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Penalty or fine paid in foreign country by airlines for default or mistake of passengers & not on account of any infraction of law, can be allowed as business expense u/s 37: ITAT

2019-TIOL-1677-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘B’ MUMBAI

ITA No.2182/Mum/2012
Assessment Year: 2008-09

AIR INDIA LTD
(FORMERLY KNOWN AS NATIONAL AVIATION COMPANY OF INDIA LTD)
DIRECTOR FINANCE, OLD AIRPORT, KALINA
SANTACRUZ (EAST), MUMBAI
PAN NO: AACCN6194P

Vs

DEPUTY COMMISSIONER OF INCOME TAX-5(2)
MUMBAI

ITA No. 1423/Mum/2012
Assessment Year: 2008-09

DEPUTY COMMISSIONER OF INCOME TAX-5(2)
MUMBAI

Vs

AIR INDIA LTD
(FORMERLY KNOWN AS NATIONAL AVIATION COMPANY OF INDIA LTD)
DIRECTOR FINANCE, OLD AIRPORT, KALINA
SANTACRUZ (EAST), MUMBAI

Mahavir Singh, JM & Rajesh Kumar, AM

Date of Hearing: July 10, 2019
Date of Decision: July 19, 2019

Appellant Rep by: S/Shri Shri D J Shukla & R J Shukla, ARs
Respondent Rep by: 
Shri M Dayasagar, CIT (DR)

Income Tax – Section 37.

Keywords – Penalty levied by foreign airports – Default or mistake of the passengers.

The assessee was engaged in the international transportation of passengers and cargo. The passengers carried by the assessee on its international carrier and if on arrival at the foreign airport, passengers were not found in possession of proper or sufficient documents for enabling them to enter in such foreign countries, the foreign countries/nations levy penalty on the assessee-carrier aircraft in accordance with their laws. The assessee claimed such penalties/fines u/s 37 of the Act. But the AO, after examination of facts, came to the conclusion that the assessee’s claim of penalty/fines was hit by Explanation 1 of Sub-section (1) of Section 37 of the Act. Accordingly, the AO disallowed the claim of assessee for an amount of Rs.1,20,27,531/-. On appeal, CIT(A) upheld the order of AO.

On appeal, Tribunal held that,

Whether penalty or fines paid in foreign country by the airlines for default or mistake of the passengers and not on account of any violation or infraction of law by itself can be allowed u/s 37 as such expenses are incurred wholly and exclusively for the purpose of business – YES : ITAT

++ penalty or fine paid at the foreign airport is ordinarily an amount paid in settlement of charges in respect of offence/guilt on the part of the passenger which is neither accepted nor proved. Consideration for payment of such penalty or fine is in respect of any offence/guilt which is neither proved nor accepted and is in the nature damages paid for settlement of disputes to avoid bad reputation and safeguard business interest. In AY.1993-94 such disallowance was considered by CIT(A). However, unfortunately the CIT(A) erroneously considered the activity of the assessee as illegal and disallowed the same. It was noted that as such activity of the assessee is neither illegal nor illegitimate. The assessee’s activity in the International Air Transport is carried on with due authority and licensed by the Govt. of India and also the respective countries to which it operates its flights. Penalty or fines are paid in foreign country by the assessee for default or mistake of the passengers and not on account of any violation or infraction of law by the assessee. However, under the International Air Transport laws, it is the obligation of the Airlines to bear such penalty/fines which arise in the ordinary course of carrying on its business. The penalty/fine which is incurred by the assessee should be considered in the context of nature of business carried on by the assessee. In this case, the assessee’s business is fully authorized and carried on legally. However, the assessee incurs the liability for payment of penalty/fine as the documents are misplaced or lost by the passengers for which the assessee cannot be held liable and over which the assessee has no control. The assessee had not made any contravention of law but inspite of the assessee exercising all care as explained above, the liability arises which is incidental and arises ordinarily in the course of international Air Transportation business and the fine/penalty is paid on account of default/non-compliance of laws by the passengers and not by the assessee. It will be obvious that the assessee has neither carried on any illegal activity nor committed any breach of law. However, in accordance with the International Air Transport laws the assessee becomes liable to pay such penalties/fines to the Immigration Authority of foreign countries and such penalty or fines in the nature of expenses incurred wholly and exclusively for the purpose of business of the assessee and in the course of ordinarily carrying out its business activity;

