TMI Blog2015 (11) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus the Court affirms the order of the ITAT 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. Training and manpower development - Held that:- Payment for payment for training and manpower development the Court remands the matter for both periods i.e. FYs 1994-95 to 1998-99 and AY 1996-97 to the ITAT for a fresh decision in accordance with law as the insertion of an Explanation below Section 9 (2) of the Act with retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. Further the entire amount was taken by the Assessee for the business purpose. Therefore, there could be no disallowance of interest. Foreign travel expenses - Held that:- The CIT (A) found that the decision of the AO was ill founded, without proper appreciation of the facts of the Assessee’s case and that the entire foreign travelling expenses were incurred after obtaining approval from the R.B.I. for purchase of foreign currency from the market which can never be done as an afterthought. It was observed that the agreement of the Assessee with Hughes Flight Training Ltd. clearly provided that the latter was not to give training to the flight crews in India. The CIT (A) demarcated the expenditure incurred on travel of relatives of the directors and confirmed an addition to that extent in the sum of ₹ 2200. The expenditure on travel in which the destination of the journeys were not mentioned was also separated and this expenditure in the sum of ₹ 8,26,638 was restored the matter back to the AO for a fresh determination so as to give an opportunity to the Assessee to produce the necessary evidences. The addition of the remaining expenditure in the sum of was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal data. It is noticed that the issue is covered by the decision in CIT v. Mak Japan Broadcasting (2008 (4) TMI 182 - DELHI HIGH COURT) and it is answered in favour of the Assessee and against the Revenue. This amendment to Section 210 of the Act with effect from 1st April 2010 provided for an extended limitation period of seven years. However, that amendment was prospective as held in Bhura Exports Limited v. The Income Tax Officer (TDS) (2011 (8) TMI 449 - CALCUTTA HIGH COURT ). - ITA 204/2002, ITA 86/2011, ITA 205/2002, ITA 128/2005, ITA 1206/2005, ITA 1209/2005 - - - Dated:- 4-11-2015 - Justice S. Muralidhar And Justice Vibhu Bakhru, JJ. For the Appellant : Mr. S. Ganesh, Senior Advocate with Mr. U.A. Rana, Ms. Mrinal Elker Mazumdar and Mr. Himanshu Mehta, Advocates For the Respondent : Mr. Rohit Madan, Senior Standing Counsel with Mr. Zoheb Hossain, Junior Standing Counsel JUDGMENT S. Muralidhar, J. Introduction 1. These are appeals both by the Assessee and the Revenue, under Section 260A of the Income Tax Act, 1961 ( Act ). While ITA Nos. 204 of 2002 and 205 of 2002 by the Revenue are directed against the common order dated 12th February 2002 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income Tax, Company Circle 3(3), New Delhi ( ACIT ), who was at the relevant time the AO having jurisdiction, to ascertain as to whether it was under any obligation to deduct tax at source in respect of the said payments. 6. It is further stated that pursuant to the said applications, ACIT issued no objection certificates ( NOC ) dated 24th February 1994 and 20th October 1994 permitting Sahara to remit the aforementioned gross sums of USD 199,370 under both the certificates. It is further stated that at the end of the lease period, Sahara exercised the option under Clause 22 of the APLPA and remitted a sum of USD 50,000 without deducting tax at source as the same did not represent income chargeable to tax in India. 7. The AO raised objections on the grounds that the payments amounted to royalty. Pursuant to the AO's orders requiring that TDS should be deducted @ 10%, Sahara deducted the tax as directed and filed appeals against the AO's order. The appeals before the CIT (A) being unsuccessful, further appeals were filed before the Tribunal. These were for AYs 1995-96 to 1997-98. After not succeeding before the ITAT on this issue, Sahara filed ITA No. 128 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Similar payments on account of supplemental lease rent were also made by Sahara to other non-resident foreign companies i.e. AMTEC, Malaysian Airlines and Lufthansa during the FYs 1997-98 to 1998-99. 11. Sahara also entered into an agreement dated 8th/9th May 1996 with Sochata, France, which was engaged in the business of maintaining and operating certain facilities for the repair, maintenance, overhaul, modification and functional testing of aircraft engine including accessories, parts and components. Pursuant to the said agreement Sahara paid, on 25th September 1996, a sum of ₹ 3,08,60,702 (equivalent to USD 8,63,719.63) and, on 24th January 1997, a sum of ₹ 2,89,19,958 (equivalent to USD 8,04,002.18) respectively in the FY 1996-97. Again it was of the view that the amount did not represent income chargeable to tax in India and no deduction of tax at source was made. 12. It is further stated that as a result of the flying operation, several parts of the aircrafts were required to be repaired/replaced. The spares were acquired in three modes. The first was an outright purchase, the second was exchange involving sending of the defective part to the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 68 of the Act. Sahara was called upon to substantiate the identity, genuineness and creditworthiness of the shareholders. 