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TMI Blog2015 (11) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... )/1999 for the Assessment Years ('AYs') 1996-97, 1995-96, 1996-97 & 1997-98. ITA Nos. 1206 of 2005 and 1209 of 2005 of the Revenue are directed against the common order dated 12th April 2005 passed by the ITAT in ITA Nos. l42&1143/Del/01 for the AYs 1998-99 & 1999-2000. ITA No. 86 of 2011 by the Revenue is directed against the impugned order dated 10th July 2009 passed by ITAT in ITA No. 682/All/2000 for the AY 1996-97. 2. At the outset it requires to be noticed that in these cases, the Assessing Officers (AO), the Commissioner of Income Tax (Appeals [CIT (A)] have in their respective orders and the ITAT in the order dated 12th February 2002 referred to FYs 1994-95 to 1998-99 whereas the subsequent orders of those authorities including the orders dated 30th August 2004, 12th April 2005 and 10th July 2009 of the ITAT refer to AYs as mentioned hereinbefore. 3. Initially the name of the Assessee was Sahara Airlines Limited ('Sahara'). Subsequently it was renamed as Jet Lite (India) Limited. Pursuant to the orders passed by the Court on 23rd May 2012 and 31st July 2015 the name of the Assessee in these appeals stood amended as such. Background Facts 4. The background to the above a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hara's flight crews on the terms and conditions set out in the said agreement. HFTL was to make available to Sahara's flight crews and instructors, training equipment including a flight simulator appropriate to the aircraft for use in flight simulator training. Sahara was to pay HFTL GBP 171 per hour for the use of the flight simulator without any instructor of HFTL being present. 9. Sahara states that similar arrangements were entered into with other companies based in the United Kingdom in terms of which flight crew was provided with the facility of a simulator. The payments were made pursuant to the said agreement made by Sahara without deducting tax at source during the FYs 1994-95 to 1998-99 as such. Sahara was of the view that no part of the payment made for the use of the flight simulator was chargeable to tax in India. 10. Sahara had taken two aircrafts on lease for a period of six years from International Lease Finance Corporation ('ILFC') and separate agreements were entered into in respect of each aircraft. In terms of Article 1.6 read with Article 5.3 thereof, Sahara was required to pay lease rent @ US Dollars ('USD') 240,000 per month with effect from 31st De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax was required to be deducted in respect of the parts purchased, exchanged or repaired and therefore, it remitted the amounts without deducting tax at source. Facts concerning subscription to share capital 13. From the balance sheet filed by the Assessee along with return it was noted by the AO that for the AY 1996-97 Sahara raised share capital of Rs. 10,87,89,090 and received premium amount of Rs. 44,60,35,269 and share application money of Rs. 7,50,000. Sahara claimed to have mobilized the above amount by way of private placement of shares from 65,285 persons through a network of establishments maintained by its sister concern M/s. Sahara India (Firm). Against the face value of Rs. 10 per share, a sum of Rs. 41was collected as premium. Sahara was asked by the AO to furnish the details of shares issued during the year of Rs. 25,000 or more by a notice dated 10th September 1998 under Section 142 (1) of the Act. Sahara filed a reply on 23rd October 1998. It was thereafter asked to furnish the basis of working out the premium of shares and the method of allotment of shares to such a large number of persons by way of private placement. Sahara was also asked to furnish the address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89,359 as unexplained credit in the books of the Assessee under Section 68 of the Act and consequently as undisclosed income of the Assessee which was attributable to the total income of the Assessee. Orders of the CIT (A) and the ITAT 17. On appeal, the Commissioner of Income Tax (Appeals) ['CIT (A)'] by order dated 3rd March 2000 held that since the AO has chosen to enquire only into the genuineness of 100 shareholders, no additions could have been made in respect of the other 65,185 shareholders. The CIT(A) noticed that out of these 100 persons, the AO himself had stated that 17 shareholders had furnished replies and 50 of persons to whom notices were served, did not respond. However, as the notices sent were duly received, the existence of these 50 persons was duly proved. The CIT (A), therefore, directed the AO to delete the additions with respect to these 67 persons. With respect to the group of 25 persons in relation to whom the notices were returned with comments such as 'refused', 'dead' , 'left indefinitely', etc, the CIT(A) held that they certainly 'were in existence and their identity is duly proved.' With respect to those persons who, according to AO, were not traceab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2005 for AY 1995-96 to 1996-98 is concerned, this Court by order dated 25th February 2005 framed the following question of law: "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?" 22. As far as the Revenue's appeal ITA 1209 of 2005 for AY 1998-99 is concerned, this Court by order dated 14th December 2005, framed the following question of law: 'Whether the Tribunal was correct in law in holding that the payments made by the Assessee towards reserve funds in respect of financial year 1998-99 were exempt under Section 10(15A) of the Income Tax Act, 1961?' 23. As far as the Revenue's appeal ITA 1206 of 2005 for AY 1999-2000 is concerned, this Court by order dated 31st January 2006, framed the following question of law: 'Whether the Tribunal was correct in law in holding that the payments made by the Assessee towards reserve funds in respect of financial year 1999-2000 were exempt under Section 10(15A) of the Income Tax Act, 1961?' 