TDS deductible on Commission retained by Airline Operators for Collecting Passenger Service Fee

M/s. Delhi International Tax Airport Pvt. Ltd Vs DCIT (ITAT Bangalore)

Once it has been repeatedly held that Airlines Operators are collecting the PSF on behalf of the Airport Authorities/Operators and the PSF is to be paid to the airport authority in terms of the notifications issued by the MOCA at different points of time,the relationship of Principal and the Agent exists between the airport authority and the airlines operator. We have also examined other contentions of the assessee that TDS can only be deducted where the assessee makes the payment of commission. In the instant case, since the collection charges or the commission are retained by the Airlines at 2.5% of the invoice amount, the remaining was paid to the assessee, there was no occasion to deduct the TDS. In this regard, our attention was invited to judgment of the Rajasthan High Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. [2017] 87 com295 (Rajasthan). But in this regard, the Board has issued a circular No.619 dated 04.12.1991 in which it has been clarified in para 6 that the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Para 6 of the circular is extracted hereunder for the sake of reference:

“6. A question may raise whether there would be deduction of tax at source under section 194H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consign-ee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time, as explained in the succeeding paragraphs.”

In the judgments referred to by the assessee, this clarification by the Board was not at all examined. Therefore, we are of the view that the judgments would not render much assistance to the assessee. Once it has been held in the case of assessee that they were collecting the PSF on behalf of the Airport Authorities/Airlines Operators, the collection charges or the commission, whatever nomenclature is given, retained by them assumes the character of commission paid by the Principal to its agents and the Principal is required to deduct the TDS on such payments to its agent under section 194H of the IT Act. In the light of these facts, we are of the considered view that the assessee is required to deduct the TDS on the amount retained by the Airlines while making the payment to the assessee.

 

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

These appealsare preferred by the assessee against the respective orders of CIT(A). Since common issues are involved in these appeals, they were heard together and are being disposed off through this single consolidated order. We however prefer to adjudicate them one after the other.

2. ITA No.636/Bang/2017

mThrough this appeal, assessee has assailed the order of the CIT(A) for the assessment year 2011-12, inter alia, on following grounds:

Ground I: Addition on account of disallowance of collection charges of Rs.5,22,04,677/- retained by the airlines under section 40(a)(ia):

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the Deputy Commissioner of Income-tax, Central Circle 2(2), Bangalore (hereinafter referred to as AO) in making the disallowance of collection charges of Rs. 5,22,04,677/- retained by the airlines under section 40(a)(ia) on completion of assessment U/s. 153A.

2. The CIT(A) failed to appreciate and ought to have held that the provisions of section 194H of the Income Tax Act,1961 are not applicable in as much as there is no principal and agent relationship between the appellant and the airlines. Further the appellant has made detailed submission in support of claim that the airlines has discharged its incometax liability on collection charges of Rs5,22,04,677/- retained by the airlines wherever applicable

3. The Appellant therefore prays that the Assessing officer be directed to allow the claim of collection charges of Rs. 5,22,04,677/-.

Ground II: Addition of Rs. 13,21,44,035/- by treating the duty credit  entitlement under SFIS accrued as grant related to revenue.:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of AO in adding an amount of Rs.13,21,44,035/- by treating the duty credit entitlement under SFIS accrued as grant related to revenue on completion of assessment U/s. 153A which was reduced from the capital cost for the purpose of allowing depreciation in the original assessmentproceedings u/s 143(3) of the Income Tax Act.

2. The Appellant therefore prays that the Assessing Officer be directed to delete the addition made of Rs.13,21 ,44,035/-.

Ground Ill :Disallowance u/s 14A

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of AO for disallowance of an amount of Rs.44,10,557/- u/s.14A as expenses incurred for earning exempt income of Rs.Nil/-.

2. The learned CIT(A) failed to appreciate and ought to have held that the Appellant had in the course of assessment proceedings has claimed that disallowance U/s 14A of the Act should be restricted to dividend income of Rs.Nil/- earned by the Appellant.

3. The Appellant therefore prays that AO be directed to restrict the disallowance U/s 14A at Rs.Nil/- being to the amount of exempt income earned during the year”

Ground IV: Not allowing the deduction for 1130^th of upfront fee and repair and  maintenance for AY 2007-08 and depreciation u/s 32 on repairs and  maintenance for AY 2008-09 and AY 2009-10:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the AO in not allowing the deduction for 1/30^thof upfront fee and repair and maintenance for AY 2007-08
and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010-11.

2. The CIT(A) failed to appreciate and ought to have held that AO has not accepted order of the CIT(A) and has further filed appeal before ITAT. Considering non acceptance of order of CIT(A), the AO based on the decision given in the assessment order of AY 2007-08, AY 2008,-09, AY 2009-10 and AY 2010-11 completed u/s 143(3) of the Income tax Act, 1961 should have allowed deduction.

3. The Appellant therefore prays that the Assessing officer be directed to allow to allow the deduction for 1/30^thof upfront fee and repair and maintenance for AY 2007-08 and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010-11.

Ground V: The Appellant craves leave to add, alter and/or amend all or any of the foregoing grounds of appeal.

3. With regard to ground No. 1, the facts in brief borne out from the orders of the authorities below are that the assessee has entered into Operation Management and Development Agreement (OMDA) vide agreement dated 04.04.2006 with the Airport Authority of India (AAI) pursuant to which assessee is required to undertake the function relating to operation, maintenance& development, design, construction, organization, finance and management of the Indira Gandhi International Airport, New Delhi (IGA) and to perform certain aeronautical and non-aeronautical services at the IGI Airport. The major source of revenue of the assessee/appellant is from providing aeronautical services at the IGI Airport which includes landing fees, parking and housing fees, passenger service fees (PSF), Common User Terminal Equipment counter charges (CUTE) and Common Infrastructure Charges (CIC) etc. All these aeronautical service charges are regulated by the Airports Economic Regulatory Authority of India (AERA) in terms of Concession Agreement. The income derived from providing non-aeronautical services, which is primarily from allowing the concessionaires to undertake operation and management of retail outlets in the Passenger Terminal Building areas and other activities at the Airport site are not regulated by AERA. Clause 3 of State Support Agreement (SSA) specifies various support, which the Government of India has undertaken to provide to assessee company. The PSF chargeable at the Airport shall be inclusive of the cost of security expenditure on the designated security agency (being 65% of the PSF) per embarking passenger (“Security Component”) (“PSF-(SC)”) and the facilitation component payable to the assessee company, (being 35% of the passenger Service Fee), per embarking passenger (“Facilitation Component”) (“PSF-(FC)”). The PSF- (SC) shall be revised as per directions of Government of India. The assessee has collected the PSF-(SC) & PSF-(FC) through Airline Operators at IGI Airport. The Appellant is maintaining the PSF-(SC) accounts separately in accordance with the procedure laid down in SOP issued by MoCA, dated January 19, 2009 and therefore the financial statement of the Appellant does not include the balances of PSF-(SC).

4. The assesseehas received Rs.2,01,27,480/- as PSF-(SC) and Rs.3,20,77,196/- as PSF-(FC) through Airline Operators for which the assessee has raised the invoices on Airline Operators and Airline Operators were paying to the assessee after retaining the amount @ 2.5% of the invoice value on account of prompt payment by them to the assessee on or before due date. The assessee has recognize the revenue from PSF-(FC) in its books of account net of prompt payment rebate/cash discount and offered the same to tax in the  assessment year under consideration. The revenue from PSF-(SC) is also recognized net of prompt payment rebate/cash discount allowed by the assessee on making prompt payment by them on or before due date. However, the assessee has not offered the net surplus related to PSF(SC) as its income, as the assessee considers the net proceeds of PSF(SC), held in fiduciary capacity and collected the same on behalf of Government of India and the income from Government of India is not liable for tax as per Article-289(1) of the Constitution of India.

5. The assessee was asked by the AO to furnish the details regarding the collection charges vide notice under section 142(1) and in response thereto, assessee filed areply stating therein that assessee company was offering the income to tax only on the net amount of collection charges/cash discount which was not acceptable to the AO. According to the
AO, the company should have offered the entire passenger service fees collected to tax and thereafter should have debitedthe expenditure. The AO further observed that cash collection or the cash discount charges is nothing but a commission paid by the assessee company to Airlines operator towards collection of PSF. Assessee should have deducted TDS on collection charges as provided under section 194H of the Income Tax Act (hereinafter called as an “Act”). Since the assessee has not deducted the tax on such payment, the AO had disallowed collection charges or cash discount of Rs.5,22,04,677/- in assessment year 2011- 12 paid by the assessee to the Airlines operator having invoked the provisions of section 40a(ia) of the Act and was added to the income of the assessee.

6. Assessee preferred an appeal before the CIT(A) with the submission that the AO failed to appreciate that the Airlines make payment to the assessee/appellant after retaining the amount of service fees/cash discount/prompt payment rebate. Firstly it is not liable to TDS and secondly, it was not possible for the appellant to deduct any tax at source since the assessee has never paid any amount to the Airlines.

7. It was further contended that provisions of Section 194H are applicable only in those cases where the element of the agency is in existence. In the present case, there was no element of agency between the appellant and the Airlines who are receiving the amount of PSF (FC&SC) and passing the same to the appellant in terms of StateSupport Agreement (SSA). The receipt of PSF (FC & SC) by the Airlines as part of sale of Air ticket is being done in normal course of Airlines business. It was further contended that there is nothing on record  to prove that element of agency existed between the appellant and the Airlines.Thus the transactions between the Airlines and the appellant/assessee are based on principal to principal and there does not exist any agreement between the Airlines and the appellant for
providing any kind of service. The Airlines are only facilitating in receiving the amount of PSF (FC&SC) as part of sale of tickets and passing the same to the appellant out of total amount collected, after retaining an amount of 2.5% towards facilitating this as service/discount. Since there is no existence of agency between the Airlines and the appellant, the provisions of section 194H cannot be applied. It was further contended that in the present case, the
customer buy the tickets through Airlines/agencies and payment of PSF (FC & SC) as part of sale price and thus becomes obligatory on the part of the Airlines who have interface with the customers to make the payment of the PSF (FC & SC) to the Airlines who in turn passes the amount so received to the assessee. While making the payment to the assessee, the Airlines deduct a small percentage from the total amount of PSF (SC & FC) and retains the same as
discount charges, etc.