++ in the case under consideration, it is observed that the assesses had not committed any infraction of law but the assessee is required to bear the amount of such penalty/fine levied at foreign airports for certain deficiencies in the records/passports/visa of the passengers carried by the assessee and in accordance with International Air Transportation Laws and/or for commercial expediency and such penalties or fines are borne by the assessee though the assessee itself has not made any infraction of law. At this juncture, a distinction is justified between the case of a deliberate violation of law and one which is innocent and unintended. Where a trader has not been at fault and has not been carrying on his business unlawfully or in contravention of the rules but discovering that the goods purchased by him are liable to be confiscated as unauthorisedly imported, saves them from being confiscated by paying a penalty and such penalty may be viewed as part of the purchase price of the goods as laid down by the Bombay High Court in the case of CIT Vs. Pannalal Narottamdas & Co. (1968) (67 ITR 667) and allowable as deduction. Applying the ratio of above case, it will be obvious that the case of the assessee for allowance of payment of penalty/fines is on a very strong footing as in the assessee’s case the assessee had neither committed any violation of law nor any breach or infraction of the law. The penalty/fine paid at the foreign airports has a direct and proximate nexus between the business operations and the loss (penalty or fine) and such penalty or fine is incidental to the carrying on of the assessee’s business in ordinary course of business and hence it is allowable to the assessee as a ‘business loss’ also.

Assessee’s appeal partly allowed

ORDER

Per: Mahavir Singh:

These are appeals filed by both assessee and Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-9, [in short CIT(A)] in Appeal No. CIT(A)-9/DC- 5(2)/286/2010-11 vide order dated 14.12.2011. The assessment was framed by the Dy. Commissioner of Income Tax Circle 5(2), Mumbai (in short DCIT/AO) for the AY 2007-08 vide order dated 24.12.2010, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).

2. The first issue in this appeal of assessee is against the order of CIT(A), confirming the action of Assessing Officer (AO) in disallowing the claim of expenditure debited on account of penalty levied by foreign airports for not found in possession of proper or sufficient documents of the passengers on arrival at foreign airports, enabling them to enter in such foreign countries. The assessee-carrier aircrafts are accordingly levied penalties/fines in accordance with law of the corresponding foreign nations. For this, assessee has raised the following Ground No.1:

“1. On the facts and circumstances of the case and in law the learned C.I.T(Appeals) erred in confirming disallowance made by the Assessing Officer (A.O) of penalty of Rs.1,20,27,531/- paid by the appellant in the course of carrying on its business activities”.

3. Briefly stated facts are that the assessee is engaged in the international transportation of passengers and cargo. The passengers carried by the assessee on its international carrier and if on arrival at the foreign airport, passengers are not found in possession of proper or sufficient documents for enabling them to enter in such foreign countries, the foreign countries/nations levy penalty on the assessee-carrier aircraft in accordance with their laws. The assessee has claimed such penalties/fines u/s.37 of the Act. But the AO, after examination of facts, came to the conclusion that the assessee’s claim of penalty/fines is hit by Explanation 1 of Sub-section (1) of Section 37 of the Act. Accordingly, the AO disallowed the claim of assessee for an amount of Rs.1,20,27,531/-. Aggrieved, the assessee is in appeal before the CIT(A).

4. The CIT(A), relying on the decision of ITAT in earlier year i.e., for AY.2005-06 in ITA No.3827/Mum/2009, dismissed the ground of assessee, wherein the Tribunal in AY.2005-06 has followed the earlier decision of assessee’s case and dismissed the Ground of assessee’s appeal in para 5, as under: –

“5. After hearing the learned representatives of the parties and perusing the material on record, we find that similar issue came up before the ITAT in assessee’s own case for assessment year 2001-02 and 2002-03 wherein the ITAT held as under:-

“16. We have considered the issue. First of all, as submitted these fines and penalties are paid by the assessee company on behalf of passengers/cargo and these are directly not levied on the assessee company. But the assessee company chose to discharge these as a part of commercial activity so as to avoid seizure of the aircraft. However, this argument was not placed before any lower authorities and the nature of penalty/fine had not been examined in detail at all. Considering that the COD has not permitted to agitate this issue in assessment year 2002-03 we are of the opinion that the amount cannot be allowed as business expenditure in the absence of any justification for payment of penalty or fine as a commercial expediency. In these circumstances, we are inclined to agree with the learned CIT(A)’s opinion. Consequently, the ground is rejected.”

6. Since the issue under consideration is identical to that of the case decided by the ITAT in assessee’s own case for AY 2001-02 and 2002-03, we respectfully follow the same and in the light of that we confirm the order of CIT(A) in sustaining the disallowance of penalty of Rs. 38,93,553/- made by the Assessing Officer. Accordingly, this ground of appeal of the assessee is dismissed”.

Aggrieved, now the assessee is in second appeal before us.