24. As far as the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st is not allowable under Section 36 (1) (iii) of the Income Tax Act, 1961, on account of substantial interest-free funds advance to the sister concerns? (vii) Whether the ITAT was correct in the eyes of law in upholding the deletion of addition of Rs. 35,97,812 made by the AO, on account of disallowance of the 1/5th of the foreign travel total expenses claimed under Section 37 (l) of the Income Tax Act, 1961, when the same are inadmissible for want of genuineness to prove that the expenditure was incurred wholly and exclusively for the business purposes? (viii) Whether ITAT was correct in the eyes of law in upholding the deletion of addition of Rs. 21,60,000 made by the AO, on account of disallowance of consultancy expenses, paid by the assessee to M/s. Sahara India International Corporation Limited, invoking the provisions of Section 40A (2) of the Income Tax Act, 1961, when the said expenditure is excessive and unreasonable and the services, which have been claimed to have been rendered have not been substantiated for genuineness? (ix) Whether the ITAT was justified in the eyes of law in upholding the deletion of addition of Rs. 54,06,701 made on account of disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e creditor/subscriber the genuineness of the transaction and veracity of the repudiation. 28. In CIT v. Steller Investment Limited (1991) 192 ITR 287 (Del) it was observed: 'Even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons.' 29. Both the aforementioned decisions were again considered by the Division Bench of this Court in CIT v. Lovely Exports Limited 299 ITR 268 (Del). Thereafter, in CIT v. Nova Promoters and Finance (P) Limited (2012) 342 ITR 169 (Del) it was observed as under: '38. The ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angel investors, after due diligence or for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the Assessee might find it difficult to unimpeachably establish creditworthiness of the shareholders.' 31. In Commissioner of Income Tax v. N.R. Portfolio Pvt. Ltd. 206 (2014) DLT 97 (DB) the Court reiterated the need of the Assessee to satisfy the AO about the "identity, creditworthiness and genuineness" of the creditors. It was pointed out that 'mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them.' 32. Turning the facts on hand, the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders in respect of whom the AO tried to conduct certain enquiries. Of the 92 persons whose addresses had been furnished, 17 persons had filed replies. Even in respect of the 50 others who were served, but had not replied, their existence was held to be duly proved. the CIT (A), therefore, directed the AO to delete the addition in respect of the share capital introduced by the 17+ 50 persons. Of the balance 25, some had died or had left for an indefinite period or had refused to receive the notices. Their existence and identity were held to be duly proved and, therefore, the AO was directed to delete the share capital introduced by the said persons also. Of the balance 8 persons plus some part of the 25 persons who were unserved, the AO himself noted that notice was not sent to them since addresses were not furnished. In this regard the CIT (A) noted the contention of Sahara that it had furnished their complete addresses and it was prepared to furnish the confirmations of those persons. The CIT (A) then directed, in respect of the 8 persons plus some part of the 25 persons the notices to were returned with the remark 'not traceable', as under: 'I, therefore, in respect of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identity of the 65,185 shareholders who are stated to have contributed the aforementioned sum. 40. However, as regards the 100 shareholders in whose cases some details were furnished by the Assessee, it is seen that 17 shareholders filed their replies and 50 others did not respond despite receiving the notice. The CIT (A) came to the conclusion that their existence or identity was duly proved. It is noticed that the persons who responded stated that they were agriculturists and not income tax assessees. Pradeep Kumar Sinha of Bhagalpur and Masood Ahmed of Madhubani, Bihar stated that they had sold their shares back to Sahara, but under the Companies Act that was not permissible. 41. The Court is of the considered view that the order of the CIT (A) as affirmed by the ITAT regarding the deletion of the addition made by the AO with regard to the share capital introduced by the said 50+17 persons does not call for interference as, on facts, it was a possible view to take. Even as regards the 8 shareholders and those other shareholders who were untraceable, the order of the CIT (A) remanding the matter to the AO does not call for interference. 42. The net result is that the orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Therefore, the question of holding Sahara to be an assessee in default under Section 201 (1) of the Act did not arise. The ITAT also disapproved the action of the AO in determining the tax liability by applying the grossed up rate of 122%. 45. It is submitted by the Revenue that by way of amendment to Section 10 (15A) of the Act, the payment for providing spares, facilities or services in connection with the operation of lease aircraft was specifically excluded. Prior to 1st April 1996 such payments were exempted and the approval given by the CBDT related back to 31st January 1995, i.e., AY 1995-96 during which exemption was available. It is pointed out that under the agreement in question the lease payment for the aircraft was separately mentioned and the payment for maintenance reserve was separately mentioned. In these circumstances, it is submitted that the ITAT erred in holding that the maintenance reserve was in the nature of the lease. 