8. It was further contended that in the event it is held that income of PSF (SC) is not includable in the hands of the appellant, then in that event, amount of service fees relatable to PSF (SC) cannot be considered for disallowance in as much as the same was not debited to the P & L account and further no deduction for the same either directly or indirectly was claimed or allowed to the assessee. It was further contended that if the AO considers that appellant is liable to deduct TDS under section 194H of the Act,there is no shortfall for revenue for the reasons that Airlines operator should have discharged income tax on the service fees/cash discount/prompt payment rebate retained by them. The CIT(A) re-examined the claim of the assessee but was not convinced with the contentions of the assessee and confirmed the disallowance having relied upon the para 6 of the Circular No. 619 dated 04.12.1991.

9. Aggrieved, the assessee preferred an appeal before the Tribunal and reiterated its contentions as raised before the CIT(A). During the course of hearing, the learned counsel for the assessee invited our attention to the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Ansal Landmark Township (P.) Ltd. (2015)(61 taxmann.com 45)(Del) in which it was held that proviso to section 40(a)(ia) inserted by the Finance Act, 2012 w.e.f. 01.04.2013 creates a legal fiction where an assessee fails to deduct tax in accordance with provisions of chapter XVIIB where such assessee is deemed not to be an assessee in default in terms of the first proviso to sub section (1) of section 201 of the Act, then in such event “it shall be deemed that assessee has deducted and paid tax on such sum on the date of furnishing of return of income by the resident payee referred to in said proviso”. Reliance was also placed upon the order of the Tribunal in the case of Shri. G. Shankar Vs. ACIT in ITA No.1832/Bang/2013 and Shri. S S Warad Vs. Add.CIT in ITA No. 375/Bang2012, in which similar view was taken by the Tribunal. Reliance was also placed upon various judgments of the Tribunal in this regard.

10. The learned counsel for the assessee further placed reliance upon the following orders of the Tribunal in support of his contentions that no TDS under section 194H is required to be deducted when payment is made to the assessee after deducting certain fees as per terms and conditions:

1. ITO Vs. Inter Serve Travels Pvt. Ltd in ITA No. 3526/Del/2010

2.  M/s. Gems Paradise Vs. ACIT in ITA No. 746/JP/201

3.  Shri. Bhandari Jewellers Vs. the ACIT in ITA No. 745/JP/2011

4. ITO Vs. Jet Airways (India) Ltd., in ITA No. 7439, 7440 & 7441/Mum/2010

5. ACIT Vs. Jet Airways (India) Ltd., in ITA No. 5264/Mum/2012

6. DCIT Vs. Jet Airways (India) Ltd., in ITA No.4348/Mum/2012

7. DCIT Vs. Vah Magna Retail (P) Ltd., in ITA No.905/Hyd/201 1

8. DCIT Vs. Future Value Retail Ltd., in ITA No.2612/Mum/2014

9. DCIT Vs. Future Value Retail Ltd., in ITA No.3968/Mum/2015

10. DCIT Vs. Air India Ltd., in ITA No.1721, 1722/Mum/2015, 4441, 5591, 5592 and 5593/Mum/2014.

Copies of all these orders are placed on record.

The learned DR on the other hand has placed heavy reliance upon the order of the CIT(A).

11. Having carefully examined the orders of the authorities below and the documents placed on record, we find that as per the various orders of the MOCA, the passenger service fee is to be charged by the Airlines Operators at the time of booking of tickets of passengers. The 65% passenger fees per embarking passenger is of security component and balance 35% of passenger service fees is a facilitation component. The assessee has collected passenger service fees [PSF (SC & FC)] through Airlines operator at the IGI Airport. The assessee has received the said amount through Airlines operators. The Airlines operators while paying the same to assessee are retaining the amount @ 2.5% of the invoice value on account of prompt payment by them to the assessee before due date. The dispute in these appeals is with regard to nature of deduction at the rate of 2.5% of the invoice value on account of prompt payment to the assessee by the Airlines Operators. The reliance was placed upon various pronouncements in which the dispute was with regard to nature of payments by the Airlines Operators to the airport authorities in the hands of Airlines operators. In the case of Jet Airways on which heavy reliance was placed the contention of the assessee was that it was collecting the PSF on behalf of the Airlines Operators and after collecting it, it was paid to them. Therefore, there is no liability of TDS under section 194I of the Act. In that case, the Tribunal has categorically observed that Airlines Operator i.e., Jet Airways only collect the PSF from the passengers for and on behalf of the of the Airport Authorities/Operators and passes them to the Airport Authorities/Operators. Therefore, provisions of section 194I are not attracted. The relevant observation of the Tribunal in the case of ACIT Vs. Jet Airways in ITA No.5264/Mum/2012 is extracted hereunder for the sake of reference: 

“12. We have carefully considered the rival submissions and perused the orders of the authorities below and the relevant material evidence brought on record. Let us first see the cause of PSF, cause lies in Rule 88 of the Indian Aircraft Rules, 1937, which provides as under :-

“the licensee is entitled to collect fees to be called as Passengers Services Fees (PSF) from the embarking passengers at such rate as the Central Government may specify and is also liable to pay for security component to any security agency designated by the Central Government for providing the security services”

A perusal of the aforementioned rule clearly shows that it is a statutory liability for every licensee to collect PSF. Since it is a statutory liability and the meaning given by the statute has to be considered and in this case the Indian Aircraft Rules, 1937 has used the term “Fees”, therefore, same meaning has to be given while considering the PSF. It is not in dispute that the assessee is only acting as a conduit between ITA No.5264/12 the embarking passengers and the Central Government agency. This view is also fortified by the fact that out of Rs.200/-, Rs.130/- is the security component, which is deposited in a separate escrow account, which is operated and can be utilized by airport concerned only to meet the security related expenses of that airport.

13. Further it is pertinent to note that the CBDT in its Office Memorandum dated 30-06-2008 has clearly stated the fact that the licensee of the airport i.e. the airport operator, is required to collect the PSF is initially collected by the concerning airlines from the passengers and then handed over to the respective airport operator/authority. Thus, it is absolutely clear that the assessee only collects the PSF from the passengers for and on behalf of the airport authority/operator and passes the same to the airport authority/operator. This view would also be made very clear by the answer to question No.24 given by the CBDT it is Circular No.715, dated 8th August, 1995, which relates to clarification of various provisions relating to tax deduction at source. Question No.24 reads as under :-

“Question 24 : Whether in a case of composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?

Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.”

The facts under consideration show that the PSF is a statutory liability without demarcating/earmarking the area taken on rent , nor it is a case of systematic use of land specified for consideration under an ITA No.5264/12 arrangement, which carries the characteristics of lease or tenancy. A mere use of the land and payment charged, which is not for the use of the land but for maintenance of the various services including technical services would not technically bring the transaction and the charges within the meaning of either lease or sub-lease or tenancy or any other agreement or arrangement or any nature of lease or tenancy and rent. For these observations, we draw support from the decision of the Hon ‘ble Madras High Court in the case of CIT Vs. Singapore Airlines Ltd., reported in (2012) 252 CTR (Mad) 429.

14. It would not be out of place to consider the CBDT Circular No.1/2008, dated 10th January, 2008 relating to the clarification regarding the applicability of provisions of Section 194-I of the Act to payments made by the customers on account of cooling charges to the cold storage owners, wherein the CBDT had the occasion to consider the representations in respect of the issue, whether the customer hires the building, plant and machineries etc., without packages for reservation for a required period are kept in cold storage after paying cooling charges. The CBDT, thus, clarified that the customer is also not given any right to use any demarcated space/place or the machinery of the cold storage and thus does not become a tenant. Therefore, the provisions of 194-I is not applicable to the cooling charges paid by the customers of the cold storage. Applying the same analogy, the PSF charges paid by the assessee on behalf of its customers, do not attract the provisions of Section 194-I of the Act.”

12. similar view was expressed by the Tribunal in other cases and in most of the cases, the order in the case of Jet Airways was relied on by the Tribunal. Similar is the position in the case of DCIT Vs. Air India Ltd., in ITA No.1721/2015, 1722/15, 4441/17, 5591/14, 5592/14 and 5593/14. In this case also the Tribunal, following the view taken in the case of Jet Airways has held that PSF collected by the Airlines from the passengers for payment to Airport Authorities by Airport Development Authorities is not rent and provision to section 194I are not applicable. The relevant observation of the Tribunal is extracted hereunder for the sake of reference:

“10. We have considered the submissions of the parties and perused the material available on record. Undisputedly, the issue before us is whether PSF collected by the assessee from the passengers travelling in the airline and paid to the airport authority or airport developer is subject to deduction of tax under section 194-I. As could be seen, the Assessing Officer has held that the terminal space utilised for the purpose of providing services would amount to rent, hence, the provisions of section  194-I is applicable. However, the issue has been decided by the co-ordinate bench in Jet Airways (India) Ltd. (supra), holding as under:-

“12. We have carefully considered the rival submissions and perused the orders of the authorities below and the relevant material evidence brought on record. Let us first see the cause of PSF, cause lies in Rule 88 of the Indian Aircraft Rules, 1937, which provides as under:-

“the licensee is entitled to collect fees to be called as Passengers Services Fees(PSF) from the embarking passengers at such rate as the Central Government may specify and is also liable to pay for security component to any security agency designated by the Central Government for providing the security services”

A perusal of the aforementioned rule clearly shows that it is a statutory liability for every licensee to collect PSF. Since it is a statutory liability and the meaning given by the statute has to be considered and in this case the Indian Aircraft Rules, 1937 has used the term “Fees”, therefore, same meaning has to be given while considering the PSF. It is not in dispute that the assessee is only acting as a conduit between ITA No.5264/12 the embarking passengers and the Central Government agency. This view is also AIR INDIA LTD.

fortified by the fact that out of Rs.200/-, Rs.130/- is the security component, which is deposited in a separate escrow account, which is operated and can be utilized by airport concerned only to meet the security related expenses of that airport.

