2008 (10) TMI 4 - HC - Income Tax

Assessee, hotel - assessee made agreement with Megapode Airlines Ltd. in order to provide facilities of charter flights to its customers - assessee could not utilize the flying hours - assessee was liable to pay annual fixed charges irrespective of the hours actually utilized by it - agreement was entered into by the assessee for its business purposes - commercial expediency Sec. 40 A (2) not invokable for disallowing the said expenditure revenue appeal dismissed

Summary

Issues:
1. Deduction of payment made towards annual entitlement fee for charter flights.
2. Disallowance under Section 40 A (2) for excessive or unreasonable expenditure.

Issue 1: Deduction of Payment for Charter Flights:
The case involved an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal. The appellant, engaged in the hotel business, paid Rs 1.19 crores to Megapode Airlines Limited (MAL) as an annual entitlement fee for availing flying hours on a Jet Aircraft. The payment was irrespective of actual utilization of flying hours. The Assessing Officer disallowed the deduction, alleging no utilization and claiming the payment was to reduce the appellant's income. However, the Tribunal found the payment was for business purposes to enhance customer facilities and was incurred in the course of business. It held the expenditure as wholly for business under Section 37 (1) of the Act, emphasizing commercial expediency and negotiated concessional rates.

Issue 2: Disallowance under Section 40 A (2):
Regarding disallowance under Section 40 A (2), the Tribunal noted the absence of findings by the Assessing Officer to prove excessive or unreasonable expenditure compared to fair market value. It highlighted the lack of evidence showing similar facilities available at lower prices or excessive payments made by the appellant. Consequently, the Tribunal ruled that Section 40 A (2) could not be invoked for disallowing the expenditure. Despite favorable findings for the appellant, the Tribunal remanded the matter to the Assessing Officer due to the unavailability of the expenditure breakdown during assessment proceedings. The High Court upheld the Tribunal's decision, stating no substantial question of law for consideration and dismissing the appeal.

In conclusion, the judgment addressed the deduction of payment made for charter flights and the disallowance under Section 40 A (2) for excessive or unreasonable expenditure. The court upheld the Tribunal's decision, emphasizing the business purpose of the payment and the lack of evidence for disallowance under Section 40 A (2).