46. A perusal of Section 10 (15A) of the Act as existed with effect from 21st January 1989 and substituted with effect from 1st April 1996 shows that prior to 1st April 1996 payments made for acquisition of an aircraft or an aircraft engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 50. Consequently, 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 51. The issue concerning payments made for training and manpower development arises in the Assessee's appeal ITA 204 of 2002 arising out of the decision dated 12th February 2002 of the ITAT in ITA Nos.950 to 954/Del/2001 for FYs 1994-95 to 1998-99 and in the Revenue's appeal ITA 86 of 2011 arising out of the decision dated 10th July 2009 of the ITAT in ITA No. 682/All/2000 for AY 1996-97. 52. There are two periods during which the question arises. One relates to the payments for FYs 1994-95 to 1998-99 and the other in relation to AY 1996-97. For FYs 1994-95 to 1998-99, the AO by order dated 10th May 2000 under Section 201 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary 1996 between Sahara and HFTL has been discussed in the order dated 12th February 2002 of the ITAT. It has referred to the submissions of the learned counsel for the Assessee to the effect that what was provided to Sahara's personnel was the facility of training on a simulator without an instructor. A higher rate of 256 pounds per hour was charged for providing training on the simulator with an instructor whereas Sahara was charged 171 pounds per hour which was the rate applicable for providing a simulator without an instructor. The ITAT however appears to have in its order dated 12th February 2002 gone by Clause 14 of the said agreement which talked of HFTL providing free training to the instructors of the Assessee. Although the ITAT states that the invoice showed the payment "for use of the simulator alone" it held that it did not mean that "technical knowledge was not provided by UK company." What was perhaps missed was that the payment had to be for providing such technical knowledge and not merely for use of the simulator. The personnel of HFTL having experience is one thing but the question of payment for such technical services is another. The other aspect which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made the payment after obtaining the said certificates. The issue is decided in favour of the Assessee and against the Revenue. Free tickets 60. The next ground concerns the addition on account of expenditure incurred for allowing free tickets in the sum of Rs. 30,40,170. The AO noticed that these tickets were issued to a large number of persons including the following persons: '(i) spouses of certain persons accompanying their husbands/wife, (ii) minors including infants, (iii) relatives of the Directors, (iv) persons with names only but without any surname or surname without any initial, whose identities were ambiguous, including one Swamiji.' 61. It was held that 50% of the above expenses were disallowed by the AO which worked out to Rs. 30,40,170. The ITAT following its order dated 8th August 2008 in the case of the Assessee in ITA No. 470/Del/99 accepted the submission of the Assessee that the free charged tickets were being issued on account of business promotion to various persons and merely because they have been issued to spouses or infants or where full names had not been given it cannot be presumed that they were not for business purposes. It was held that 'this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign travel expenses 66. The next issue concerns the addition made by the AO on account of foreign travel expenses. The Assessee had claimed foreign travelling expenses amounting to Rs. 2,21,33,253. According to the Assessee, these expenses were incurred for the purpose of training of the pilots abroad. Further the training was imparted by technical experts for the purposes of the business of the Assessee. The AO disallowed the above expenses in the sum of Rs. 44,26,650. 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 Rs. 2200. The expenditure on travel in which the destination of the journeys were n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt expenses as defined by Section 37(2)(iii) and directed the AO to restrict the disallowance insofar as conveyance expenses of Rs. 7,31,324. 70. The Court is unable to find any illegal infirmity in the order of the CIT (A) as upheld by the ITAT. The issue is decided in favour of the Assessee and against the Revenue. Advertisement and publicity expenses 71. The next issue concerns the addition of Rs. 10,37,367 on account of disallowance of advertisement and publicity expenses as they were not related to AY 1996-97. As rightly pointed out by the ITAT, as per the mercantile system of accounting, bills received by the Assessee in respect of advertisement services pertaining to the previous year and continued during the year was booked only when it was crystallized. The issue has been answered in favour of the Assessee by the decision of the Gujarat High Court in Saurashtra Cement and Chemical Industries v. CIT 213 ITR 523 which observed that merely because the expenditure relates to an earlier year, it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 ITR 222 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) (2014) 365 ITR 548 (Cal). 78. Consequently, the said issue is decided in favour of the Assessee and against the Revenue. Payment to Sochata France 79. The Court is informed that pursuant to the remand of the issue to the AO as directed by the ITAT, the Assessee succeeded before the AO. Therefore the said issue is not pressed. Summation and answers 80. The questions framed in the appeals are answered as indicated hereafter. ITA 204 of 2002 81. Question (i) regarding payments to AAR Aviation Inc is answered in the negative i.e. in favour of the Assessee and against the Revenue. 82. Question (ii) regarding payment for use of flight simulator is remanded to the ITAT for a fresh decision in accordance with law. 83. Question (iii) regarding payments to M/s. Sochata France is disposed of as not pressed in view of the subsequent development whereby on remand the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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