15. Sahara filed two replies dated 24th March 1999 stating that the shareholders were spread all over the country and requisitions had to be sent to the Zonal Managers placed in the different zones. Sahara enclosed photocopies of the share applications filed in 1996 to prove the identity of the subscribers. The Department took upon itself to verify the genuineness of the transactions and replies were received only in about 20% of the cases. The AO noticed from the share application forms that the shareholders were allotted only 25% of the shares and 75% of the shares were retained by the collecting agent on the plea of getting the shares listed in the stock exchanges. The AO was of the opinion that since 75% of the shares were not handed over to the subscribers the transactions themselves appeared to be suspicious. Further it was noticed that those who had replied stated that they had invested the money in cash. This also gave the transaction a dubious colour. All the persons who replied claimed to have sold their shares back to Sahara. The order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d: (i) Whether the Tribunal was right in law in holding that the Assessee could be regarded as Assessee in default for failing to deduct tax at source in respect of payments made to AAR Aviation Trading Inc as required under Section 195 of the Income-tax Act, 1961? (ii) Whether the Tribunal s conclusion that the fee paid by the Appellant for use of flight simulator in terms of agreement dated 30th January 1996, was to be regarded as a payment by way of fee for technical services and accordingly, chargeable to tax in India is correct in law? (iii) Whether the Tribunal was justified in holding that the payments made to M/s. Sochata France in terms of the agreement dated 8th March 1996/9-5-1996, were to be regarded as fee for technical services? 20. In ITA No. 205 of 2002, which is the Revenue s appeal, the following questions were framed: (i) Whether the Tribunal was correct in law in holding that the order by the AO under Section 201 of the Income Tax Act, 1961 in respect of financial year 1994-95 was barred by limitation? (ii) Whether the Tribunal was right in law in holding that since the tax had not been deducted at source by the Assessee, the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the ITAT was correct in the eyes of law in upholding the deletion of the addition of ₹ 4,74,13,470 made under Section 195 read with Section 40 (a) (i) of the Income Tax Act, 1961, by the AO, on account of the non-deduction of tax at source (TDS) on the amount paid by the assessee to the non-resident company towards the maintenance reserve for leased Aircraft? (iii) Whether the ITAT was correct in the eyes of law in not adjudicating the issue of inadmissibility of expenses of ₹ 52,47, 225 towards the training and manpower development, paid to foreign companies u/s 40 (a) (i) of the Act for being paid without deducting the TDS? (iv) Whether the ITAT was correct in the eyes of law in upholding the deletion of the addition of ₹ 1,77,82,789 made under Section 40 (a) (i) of the Income Tax Act, 1961, by the AO, for non-deduction of TDS on payment to the non-residents of computerized reservation system? (v) Whether the ITAT was correct in the eyes of law in upholding the deletion of the addition of ₹ 30,40,170 made by the AO on account of disallowance of 50% of total expenditure incurred by the Assessee in issuing the free tickets was a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 43B of the Income Tax Act, 1961 and for which no proof of payment has been furnished? 25. This Court has heard the submissions of Mr. S. Ganesh, learned Senior counsel for the Assessee as well as Mr. Rahul Chaudhary and Mr. Rohit Madan, learned Standing counsel for the Revenue respectively. Unexplained cash credit under Section 68 of the Act 26. The Court first proposes to examine the issue concerning unexplained cash credits under Section 68 of the Act. 27. A Full Bench of this Court in CIT v. Sophia Finance Limited (1994) 205 ITR 98 [FB, (Delhi)] held that in the context of Section 68 of the Act that: (i) The Assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber . (ii) If the relevant details of the address of PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc., it would constitute acceptable proof or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a premeditated plan-a smokescreen-conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. 30. In CIT v. Nipun Builders and Developers (2013) 350 ITR 407 (Del) it was held that the point at which the initial onus on the Assessee to prove the unexplained discredit would stand discharged depends upon the facts and circumstances of each case. It was pointed out that where there is private placement of shares the Assessee cannot simply furnish details and remain quiet even when summons issued to shareholders under Section 131 return unserved and uncomplied. This approach would be unreasonable as a general proposition as the Assessee cannot plead that they had received money, but could do nothing more and it was for the Assessing Officer to enforce share holders attendance. Some cases might require or justify visit by the Inspector to ascertain whether the shareholders/subscribers wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the shareholders rendered the genuineness of the transactions doubtful. (ii) All the persons who replied stated that they made the investment in cash. (iii) Almost all the persons in their replies stated that they are agriculturists and their source of income was from agricultural activities. Excepting one, none of them were income tax assessees. (iv) Although there was no provision enabling a company to buy-back shares, at least two persons had categorically stated that they had sold the shares back to Sahara. If the purchase of the shares by Sahara was made through cheque this made the transactions dubious. (v) Sahara has concealed some very vital transactions relating to issue and transfer of the shares and had not come clean with all the relevant facts and documents for the purpose of ascertainment of the exact nature of the transactions. 