Further it is pertinent to note that the CBDT in its Office Memorandum dated 30-06-2008 has clearly stated the fact that the licensee of the airport i.e. the airport operator, is required to collect the PSF is initially collected by the concerning airlines from the passengers and then handed over to the respective airport operator/authority. Thus, it is absolutely clear that the assessee only collects the PSF from the passengers for and on behalf of the airport authority/operator and passes the same to the airport authority/operator. This view would also be made very clear by the answer to question 24 given by the CBDT it is Circular No.715, dated 8th August, 1995, which relates to clarification of various provisions relating to tax deduction at source. Question No.24 reads as under :-

“Question 24 : Whether in a case of composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?

Answer: If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.”

The facts under consideration show that the PSF is a statutory liability without demarcating/earmarking the area taken on rent , nor it is a case of systematic use of land specified for consideration under an ITA No.5264/12 arrangement, which carries the characteristics of lease or tenancy. A mere use of the land and payment charged, which is not for the use of the land but for maintenance of the various services including technical services would not technically bring the transaction and the charges within the meaning of either lease or sub-lease or tenancy or any other agreement or arrangement or any nature of lease or tenancy and rent. For these observations, we draw support from the decision of the Hon’ble Madras High Court in the case of CIT Vs. Singapore Airlines Ltd., reported in (2012) 252 CTR (Mad) 429.

14. It would not be out of place to consider the CBDT Circular No.1/2008, dated 10th January, 2008 relating to the clarification regarding the applicability of provisions of Section 194-I of the Act to payments made by the customers on account of cooling charges to the cold storage owners, wherein the CBDT had the occasion to consider the representations in respect of the issue, whether the AIR INDIA LTD.

15. customer hires the building, plant and machineries etc., without packages for reservation for a required period are kept in cold storage after paying cooling charges. The CBDT, thus, clarified that the customer is also not given any right to use any demarcated space/place or the machinery of the cold storage and thus does not become a tenant. Therefore, the provisions of 194-I is not applicable to the cooling charges paid by the customers of the cold storage. Applying the same analogy, the PSF charges paid by the assessee on behalf of its customers, do not attract the provisions of Section 194-I of the Act.

15. Considering all these judicial decisions in the light of the facts of the case, we do not find any error/omission in the findings of the CIT(A). Hence, the assessee succeeds and the revenue fails and the findings of the CIT(A) are confirmed. Accordingly, grounds No.1 & 2 are hereby dismissed.

16. In the result, the appeal of the revenue is dismissed.”

11. On a perusal of the aforesaid decision of the co-ordinate bench, it is evident that the Bench, while deciding the issue has held that PSF collected by the Airline from the passengers for payment to Airport Authority of India / Airport developer is not rent, hence, provisions of section 194-I are not applicable. As the Department has failed to bring to our notice any other decision expressing a contrary view, respectfully following the decision of the co-ordinate bench of the Tribunal in Jet Airways (India) Ltd. (supra), we uphold the decision of the learned Commissioner (Appeals) by dismissing the ground no.1, raised by the Department.”

13. Once it has been repeatedly held that Airlines Operators are collecting the PSF on behalf of the Airport Authorities/Operators and the PSF is to be paid to the airport authority in terms of the notifications issued by the MOCA at different points of time,the relationship of Principal and the Agent exists between the airport authority and the airlines operator. We have also examined other contentions of the assessee that TDS can only be deducted where the assessee makes the payment of commission. In the instant case, since the collection charges or the commission are retained by the Airlines at 2.5% of the invoice amount, the remaining was paid to the assessee, there was no occasion to deduct the TDS. In this regard, our attention was invited to judgment of the Rajasthan High Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. [2017] 87 com295 (Rajasthan). But in this regard, the Board has issued a circular No.619 dated 04.12.1991 in which it has been clarified in para 6 that the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Para 6 of the circular is extracted hereunder for the sake of reference:

“6. A question may raise whether there would be deduction of tax at source under section 194H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consign-ee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time, as explained in the succeeding paragraphs.”

14. In the judgments referred to by the assessee, this clarification by the Board was not at all examined. Therefore, we are of the view that the judgments would not render much assistance to the assessee. Once it has been held in the case of assessee that they were collecting the PSF on behalf of the Airport Authorities/Airlines Operators, the collection charges or the commission, whatever nomenclature is given, retained by them assumes the character of commission paid by the Principal to its agents and the Principal is required to deduct the TDS on such payments to its agent under section 194H of the IT Act. In the light of these facts, we are of the considered view that the assessee is required to deduct the TDS on the amount retained by the Airlines while making the payment to the assessee. Our attention was also invited to the proviso to section 40(a)(ia) of the Act, according to which if the respondent has paid the tax on the receipt and filed the return before the due date of filing the return, the assessee cannot be deemed to be in default.

15. The scope of proviso was examined at number of occasions by the Tribunal and various High Courts. The Hon’ble Delhi High Court in in the case of CIT Vs. Ansal Landmark Counsel Pvt. Ltd., (supra) examined this aspect and has held that though the proviso was inserted w.e.f. 01.07.2012, but it was declaratoryand curative in nature and has retrospective effect from 01.04.2005 being the date from 40(a)(ia) inserted by the Finance Act, 2004. The relevant observation of the Hon’ble High Court is extracted hereunder for the sake of reference:

“10. It is pointed out by learned counsel for the Revenue that the first proviso to Section 201 (1) of  the Act was inserted with effect from 1st July 2012. The said proviso reads as under:

“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident-

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income; And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.

11. The first proviso to Section 210 (1) of the Act has been inserted to benefit the Assessee. It also states that  where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfilment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.

12. Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.

13. Turning to the decision of the Agra Bench of ITA T in Rajiv Kumar Agarwal v. A CIT (supra ) , the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under:

“On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a “fair, just and equitable” interpretation of law- as is the guidance from Hon ‘ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an “intended consequence” to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an “intended consequence” to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.”

14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.”

16. But this aspect was not examined by the CIT(A). Since it requires verification of facts, we feel it proper to set aside the order of the CIT(A) and restore the matter to the file of the AO with the direction to readjudicate the issue in the light of proviso to section 40(a)(ia) of the Act, after affording opportunity of being heard to the assessee and if it is established that the respondent has paid the tax and filed the return in time, the assessee should not be held in default for the purpose of making disallowance under section 40(a)(ia) of the Act.

17. With regard to ground No.2 i.e., addition by treating the duty credit entitlement under SFIS. The facts in brief borne out from the record are that assessee company is engaged in the business of development, operation and management of Airport and thus is entitled to custom duty credit scrip under the “Served From India Scheme”(SFIS) of Foreign Trade Policy issued by the Government of India. In terms of SFIS, service providers are entitled to custom duty credit scrip as a percentage of foreign exchange earned which can be utilised against the payment of import duty on capital goods imported from outside India. During the financial years 2007-08 to 2012-13, the assessee company became entitled to duty credit entitlement certificate from the Director General of Foreign Trade, Government of India (DGFT) under SFIS. As per the scheme, the certificate is valid for 2 years from the date of issue and the duty credit entitlements may be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables, that are otherwise freely importable under ITC (HS) classification of export and import items providing main line of business. The entitlements and the goods imported shall be non- transferrable (except within group company and managed hotels) and is subject to actual user
condition.

18. Assessee earns the foreign exchange earned on service such as landing, parking, PSF (CUTE counters), etc. This foreign exchange earning is eligible under the schemes and the assessee would utilize the duty credit scrips towards payment of custom duty towards import of goods. The value of duty credit scrips would be reduced from the capital asset and the value of the duty credit script will be recognized as revenue according to the assessee. The

19. Assessee preferred an appeal before the CIT(A) with the submission that under the SFIS scheme, assessee became entitled to SFIS duty credit scrips amounting to Rs.8.82 crores based on the foreign exchange earned by the assessee company during the financial year 2010-11. It was further submitted that assessee company has cumulatively utilised duty credit scrips amounting to Rs.89.60 crores upto the financial year 2012-13 against the payment of custom duty which was required to pay on import of capital goods/consumables. The complete details of year wise duty entitlement and its utilization from financial year 2007- 08 to financial year 2012-13 was furnished before the CIT(A) with the submission that out of Rs.8.82 crores of duty credit entitlement, assessee company has utilised the duty credit scrips amounting to Rs.4.45 crores upto financial year 2012-13 against the custom duty which it was required to pay on import of capital goods. It was further contended that the assessee company has utilised the custom duty credit certificate only against the amount of custom duty payable by it on import of capital goods and has neither used for the purpose of import of consumables nor transferredto any of its group company/entity. As the company utilised the SFIS scrips for the purpose of import of capital goods and not paid any custom duty in cash for capital items imported during the financial year 2009-10 to 2012-13 for development, operation and management of Delhi Airport as per details given above. Therefore, the assessee has adjusted the amount of SFIS scrips utilised against the entitlement against the cost of asset imported and accordingly the assets were capitalized at cost/net SFIS scrips. It was further contended that SFIS amounting to Rs.2,07,84,731/- is utilised for import of capital goods which is lying under capital work in progress and yet to be capitalised. Further the SFIS scrips amounting to Rs.5,31,85,162/- remains unutilized due to expiry of the said SFIS. The learned Counsel for the assessee further placed reliance upon the accounting standard 12 on accounting of Government grants issued by ICAI with the submission that assessee has treated the SFIS scrips utilised for import of capital goods as capital grant in accordance with the accounting standard 12. The detailed submissions made by the assessee is also extracted in the order of CIT(A) and for the sake of reference, we extract the same as under:

“3.1 Government refers to government, government agencies and similar bodies whether local, national or international

3.2 Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.”