5. Before us, Ld. Counsel for the assessee argued that in earlier years, the Tribunal has taken a view against assessee but he stated that recently, the Hon’ble Madhya Pradesh High Court in the case of CIT Vs. Khemchand Motilal Jain, Tobacco Products P. Ltd., [340 ITR 99] (MP) = 2011-TIOL-540-HC-MP-IT has considered the identical situation, wherein the assessee’s claim of business expenditure paid for un-lawful purpose i.e., kidnapping of Director of a company while on business tour and amount paid as ransom was held to be deducted. The Hon’ble High Court held that – Section 364A of the Indian Penal Code provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay, is liable to the punishment as provided in the section, but nowhere is it provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that the payment of ransom is prohibited by any law. In the absence of it, the Explanation to sub-section (1) of Section 37 would not be applicable. In this connection, the Ld. Counsel for the assessee relied on paras 13 and 14, as under:

“13. The contention of the petitioner is that under the Explanation of subsection (1) of section 37, such expenditure could not have been allowed. We find it appropriate to refer section 37(1) and the Explanation to it for ready reference which reads as under:

“The Explanation provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. To ascertain whether any expenditure incurred by the asses-see for any purpose which is an offence or prohibited by law is to be seen.”

Kidnapping for ransom is an offence under section 364A of the Indian Penal Code which reads as under:

“364A. Whoever kidnaps or abducts any person or keeps a person in detention after such kidnapping or abduction and threatens to cause death or hurt to such person, or by his conduct gives rise to a reasonable apprehension that such person may be put to death or hurt or causes hurt or death to such person in order to compel the Government or any foreign State or international inter-governmental organisation or any other person to do or abstain from doing any act or to pay a ransom, shall be punishable with death, or imprisonment for life and shall also be liable to fine.”

14. The aforesaid section provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay, is liable for the punishment as provided in the section, but nowhere it is provided that to save a life of the person if a ransom is paid, it will amount to an offence. No provision is brought to our notice that payment of ransom is prohibited by any law. In the absence of it, the Explanation to sub-section (1) of section 37 will not be applicable in the present case”.

6. Ld. Counsel for the assessee also relied on the decision of the Hon’ble Supreme Court in the case of Ramchandar Shivnarayan Vs. CIT [111 ITR 263] (SC) = 2002-TIOL-1672-SC-IT, wherein it was held that – the loss occurred on account of theft to be a trading loss incurred in the ordinary course of business of purchasing Government securities. It was also held that – the loss by theft is connected directly with and incidental to the business of assessee. In this connection, Ld. Counsel for the assessee relied on para Nos.11 and 12 of the said order, as under:

“11. Now, we proceed to point out the persistently wrong application of the law laid down by this Court by the Andhra Pradesh High Court in two earlier decisions followed in the decision under appeal also. They are : CIT vs. Chakka Narayana (1961) 43 ITR 249 (AP) : TC14R.307 and Maduri Rajeshwar vs. CIT (1964) 51 ITR 213 (AP) : TC14R.310. In Chakka Narayana’s case (supra) the assessee, who was a dealer in cloth and Government securities, encashed Government securities worth about Rs. 20,000. He went to the Madras railway station for taking the cash to his place of business but lost the money on account of theft committed. The High Court referred to Badridas Daga’s case (supra), but yet distinguished it and preferred to follow the majority decision of the Full Bench of the Madras High Court in Ramaswami Chettiar’s case (supra), which, as we have already pointed out, was not approved by this Court in Nainital Bank’s case (supra). The High Court enunciated the law correctly, but committed an error in applying the same to the facts of that case when it said-See (1961) 43 ITR 249 (AP) :

“It could not be posited that it was absolutely necessary for the assessee to cash the cheque issued and to carry the money on his person. It is only when it could be posited that it was part of his business to take money with him that it could be said that the loss was incidental to his business.”

We do not approve of this distinction. Similarly, the Andhra Pradesh High Court took a narrow view in Maduri Rajeshwar’s case (supra) also. There, a stranger came to the assessee’s shop during business hours and, when the assessee had gone into another room to talk on the telephone, the stranger removed the cash box and disappeared. Chandra Reddy C.J., who had delivered the leading judgment in the earlier case as also in this case, if we may point out with respect, committed the same mistake when he said at page 216 :

“It cannot be postulated that the loss sustained by the assessee resulting from the theft committed by the stranger springs directly from his business or is incidental to the carrying on of it. The only connection that could be established in this case is that at the time theft was committed money was in the business premises and it was during business hours. There is no other connection between the theft of the money and the business of the assessee.”

12. It is to be remembered that the direct and proximate connection and nexus must be between the business operation and the loss. It goes without saying that a businessman has to keep money either when he gets it as sale proceeds of the stock-in- trade or for disbursement to meet the business expenses or for purchasing stock-intrade and if he loses such money in the ordinary course of business, the loss is a deductible trading loss. It is immaterial whether the money is a part of the stock- intrade, such as, of a banking company or a money-lender, or is directly connected with the other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it or incidental to it.”

