Appeal Details
Counselvise Citation
[2016] 131 COUNSELVISE.COM (IT) 6665 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
9 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-11-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
G
Next Hearing Date
21-09-2016
Assessment Year
2008-2009
Appeal Filed On
11-02-2016
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : G NEW DELHI BEFORE SH. H.S. SIDHU , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO S . 749 & 750 /DEL/ 2016 ASSESSMENT YEAR S : 2008 - 09 & 2009 - 10 M/S. INTERGLOBE AVIATION LTD., 4 TH FLOOR, TOWER D, GLOBAL BUSINESS PARK, MG ROAD, GURGAON. VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE - 11, NEW DELHI PAN : AABCI2726B (APPELLANT) (RESPONDENT) APPELLANT BY SH. TARUNDEEP, ADV. RESPONDENT BY SH. SATPAL GULATI, CIT (DR) DATE OF HEARING 21.09.2016 DATE OF PRONOUNCEMENT 18.11.2016 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 YEAR S 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. T HE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN ITA NO. 749/DEL/2016 ARE AS UNDER: 2 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 RS. 386,51,44,840/ - (ALLEGED TO BE SUBSIDY) FROM SUPPLIERS OF AIRCRAFT ENGINES AND OTHER COMPONENTS IS A REVENUE RECEIPT (IN THE NATURE OF COMMISSION) AND TAXABLE AS SUCH. 1.1 THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN ASSUMING / EXERCISING JURISDICTION TO ENHANCE THE INCOME ASSESSED BY THE ADDITIONAL COMMISSIONER OF INCOME - TAX {HEREINAFTER REFERRED TO AS AO }. 1.2 THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN NOT ADJUDICATING UPON THE OBJECTION TO THE ASSUMPTION OF JURISDICTION TO ENHANCE INCOME ASSESSED BY THE AO BY RS. 306,40,63,012/ - . 2. THAT ON FACTS AND IN LAW THE ORDERS PASSED BY THE CIT(A) AND THE AO ARE INTER ALIA VOID - AB - INITIO AND BAD IN LAW. 2.1THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN NOT COMPLYING WITH THE PRINCIPLES OF NA TURAL JUSTICE RENDERING THE IMPUGNED ORDER AS BAD IN LAW. 2.2THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN UPHOLDING DISALLOWANCE OF SUPPLEMENTARY LEASE RENT OF RS. 84,98,20,146/ - . 3.1 THAT ON FACTS AND IN LAW THE AO/CIT(A) ERRED IN NOT APPRECIATING THAT PAYMENTS MADE FOR SUPPLEMENTARY LEASE RENTS ARE NOT LIABLE FOR TAX DEDUCTION AT SOURCE UNDER SECTION 195 OF THE INCOME - TAX ACT, 1961 {HEREINAFTER REFERRED TO AS THE ACT }. 4. THAT ON FACTS AND IN LAW THE AO/CIT(A) ERRED IN NOT APPRECIATING THAT: (A) PAY MENTS MADE BY THE ASSESSEE ON ACCOUNT OF SUPPLEMENTARY LEASE RENT VIS A VIS LEASE AGREEMENTS EXECUTED PRIOR TO 01ST APRIL 2007 ARE INCOME EXEMPT FROM TAX UNDER SECTION 10(15A) OF THE ACT. (B) PAYMENTS OF SUPPLEMENTARY LEASE RENT V!S A VIS LEASE AGREEMENTS EXECUTED AFTER 01ST APRIL 2007 ARE EXEMPT FROM TAXATION UNDER THE PROVISIONS OF AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION BETWEEN INDIA AND IRELAND. 3 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 5. THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN UPHOLDING THE ADDITIONAL DISALLOWANCE OF RS. 48,77,850/ - MADE BY THE AO INVOKING PROVISIONS OF SECTION 14A OF THE ACT. 5.1 THAT ON FACTS AND IN LAW THE CIT(A) ERRED IN UPHOLDING THE ACTION OF AO IN INVOKING PROVISIONS OF RULE 8D OF INCOME - TAX RULES, 1962. THAT THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, AMEND AND/OR VARY THE GROUND(S) OF APPEAL AT OR BEFORE THE TIME OF HEARING. 3. T HE FACTS IN BRIEF OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF OPERATING A LOW - COST AIRLINE IN INDIA UNDER THE NAME OF INDIGO AIRLINES . FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 20/09/2008, DECLARING TOTAL LOSS OF RS.314,14, 79 , 060/ - . T HE CASE WAS SELECTED FOR SCRUTINY AND NOTI CE UNDER SECTION 143(2) OF THE INCOME - TAX ACT, 1961 (FOR SHORT THE ACT ) WAS ISSUED AND COM PLIED WITH. IN THE ASSESSMENT COMPLETED UNDER SECTION 143 (3) OF THE ACT ON 07/12/2010, AFTER MAKING ADDITIONS/D ISALLOWANCES WORTH RS. 165,57,79, 824/ - THE LOSS WAS ASSESSED AT RS.148,56,99, 240/ - . THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) ALLO WED 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 NO S . 