Thus, the thrust of Government grant is that it is assistance in one form or the other and not necessarily in form of cash. It could be seen from the abovedefinition that any assistance from the Government whether in cash or kind given eitherfor past or future compliance with certain conditions would constitute a government grant. The featuresof the duty credit entitlement certificate reveals that it is in the form of assistance given by the government.

Further, as per AS-12, there are two approaches for accounting of government grant i.e. capital approach under which the grant ‘is treated as part of shareholder’s fund and the’ income approach under which the grant is taken to income^– over one or more periods. As the Company has used the scrips for the payment of custom duty on purchase of capital assets only, the assessee company has treated the government grant as ‘related to specific fixed assets and presented the same as deduction from the gross value of fixed assets in its books of account. Thus grant is recognized in profit & loss account over the useful life of a depreciable assets by way of a reduced depreciation charge.

5. The Appellant had cumulatively utilized SFIS scrip amounting to Rs. 41.27 Crores (approx.) out of Rs. 45.62 Crores against payment of import duty in respect of import of fixed assets (including capital work in progress) up to financial year 2010-11.

6. Further, section 43(1) of the Act defines “Actual Cost” for the purpose of allowing depreciation and the same is reproduced as under:

“43(1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if ‘any, as has been met directly or indirectly by any other person or authority.”

7. As would be evident from above that for the purpose of allowing depreciation as per the provisions of section 32, the actual cost of asset is cost of acquisition as reduced by the amount which is directly or indirectly met by someone. Accordingly, the appellant has claimed depreciation on the amount of Actual Cost of asset as reduced by the amount of SFIS scrip of Rs. 41.27 Crores (approx.).

 8. The appellant has treated the amount of Custom Duty Scrip utilized in the nature of capital receipt and accordingly it reduced the same from the value of fixed assets/Capital Work in progress in terms of Accounting Standard-12 (AS-12) issued by the Institute of Chartered Accountants of India (ICAI) and the settled legal propositions as laid down by the Hon ‘ble Supreme Court in the case of Ponni Sugars Limited (2008, 174 Taxman 87(SC) and in accordance with the provisions of Section 43(1) of the Income Tax Act, 1961 which clearly provide that “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any,as has been met directly or indirectly by any other person or authority. Further Explanation 9 and 10 to section 43(1) reads as under:

Explanation 9.—For the removal of doubts, it is hereby declared that where an asset is or has been acquired on or after the 1st day of March, 1994 by an assessee, the actual cost of asset Shall be reduced by the amount of duty of excise or the additional duty leviable under section ,3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944.]

Explanation 10.—Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee:

Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

The appellant has utilized the SFIS duty scrips of Rs.41.27 Crores against payment of capital goods and claimed depreciation on such reduced amountafter the asset was capitalized and put to Use.

9. The Appellant most humbly submits that the learned AO failed to appreciate and ought to have held that mere accrual of the entitlement of SFIS duty credit scrips would not be considered as income. The Appellant is only eligible to obtain the SFIS Scrips on the foreign exchange earned during the year but the process for obtaining the same have not been initiated during the assessment year under Further, the appellant has to meet various other conditions prescribed in the Foreign Trade Policy to be eligible to receive the SFIS scrips. Since the eligibility of Appellant to receive the SFIS scrips is dependent on various other conditions in addition to earning to foreign exchange the mere accrual of entitlement of SFIS duty credit scrips should not be considered as income. Further, such duty credit scrips are to be utilized against custom duty payment on capital goods and having regard to same the amount of duty credit scrips cannot be treated as revenue receipt.

10. It is relevant to note that the Finance Act, 2015 with effect from 01/04/2016 has inserted Sub-Clause (xviii) in Section 2(24) of the Income Tax Act, 1961 providing an inclusive definition of the expression Income’ under the taxing law. The relevant portion of Sub-Clause (xviii) is produced below:-

Section- 2(24) (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any other authority or body or agency in cash Or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43.  

It is thus submitted that the ever growing dispute concerning the taxability of subsidy (by whatever name called) has been dealt prospectively with by the provisions of Finance Act 2015 with effect from 01st April, 2016. Though through at the very outset, in case the very incidence of subsidy awarded is unknown, then as per the statutory provisions in force, it would be reckoned as an income liable for taxation in so far as the provisions of sub clause (xviii) appended to section 2(24) provides so^–, but to the excepting part concerning any award of subsidy (by whatever name called) made towards the cost of an asset, it will be dealt with by the Explanation 10 appended to section 43(1) and will be designated as merely a capital receipt and followed by consequent deduction from the cost of asset.

11. However, in so far as assessment years prior to AY 2016-17 are concerned that amount of subsidy needs to be taken as capital In the present case, e Duty Credit scrips granted is towards utilizing the same for payment of custom duty on capital goods imported from abroad and thus the same shall be in the nature of capital receipt to be reduced from the capital  receipt for the purpose of claiming depreciation thereon. And in fact the appellant has accorded the same treatment in its tax return which is in accordance with accounting Standard 12 issued by ICAI, provisions of section 43(1) read with Explanation 9 and 10 and the settled legal position on the issue.

12. Further, it is relevant to note that in due furtherance of the Income Computation and Disclosure Standard VII (ICDS) dealing with Government Grants notified by the Central Board of Direct Taxes vide Notification No. SO 892(E) dated 31st March, 2015 with effect from Ay 201 6-17 which are applicable for computation of income chargeable under the head Profit & Gains of business or profession’ or ‘Income from other sources’, any government grant such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements etc. in case it relates to:

a) Depreciable assets – shall be deducted from actual cost of the asset or written down value of block of assets to which concerned asset or assets belonged to.

b) Where the Government grant relates to a Non-Depreciable asset or assets of a person requiring fulfilment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

c) Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or With reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to.

d) The Government grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate fnancial support to the person with no further related costs, shall be recognised as income of the period in which it is receivable.

e) Any other government grant other than mentioned above shall be recognized as income over the periods necessary to match them with the related costs, which they are intended to compensate.

f) Non-Monetary Grants The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. In case of refunds attributable to depreciable assets, the amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable.

Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate. In case of refunds attributable to non-depreciable assets, shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be criarged to profit and loss statement. In case of any confliction between the provisions of the Income Tax Act, 1961 and. the Income Computation and Disclosure Standards, the provisions of the Act shall prevail to that extent.

13. It is respectfully submitted that the Hon’ble Supreme in the case of Commissioner of Income Tax, Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) has settled that, it is the object for which subsidy/assistance is given, that truly which determines nature of subsidy. 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 words, in such cases one has to apply the ‘Purpose Test’. The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt was on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand its account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.

14. It would also be of immense merit to refer to another judgement of the Hon’ble Calcutta High Court in the case of Commissioner of Income Tax vs. Rasoi Limited [2011] 335 ITR 438, wherein it has been settled by the Hon’ble Court by making a due reference to the judgement of the Hon’ble Apex Court in the case titled Commissioner of Income Tax vs. Ponni Sugars & Chemicals Ltd [2008] 174 Taxman 87 (SC) that one time subsidy received as a percentage of sales tax paid for modernization and expansion purposes would constitute a capital receipt not subject to the rigours of tax under the Income Tax Act, 1961. The Hon’ble Calcutta High Court further held that merely because subsidy received Was equivalent a substantial percentage of the sales tax paid, it cannot be construed that the same was in form of refund of sales tax paid and exigible to tax. Hence one time subsidy received from the State Government under the scheme of industrial promotion for expansion of its facilities and for modernization purposes is capital receipt and cannot be brought into tax net.

15. It is submitted that in a very recently settled matter, the Hon’ble High Court of Jurisdiction at Bombay in a case titled Commissioner of Income Tax vs. Kirloskar Oil Engines Ltd [2014] 364 ITR 88 (Bombay)has settled that when subsidy is received by the assessee for setting up a new unit, then  receipt of subsidy is on capital account. In another path breaking judgement, the Hon ‘ble Bombay High Court has held in the case of Commissioner of Income Tax Vs. Chaphalkar Brothers [2013] 351 ITR. 309 (Bombay) Where object of entertainment duty subsidy was to promote construction of multiplex theatre complexes, receipt of subsidy would be on capital account.

16. Therefore, the Appellant prays that the action of AO in treating the accrual of SFIS duty credit scrips as income of the Appellant is incorrect and is contrary to the provisions of laws, settled legal position on the issue and the AO be directed to delete the aforesaid amount in the hands of the Appellant and adopt the tax treatmentwhich is given by the appellant by reducing the amount of such duty credit scrips from the capital cost and claiming depreciation on the reduced amount.”

20. It was further contended that the entire arguments of the assessee was not considered by the CIT(A) and in few lines he confirmed the order of the AO having relied upon the report of the Expert Advisory Committee of the ICAI wherein they have opined that such amount would be in the nature of revenue receipt whereas the Hon’ble  Supreme Court in the case of  CIT Vs. Ponni Sugars Ltd., (2008, 174 Taxman 87(SC) has held that it is the object for the subsidy given, that truly determines the nature of subsidy assistance. The character of subsidy received in the hands of the assessee has to be determined with respect to for the purpose for which subsidy is given. Since the CIT(A) has not adjudicated the issue in the light of submissions made by the assessee and rather in the light of the judgment of the Apex Court this order deserves to be set aside. The learned DR on the other hand has placed heavy reliance upon the order of the CIT(A).