7. In terms of the above, Ld.Counsel for the assessee stated that the Corporation has been engaged in the International Transportation of passengers and cargo. The passengers carried by the Corporation on its Aircraft, if on arrival at the foreign airport are not found in possession of proper or sufficient documents for enabling them entry in such foreign country, the Corporation becomes liable to transport such passengers back and may also become liable to penalty/fine in accordance with law of the foreign country. The documents carried by the passengers are checked by the staff of the assessee-carrier Aircraft at the time of departure from the Indian Airports and the documents are also checked by the immigration authority (Government of India) at the airport of departure. Sometimes, the passengers misplace or lose the travel documents carried by them or the immigration authority at foreign airport may not be satisfied fully with the travel documents and/or visa etc., carried by the passengers. In such event inspite of the assessee-carrier Aircraft at the airport of departure checking the documents, and the immigration authorities of Govt. of India having been duly satisfied about the passenger travelling abroad with proper travel documents etc., on account of reasons beyond the control of the corporation, it may become liable to penalty/fine at the foreign airports and in such an event the assessee-carrier Aircraft is also required to transport such passengers back, who are refused entry in such foreign airport.

8. In terms of above, he argued that the penalty/fine levied by the corresponding foreign countries at the foreign aircraft and transport of such passengers back, who are refused entry of such airports, the expenses incurred are incidental to carry on its legal business and liability for expenses and penalty arises in the capacity of a trader for carrying on its legal business. He argued that such liability whether described as penalty/fine or otherwise, would be an expenditure incidental to the carrying on business and should be allowable u/s.37 of the Act.

9. On the other hand, Ld.CIT-DR heavily relied on the order of the lower authorities and also stated that the issue is squarely covered on the facts in earlier year’s Tribunal order in assessee’s own case.

10. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that penalty or fine paid at the foreign airport is ordinarily an amount paid in settlement of charges in respect of offence/guilt on the part of the passenger which is neither accepted nor proved. Consideration for payment of such penalty or fine is in respect of any offence/guilt which is neither proved nor accepted and is in the nature damages paid for settlement of disputes to avoid bad reputation and safeguard business interest. In AY.1993-94 such disallowance was considered by CIT(A). However, unfortunately the CIT(A) erroneously considered the activity of the assessee as illegal and disallowed the same. In para 22, the CIT(A) has observed as under:

“I cannot see any business expediency from an illegitimate activity and therefore, disallowance made by the AO is perfectly in order”.

11. We noted that as such activity of the assessee is neither illegal nor illegitimate. The assessee’s activity in the International Air Transport is carried on with due authority and licensed by the Govt. of India and also the respective countries to which it operates its flights. Penalty or fines are paid in foreign country by the assessee for default or mistake of the passengers and not on account of any violation or infraction of law by the assessee. However, under the International Air Transport laws, it is the obligation of the Airlines to bear such penalty/fines which arise in the ordinary course of carrying on its business. As stated above, the penalty/fine which is incurred by the assessee should be considered in the context of nature of business carried on by the assessee. In this case, the assessee’s business is fully authorized and carried on legally. However, the assessee incurs the liability for payment of penalty/fine as the documents are misplaced or lost by the passengers for which the assessee cannot be held liable and over which the assessee has no control. The assessee had not made any contravention of law but inspite of the assessee exercising all care as explained above, the liability arises which is incidental and arises ordinarily in the course of international Air Transportation business and the fine/penalty is paid on account of default/non-compliance of laws by the passengers and not by the assessee. We further note the following:

(a) As submitted above the fine/penalty which is paid by the assessee is not for any infraction of law by the assessee but assessee becomes liable for payment of such fines/penalties either on account of the passengers carried by the assessee-aircraft not possessing proper or sufficient documents for enabling them entry in the foreign country or because of the Immigration Authorities in foreign countries being not satisfied with the documents of the passengers.

(b) The documents carried by the passengers are duly checked by the assessee’s staff at the time of departure from Indian Airport and also checked by the Immigration Authorities of the Govt. of India at the Airport of departure.

12. From the above it will be obvious that the assessee has neither carried on any illegal activity nor committed any breach of law. However, in accordance with the International Air Transport laws the assessee becomes liable to pay such penalties/fines to the Immigration Authority of foreign countries and such penalty or fines in the nature of expenses incurred wholly and exclusively for the purpose of business of the assessee and in the course of ordinarily carrying out its business activity.

13. We also noted the fact that the penalties/fines arise not on account of any infraction of law/non-compliance of the requirements of the Immigration Authorities by the assessee but the passengers and such penalties/fines borne by the assessee can also be considered in the nature of business loss allowable to the assessee u/s 28 of the Act itself while computing assessee’s income from business.

14. It is further noted that infraction of law as such and that too not by the assessee but by the passengers carried by the assessee should not however be presumed for disallowance of such expenses which are normally incurred for carrying out the business of the assessee. In this connection, we invite attention to the decision of the Hon’ble Bombay High Court in the case of CIT Vs. P.C.Tangal (184 ITR 88). In this case penalty was imposed by the Customs Authority on the ground that the assessee had under invoiced certain imports and thereby imported more goods than were authorized by the Import License. The penalty was reduced by the appellate authorities and the Hon’ble Bombay High Court held that such penalty was allowable as deduction u/s.37(1) of the Act as it could not be determined that the assessee has himself committed an infraction of law.

