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2021 (9) TMI 1400 - AT - Income TaxNature of receipts - Credits received by the assessee from International Aero Engines and others, i. e., nature of credits received by the assessee from International Aero Engines - whether the agreement/ transactions are separate or composite? - purpose and nature of credits received by the assessee and their taxability - HELD THAT - The findings of the learned Commissioner of Income-tax (Appeals), in our opinion, are based on con-jectures and surmises when he wrongly views the agreements with Inter-national Aero Engines, Airbus and lessors as an amalgamation. When the Commissioner of Income-tax (Appeals) himself noted that right to acquire aircraft has been assigned to lessor at par value then, there is no consideration received for such assignment. Although right to acquire air-craft from International Aero Engines is a capital asset , however, for applicability of provisions of section 48 which deals with computation of capital gains, there has to be a Full value of consideration received or accruing as a result of the transfer of the capital asset. Therefore, there should be a sale consideration flowing to the assessee from the lessors for transfer of a capital asset which in this case is the right to acquire an air-craft from Airbus. We find merit in the submissions of the learned senior counsel for the assessee that under the purchase agreement the assessee was under an obligation to only take delivery of aircrafts. There was no compulsion on the assessee to mandatorily purchase the aircraft. The learned special counsel for the Revenue, in our opinion, has erroneously presumed that amount paid by the lessors represents a consideration as the taking-over of a liability amounts to a consideration . We find in the year under consideration the lease agreements are in the nature of operating lease. Assessing Officer in the order has also mentioned that the lessors are the owners and are claiming depreciation. Therefore, consideration paid by lessors to Airbus is not on account of the assessee. The transaction of payment of purchase price by lessors to Airbus is a separate transaction, under which, no right to the aircraft is flowing to the assessee. There is, therefore, no sale consideration received by the assessee which could be held assessable to capital gains tax . We, therefore, hold that credits received by the assessee are not taxable as capital gains. Disallowance of proportionate lease rental under section 37(1) - HELD THAT - We find there is no connection between credits received and the payment of lease rentals. We have already adjudicated in the preceding paragraphs that credits received under agreement dated October 19, 2005 and payment of lease rentals under lease agreements executed much after are separate transactions not related to each other. Therefore, there cannot be any disallowance of proportionate lease rentals. Disallowance u/s 40(a)(ia) of supplementary rent (SR) - HELD THAT - It was held that supplementary rent is not a payment made for use of spares, facilities or any services, whereas basic rent is a fixed amount. Supplementary rent is determined taking into consideration the number of flying hours. Supplementary rent, in our opinion, is a payment made for lease of aircraft. The lease agreement defines rent as means collectively base rent and supplementary rent . Therefore, respectfully following the decision of Tribunal for the assessment year 2007-08 which has also been followed in subsequent years, we hold that payment of supplementary rent is exempt from tax in hands of lessors as per provisions of section 10(15A) and hence, disallowance under section 40(a)(i) is not called for. However, the above figure is subject to verification by the Assessing Officer. For lease agreements executed after 1st April, 2007, a claim was made by the assessee before the lower authorities that the income is not chargeable to tax in hands of lessor under article 12 of the Double Taxation Avoidance Agreement between India and Ireland. It is an undisputed fact that the basic lease rent of Rs. 673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of Rent . In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The learned special counsel for the Revenue has filed copies of three lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the learned special counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Airbus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterised as interest . We, therefore, find no merit in the above submissions raised by the Revenue. Thus for failure to non-deduction of tax on supplementary lease rent Rs. 61,81,04,551 is sent back to the Assessing Officer for considering the allowability in the light of the directions and Rs. 276,28,59,861 is deleted.
Issues Involved:
1. Nature of receipts from International Aero Engines (IAE). 2. Taxability of credits under sections 28(i) or 28(iv) of the Income-tax Act, 1961, or as "commission" income or "Income from capital gains." 3. Disallowance of lease rental payments under section 37(1) of the Income-tax Act, 1961. 4. Allowability of supplementary lease rent payments and applicability of TDS provisions. Detailed Analysis: 1. Nature of Receipts from International Aero Engines (IAE): The primary issue was whether the credits received by the assessee from International Aero Engines (IAE) for selecting their engines were capital or revenue receipts. The Tribunal found that the credits were received as a consideration for selecting IAE engines over others, termed as fleet introductory assistance (FIA). The credits were not linked to the purchase of engines but were for the selection of engines. The Tribunal upheld the view that these credits were capital receipts, not liable to tax, as they were not derived from the business of operating a low-cost airline but were related to the acquisition of a capital asset (aircraft engines). 2. Taxability Under Sections 28(i) or 28(iv) or as "Commission" Income or "Capital Gains": The Tribunal examined whether the credits could be taxed under sections 28(i) or 28(iv) of the Income-tax Act, 1961, or as "commission" income or "Income from capital gains." It was concluded that: - Section 28(i) was not applicable as the assessee was not engaged in the business of selecting engines. - Section 28(iv) was not applicable as the credits were in the form of money, and section 28(iv) applies only to non-monetary benefits. - The credits were not "commission" income as there were no services rendered by the assessee to IAE. - The credits were not taxable as "capital gains" since there was no sale consideration received by the assessee for the assignment of the right to acquire aircraft. 3. Disallowance of Lease Rental Payments Under Section 37(1): The Tribunal addressed the disallowance of lease rental payments under section 37(1) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) had disallowed the proportionate lease rentals, arguing that the lease rentals were partly attributable to the credits received and hence were capital in nature. The Tribunal found no connection between the receipt of credits and the payment of lease rentals, as these were separate transactions. Therefore, the disallowance under section 37(1) was deleted. 4. Allowability of Supplementary Lease Rent Payments and Applicability of TDS Provisions: The Tribunal examined the issue of supplementary lease rent payments and the applicability of TDS provisions. It was concluded that: - Supplementary lease rent was a mandatory payment under the lease agreements and was not contingent. - The payment of supplementary rent was not for the provision of spares, facilities, or services by the lessor but was for the use of the aircraft. - For lease agreements executed before April 1, 2007, the supplementary rent was exempt under section 10(15A) of the Act, and hence, disallowance under section 40(a)(i) was not applicable. - For lease agreements executed after April 1, 2007, the supplementary rent was not taxable in India under Article 12 of the India-Ireland Double Taxation Avoidance Agreement, and hence, disallowance under section 40(a)(i) was not applicable. Conclusion: The Tribunal concluded that the credits received from IAE were capital receipts not liable to tax, disallowed the proportionate lease rental payments under section 37(1), and allowed the supplementary lease rent payments, holding that TDS provisions were not applicable. The appeals filed by the assessee and the Revenue were disposed of accordingly.
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