21. Having carefully examined the orders of the authorities below in the light of rival submissions, we find that undisputedly under the SFIS, the assessee company became entitled to duty credit entitlements certificate from the Director General of Foreign Trade, Government of India,for custom duty credit scrips which are to be used for import of any capital goods including spares, office equipment and provisional equipment, etc. These certificates are valid for 2 years from the date of issue. From the details furnished it is evident that the assessee utilised the duty credit scrips in different assessment years but the complete SFIS scripswere not utilised. According to the assessee, SFIS schemes amounting to Rs.5,31,85,162/- remains unutilized due to expiry of said SFIS scrips. In the light of these facts, it is not proper to tax the accrual of duty credit scrips on mercantile basis as the life of the certificate is only for 2 years. Moreover, the nature of receipt or the duty credit entitlements is to be examined in the light of judgment of Apex Court in the case of CIT Vs. Ponni Sugars Ltd., (supra). Though CIT(A) has recorded the detailed submissions in 4 pages in its order but in one para in few lines, he rejected the claim of the assessee after placing heavy reliance upon the Expert Advisory Committee report whereas the issue should have been examined in the light of the judgment of the Apex Court in the case of Ponni Sugars Ltd., (supra). Therefore, we are of the view that CIT(A) has not properly adjudicated the character of receipts and the year of taxability. If itis held to be the capital receipt, it may reduce the value of the capital assets but it cannot be taxed as a revenue receipt. In any this issue was not properly examined by the CIT(A). We therefore set aside his order and restore the matter to his file with a direction to readjudicate this issue afresh in the light of assessee  contentions and also in the light of the judgment of the Apex Court in the case of Ponni Sugars Ltd., (supra).

22. Next ground relate to the disallowance under section 14A of the Act. In this regard, it was contended on behalf of the assessee that in the impugned assessment years, the assessee has not earned any exempted income, therefore no disallowance under section 14A is to be made. In support of his contention,he placed reliance upon the order of the Tribunal in the case of DCIT Vs. M/s. MFar Holdings Pvt. Ltd., in ITA No.1443/Bang/2017 in which it was held that in the absence of exempted income, no disallowance u/s. 14A can be made. The learned DR placed reliance upon the order of the AO.

23. Having carefully examined the orders of authorities below we find that undisputedly the assessee did not earn any exempted income during the impugned assessment year. The aspect where disallowance can be made in the absence of exempted income was examined by the Tribunal and relying upon the order of the High Court and the Apex Court it was held that in the absence of any exempted income, no disallowance under section 14A can be made. The relevant observation of the Tribunal in the case of case of DCIT Vs. MFar Holdings Pvt. Ltd., is as under:

“4. Having carefully examined the orders of authorities below, we find that undisputedly the assessee has not earned any exempted income. Now it is settled position of law that whenever assessee did not earn any exempt income, no disallowance could be made u/s. 14A of the Act. In this regard, the Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT, 378 ITR 33 (Del) has categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. The relevant observations of the judgment of the Hon’ble Delhi High Court are extracted hereunder:-

“15. Turning to the central question that arises for consideration, the court finds that the complete answer is provided by the decision of this court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014, in I. T. A. No. 486 of 2014). In that case, a similar question arose, viz., whether the Income-tax Appellate Tribunal was justified in deleting the disallowance under section 14A of the Act when no dividend income had been earned by the assessee in the relevant assessment year ? The court referred to the decision of this court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the Income-tax Appellate Tribunal in this very case, i.e., Cheminvest Ltd. v. CIT [2009] 317 ITR (AT) 86 (Delhi) [SB]. The court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Incl. (decision dated April 2, 2014, of the High Court of Punjab and Haryana in I. T. A. No. 970 of 2008)—since reported in [2015] 4 ITR-OL 246 (P&H)— which in turn referred to two earlier decisions of the same court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H). The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj) ; [2015] 372 ITR 97 (Guj) and the third of the Allahabad High Court in CIT v. Shivam Motors (P) Ltd. (decision dated 5th May, 2014, in I. T. A. No. 88 of 2014). These three decisions reiterated the position that when an assessee had not earned any taxable income in the relevant assessment year in question “corresponding expenditure could not be worked out for disallowance.”

16. In CIT v. Holcim India (P.) Ltd. (supra), the court further explained as under :

“15. Income exempt under section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of trans action entered into in the subsequent assessment year. For example, long-term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”

17. On facts, it was noticed in CIT v. Holcim India (P.) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the assessee in that case and that expenditure had been incurred to protect investment made.

18. In the present case, the factual position that has not been disputed is that the investment by the assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such The interest expenditure incurred by the assessee is in relation to such investments which gives rise to income which does not form part of the total income.

19. In the light of the clear exposition of the law in Holcim India (P.) Ltd. (supra) and in view of the admitted factual position in this case that the assessee has made strategic investment in shares of Max India Ltd. that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee is not in doubt, the question framed is required to be answered in favour of the assessee and against the Revenue.

 20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under section 57(iii) of the Act could be allowed as a deduction against dividend income assessable under the head “Income from other sources”. Under section 57(iii) of the Act, deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression “incurred for making or earning such income, did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The court explained (page 522 of 115 ITR) :

“What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”

21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under section 57(iii) of the Act, where the expression used is “for the purpose of making or earning such income”. Section 14A of the Act on the other hand contains the expression “in relation to income which does not form part of the total income”. The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under section 14A of the Act.

22. In the impugned order, the Income-tax Appellate Tribunal has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the Assessing Officer for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under section 14A of the Act. In the said case, admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.

 23. In the context of the facts enumerated hereinbefore the court answers the question framed by holding that the expression “does not form part of the total income” in section 14A of the Act envisages that there should be an actual receipt of 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. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

5. In the light of the aforesaid judgment, the provisions of section 14A cannot be invoked as there is no exempt income in the hands of the assessee. Accordingly, we find no infirmity in the order of the CIT(Appeals) who has rightly deleted the addition.”

24. Accordingly, in the light of aforesaid order of the Tribunal, we are of the view that in the absence of exempted income, disallowance under section 14A cannot be made and we accordingly set aside the order of the CIT(A) and delete the additionmade by the AO.

25. Next ground relate to the non-allowance of deduction for 1/30th of upfront fee and repair and maintenance for assessment year 2007-08 and depreciationunder section 32 on repairs and maintenance. In this regard, we do not find any observation of the AO but before the CIT(A), assessee has made the written submissions which is as under:

“In the previous year relevant to assessment yeaer 200 7-08, the Appellant had paid Upfront Fee which it claimed as revenue expenditure. However, the learned AO restricted the claim of the Appellant only to the extent of 1/30^th of the expenditure incurred spreading the expenditure so incurred over the tenure of the OMDA and accordingly, allowed 1/30^th of the said expenditure in the previous year relevant to captioned assessment year.

In first appeal against the said order for AY 2007-08, the said Upfront expenditure has been held allowable as revenue expenditure by Your Honour’s predecessor. However, the AO has not accepted the decision of ICT(Appeals) and the Revenue has filed further appeal against the relief allowed by CIT(A app eals) before the ITAT which is pending for disposal. Considering, non-acceptance of order of CIT(Appeals), the AO based on the decision given in the assessment order of AY 200 7-08 should have allowed deduction for 1/30^th of upfront fees.

– The Appellant prays that the AO be directed to allow the deduction for 1/30^thfor upfront fees.

-The learned AO in the assessment order for AY 2007-08 had held repair and maintenance expenditure as capital in nature and allowed 1/30^1hor the total expenditure for the relevant assessment year. Further, the learned AO allowed depreciation on the ground that the said expenditure was capital in nature and has allowed depreciation thereon for AY 2008-09 to 2010-11.

– In first appeal against the said order for AY 2007.-08 to 2010-11, the said repair and maintenance expenditure has been held allowable as revenue expenditure by Your Honour’s predecessor. However, the AO has not accepted the decision of CIT(Appeals) arid the Revenue has filed further appeal against the relief allowed by CIT(Appeals) before the ITAT which is pending for disposal. Considering, non – acceptance 6f order of CIT(Appeals), the AO based on the decision given in the assessment order of AY 2007-08 should have allowed deduction for 1/30th of repairs and maintenance.

– The Appellant prays that in the event upon further appeal by the Department, the said expenditure is ultimately held as capital in nature, depreciation be allowed on the same under section 32 of the Act at appropriate rates.

26. Having taken into account the written submissions filed by the assessee, the CIT(A) rejected the grounds of the assessee being infructuous relying upon its order dated 08.2011 in which he has allowed the upfront, repairs and maintenance expenditure as revenue expenditure and directed the AO to allow depreciation on capital work in progress. Now the assessee is before us but could not make out his case. We therefore find no merit in this ground and we reject the same and confirm the order of the CIT(A).

27. ITA No.622/Bang/2017

Through this appeal, assessee has assailed the order of the CIT(A), inter alia, on following grounds:

Ground I: Addition on account of disallowance of collection charges of Rs.5,33,45,596/- retained by the airlines under section 40(a)(ia):

1. On the facts and in the circumstances of the case and in law. the learned CIT(A) has erred in upholding the action of the Deputy Commissioner of Income-tax, Central Circle 2(2), Bangalore (hereinafter referred to as AO) in making the disallowance of collection charges of Rs. 5,33,45,596/- retained by the airlines under section 40(a)(ia) on completion of assessment U/s. 153A.