34. The CIT (A), however, disagreed and held that once the identity of the persons was fully established before the AO, there was no occasion to treat the share capital as unexplained . The CIT (A) concluded that the fact that the AO had required the Assessee to furnish the addresses of top 100 shareholders only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since there was a separate custodial agreement under which a shareholder could entrust his shares to be kept in the custody of Sahara India who were the managers of the issue of shares by way of private placement. 37. Having perused the documents placed on record, the Court is of the view that there was no justification for the CIT (A) to have deleted the addition made by the AO in respect of the 65,185 shareholders on the ground that the AO did not conduct any enquiry. When the AO sought details of shareholders who invested ₹ 25,000 or more, the Assessee was able to furnish the addresses of only the top 100 shareholders. The only conclusion that was possible in this regard was that reached by the AO, viz., that the Assessee was unable to establish the identities of the 65,185 persons in respect of an amount of ₹ 55,55,89,359. The onus on the Assessee of providing some prima facie material to establish the identity, genuineness and creditworthiness of the said 65,185 persons was not discharged by the Assessee. 38. It was then urged by Mr. Ganesh, learned Senior counsel for the Assessee, that in respect of the above 65,185 persons, the matter should be sent back t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is taken up for consideration is the disallowance of ₹ 4,74,13,470 made by the AO under Section 195 read with Section 40 (a) (i) of the Act for non-deduction of tax at source from payment to non-residents for maintenance reserve (supplemental lease rent). In the case of AMTEC, Malaysian Airlines and Lufthansa, the CIT (A), deleted the addition, and concluded that the supplementary rent paid by the Assessee was not taxable as the agreement in question was entered into after the amendment to Section 10 (15A) of the Act. This was upheld by the ITAT by holding that there should be an inextricable link between expenditure for spares/facility and operation of aircraft and that the payment was exempt under Section 10 (15A) of the Act. 44. As regards the payments to ILFC, the AO was of the view that after 1st April 1996, the above payments of supplemental rent were for operating the aircraft and not for acquiring it. Therefore, they fell within the exclusionary provision of Section 10 (15A) of the Act and were chargeable to tax in the hands of the recipient and Sahara was, therefore, liable to deduct tax at source under Section 195 from such payments. It was held that the AO wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 D 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 has rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved by the said order, the Assessee has filed ITA 204 of 2002. 53. As regards AY 1996-97, the AO by order dated 26th March 1999 held on an examination of the copy of the agreements with M/s Crown Mart Ltd. (CML), U. K. and J. T. P. Aircraft Training Services (P) Ltd., Australia (JTP) furnished by the Assessee on 10th March 1999, that the said foreign entities were to impart training in India by deputing their personnel and not in a foreign country. The income accruing to the said companies by way of fees to be paid to them in accordance with the agreement was in fact income through and from a source of income in India as defined in Section 9(1)(vii) of the Act. It was taxable and tax was deductible in respect thereof under Chapter XVII B i.e Section 195 (1) of the Act. It was held that the fees paid to the said foreign agencies were indeed fees for technical services, as was evident from the agreement in question and came under the purview of Article 13 of the DTAA and was as such taxable. 54. For AY 1996-97, the CIT by order dated 3rd March 2000 held that no payments were made to CML; that the addition of ₹ 46,77,491/- paid to HFTL was deleted as the training agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enter Co Ltd. [2012] 346 ITR 504 (Del)is also relevant in this regard. 57. As regards AY 1996-97, the ITAT has indeed abruptly ended its discussion after extracting a passage from its order dated 12th February 2002 and has not rendered any opinion. Apart from the fact that the said order of the ITAT, for the reasons discussed above, is found not to have addressed certain important aspects, the issues highlighted by the CIT (A) in the order dated 3rd March 2000 have not been addressed. For e.g., the fact that no payment was made to CML and that tax was deducted by the Assessee while making payment to JPT was not dealt with by the ITAT. Further the insertion of an Explanation below Section 9 (2) of the Act with retrospective effect from 1st June 1976, making the place of rendering services redundant, has not been considered. Again, it is necessary for the ITAT to consider, in the context of the agreement with HFTL and the Article 13 (4) (c) of the DTAA with UK, whether any technology was 'made available' to the Assessee and whether there was payment for such services. 