15. In the case under consideration, it is observed that the assesses had not committed any infraction of law but the assessee is required to bear the amount of such penalty/fine levied at foreign airports for certain deficiencies in the records/passports/visa of the passengers carried by the assessee and in accordance with International Air Transportation Laws and/or for commercial expediency and such penalties or fines are borne by the assessee though the assessee itself has not made any infraction of law. At this juncture, a distinction is justified between the case of a deliberate violation of law and one which is innocent and unintended. Where a trader has not been at fault and has not been carrying on his business unlawfully or in contravention of the rules but discovering that the goods purchased by him are liable to be confiscated as unauthorisedly imported, saves them from being confiscated by paying a penalty and such penalty may be viewed as part of the purchase price of the goods as laid down by the Hon’ble Bombay High Court in the case of CIT Vs. Pannalal Narottamdas & Co. (1968) (67 ITR 667) and allowable as deduction. Applying the ratio of above case, it will be obvious that the case of the assessee for allowance of payment of penalty/fines is on a very strong footing as in the assessee’s case the assessee had neither committed any violation of law nor any breach or infraction of the law. As noted earlier the expenses incurred by the assessee on fines/penalties at foreign airport is also in the nature of loss incurred in the carrying on assessee’s business and it is incidental to carrying on of such business of International Air transportation of passengers.

16. From the above stated facts, it will be obvious that the penalty/fine paid by the assessee has been incurred on carrying out an operation of the assessee’s business and it is incidental to the business operations. Reliance in this case is placed on the decision of CIT Vs. Howrah & Co. Pvt. Ltd. (1989) 44 Taxman 409 (Cal).

17. Further in the case of Ramchand Shrinarayan Vs. CIT (1978) [111 ITR 263] = 2002-TIOL-1672-SC-IT It was held by the Hon’ble Supreme Court that if there is a direct and proximate nexus between the business operations and the Loss and it is incidental to its business operation and doing all that is incidental for profit earning, such losses would be allowable as a business loss u/s.28 of the Act. We noted that on the above mentioned facts in the assessee’s case the penalty/fine paid at the foreign airports has a direct and proximate nexus between the business operations and the loss (penalty or fine) and such penalty or fine is incidental to the carrying on of the assessee’s business in ordinary course of business and hence it is allowable to the assessee as a ‘business loss’ also. We order accordingly.

18. The next issue in this appeal of assessee is against the order of CIT(A), confirming the action of AO, treating the income derived from interest as ‘income from other sources’ instead of income declared by assessee as ‘business income’. For this, assessee has raised the following Ground No.2:

“2

(i) On the facts and circumstances of the case and in law the learned CIT(Appeals) erred in disregarding and ignoring the decisions of C.I.T(Appeals) erred in appellant’s own case in Asst. Years 2001-02 to 2004-05 where the Hon’ble I.T.A.T. had held that “Income from Interest” on Short Term Deposits was assessable as “Business Income” of the appellant.

(ii) The learned C.I.T.(A) erred in confirming action of the A.O. to tax “Income from Interest” on Short Term Deposits of Rs.74,37,00,000/-as “Income from Other Sources” and rejecting the claim of the appellant that such interest income was assessable as “Income from Profits and Gains of Business”.

19. At the outset, Ld. Counsel for the assessee stated that this issue is covered by the Tribunal’s decision in assessee’s own case for the AY.2001-02 and further, the Department’s appeal against the ITAT’s order were decided by the Hon’ble Bombay High Court vide order dt.14-06-2012, confirming order of ITAT stating that the interest income is taxable as ‘business income’.

20. We noted that the assessee has earned interest income of short term deposit amounting to Rs.74,37,00,000/- declared as ‘business income’. However, the AO treated this interest income under the head ‘income from other sources’, whereas the Tribunal in AYs.2001-02 & 2002-03 in ITA Nos.6865 & 6866/Mum/2005, dated 31-10-2008 has considered this issue and held the same as ‘business income’ by observing as under:

“We have considered the issue, examined the facts and the case laws. It is true that various judicial principles were established on the basis of the facts available in each case. If the funds arc nor having any business requirement and funds are deposited for Long Term Investments or funds are received and invested which are not required for business purposes the income thereon can be considered as ‘Income form Other Sources’. The various case laws relied upon by the learned D.R. are given in the context where the surplus funds were not being used for the business. However, in the various case laws relied upon by the learned counsel for the assessee, the deposits are being used in the course of business and are only deposited for short term periods or in current accounts and the source of funds are business receipts. In the present case, there is no dispute that the funds are sale proceedings in the business activities of the assessee company abroad. It is also seen that instead of repatriating the funds to India, the assessee was permitted to utilize the funds for their day-to-day administration purposes as well as for repayment of various loans taken for business purposes by retaining the funds abroad with the necessary permission from RBI. It is also a fact that these deposits are kept in Current Accounts or in short term deposits for their immediate use for business purposes. On these facts it is to be held that the funds are being used in the business and the incidental business incomes on the short ten deposits abroad are to be considered as business receipts only. This view is also supported by the action of the CBDT in taking up the assessee’s case before the inland revenue authorities of UK when the same was being taxed as ‘Income from Other Sources’ not covered by the DTAA between UK and India. These facts are established in the order for the Assessment Year 1993-94 of the learned CIT(A) and as submitted by the assessee, the matter was not challenged and accepted upto Assessment Year 1996-97. For these reasons, we are of the opinion that the interest earned on short term deposits is to be considered as Income from Business. Consequently, the Assessing Officer is directed to treat the interest income as income from Business. The assessee’s grounds are allowed on this issue”.