2. The CIT(A) failed to appreciate and ought to have held that the provisions of section 194H of the Income Tax Act,1961 are not applicable in as much as there is no principal and agent relationship between the appellant and the airlines. Further the appellant has made detailed submission in support of claim that the airlines has discharged its income tax liability on collection charges of Rs. 5,33,45,596/- retained by the airlines wherever applicable

3. The Appellant therefore prays that the Assessing officer be directed to allow the claim of collection charges of Rs. 5,33,45,596/-

Ground II: Allowance of Rs. 8,64,31,498!- by treating the duty credit entitlement under SFIS  accrued as grant related to revenue.:

On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the AO in allowing an amount of Rs.8,64.31 ,498/- by treating the duty credit entitlement under SFIS accrued as grant related to revenue on completion of assessment U/s. 153A which was reduced from the capital cost for the purpose of allowing depreciation in the original assessment proceedings u/s 143(3) of the Income Tax Act.

2 The Appellant therefore prays that the Assessing officer be directed not to allow an amount of Rs.8,64,31 ,498/-.

Ground III: Addition by including the revenue of Rs.69,04,00,000!- from National Aviation  Company India Ltd on accrual basis:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in  upholding the action of the AO in including the revenue of Rs. 69,04,00,000/- from National Aviation Company India Ltd on accrual basis on completion of assessment U/s. 143(3) r.w.s 153A of the Income Tax Act.

2. The CIT(A) failed to appreciate and ought to have held that in view of uncertainty in collection of revenue of Rs.69,04,00,000/- from National Aviation Company India Ltd are to be taxed on receipt basis.

3. The Appellant therefore prays that the Assessing officer be directed to delete the addition made of Rs.69.04,00,000/- on accrual basis.

Ground IV :Disallowance u!s 14A

1. On the facts and in the circumstances of the case and in law, the learned of 84,00,437/- u/s.14A as expenses incurred for earning exempt income of Rs.Nil/-

2. The learned CIT(A) failed to appreciate and ought to have held that the Appellant had in the course of assessment proceedings has claimed that disallowance U/s 14A of the Act should be restricted to dividend income of Rs. Nil/- earned by the Appellant.

3. The Appellant prays that AO be directed to restrict the disallowance U/s 14A at Rs.Nil/- being to the amount of exempt income earned during the year.

Ground V: Not allowing the deduction for 1!30^th of upfront fee and repair and  maintenance for AY 2007-08 and depreciation u!s 32 on repairs  and maintenance for AY 2008-09,^•2009-10 & 2010-11:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the AO in Not allowing the deduction for 1/30th of upfront fee and repair and maintenance for AY 2007-08 and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010-11.

2. The CIT(A) failed to appreciate and ought to have held that AO has not accepted order of the CIT(A) and has further filed appeal before ITAT. Considering non acceptance of order of CIT(A), the AO based on the decision given in the assessment order of AY 2007-08, AY 2008-09, AY 2009-10 and AY 2010-11 completed u/s 143(3) of the Income Tax Act,1961 should have allowed deduction.

3. The Appellant therefore prays that the Assessing officer be directed to allow to allow the deduction for 1/30th of upfront fee and repair and maintenance for AY 2007-08 and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010- 11.

Ground VI: The Appellant craves leave to add, alter and/or amend all or any of the foregoing grounds of appeal.

28. Ground Nos. 1, 2, 4 & 5 are already adjudicated by us in the foregoing paras in ITA 636/Bang/2017 in which the matter was restored to the AO with respect to ground Nos. 1, 2 & 4 with certain directions. Following the same, the order of the CIT(A) is set aside in this regard and matter is restored to the AO for readjudication of the impugned issues in terms indicated in foregoing paras. So far as ground No. 5 is concerned, the addition was confirmed in foregoing para. Hence, following the same, we confirm the order of the CIT(A).

29. Ground No. 3 relate to addition on account of inclusion of revenue from National Aviation Company India Ltd., (NACIL) on accrual basis of Rs.69,04,00,000/-. The facts in brief borne out from the record are that the assessee company, as per notes of accounthas for the period from October 2011 to March 2012 recognised revenue from the services rendered to M/s. National Aviation Company of India Ltd., (NACIL) which includes its affiliates like Air India, Indian Airlines and Alliance Air , Air India Charters and Centaur Hotel on cash basis when the assessee company is following the merchantile basis where the revenue is to be recognized on accrual basis. The assessee company for the financial year for all other revenues has followed mercantile system of accounting including for the revenues generated fromM/s. NACIL and its affiliates till September 2011. The assessee was asked to explain for the diversion from the regular method of accounting by issuing a show cause notice dated 27.11.2014 as to why the revenues from M/s. NACIL should not be recognized on accrual basis. In response thereto, the assessee filed a letter dated 04.02.2015 stating the reasons along with the documents in terms of submissions made to the MOCA, Government of India, minutes of meeting between it and the office bearers of M/s. NACIL and board resolution of the company where it was decided to put M/s. NACIL and its affiliates on cash and carry It was also explained to the AO that there was huge outstanding dues to the assessee from M/s. NACIL and its affiliates and there were no signs of either payment or improvement in the financial position of M/s. NACIL so as to continue provision of services or recognize revenue on mercantile basis as these were turning into bad debts. Hence, under the impression that dues from M/s. NACIL would be difficult to recover and there being no sign of any improvement of the finances or any commitment on a deferred payment schedule from M/s. NACIL, the assessee company, after due diligence took the decision to recognize revenue from M/s. NACIL on cash basis.

30. The submission and reasons furnished by the assessee were not acceptable to the AO since the assessee is following the mercantile system of accounting and the assessee has to recognize the revenue on accrual method and as per this system the assessee company has the benefit to claim bad debts if and when it can be reasonably established that the debt has gone bad and there is no chance of any recovery from the debtor. The AO has also observed that assessee has not stopped offering services to M/s. NACIL and its affiliates and has recognized the expenditure incurred for services provided to M/s. NACIL on mercantile basis. The assessee cannot recognized expenditure on mercantilemethod but the revenue recognition from the same party on cash method. The AO further observed that as per accounting standards and accepted principle of taxation the assessee has to follow consistent method of accounting. As per the matching concept of the accountancy, expenditure claimed is to be matched with the income offered. The AO further observed that assessee company has claimed the expenditure incurred for the provision of services to M/s. NACIL but has not offered the corresponding income which is not acceptable. The AO accordingly rejected the contention of the assessee and brought the revenue accrued from M/s. NACIL for the period of October 2011 to March 2012 amounting to Rs.69.04 crores to tax as income from business. The assessee has preferred an appeal before the CIT(A) and furnished the detailed submissions explaining the reasons for the conversion of method of accounting to cash basis. For the sake of reference, we extract the detailed submissions from the order of the CIT(A) as under:

“Facts

– The Appellant has entered into OMDA with Airport Authority of India (AAI), pursuant to which the appellant is required to undertake the functions relating to the operation, maintenance, development, design, construction, finance and management of the Indira Gandhi International Airport at New Delhi (IGI Airport) and to perform certain aeronautical and non-aeronautical services at the IGI Airport. It is submitted that major^–source of revenue of the Company is from providing aeronautical services at the IGI Airport which includes landing fees, parking and housing fees, passenger service fee (PSF), Common User Terminal Equipment counter charges (CUTE) etc. All these charges are regulated by the Airports Economic Regulatory Authority of India (AERA) in terms of OMDA and the State Support Agreement (SSA). The income derived from providing Non-aeronautical services, which is primarily from allowing the developer to undertake development, operation and management of CPD area and other activities at the Airport site are not regulated by AERA.

– In terms of OMDA, the appellant is required to pay revenue share @45.99% to AAI of the projected pre-tax Gross Revenue for each year in 12Monthly equal installments throughout the term of OMDA.

During the financial year 2010-11 & 2011-12, Air India Limited and its affiliates had made substantial delay in making payment for the use of aeronautical/ non-aeronautical services to the appellant. The aeronautical revenue derived by the appellant from Air India and its affiliates are very significant. The details of outstanding amount from Air India and its affiliates are given below:

Sr. No.	Month	Amount Billed * Rs. in Crores	Outstanding Amount as on Month end Rs. in Crores
1	April-10	27.71	18.94
2	May-10	16.40	12.50
3	June-10	13.65	-0.33
4	July-10	29.38	18.45
5	August-10	42.33	45.64
6	September-10	17.65	49.42
7	October -10	17.51	52.92
8	November-10	13.80	48.56
9	December-10	19.53	54.31
10	January-11	16.12	57.21
11	February-11	15.81	71.09
12	March-11	15.14	81.04

* Amounts Billed denotes billing done by the Company including the billing on account of Development Fee, utility charges, Service Tax etc.

– As would be evident from the above table that there was outstanding of Rs. 81.04 Crores (approx.) (including billing related to Development Fee, Utility Charges, Service Tax etc.) as on March 31″ 2011. In this regard, it is submitted that the appellant was having opening outstanding dues of
Rs. 40.29 Crores (approx.) (including amount outstanding relating to DF, utility charges, service tax) recoverable from Air India as on 31^st March 2010. During the period from April 2010 to March 2011, the appellant has raised bills amounting to Rs. 245.05 Crores (including billing related to DF, utility charges and service tax) to Air India against which the Air India has paid only Rs. 204.30 Crores (approx.) due to which the amount of outstanding dues increased to Rs. 81.04 Crores (approx.).

– It is submitted further that the appellant during the period April 2011 to September 2011, has raised invoices (inclusive of DF charges, Utility charges, and service tax) to Air India and its Subsidiaries (collectively referred to as ‘Air India’) amounting to Rs. 132.61 Crores (approx.). However, against the above billing Air India has paid in aggregate an amount of Rs. 21.77 Crores only up to September 2011. Thus, the total amount of outstanding from Air India as on September 30`^h 2011 increased to Rs. 191.88 Crores.

–  It is submitted further that in terms of agreement, for the aeronautical services provided by the appellant, Air India was required to pay within 15 days from the date of invoice and in case of non-aeronautical services provided by the appellant Air^–India is required to pay within 7 days from the date of invoice.