58. Consequently on the issue of payment for payment for training and manpower development the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital 63. The next issue concerns disallowance of interest on borrowed capital of ₹ 1,42,76,535. The case of the Revenue was that the interest bearing funds were being diverted as interest free advances to sister concerns. The Assessee had paid interest to two sister concerns, namely, M/s. Sahara India Mutual Benefits Co. Ltd. at 24% and M/s. Sahara India Corporation Limited. The case of the Revenue was that while the Assessee had to borrow funds from its sister concerns for carrying on its business on which interest has been claimed under Section 36 (1) (iii), the Assessee had allowed its other sister concerns to retain interest bearing funds without charging any interest. Therefore, the proportionate interest relatable to the funds retained by the sister concerns was stated to be not for the purpose of business. 64. The CIT (A) allowed the claim of the Assessee after observing that the AO did not hold the interest payment to be excessive or unreasonable and it was found factually that not a single paisa has been advanced to the four sister concerns out of the borrowed funds and that the AO has himself accepted that the outstanding amounts were on account of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of consultancy charges of ₹ 21,60,000 on the ground that no reliable documentary evidence has been furnished by the Assessee. On this aspect the ITAT, for the AY 1995-96 held that the services rendered by Sahara India International Corporation Limited ( SIICL ) to the Assessee was in connection with the lease of two aircrafts and the payment made to it for the services rendered. The Revenue had been unable to show as to how such payment should be treated as unreasonable. The Court finds that even in the present appeal the Revenue has been unable to show that the said payment has been excessive or unreasonable. The issue is decided in favour of the Assessee and against the Revenue. Staff welfare expenses 68. The next issue concerns the deletion of ₹ 54,06,701 on account of claim made by the Assessee as staff welfare. The Assessee categorised the expenditure under two heads meetings and conveyance expenditure and staff welfare expenditure. Observing that it was unclear that the staff welfare expenditure was actually incurred for the staff of the Assessee itself and that the expenditure claimed under both heads was excessive, the AO treated the entire ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply dated 24th March 1999. The AO held that since evidence for payment of the amount in the sum of ₹ 10,17,553 could not be produced, the same was to be disallowed under Section 35B and added the said amount back to the income of the Assessee. The CIT (A), following its earlier order dated 23rd March 1999 for AY 1994-95 and order dated 29th December 1999 for A. Y. 1995-96 in AY, held that Section 43B does not apply. 74. The ITAT followed its order dated 8th August 2008 in ITA No. 294/Luc/2000 which held that Section 43B is only attracted when the Assessee claims deduction for any sum payable by way of tax or duty under any law for the time being in force, and, where, as in the case of the Assessee, no charge is claimed or made to the profit or loss account, there was no question of disallowing the amount taken to the balance sheet on the liabilities side or of adding back and deleted the addition. 75. Consequently, the Court upholds the order of the ITAT which affirmed the order by the CIT (A) deleting the above addition. The issue is decided in favour of the Assessee and against the Revenue. Limitation under Section 201 of the Act. 76. The other issue that requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment towards reserve funds is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. ITA 128 of 2005 87. The sole question regarding payment to AAR Aviation Inc is answered in the negative i.e. in favour of the Assessee and against the Revenue. ITA 1206 and 1209 of 2005 88. The sole question in both these appeals regarding payment towards reserve funds is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. ITA 86 of 2011 89. Question (i) regarding additions under Section 68 of the Act is answered partly in favour of the Revenue by setting aside the orders of the CIT (A) and ITAT deleting the addition made by the AO of the sum corresponding to 65185 shareholders and directing the corresponding addition of the said sum to the income of the Assessee for AY 1996-97. However, the orders of the CIT (A) as confirmed by the ITAT deleting the addition made in respect of the amount brought in by 50 + 17 shareholders and remanding the matter to the AO in respect of 8 persons and some part of 25 persons who were not traceable and whose addresses had not been furnished is upheld. 90. Question (ii) regarding paym ..... X X X X Extracts X X X X X X X X Extracts X X X X
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