21. This was affirmed by the Hon’ble Bombay High Court and answered this issue in favour of assessee vide paras 7 and 8 as under:

“7. It is of vital importance to note the representation made by the CBDT to the Revenue Authorities of U.K. in 1990 to the effect that the interest income earned in England from the current account and short term fixed deposits were not income from other sources chargeable to tax in U.K. but in fact income from business. The very fact that in the year 1990, the Central Board of CBDT through its Chairman had represented to the Revenue Authorities in U.K. that the interest income earned on amounts kept in current account arid short terms fixed deposits was essentially business income and not income from other sources is certainly binding upon the department, more so when they are unable to show any difference on facts when the representation was made in 1990 and during the Assessment years 2001-02 and 2002-03 in question.

8. In view of the above, so far as question (b) is concerned, no substantial question of law arises and therefore the same is dismissed.”

22. When these facts were confronted, Ld. CIT-DR, he fairly agreed that there is no difference in facts in this year, what was in AY.2001-02 and he could not controvert or could not distinguish the decision of Hon’ble Bombay High Court or of the Tribunal. We noted that this issue is squarely covered in favour of assessee and against the Revenue and respectfully following the view taken in AY.2001-02 by the Hon’ble Bombay High Court, we reverse the order of lower authorities and allow this issue of assessee’s appeal.

23. The next issue in this appeal is as regards the order of CIT(A), confirming the action of AO in holding that the provisions of Section 14A of the Act are applicable to the dividend income received by assessee. For this, assessee has raised the following Ground No.3:

“3(i) On the facts and circumstances of the case and in law the learned C.I.T.(A) erred in confirming action of the A.O. that provisions of Sec. 14A were applicable to dividend received by the appellant on “Trade Investments”.

WITHOUT PREJUDICE TO ABOVE on the facts and circumstances of the case and in law the learned C.I.T.(A) erred in directing the learned A.O. that disallowance u/s. 14A may be reworked on dividend received from Indian Companies of Rs.2,11,18,743/-“.

24. We noted that this issue is also covered by the Tribunal’s decision in assessee’s own case for AY.2007-08. Ld. Counsel for the assessee before us stated that total dividend received by assessee is as under:

(e) Total Dividend Received 
NACIL (I) Foreign Dividend27,96,151.39
NACIL (A) Foreign Dividend2,11,18,743.39
 ——————–
TotalRs.2,39,14,898.63
 ——————–

25. He stated that this foreign dividend is not exempt and assessee has not claimed any exemption u/s.14A of the Act. Hence, he stated that once there is no exempt income, the issue is covered by the decision of the Hon’ble Bombay High Court in the case of Pr.CIT Vs. Ballarpur Industries Limited in Income Tax Appeal No.51 of 2016 = 2016-TIOL-3293-HC-MUM-IT, wherein this issue has been considered following the judgment of Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CIT (2015) 378 ITR 33 (Delhi) = 2015-TIOL-2070-HC-DEL-IT held as under: –

“On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.”

Hence, this issue is decided in favour of assessee.

26. The next issue in this appeal of assessee is against the order of CIT(A), confirming the action of AO in disallowing the provision made in respect of accounts of Frequent Flyer Programme. For this, assessee has raised the following Ground No.4:

“4. On the facts and circumstances of the case and in law the learned C.I.T.(A) erred in confirming disallowance of Rs. 115.90 Million out of provision of Rs.118 Million made in the accounts in respect of Frequent Flier Programme”.