– With respect to increase in the amount of dues, the appellant had series of meetings and discussions at various levels with the senior officers of Air India, as well as Ministry of Civil Aviation (Mo CA) in regard to non-payment of its dues on time against the services utilized by Air India, but no concrete resolution It is submitted further that the Company was having huge cash losses to the tune of Rs. 209 Crores (approx.) and 645 Crores (approx.) during the financial year 2010-11 & 2011-12 and non- payment of outstanding dues from Air India has further worsen the cash crunch situation faced by the appellant.

– Further the Appellant had a series of correspondences with Air India/AA I/Ministry of Civil Aviation (MoCA) in which the Appellant Company at several times has raised the issue relating to non-payment of outstanding dues from Air India wherein also no concrete response was received. Also the Company raised the issue with Air India/AAI/Ministry of Civil Aviation (MoCA) that inspite of non-payment of outstanding dues by Air India, the Company is paying the revenue share to AAI @45.99% on the amount of revenue billed to Air India which in turn creating a cash crunch situation in the Appellant Company.

– The Appellant has issued the “Cash & carry notice to” Air India on January 28, Further vide its letter^–no 273 dated 12^th 2011, the Company informed the Chairman & Managing Director (C&MD) of Air India regarding cash flow crisis faced by the Company and requested to Air India to reduceits outstanding by 75% immediately and also submit the action plan for reducing balance outstanding to the extent of 25% only. The appellant requested the C & MD to intervene and clear the outstanding. The Appellant further wrote that if the dues are not cleared, the Company would be left with no alternative but to take recourse to the following:

a. Air India to be put on ‘Cash & Carry basis’ mode w.e.f. 00:01 hrs of June 1st 2011 without any further notice;

b. Message would be displayed for point (a) above on FIDS for advance intimation to passengers w.e.f. 16:00 hrs of May 27th 2011;

c. Air India would not be extended IT Services at T-3 by WAISL w.e.f. June 1st 2011.

In view of failure of Air India to clear their outstanding, the Appellant Company requested the Regional Executive ‘Director of AAI vide its letter no 379 dated May 27th 2011 to invoke Cash & Carry action on Air India effective from 00:01 hrs of June 1st 2011. The Appellant further mentioned that the outstanding Les from Air India have far exceeded the credit facility granted to them andalso they do not have any security deposits with the Company unlike the other Airline Operators where they have placed certain amount of security deposit. The Company further requested not to allow take off unless itsCA-12 certificate (for cash payment) for each flight is produced by Air.

– However, in the meeting with C&MD – Air India, Joint Secretary, MoCA on 30th May, 2011 the following understanding was reached:

a. Air India will submit a plan of settlement of dues by 2nd June, 2011 through MoCA confirming their commitment for payment of dues on immediate basis as well as going forward.

 b. Air India will remit Aero dues mainly on account of Landing, Parking and Housing charges on daily basis effective 1st June, 2011 for which DIAL will raise invoices on daily basis.

c. Air India agreed to settle DF and PSF dues for the period upto 31st May, 2011 latest by 15th June, 2011.

As per the above decision, the Company started raising invoices on daily basis effective from 1st June, 2011. However, there was no recovery from Air India side on the basis of above decision. The dues from Air India were constantly increasing despite continuous meetings and follow-ups with their senior management.

– Thereafter, the Appellant on June 8^u1 2011 and June 17^th 2011 again sent reminder letter to Air India in relation to clearance of its outstanding dues. However, due to non-realization of dues from Air India, the Company vide its letter no. 581 dated June 24^th 2011, explained the Secretary, MoCA, regarding the cash losses suffered by the Appellant due to non-recovery of dues from Air India. Further, the Company requested to advise the AAI to recognize the revenue share on revenue from Air India on receipt basis and allow the Company to put Air India on ‘Cash & Carry basis’.

– During the period April, 2011 to September, 2011, the billing done by the Appellant to Air India was Rs. 132.61 Crores (inclusive of DF charges, Utility charges, and service tax) but the receipt during the same period was merely 21.77 Crores, which mounting up to total outstanding dues from Air India to Rs 191.88 Crores as on 30′ⁿ Sep, 2011.

– It is further submitted that. Air India was not able to honour its commitment made at several time and there was tremendous pressure on the Company’s cash flow conditions, the Company was not realizing money from Air India and on the other hand it was required to pay revenue share from Air Inida and on the other hand it was required to pay revenue @ 45.99% to AAI in advance on the amount which is outstanding for a period of almost more than one year and thus not recovered by it. This has resulted in severe cash crunch situation to the Appellant to comply the OMDA condition on payment of revenue share to AAI and to take care of servicing of its debts, meeting its contractors liability and other statutory payments.

– Decision of Board of Directors on revenue! receivables from Air India

The board of directors (including nominee directors of AAI and MoCA) in its board meeting held on October 25, 2011, took on record the minutes of meeting of the Committee of the Board for considering change in revenue recognition for NACIL (i.e, Air India and its subsidiaries) held on October 22, 2011. and approved the accounting of revenue! receivables from Air India on cash basis. (Copy enclosed). In the meeting held on October 22, 2011, a detailed presentation is made by the Chief Financial Officer (CFO) of the Appellant mentioning the detailed reasons for recognizing the revenue from NACIL (i.e. Air India and- its subsidiaries) on cash basis. Some of the reasons are as follows:

i. The amount recoverable from NACIL (Air India, Indian Airlines, Alliance Air, Air India Chartres and Centaur Hotel) as on September, 2011 had increased by Rs. 69 Crores over the last quarter to Rs. 272.30 Crore

ii. The continuous increase in outstanding dues from NACIL creates working capital gap
and severe pressure on the cash flows of the company;

iii. Inspite of the continuous outstanding from dues of NACIL and non-receipt of their payment, the company was paying its corresponding revenue share to AAI on the revenue recognized from NACIL, as per OMDA, thereby increasing the working capital deficiency and creating the negative cash flows for the company.

vi. As per Companies Act 1956 every Profit and Loss account and Balance sheet of the company shall comply with accounting standards and accounting standards mean the accounting standards recommended by the Institute of Chartered Accountants of India.

v.  As per Accounting Standard -9, Revenue means the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of any enterprise and Revenue on rendering services is recognized when all the following criteria have been satisfied:

i. Performance has been achieved i.e. no significant uncertainty exists regarding the amount of consideration that shall be derived from rendering the service.

ii. Revenue is measurable.

iii. It is not unreasonable to expect the ultimate collection

vi. As per Clause 9.2 of Accounting Standard-9, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, then in such cases, it may be appropriate to recognize the revenue only when it is reasonable certain that the ultimate collection will be made.

vii. As per OMDA, Annual Fees was paid to AAI on the basis of Business Plan and Business Plan can be updated as and when required.

Thus, having explored all the possibilities at all the levels and also approached the Government but no concrete solution was forth coming and due to continuous uncertainty in respect of the timing of ultimate collection of recovery of dues from Air India, the Board of Directors of the Company deliberated and concluded that there were serious issues on certainty of realization of outstanding dues from Air India from a timing perspective in the current financial year and accordingly in its meeting held on October 25^th 2011 (having nominee of AAI & MoCA on the board) approved the accounting of revenue from Air India on cash basis (other than PSF and DF) instead of on accrual basis in accordance with paragraph 9.2 of the Accounting Standard 9 under the Companies (Accounting Standard) Rules, 2006, as amended and accordingly the Company has started the billing to Air India on receipt basis. It is submitted further that:

i. The Appellant Company at Note 31 to the financial statements for the year ended on March 31^st2012, has disclosed the treatment given to the revenue/receivables from Air India. The same is reproduced as follows:

“31. As at March31 2012, the Company has receivables from Air India Limited and its subsidiaries (collectively referred to as Air India) aggregating to Rs. 128.19 Crores (March 31, 2011 Rs. 59.25 Crores). Considering the delays in realization of dues from Air India and the uncertainty over the timing of ultimate collection involved, the company, as a measure of prudence, has decided to recognize the revenue from Air. India from October 1, 2011 only when such uncertainty is removed as required by para 9.2 of the Accounting Standard 9, Revenue Recognition. However, based on the internal assessment and various discussions that the company has had with Air India, the management is confident of recovery of such receivables as at March 31, 2012. As such no adjustments have been made in these financial statements.”

ii. It is submitted further that the Appellant Company in accordance with the decision taken in its Board Meeting held on October 25′ 2011 has recognized the revenue from Air India for the period starting from October 2011 to March 2012 on receipt basis in financial year 2012-13. Accordingly, the Company has also paid the revenue share © 45.99% in terms of OMDA to AAI on the revenue from Air India on cash basis.

iii. It is submitted further that the Appellant Company has recognized the revenue from Air India on receipt basis from October 1’2011 to March 31.”` 2012 in line with Clause 9.2 of AS-9 deals with “Revenue Recognition” issued by the ICAI which allows the deferment of revenue recognition till such time there is reasonable certainty of timing of its realization. The relevant extract is reproduced below:

“9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments.”

– Based on above, it is submitted that due to uncertainty in ultimate collection of dues from Air India which resulted in severe cash crisis to the company due to the reasons as mentioned above. The Company has changed recognizing the revenue from Air India in terms of the provisions of AS-9 on Revenue Recognition issue by the ICAI. Therefore, the Company has started recognizing the revenue / receivables from Air India on receipt basis for the period October 2011 to March 2012, related to the financial year 2011-12. It is submitted further that the Company has disclosed all the relevant facts vide letter no 3302 dated August 5^th 2013 filed with the Assessing Officer.”

31. The CIT(A) was not convinced with the submissions furnished by the assessee before him and he confirmed the disallowance.