1 TO 1.2 RELATE S TO HOLDING THE CREDITS OF RS. 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 RS.386,51,44,840/ - . 4.1 BEFORE US , THE LEARNED AUT HORIZED REPRESENTATIVE OF THE ASSESSEE REFERRING TO PAGE S 6 TO 73 OF THE ASSESSE E 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/DEL/2012 HOLDING 4 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 THE CRED ITS RECEIVED BY THE ASSESSEE FROM IAE AS CAPITAL IN NATURE. HE FURTHER SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) HAS ALSO FOLLOWED TH E ORDER OF THE COMMISSIONER OF INCOME T AX I N ASSESSMENT YEAR 2007 - 08, THUS, ISSUE BEING COVERED, THE ADDITION MADE BY THE LOWER AUTHORITIES MIGHT BE DELETED. 4.2 ON THE OTHER HAND, LEARNED COMMISSIONER OF INCOME T AX (DEPARTMENTAL REPRESENTATIVE) RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE FACTS EMANATING FROM THE ORDERS OF THE LOWER AUTHORITIES ARE AS UNDER: (I) I N FINANCIAL YEAR 2005 - 06, THE ASSESSEE ENTERED INTO AN AGREEMENT WITH AIRBUS SAS, FRANCE ( AIRBUS ) FOR PURCHASE OF HUNDRED AIRCRAFTS WITH THE OPTION T O CHOOSE THE ENGINES FITTED IN SUCH AIRCRAFTS. (II) THE ASSESSEE SELECTED V - 2500 ENGINES MANUFACTURED BY IAE INTERNATIONAL AERO E NGINES AG , SWITZERLAND ( IAE ). ON DELIVERY OF AIRCRAFTS FITTED WITH THE ENGINES SUPPLIED BY THE IAE, THE ASSESSEE WAS ALLOWABLE TO GET SOME CREDITS FROM IAE. SIMILARLY, SUPPLIERS OF OTHER COMPONENTS OF AIRCRAFTS ALSO EXTENDED CREDITS TO THE ASSESSEE. (III) THE ASSESSEE ASSIGNED ITS INTEREST IN PURCHASE AGREEMENT TO OTHER PARTIES I.E. GENESIS ACQUISITION LTD, LARE L EASING LTD . ETC . AND THE ASSESSEE ACQUIRED THE AIRCRAFTS ON OPERATING LEASE BASIS. IN VIEW OF THE ARRANGEMENT, THE AIRCRAFTS WERE PURCHASED BY THE LEASING COMPANIES, WHO WE RE RESIDENTS OF IRELAND AND LEA S ED TO THE ASSESSEE ON OPERATING LEASE BASIS. (IV) DURING THE RELEVANT PREVIOUS YE AR, THE ASSESSEE RECEIVED CREDITS FROM SUPPLIERS ( MAJOR AMOUNT BEING FROM IAE ), IN RELATION TO THE ENGINES AND OTHER COMPONENT SUPPLIED BY SUCH SUPPLIERS TO AIRBUS 5 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 IN RESPECT OF AIRCRAFTS DELI VERED BY THE AIRBUS AND LEASED IT TO THE ASSESSEE BY THE LESSO R DURING RELEVANT PREVIOUS YEAR. (V) THE ASSESSEE TREATED THE CREDITS RECEIVED AS CAPITAL RECEIPTS NOT LIABLE TO TAX AND ACCORDINGLY, THE ASSESSEE REDUCED A SUM OF RS. 80,10,81, 828/ - ( PROPORTIONATE AMOUNT OF CREDITS RELATABLE TO THE RELEVANT FINANCIAL YEAR) FRO M AIRCRAFT LEASE RENTALS. (VI) THE ASSESSING OFFICER , HOWEVER , HELD THE PROPORTIONATE AMOUNT OF CRE DITS RECEIVED AMOUNTING TO RS.80, 10,81,828/ - AS REVENUE RECEIPT AND MADE ADDITION FOR THE SAME. (VII) IN ASSESSMENT YEAR 2007 - 08, THE AS SESSEE TREATED AN AMOUNT OF RS.1 1,54,44, 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 RS.160,66, 36,009/ - AS REVENUE RECEIPT. (VIII) FOLLOWING THE FINDING OF THE COMMISSIONER OF INCOME T AX 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 RS. 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 APPEL LANT 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 F ROM THE MANUFACTURER OF AIRCRAFT IS IN THAT NATURE OF COMMISSION WHICH IS PAID TO THE APPELLANT FOR 6 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 FIXING A HUGE SALES ORDER WITH THE LESSOR, AND THEREFORE IT IS REVENUE IN NATURE AND HAS TO BE TAXED. LET THERE BE ANY NUMBER OF AGREEMENTS/CONTRACTS BETWEE N THE MANUFACTURER AND THE AIRLINES CO. (LESSEE) AND THE LESSOR, BEFORE HAND OR AFTERWARDS, AND THE ASSIGNMENT OF THESE AGREEMENTS BY THE LESSEE TO THE LESSOR, THE CRUX OF THE MATTER REMAINS THAT APPELLANT IS NOT THE OWNER OF THE AIRCRAFTS, AND DOES NOT CL AIM DEPRECIATION ON THESE AIRCRAFTS. THEREFORE, THE REFUND W.R.T. THE AIRCRAFTS IS A REVENUE RECEIPT AND NOT A CAPITAL RECEIPT AND THIS REVENUE RECEIPT IS NOTHING BUT A COMMISSION RECEIVED FOR FIXING THE BULK SALES BETWEEN MANUFACTURER AND THE LESSOR. THES E NON - REFUNDABLE REFUNDS RECEIVED FROM AIRCRAFT MANUFACTURER