific exception in section 40A(3) read with Rule 6DD to exempt such payments from disallowance. He disallowed 20% of this amount which has been calculated at Rs. 14,40,228. The submissions made before the Assessing Officer were reiterated before the CIT (A) and learned CIT (A) has held that the payments made by the assessee were in accordance with its operation on urgency basis and, therefore, no disallowance was called for. The department is aggrieved, hence, in appeal. 31. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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