32. Now the assessee has preferred an appeal before the Tribunal with the submission that assesee was rendering services to M/s. NACIL which includes its affiliates like Air India, Indian Airlines, Alliance Air, Air India Charters and Centaur Hotel and the assessee is required to pay revenue share at the rate of 45.99% to Airports Authority of India of the projected per-tax Gross Revenue for each year in 12 monthly equal installments throughout the term of OMDA. During the financial year 2010-11 and 201 1-12 Air India Ltd., and its affiliates had made substantial delay in making the payment for the use of Aeronautical or non-aeronautical services to the appellant. The aeronautical revenue derived by the appellant from Air India and its affiliates are very significant . As on 31^stMarch 2011, outstanding amount of Rs.81 .04 Crores is due from M/s. NACIL and its affiliates. The detail outstanding was also furnished before the CIT(A). The assessee has also repeatedly approached various senior officers of the Air India as well as the MoCA with regard to non payment of its dues on time against the services utilised by Air India but no concrete response was received. It was also told to authorities that in spite of non payment of outstanding dues to Air India Ltd., the assessee company is paying the revenue share to the Airport Authority of India @ 45.99% on amount of revenue billed to Air India which in turn creating a cash crunch situation in the appellant company. The assessee also issued a cash and carry notice to Air India in January 28, 2011 and thereafter vide letter dated 12.05.2011 the assessee company informed the Chairman and Managing Director of Air India regarding cashflow crises faced by the company and requested the Air India to reduce its outstanding by 75% immediately and also submit the action plan for reducing the balance outstanding to the extent of 25% only. Ultimately the meeting was convened with the Chairman and Managing Director of Air India Ltd., Joint Secretary, MoCA on 30.05.2011 in which certain decisions were taken and as per those decisions, assessee company started raising invoices on daily basis effective from 01.06.2011. However, there was no recovery from Air India side on the basis of the decisions. Dues from Air India were constantly increasing despite continuous meeting and follow upswith the senior management. Despite all repeated reminders and efforts, dues were not cleared and ultimately vide letter dated 24.06.2011, assessee has explained the Secretary, MOCA regarding cash losses suffered by the appellant due to non-recovery of dues from Air India. Further assessee company requested to advise the Airport Authority of India to recognize the revenue share from Air India on receipt basis and allow the company to put Air India on cash and carry basis. Thereafter, several meetings were held with the Board of Directors explaining the detailed reasons for recognizing the revenue from NACIL on cash basis. On the basis of outcome of the meetings and accounting standards 9, the assessee has started recognizing the revenue/receivables from Air India on receipt basis for the period of October to March 2012 related to financial year 2011-12. The learned counsel for the assessee further contended that since the assessee was engaged with the government agencies and the public sectors, it cannot be so harsh to affect the business of public sectors. The assessee had been adopting all these changes and was following the mercantile system of accounting but when its dues were not recovered from the public sectors, the recognition of the revenue was changed from mercantile into cash basis. Therefore, since it was done as per the accounting standard 9 and other guidelines, no disallowance should be made.

33. The learned DR placed the reliance upon the order of the CIT(A).

34. Having carefully examined the orders of authorities below, in the light of rival submissions we find that assessee has furnished the detailed explanations for the conversion of revenue recognition with regard to the receipts from M/s. NACIL and its affiliates but the explanations furnished by the assessee were not accepted by the CIT(A) though he has recorded the same in his order. Undisputedly, assessee was dealing with the public sectors and that too with the essential services providers. Despite of non receipt from the NACIL and its affiliates, the assessee was contributing the revenue shares @ 45.99% to Airport Authority of India of the projected pre-tax Gross Revenuefor each year in 12 equal monthly instalments. He has explained as to what efforts he has made to get the recovery of the outstanding dues and after the meeting the Chairman and Managing Director and senior officers of the MOCA a decision was taken to change the mode of recognition of revenue. Since the assessee has satisfactorily explained the circumstances under which he was forced to change the mode of revenue recognition from mercantile to cash basis, we are of the view that he should be allowed as there is no loss to the revenue. Moreover, assessee was dealing with the public sectors which are engaged in essential services. Therefore, we do not find anything wrong in conversion of mode of recognition of revenue from mercantile to cash basis only with regard to receipt from M/s. NACIL and its affiliates. Accordingly, we set aside the order of the CIT(A) and direct the AO to accept the mode of recognition of revenue by the AO.

35. ITA No.581/Bang/2017

In this appeal, the assessee has assailed the order of CIT(A), inter alia, on following grounds:

Ground I: Order passed under section 143(3) r.w.s. 153A is liable to be quashed

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that in case a notice under section 153A is issued the Assessing Officer is bound to assess and reassess the total income of the Appellant.

2. The Assistant Commissioner of Income-tax, Circle-10(1), New Delhi has completed the assessment of the Appellant vide order dated December 29, 2009 passed under section 143(3) and in the course of such assessmentand examination was made. A search and seizure operationunder section 132 was conducted on October 11, 2012 and during the course of search no incriminating documents or undisclosed income was found.

3. The CIT(A) has erred in not considering that having regard to the second proviso to section 153A, the completed assessment cannot be disturbed except only in the case where there is any undisclosed income found in the course of search or any incriminating documents pointing towards such undisclosed income is found in the course of search or in the course of assessment proceedings under section 153A of the Income-tax Act.

4. The Appellant therefore prays that the order passed by the Assessing Officer is contrary to the provisions of law and liable to be quashed since no undisclosed income is found in the course of search or in the course of proceedings under section 153A

WITHOUT PREJUDICE TO THE ABOVE

Ground II: Addition on account of disallowance of collection charges of  Rs.2,74,32,632/- retained by the airlines under section 40(a)(ia):

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the Deputy Commissioner of Income-tax. Central Circle 2(2), Bangalore (hereinafter referred to as AO) in making the disallowance of collection charges of Rs.2,74,32,632/- retained by the airlines under section 40(a)(ia) on completion of assessment U/s. 153A.

2. The CIT(A) failed to appreciate and ought to have held that the provisions of section 194H of the Income Tax Act,1961 are not applicable in as much as there is no principal and agent relationship between the appellant and the airlines. Further the appellant during the course of assessment proceedings has made detailed submission in support of claim that the airlines has discharged its income tax liability on collection charges of Rs.2,74,32.632/-retained by the airlines wherever

3. The Appellant therefore prays that the Assessing officer be directed to allow the claim of collection charges of Rs.2,74,32,632/- retained by the airlines.

4. Ground III: The Appellant craves leave to add, alter and/or amend all or any of the foregoing grounds of appeal.

36. During the course ofhearing, ground No.1 is not pressed, therefore, the same is dismissed being not pressed. Ground No. 2 has already been adjudicated by us in foregoing appeal in ITA No. 622/Bang/2017. Therefore, following the same, we set aside the order of the CIT(A) and restore the matter to AO to readjudicate the issue afresh after affording opportunity of being heard to the assessee in terms indicated in the foregoing appeals.

37. ITA No.596/Bang/2017

This appeal is preferred by the assessee assailing the order of the CIT(A), inter alia, on following grounds:

Ground I: Addition on account of disallowance of collection charges of Rs.4,53.88,032/- retained  by the airlines under section 40(a)(ia):

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the Deputy Commissioner of Income-tax, Central Circle 2(2), Bangalore (hereinafter referred to as AO) in making the disallowance of collection charges of Rs. 4,53,88,032/- retained by the airlines under section 40(a)(ia) on completion of assessment U/s. 153A.

2. The CIT(A) failed to appreciate and ought to have held that the provisions of section 194H of the Income Tax Act,1961 are not applicable in as much as there is no principal and agent relationship between the appellant and the airlines. Further the appellant has made detailed submission in support of claim that the airlines has discharged its income tax liability on collection charges of Rs. 4,53,88,032/- retained by the airlines wherever

3. The Appellant therefore prays that the Assessing officer be directed to allow the claim of collection charges of Rs. 4,53.88,032/-.

Ground II :Disallowance u/s 14A

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of AO for disallowance of an amount of Rs.91 .09,065/- u/s.14A as against disallowance of Rs 16.47.676/- made in the return of income .

2. The CIT(A) failed to appreciate that the Appellant had worked out at Rs.16,47,676/- (comparing of interest of Rs.97,676/- and administrative expenses of Rs.15,50,000/-) in the return of income.

3. The Appellant therefore prays that AO be directed to consider the disallowance U/s 14A at Rs.16.47,676/- as worked out by the Appellant as per books of account.

Ground III: Not allowing the deduction for 1/30^th of upfront fee and repair and  maintenance for AY 2007-08 and depreciation u/s 32 on repairs and  maintenance for AY 2008-09, 2009-10 & 2010-11:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of the AO in not allowing the deduction for 1/30^thof upfront fee and repair and maintenance for AY 2007-08 and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010-11.

2. The CIT(A) failed to appreciate and ought to have held that AO has not accepted order of the CIT(A) and has further filed appeal before ITAT. Considering non acceptance of order of CIT(A), the AO based on the decision given in the assessment order of AY 2007-08, AY 2008-09. AY 2009-10 and AY 2010-11 completed u/s 143(3) of the Income Tax Act,1961 should have allowed deduction.

3. The Appellant therefore prays that the Assessing officer be directed to allow to allow the deduction for 1/30^thof upfront fee and repair and maintenance for AY 2007-08 and depreciation u/s 32 on repairs and maintenance for AY 2008-09, AY 2009-10 and AY 2010-11.

 Ground IV: The Appellant craves leave to add, alter and/or amend all or any of the foregoing grounds of appeal.

38. Ground Nos. 1, 2 & 3 are already adjudicated by us in the foregoing paras in ITA 636/Bang/2017 in which the matter was restored to the AO with respect to ground Nos. 1 & 2 with certain directions. Following the same, the order of the CIT(A) is set aside in this regard and matter is restored to the AO for readjudication of the impugned issues in terms indicated in foregoing paras. So far as ground No. 3 is concerned, the addition was confirmed in foregoing para. Hence, following the same, we confirm the order of the CIT(A).

39. In the result, appealsof the assessee are partly allowed.

Pronounced in the open court on19^thApril, 2018.