ARE FIRST PAID TO THE LESSEE AND NOT TO THE LESSOR WHO IS THE ACTUAL BUYER. THESE REFUNDS ARE ALSO NOT TO BE RETURNED BACK TO THE MANUFACTURER OR ANY OTHER PERSON. I AM SORRY TO SAY THAT SUCH A H IMAGINATION BY THE APPELLANT IS NOTHING BUT DEFRAUDING THE REVENUE IN A WAY. IT S LIKE INSISTING ON SAYING THAT TWO PLUS TWO IS EQUAL TO FIVE, JUST BECAUSE IT IS THE INDUSTRY PRACTICE AND IS BEING DONE BY AIL THE AIRLINES, DOES NOT MAKE IT RIGHT AND COME TO THEIR RESCUE. IT ALSO DOES NOT MATTER AS TO WHAT IS THE ACCOUNTING POLICY ADOPTED BY THE APPELLANT THE PRINCIPLES OF ' COMPANIES ACT AND IT ACT HAVE TO PREVAIL AS FAR AS THE WORKING OF RIGHT TAXABLE INCOME IS CONCERNED. IN FACT VIDE MY LETTER DATED 1 6/10/2015, I HAVE WRITTEN TO THE CHAIRMAN, CBDT TO LOOK INTO THE MATTER AND ISSUE INSTRUCTIONS TO ALL THE CONCERNED AOS ALL OVER INDIA, WHO ARE ASSESSING THE VARIOUS AIRLINES, SO THAT ALL THE AOS TAKE A UNIFORM VIEW. THUS, I HOLD THESE CREDITS AND REFUNDS TO BE COMMISSION RECEIVED BY THE APPELLANT AND THEREFORE A REVENUE RECEIPT. IN THIS FY 2007 - 08 (AY 2008 - 09) THE APPELLANT HAS RECEIVED A COMMISSION OF RS3,86,51,44,840/ - AND THIS BEING A REVENUE RECEIPT IS ADDED TO THE INCOME OF THE APPELLANT. THE NET EN HANCEMENT ON THIS COUNT WOULD BE RS 306,40,63,012/ - . ASSESSING/OFFICER IS DIRECTED TO DO THE NEEDFUL ACCORDINGLY. 7 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 4.4 THE TRIBUNAL DECIDED THE ISSUE OF CREDITS FROM THE SUPPLIER IN ITA NO. 2202/DEL/2012 IN ASSESSMENT YEAR 2007 - 08 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 CIT IN THE IMPUGNED OR DER, 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 F ROM 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 B LE 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 AN D 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 WOR DS, 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 T HIS CASE IS THAT THE INCENTIVE MUST BE UTILIZED FOR REPAYMENT OF LOAM TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EXPAMION OF EXISTING UNITS. ON THIS ASPECT THERE IS NO DISPUTE. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSE E 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 SUBS IDY SCHEME WAS TO ENABLE THE ASSESSEE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THEN THE RECEIPT OF TH E SUBSIDY WAS ON CAPITAL ACCOUNT. THEREFORE, IT IS THE OBJECT FOR WHICH THE 8 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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. 9.1 THE LEARNED SEN IOR 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 BL E 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, ARGUE S IN THE MATTERS AT HAND THAT THE ASSESSEE CANNOT BE ALLOWED TO TREAT THE ENTERTAINMENT TAX SUBSIDY AS RECEIPTS BECAME 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 FURTH ER 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 US E 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 IMPORTA NT. 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 SU PPLIED] 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 MULTIPL EXES. 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 9 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 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 S OLD. 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. GIVEN THE UNCERTAINTIES OF A BUSINESS OF THIS NATURE, IT IS ALSO POSSIBLE THAT A MULTIPLEX OWNER MAY NOT BE ABLE TO MUSTER ENOUGH VI EWERSHIP TO RECOVER ALL HIS INVESTMENTS IN THE 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 RECEI PT. 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 NYEAR 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 R ETAINED) 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 10 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH IT IS GRANTED. THE 'PURPOSE TEST', REFERRED TO IN PORMI 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 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 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 ST OPS 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 IMP ORTANCE 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 (SU PRA) SUPPORTS DIE 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 15.1 2.2006. 