27. Brief facts are that the AO noticed that the assessee-company has made provision under Frequent Flyer Programme of Rs.118.1 Million. The AO required the assessee to justify as to how such provision is deductible and also to furnish the working of such claim. The assessee explained vide letter dated 25-10- 2010 and noted that the assessee in a view to encourage the passengers to prefer travelling by the same air-line over flights of other air-lines, introduced the reward programme styled as ‘Mileage Accumulation Programme/Frequent Flyer Scheme’ over the customers. Accordingly, a provision was made for Frequent Flyer Programme of Rs.115.90 Million as outstanding in the Balance Sheet as on 31-03-2008. Ld. Counsel for the assessee explained that the AO inferred that out of the provisions of Frequent Flyer Programme, a sum of Rs.118.1 Million, the assessee actually incurred expenses of Rs.2.2 Million only during the FY.2007-08 relevant to AY.2008-09. According to the AO, the excess provision has been made on this account of Rs.115.90 Million. Ld. Counsel for the assessee stated that such excess provision of Rs.115.90 Million was contingent in nature and this view was taken in earlier assessment years also and since the excess provision was contingent liability, the same was disallowed. Assessee filed the complete details of Frequent Flyer Programme in assessee’s Paper Book at Pages 43 to 48 and reconciled the entire provision made of Rs.11,81,12,010/-. Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for AY.2007-08 in ITA No.5204/Mum/2011, dt.01-04-2016, vide para 6, as under:

“6. The last ground pertains to deleting the disallowance of Rs.455.28 lakhs made on account of frequent flier program (FFP). The ld. DR defended the disallowance made by the Assessing Officer, whereas, the ld. Counsel for the assessee contended that the impugned issue is covered by the decision of the Tribunal in the case of Jet Airways Ltd. (ITA No.3201/Mum/2003 and 6084/Mum/2003) order dated 30/05/2006 =2006-TIOL-267-ITAT-MUM. This factual matrix was not controverted by the ld. DR.

6.1. We have considered the rival submissions and perused the material available on record. There is uncontroverted finding that the liability in respect of FFP miles accrues simultaneously with a passenger undertaking travel on a fare paying ticket, therefore, it cannot be a contingent liability. Following the aforesaid decision of the Tribunal dated 30/05/2006 and further in the absence of any contrary facts/decision and the case laws relied upon in para 7.5 of the impugned order, we find no infirmity in the conclusion of the Commissioner of Income Tax (Appeal).

Finally, the appeal of the assessee is allowed and that of the Revenue is dismissed”.

28. As the issue is covered in favour of assessee, respectfully following the decision of the Co-ordinate Bench decision, we allow this issue of assessee.

29. The next issue in this appeal of assessee is against the order of CIT(A), confirming the addition made to income in respect to disputed bills, amounting to Rs.116.3 Million. For this, assessee has raised the following Ground No.5:

“5. On the facts and circumstances of the case and in law the learned C.I.T.(A) erred in confirming additions made to income of the appellant by the A.O. of Rs.116.3 Million in respect of disputed bills”.

30. Briefly stated facts are that the AO noticed from the Government’s Auditor’s note qualifying remark that the amount of Rs.116.3 Million is income actually accrued during the FY.2007-08, relevant to AY.2008-09. The AO reproduced the relevant note, which is being again reproduced herein for the sake of clarity, which reads as under:

“The company has neither accounted for the revenue of R.116.3 million raised in respect of invoices raised on M/s. US Bank Trust National Association during 2007-08 towards ferry flight including crew cost modification of 777-200 ER aircraft nor disclosed the circumstances; in which revenue recognition has been postponed pending resolution of significant uncertainties, if any, as required under AS-9 prescribed under section 211(3) of the Companies Act, 1956.”

31. In view of the above qualifying remark by the Government Auditor, the AO charged this amount of Rs.116.3 Million as taxable in this year. Aggrieved, assessee preferred an appeal before the CIT(A), who also confirmed the action of AO. Aggrieved, now the assessee is in appeal before the Tribunal.

32. Ld. Counsel for the assessee before us argued that the disputed bill relates to claim of reimbursement of expenses from the lessors of Air-craft, obtained on lease by the assessee and in respect of which, assessee has raised provisional bills amounting to Rs.116.3 Million. He explained that this fact was explained even to Comptroller and Auditor General (CAG) and narrated that since the matter has been crystalised in October, 2008, accounting action could not be taken in FY.2007-08 relevant to AY.2008-09. For this, assessee’s Counsel placed reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs. Gajapathy Naidu (1964) [53 ITR 114] (SC) = 2002-TIOL-804-SC-IT-LBThe assessee before us now claimed that the authorities have rejected the entire invoice value for overhaul of engine to the extent of Rs.105.90 Million and settled such invoices towards ferry cost only partly to the extent of Rs.4.53 Million for the FY.2008-09, relevant to AY.2009-10. It was also explained that on settlement of claim in October, 2008, such amount of Rs.4.53 Million was accounted in the year 2008-09. When these facts were asked to file in details, Ld. Counsel for the assessee as well as the Ld. CIT-DR agreed that this matter can be restored back to the file of AO for fresh verification and adjudication. In terms of concession given by both the sides, we restored this issue back to the file of AO, who will consider the issue as per law. This issue is accordingly treated as allowed for statistical purposes.