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 11 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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. DECISION OF BOUGAINVILLEA MULTI PLEX 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 WO RKING 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. ACCE PTABLY AS POINTED OUT BY THE APPELLANT THE ACCOUNTING POLICY FOLLOWED WAS IN SPIRIT WITH THE AS - 12 ISSUED BY ICAI. LD CIT AFTER HAVING ACCEPTED THAT THE CREDITS WERE GIVEN TO THE APPELLANT AS A CONSIDERATION FOR SELECTION OF IAE ENGINES TO BE FITTED IN . A IRCRAFTS 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 IAE ENGINES, GIVING THEM A P REFERENCE 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 2 005 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 RI GHT 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 WRITT EN 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 A IRCRAFT, 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 RECEIP T OF CREDITS IN THE PRESENT CASE BE TERMED AS A COMMISSION INCOME. WE THEREFORE REVERSE THE 12 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 FINDING RECORDED BY CIT IN THE IMPUGNED ORDER AND HOLD THAT THE CREDITS RECEIVED BY THE APPELLANT FROM IAE ARE CAPITAL IN NATURE. 4.5 WE FIND THAT THE LEARNED CO MMISSIONER OF INCOME - TAX (APPEALS) IN THE IMPUGNED ORDER HAS FOLLOWED THE FINDING OF THE LEARNED COMMISSIONER OF I NCO ME T AX IN ORDER UNDER SECTION 263 OF THE ACT, WHICH HAS BEEN REVERSE D BY THE TRIBUNAL, THUS RESPECTFULLY FOLLOWING THE FINDING OF THE TRIBUN AL, WE REVERSE THE FINDING OF THE LEARNED . COMMISSIONER OF INCOME - TAX ( APPEALS) ON THE ISSUE IN DISPUTE AND THE ADDITION IS ACCORDINGLY DELETED. THE GROUNDS OF THE APPEAL FROM 1 TO 1.2 ARE ALLOWED. 5. THE GROUNDS NO. 2 TO 2.1 ARE GENERAL IN NATURE AND NOT ARGUED BY THE LEARNED AUTHORISED REPRESENTATIVE AND , HENCE , DISMISSED AS INFRUCTUOUS. 6. IN GROUNDS NO. 3 TO 3.1 AND 4, THE ASSESSEE HAS CHALLENGED UPHOLDING DISALLOWANCE OF SUPPLEMENTARY LEASE RENTS OF RS.84,98, 20, 146/ - UNDER SECTION 40(A)(IA) OF THE ACT FOR NON - DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT. 6.1 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE REFERRING TO PAGE 56 TO 61 OF THE ASSESSE E S PAPER BOOK SUBMITTED THAT THE ISSUE IN DISPUTE HAS BEEN DECIDED BY THE TRIBUNAL IN ITA NO. 2202/DEL/2012 IN FAVOUR OF THE ASSESSEE, ACCORDINGLY , HE PRAYED THAT ADDITION MIGHT BE DELETED. 6.2 ON THE OTHER HAND, LEARNED COMMISSIONER OF INCOME TAX (DEPARTMENTAL REPRESENTATIVE) RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 6.3 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER OBSERVED THAT THE BASIC LEASE RENT WAS FIXED, HOWEVER , THE SUPPLEMENTARY LEASE RENT WAS CALCULATED WITH REFERENCE TO THE FLIGHT HOURS. THE ASSESSING OFFICER 13 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 RECORDED THAT THE SUPPLEMENTARY RENT CONSISTS OF ITEMS SUCH AS AIRFRAME PAYMENT, APU LLP PAYMENT, ENGINE LLP PAYMENT, ENGINE REST PAYMENT ETC. ACCORDING TO THE ASSESSING OFFICER, THE SUPPLEMENTARY LEASE RENTAL WAS NOT EXEMPTED UNDER SECT ION 10(15A) OF THE ACT, AND THEREFORE BEING LIABLE FOR TDS AND THE ASSESSEE DID NOT DEDUCT THE TAX AT SOURCE AS REQUIRED UNDER SECTION 195 OF THE ACT AND THEREFOR E THE LEASE RENT PAYMENT OF RS.84,98,20, 146/ - W AS DISALLOWED IN TERMS OF SECTION 40(A)(I) OF T HE 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 A IRLINES , 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 H AVE 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 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 14 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 COST, REPAIR AND REPLACEMENT, LOSSES AND OTHER EXPENDITURE WHICH WERE REQ UIRED TO KEEP THE AIRCRAFT IN AIR - WORTHY CONDITION. SO THE LESSOR WAS UNDER NO 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. THE LE SSOR 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 A CCORDANCE 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 TH E 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 RESER VE, 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 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 AN Y 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 15 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 PAYMENT S. 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 FACILITY OR SERVICE BY THE LESSOR. . . .. 13. SO THE QUESTION THAT ARISE S 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 NOD - 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 TECHNICIA NS 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 AIRCRAFT, 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 REVEN UE 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 SUGGESI THAT LESSOR 16 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 IN FACT SUPPLIED ANY SPARE OR PROVIDED ANY FACILITY OR SERVICE WHATSOEVER IN CONNECTION WITH THE O PERATION 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 OF THE EXCLUSIONARY PROVISIONS OF SECTION 10(15A) OF THE ACT. SINC E 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 O F 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 LE ASED 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 SCHE DULED MAJOR STRUCTURAL INSPECTION AND RECTIFICATION OF STRUCTURAL DEFICIENCIES (OVERHAULS) OF THE AIRFRAME (I.E., THE COMPLETE 'D' CHEEK OR EQUIVALENT IF THE AIRCRAFT IS ON A BLOCK 'D MAINTENANCE SYSTEM UNDER LESSEE'S MAINTENANCE PROGRAMME OR 'D' CHECK LE VEL 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. ' 17 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 EXCL USIONARY 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 LES SEE IN CONSIDERATION OF SUCH SPARES/FACILITIES/SERVICES. THE 1TAT HAS RIGHTLY POINTED OUT THAT THE SUPPLEMENT RENTAL WAS WITHIN THE AMBIT OF THE ORIGINAL PROVISION OF SECTION 10(15 A) 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 HOLDIN G 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. 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 SECTI ON 10(15 18 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 TH E 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 WE HOLD THAT PA YMENT OF SUPPLEMENTARY LEASE RENT WAS EXEMPT U/S 10(15 A) OF THE ACT AND THE APPELLANT WAS NOT REQUIRED TO DEDUCT TDS THEREON........... 6.5 WE FIND THAT THE TRIBUNAL HAS ALSO CONSIDERED THE FACT OF THE ASSESSMENT YEAR UNDER CONSIDERATION WHILE ARRIVING AT THE ABOVE DECISION. IN OUR OPINION THE ISSUE HAS ALREADY BEEN CONSIDERED BY THE TRIBUNAL IN DECISION (SUPRA), THUS RESPECTFULLY FOLLOWING THE ABOVE DECISION WE HOLD THAT THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON SUPPLEMENTARY LEASE RENTAL BEING EXEMPT UNDER SECTION 10(15 A) OF THE ACT . A CCORDINGLY , THE DISALLOWANCE MADE UNDER SECTION 40(A)(I) OF THE ACT IS DELETED AND GROUNDS OF THE APPEAL FROM 3 TO 3.1 AND 4 ARE ALLO WED. 7. THE GROUNDS NO. 5 TO 5.1 ARE RELATED TO UPHOLDING BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) , THE DISALLOWANCE OF RS.48,77, 850 / - MADE BY THE ASS ESSING OFFICER UNDER SECTION 14 A OF THE ACT. 7.1 THE FACTS IN RESPECT OF ISSUE IN DISPUTE ARE THAT THE ASSESSING OFFICER OBSERVED DIVIDEND INCOME OF RS.3,09,10, 261/ - BUT FOUND THAT THE DISALLOWANCE OF RS. 92,570 / - COMPUTED BY THE ASSESSEE WAS NOT CORRECTLY DETERMINED. THE ASSESSING OFFICER COMPUTED THE DI SALLOWANCE AS UNDER: CLAUSE PARTICULARS AMOUNT 1. EXPENDITURE DIRECTLY RELATED TO EXEMPT INCOME NIL NIL NIL II DISALLOWANCE OF INTEREST 19 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 EXPENDITURE A. INTEREST EXPENDITURE INCURRED DURING THE YEAR B. AVERAGE VALUE OF INVESTMENT C. AVERAGE OF TOTAL ASSETS. DISALLOWANCE =A* B/C (A)1 9 ,33,60,000 X (B)10,42,90,000 (C)453,26,25,0000 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 T HE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) UPHELD THE DISALLOWANCE. 