33. The only issue in Revenue’s appeal is as regards the order of CIT(A), confirming the addition made by the AO on account of excess provision for obsolescence or write back the provisions, amounting to Rs.358.50 Crores. For this, Revenue has raised following Ground Nos. 1 & 2:

“1. Whether on the facts and in the circumstances and in law, the Ld.CIT(A) erred in directing the Assessing Officer to delete the addition of Rs.358.50/- crores made by the assessing officer on account of excess provisions for obsolescence without appreciating the fact that the provision made is contingent liability and was not incurred by the Assessee?

2. Whether on the facts and in the circumstances and in law, the Ld.CIT(A) erred in directing the Assessing Officer to delete the addition of Rs.358.50/- crores without appreciating the fact that the provision was written back and credited to the P/L A/c. and was further reduced from the total income in the computation of income?”

34. At the outset, Ld. Counsel for the assessee stated that this issue has been adjudicated by the CIT(A) in AY.2007-08 and the Department has accepted the decision and not filed any appeal in any higher forums regarding the disallowance of exclusion of provisions for obsolescence transfer to credit of Profit and Loss A/c while computing business income. When this fact was pointed out, Ld. Counsel for the assessee stated that the Tribunal can take a view. The assessee has filed complete details for AYs.2004-05, 2005-06 and 2006-07, wherein excess provision for obsolescence transferred amount to the credit of Profit and Loss A/c and exclusion by assessee while computing business income was not added by the AO. The relevant details are as under:

Account Year: 31.03.2008Asst. Year: 2008-09

Excess Provision for Obsolescence transferred to the credit of Profit & Loss A/c and excluded in the computing Business Income.

YearAsst.YearAmt. Credited to P&L A/cRemarks
2004-052005-0678,88,13,239Not added in Asst. by AO
2005-062006-071,40,78,00,000Not added in Asst. by AO
2006-072007-0842,87,36,908Added by AO on completing Asst.Addition deleted by CIT(A)Dept. has not filed appeal to I.T.A.T.

35. We noted that the CIT(A) has considered this issue and following the findings of CIT(A) in AY.2007-08, deleted the addition by observing in para 5.3, as under:

“5.3 Ground of appeal No. 3 :

5.3.1 This issue has been discussed by my Ld.Predecessor in appellant’s own case in assessment year 2007-08 vide appeal No.CIT(A)-9/AC 5(1)/252/2009-10 dated 28.03.2011 vide para No.3. The LAO as well as the LAR have argued that the facts are identical in assessment year 2007-08 and 2008-09 with reference to this particular disputed issue. Since the facts are identical, hence the decision of my Ld.Predecessor is reproduced from the appellate order for Assessment year 07-08 as under:

“In ground No.2, the appellant has challenged the action of the assessing officer against addition of Rs.42,87,36,908/- credited to the P&L Account for the year ended 31st March 2007 in respect of transfer from provision for obsolescence.

3.1 The facts are that the appellant is engaged in the business of international air transport of passengers and cargo, in accordance with the consistently followed accounting practice based on the method advised by International Air Transport Association has provided for ‘Provision for Obsolescence’ of aircraft related stores 0nd spare parts. This matter is disclosed in the significant accounting policies in the Audited Accounts, It is further stated by the Counsel of the assessee that the appellant has regularly made provision was always disallowed by the appellant in Computation of Income submitted with Return of Income of determine “Business Income” as per I.T. Act, 1961.

3.2 It is further submitted that if it is observed at the close of the year that the final balance for provision for obsolescence is in excess, such excess amount was transferred to the credit of P&L Account such allowance credited to Profit and Loss Account was excluded from income to compute taxable income of respective years. The appellant has also submitted a statement showing treatment of provisions for obsolescence in earlier years from assessment years 2002-03 to 2006-07.

3.3 In the appellate hearings, the appellant has also submitted copies of Computation of Income and Assessment orders for Assessment Years 2002-03 to 2006-07 in support of the submissions that such provisions debited to the P & L Account was excluded while computing taxable income of the appellant. It is finally submitted that the provisions for obsolescence debited to P & L Account has never been claimed for computing taxable income of the appellant and never been allowed in the income tax assessments of the appellant.

3.4 I have considered the submissions of the appellant and considering the fact that such provisions was never allowed as deduction in earlier years, any amount transferred to the credit of P & L Account from such “Provisions for Obsolescence” could not be added to the income of the appellant and accordingly the Assessing Officer is directed to delete the addition of Rs.42,87,36,908/- made in respect of Provisions for Obsolescence’.

5.3.2 Respectfully following The decision of my Ld.Predecessor and keeping in view that the facts are absolutely identical in nature for assessment year 2007-08 and the assessment year 2008-09 on this particular issue, the addition made by the LAO is deleted. Ground of appeal No.3 is allowed”.

36. As the issue is no longer res integra we confirm the order of CIT(A) deleting the addition. Even for the sake of consistency, the issue is in favour of assessee.

37. In the result, the appeal of Revenue is dismissed & the appeal assessee is partly allowed.

(Order pronounced in the open court on 19.07.2019)

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