7.3 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITT ED THAT THE DISALLOWANCE OF RS.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 EXP ENSES WERE INCURRED IN MAKING SUCH INVESTMENT OR EA RNING FROM THE DIVIDEND INCOME. IT WAS ALSO SUBMITTE D THAT INTEREST EXPENSES OF RS. 19,19,97,909 / - , OUT OF RS.19,33,55,135/ - INCURRED WERE IN RESPECT OF SPECIFIC PURPOSE S FOR PURCHASE OF EQUIPMENT, DEPOSIT WITH AIRBUS , SUPPLY OF AIRCRAFTS ETC . AND NO PART OF THE INTEREST EXPENSES WERE SAID TO BE RELATABLE TO EARNING OF DIVIDEND INCOME. THE LEARNED AUTHORIZED REPRESENTATIVE REFERRED TO THE SUBMISSION MADE BEFORE THE LEARNED COMMISSIONER OF INCOME - TAX (APPEAL S) ON THE ISSUE IN DISPUTE AND 20 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 SUB MITTED THAT THE INTEREST OF RS. 19,19,97,910/ - WAS RELATED TO THE SPECIFIC OBJECT . 7.4 HE ALSO REFERRED TO WITHO UT PREJUDICE COMPUTATION UNDER R ULE 8D OF INCOME TAX R ULES , 1962 (FOR SHORT THE RULES ) SUBMITTED BEFORE THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) , WHICH IS REPRODUCED AS UNDER: AS REGARDS THE REMAINING AMOUNT OF INTEREST OF RS 1,357,226, THE SAME RELATES TO OVERDRAFT. HOWEVER, THE OVERDRAFT HAS NOT RESULTED ON ACCOUNT OF INVESTMENTS MADE BY THE APPELLANT AS CAN BE HAD FROM THE FACT THAT THE OVERDRAFT OF THE APPELLANT FAR EXCEEDED THE INVESTMENTS MADE IN SHARES, ETC. THAT APART, IT WOULD BE APPRECIATED THAT THE FORMULA IN RULE 8D(2)(II), MANDATES THE DISALLOWANCE OF INTEREST TO BE WORKED OUT IN THE RATIO OF AVERAGE VALUE OF INVESTMENTS AND AVERAGE TOTAL ASSETS. FOR THE PURPOSES OF THIS RULE, THE AVERAGE VALUE OF INVESTMENTS IS TO BE DETERMINED BY OBTAINING THE MEAN OF TOTAL INVESTMENTS, AS APPEARING IN THE BALANCE SHEET AS ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOM E. SIMILARLY, THE AVERAGE TOTAL ASSETS WOULD BE DETERMINED BY CALCULATING THE SIMPLE ARITHMETIC MEAN OF THE OPENING VALUE OF ASSETS AND THE CLOSING VALUE OF ASSETS. IT IS RESPECTFULLY SUBMITTED, THAT THE ASSESSING OFFICER HAS WHILE APPLYING THE ABOVE RULE , WRONGLY CONSIDERED THE CLOSING VALUE OF INVESTMENTS AND ASSETS AS ON 31.03.2008, INSTEAD OF THE AVERAGE VALUE OF THE INVESTMENTS AND ASSETS AS APPEARING IN THE BALANCE SHEET ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR 2007 - 08. TAKING INTO CON SIDERATION, THE OVERAGE VALUE OF INVESTMENT AND TOTAL ASSETS, AS MANDATED BY THE ABOVE RULE, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 80, WORKS OUT TO RS. 176,888 AS BELOW: S. NO. PARTICULARS AMOUNT(RS) 1 DISALLOWANCE OF INTEREST EXPENDITURE A= INTEREST COST INCURRED DURING THE YEAR 1,357,226 B = AVERAGE VALUE OF INVESTMENT 52,144,842 21 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 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 INTEREST ON OVERDRAFT IS TO BE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D .. 7.5 T HE LEARNED AUTHORIZED REPRESENTATIVE RELIED ON THE DECISION OF THE HON B LE DELHI HI GH COURT IN THE CASE OF BHARTI OVERSEAS PRIVATE L IMITED , (2015) 64 TAXMANN.COM 340 (DELHI) AND SUBMITTED THAT WHILE COMPUTING DISALLOWANCE FOR PROPORTIONATE INTEREST TOWARDS EXEMPT INCOME UNDER R ULE 8D(2)(II) OF THE RULES, ASSESSING OFFICER HAS TAKEN ENTIRE INTEREST AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT IRRESPECTIVE OF THE FACT THAT MAJOR AMOUNT WAS TOWARDS SPECIFIC LOANS. ACCORDINGLY , HE SUBMITTED THAT THE DISALLOWANCE UNDE R R ULE 8D(2)(II) SHOULD BE COMPUTED IN ACCORDANCE WITH T HE RATIO LAID DOWN IN BHARTI OVERSEAS PRIVATE L IMITED (SUPRA). 7.6 THE LD. CITDR ON THE OTHER HAND RELIED ON THE FINDINGS OF THE AUTHORITIES BELOW. 7.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN THE CASE OF BHARTI OVERSEAS PRIVATE L IMITED (SUPRA) , THE HON BLE HIGH COURT HAS HELD AS UNDER: 12. THE CENTRAL ISSUE THAT REQUIRES TO BE CONSIDERED IS WHETHER THE ITAT WAS JUSTIFIED IN UPHOLDING THE ORDER OF THE CIT (A) BY 22 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 INTERPRETING RULE 8D(2)(II) OF THE RULES IN THE M ANNER IN WHICH IT HAS IN THE IMPUGNED ORDER. 13. SECTION 14A (1) OF THE ACT STATES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT . R ULE 8D OF THE RULES SETS OUT THE METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF INCOME . RULE 8D READS AS UNDER: 8D. (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREV IOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB - RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART 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 D URING 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 ; 23 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 C = THE AVE RAGE 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 F ORM 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 ING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. 14. AS FAR AS RULE 8D(2)(I) IS CONCERNED, THE AO HAS NECESSARILY TO RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF T HE EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THAT THIS REQUIREMENT IS MANDATORY IS NOW WELL SETTLED IN VIEW OF THE DECISION OF THIS COURT IN MAXOPP INVESTMENT (SUPRA). FOR RULE 8D(2)(II) TO APP LY THERE HAS TO BE SOME EXPENDITURE BY WAY OF INTEREST 'WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT.' IF THERE IS NO SUCH EXPENDITURE, AS HAS BEEN FOUND FACTUALLY BY THE ITAT IN THE PRESENT CASE, THEN THE QUESTION OF APPLYING THE FORMULA THEREUNDER WILL NOT ARISE. 15. NEVERTHELESS, THE ITAT HAS HAD TO INTERPRET RULE 8D (2) (II) SINCE THE AO APPLIED IT AND THE CIT (A) HAD TO DECIDE WHETHER THAT INTERPRETATION WAS CORRECT. THAT IS HOW THIS COURT TOO IS CALLED UPON TO DECIDE WHETHER THE ITAT WAS RIGHT IN ITS INTERPRETATION OF THAT PROVISION. THE METHODOLOGY SET OUT UNDER RULE 8D FOR DETERMINING THE AMOUNT OF EXPENDITURE IN RELATION TO THE EXEMPT INCOME CORRESPONDS TO SECTION 14 A (2) OF THE ACT. SECTION 14A (3) CLARIFIES THAT SECTION 14A (2) WOULD APPLY WHEN THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME. 16. THE OBJECT BEHIND SECTION 14A (1) IS TO DISALLOW ONLY SUCH EXPENSE WHICH IS RELATABLE TO TAX EXEMPT INCOME AND NOT EXPENDITURE IN RELAT ION TO ANY TAXABLE INCOME. THIS OBJECT BEHIND SECTION 14A HAS TO BE KEPT IN VIEW WHILE EXAMINING RULE 8D (2) (II). IN ANY EVENT A RULE CAN NEITHER GO BEYOND OR RESTRICT THE SCOPE OF THE STATUTORY PROVISION TO WHICH IT RELATES. 24 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 17. RULE 8D (2) STATES THAT T HE EXPENDITURE IN RELATION TO INCOME WHICH IS EXEMPT SHALL BE THE AGGREGATE OF (I) THE EXPENDITURE ATTRIBUTABLE TO TAX EXEMPT INCOME, (II) AND WHERE THERE IS COMMON EXPENDITURE WHICH CANNOT BE ATTRIBUTED TO EITHER TAX EXEMPT INCOME OR TAXABLE INCOME THEN A SUM ARRIVED AT BY APPLYING THE FORMULA SET OUT THEREUNDER. WHAT THE FORMULA DOES IS BASICALLY TO 'ALLOCATE' SOME PART OF THE COMMON EXPENDITURE FOR DISALLOWANCE BY THE PROPORTION THAT AVERAGE VALUE OF THE INVESTMENT FROM WHICH THE TAX EXEMPT INCOME IS EAR NED BEARS TO THE AVERAGE OF THE TOTAL ASSETS. IT ACKNOWLEDGES THAT FUNDS 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 DI RECTLY 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 ILLUSTRATIO N PROVIDED BY THE ITAT IN CHAMPION COMMERCIAL (SUPRA) DEMONSTRATES THE INCONGRUITY: IN THE CASE OF A & CO. LTD., TOTAL INTEREST EXPENDITURE IS RS.1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNE D IS RS.10,000. OUT OF THE BALANCE RS. 90,000, THE ASSESSEE HAS PAID INTEREST OF RS. 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIP T OR INCOME IS THUS ONLY RS. 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D(2) (II), ALLOCATION OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WILL BE FOR RS.90,000 BECAUSE, AS PER FORMULA THE VALUE OF A(I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) [I.E. 25 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 DIRECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING TH E PREVIOUS YEAR . LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8D(2) (II) WILL BE RS.18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE RS.1 0,000 . 19. WHAT THE ITAT HAS DONE IN THE PRESENT CASE INSTEAD IS TO FOLLOW ITS EARLIER DECISION IN CHAMPION COMMERCIAL (SUPRA) WHICH IN TURN FOLLOWED THE DECISION OF THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA). THE ITAT DID NOT ON ITS OW N READ DOWN RULE 8D (2) (II). RATHER, IT WENT BY THE STAND TAKEN BY THE REVENUE BEFORE THE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) IN COUNTERING THE CHALLENGE TO THE CONSTITUTIONAL VALIDITY OF RULE 8 D (2). THE STAND OF THE REVENUE WAS TH AT VARIABLE A IN THE FORMULA IN RULE 8D (2) (II) WOULD EXCLUDE BOTH INTEREST ATTRIBUTABLE TAX EXEMPT INCOME AS WELL AS TAXABLE INCOME. THE BOMBAY HIGH COURT TOOK ON BOARD THE SAID STATEMENT AND NEGATIVED THE CHALLENGE TO THE CONSTITUTIONAL VALIDITY OF THE PROVISION BY HOLDING AS UNDER: 60. IN THE AFFIDAVIT - IN - REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING RULE 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R.8D(2) (II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX - FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WO ULD 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 TH E 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 P OSSIBLE 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 26 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 RULE 8D (2) (II) OF THE RULES AND THEREFORE TRAVELLED BEYOND THE SCOPE OF ITS JURISDICTION AND POWERS. 21. IN THE CASE I N HAND, IN NOTE 4 OF THE COMPUTATION OF INCOME SUBMITTED BY THE ASSESSEE, THE TOTAL INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS RS.5,52,83,131. THERE WAS AN ENTRY REGARDING INTEREST ON LOANS GIVEN TO TWO ENTITIES. AFTER ACCOUNTING FOR THE OTHER INT EREST EXPENDITURE, THE ASSESSEE COMPUTED THE TOTAL INTEREST EXPENDITURE WHICH WAS ALLOWABLE AS RS.83,90,178. IN THE COMPUTATION DRAWN UP BY THE ASSESSEE, THE ENTIRE INTEREST EXPENDITURE WAS INCURRED FOR EARNING EITHER TAXABLE INCOME OR EXEMPT INCOME. THERE WAS NO INTEREST AMOUNT WHICH WAS NOT DIRECTLY ATTRIBUTABLE TO EITHER THE TAX EXEMPT OR TAXABLE INCOME. THE ITAT, THEREFORE, CORRECTLY OBSERVED IN THE PRESENT CASE NO PORTION OF INTEREST REALLY SURVIVES FOR ALLOCATION UNDER RULE 8D (2) (II) . HOWEVER, AS RIGHTLY POINTED OUT BY THE ITAT, SINCE THE ASSESSEE DID NOT CHALLENGE THE ORDER OF THE CIT (A) TO THE EXTENT IT RESTRICTED THE DISALLOWANCE, THAT PART OF THE ORDER OF THE CIT (A) REMAINED. 22. THE POINT CONCERNING RULE 8D (2) (III) DOES NOT APPEAR TO HAVE BEEN URGED BY THE REVENUE BEFORE THE ITAT AND THEREFORE NOT CONSIDERED BY IT. IN ANY EVENT THAT DOES NOT AFFECT THE INTERPRETATION OF RULE 8D (2) (II) WHICH WAS THE ONLY ISSUE CONSIDERED BY THE ITAT IN THE IMPUGNED ORDER. 7.8 IN VIEW OF THE ABOVE DECISI ON OF THE HON BLE HIGH COURT, WE ARE OF THE OPINION THAT THE COMPUTATION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER R ULE 8D OF THE R ULES, CANNOT BE ACCEPTED. ACCORDINGLY , RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE HIGH COURT, WE RESTORE T HE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE SUBMISSION OF THE ASSESSEE IN RESPECT OF INTEREST SPECIFIC TO LOANS AND COMPUTE THE DISALLOWANCE UNDER R ULE 8D IN VIEW OF THE RATIO LAID DOWN BY THE HON BLE HI GH COURT IN THE CASE OF BHARTI O VERS EAS PRIVATE L IMITED (SUPRA). NEEDLESS TO MENTION THAT ASSESSEE SHALL BE AFFORDED SUFFICIENT OPPORTUNITY OF HEARING. THE GROUND OF APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE. 27 ITA NOS. 749 & 750/DEL/2016 AYS: 2008 - 09 & 2009 - 10 8. IN THE RESULT , THE APPEAL OF THE ASSESSEE IS ALLOWED PARTLY FOR ST ATISTICAL PURPOSE. ITA NO. 750/DEL/2016 FOR AY: 2009 - 10 9. T HE GROUNDS RAISED IN ITA NO. 750/DEL/2016 ARE IDENTICAL TO GROUNDS RAISED IN ITA NO. 749/DEL/2016, WHICH WE HAVE DECIDED ABOVE, THUS , GROUNDS IN ITA NO. 750/DEL/2016 ARE DECIDED MUTATIS MUTANDIS TO GROUNDS IN ITA NO. 749/DEL/2016. 10. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 18 TH NOV. , 2016 . SD/ - SD/ - ( H.S. SIDHU ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 18 TH NOVEMBER , 2016 . LAPTOP / - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI
