44BBA Assessee can declare less than presumptive income

Citation of the Case: -DIT vs. Royal Jordanian Airlines (Delhi High Court), Income Tax Appeal Nos. 159 of 2002 & others, Date of Judgment: 24/11/2015

Brief of the Case

Delhi High Court held In the case of DIT vs. Royal Jordanian Airlines that section 44BBA is not charging provision, but only a machinery provision; it cannot preclude an Assessee from producing books of accounts to show that in any particular AY there is no taxable income. In other words, the Court concurs with a view that where there is no income, Section 44BBA cannot be applied to bring to tax the presumptive income constituting 5% of the gross receipts in terms of Section 44BBA(2). No doubt, for that purpose the Assessee has to produce books of accounts to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

Facts of the Case

The Royal Jordanian Airlines (RJA) came to existence by Ordinance No. 10 of 1969 issued by the Hashemite Kingdom of Jordan under Article 31 of the Constitution of Jordan. The said Ordinance was published in the Jordanian official gazette dated 10th April 1969. The features of RJA as spelt out in the Ordinance were that it was a body corporate having financial and administrative independence, it was a part of the Ministry of Transport of the Government of Jordan and it was to undertake all the scheduled air transport activities from and to the Kingdom of Jordan.

RJA has its principal office in Amman in Jordan. It appointed Jet Air Pvt. Ltd. as its general sales agent in India. RJA commenced its operations in India, carrying passengers and cargo on international flights from and to India from 1989 onwards. Since commencement of operations in India, RJA has been incurring losses. It did not file any return of income in India. In response to a notice issued to it under Section 148 in respect of the AYs 1989-90 to 1992-93, stating that RJA has not declared its income in terms of Section 44BBA and in response to another notice under Section 142(1) in respect of AY 1993-94, RJA filed its return for the aforementioned AYs 1989-90 to 1993-94. RJA disclosed its gross receipts as well as its expenses, apart from the commission paid to its agents.

It pointed out that it had been paying income tax to the Government account since September 1993 in order to obtain a ‘No Objection Certificate’ for remittance of sales proceeds calculated on the basis of gross receipts less commission under Section 44BBA. The AO, nevertheless, proceeded to pass orders on 28th February 1994, in respect of AYs 1990-91 to 1993-94 holding that in terms of Section 44BBA, 5% of the gross receipts were to be deemed to be taxable income on a presumptive basis. For the AY 1989-90, a similar order was passed by the AO on 31st March 1994.

For the AYs 1994-95, 1995-96, 1996-97 and 2000-01 RJA filed its return of income declaring nil income. Nonetheless, the AO framed assessment under Section 143(3) on 14th March 1997, holding that RJA is a foreign company and is liable to pay tax in India, in terms of Section 44BBA. The AO proceeded to determine income @ 5% of the net sales and assessed the income of RJA for AY 1994-95 at Rs.2,09,01,800. For AY 1995-96, a similar order was passed on 6th March 1998, determining the income at Rs.1,91,63,360. Another order dated 28th December 1998 was passed by the AO under Section 143(3) for AY 1996-97, assessing the income of RJA at Rs.2,07,08,260. For AY 2000-01, the AO passed an order dated 30th October 2002 under Section 143(3), determining the income at Rs. 63,13,422.

 Held by CIT (A)

The CIT (A) allowed the appeals on the short ground that RJA was not liable to tax as its entire income was in fact the income of the Government of Jordan. The CIT (A) also referred to the decision of the ITAT in Iraqi Airways v. Inspecting Assistant Commissioner 23 ITD 115 and noticed that there was no distinction between the case of RJA and that of Iraqi Airways. Reference was also made to Note 11 attached to the audited accounts of RJA for the year ending 31st December 1993 which stated that the Kingdom of Jordan was committed to cover the losses incurred by RJA. The CIT (A) also considered the opinion given by the public accountants of Jordan, M/s Saba & Co. The CIT (A) held that the entire income of RJA was exempt from taxation and that the exercise of jurisdiction by the ADIT under Section 147/148 was unsustainable in law.

However, the CIT (A) observed that “no refund can be granted with respect to the income already admitted on which tax had been paid. The effect of this appellate order would only be to reduce the additional demand, if any raised in the reassessment proceedings which should be refunded to the appellant, if already collected.

For AY 1994-95, the CIT (A) passed an order on 4th June 1999 affirming the order of the AO as far as applicability of Section 44BBA was concerned. However, it felt that the AO had incorrectly allowed deduction from the gross receipts and accordingly its income was enhanced to that extent. Similar orders were passed by the CIT (A) in respect of the appeals against the assessment orders for AYs 1995-96, 1996-97 and 2000-01.

Held by ITAT

The ITAT in the order dated 2nd November 2011, followed its earlier order in the case of Iraqi Airways 23 ITD 115 and, therefore, upheld the order of the CIT (A) that the income of RJA was not liable to be assessed to income tax. It was also noticed that between the financial year ending 31st December 1989 to 31st December 1998, RJA has suffered losses and all the losses had been borne by the State treasury. The Revenue’s appeals were dismissed. As far as RJA’s appeals were concerned, the ITAT held that Section 44BBA could not have been applied to Assessee. Therefore, there was “no alternative but, to cancel the assessment and direct the refund of amount of tax paid”. As a result, RJA’s appeals were allowed.

For AY 1994-95 when the appeal of RJA being 3085/Del/99 was heard by the ITAT, there was a difference of opinion amongst its members, where one of them was inclined to follow the order of the ITAT in Iraqi Airlines23 ITD 115 as well as order dated 2nd November 2001 in the Assessee’s own case for AY 1993-94, whereas the other was not. As a result, a Special Bench of the ITAT was constituted. The Special Bench held that RJA was liable to be re-assessed to income tax as a foreign company. It was held that there was no immunity from tax to sovereigns unless it was specifically granted by the Parliament. The Special Bench held that it was unable to subscribe to the view taken by the ITAT in the Iraqi Airways case 23 ITD 115.It held that RJA is a company under the Jordan company law and was therefore a ‘person’ under Section 2 (17) read with Section 2 (31). The Special Bench then referred to the alternative plea of RJA in its appeals for AYs 1994-95 and 2000-01 that the Income Tax authority had erred, for the purposes of Section 44BBA, in not reducing the gross sales by the commission paid to its agents and the sums refundable to the customers. It was held that since there was no discussion in the impugned order of the CIT (A) in that regard, RJA should be given a specific opportunity to put forth its arguments in relation to the computation of its income under Section 44BBA. The matter was therefore restored to the file of the AO for that purpose. The AO was also asked to examine the question of levy of interest under Section 234B.

Held by High Court

In Sanyasi Rao 219 ITR 330, the Supreme Court was interpreting Section 44AC which provides for taxation of presumptive income based on the gross receipts. The Supreme Court in the said case held that even where Section 44AC is sought to be applied to a trader, it was only a machinery provision and could not deny the normal relief afforded to all Assessees. It was accordingly held in such instance an option would be available to the Assessee to produce the books of accounts to show that the assessable income is in fact less than the presumptive income.

In as much as Section 44BBA is not charging provision, but only a machinery provision, it cannot preclude an Assessee from producing books of accounts to show that in any particular AY there is no taxable income. The Court, therefore, concurs with the view expressed in this regard by the ITAT in its order dated 29th August 2008, which in any event has not been challenged by the Revenue and has attained finality. In other words, the Court concurs with a view that where there is no income, Section 44BBA cannot be applied to bring to tax the presumptive income constituting 5% of the gross receipts in terms of Section 44BBA(2). No doubt, for that purpose the Assessee has to produce books of accounts to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

As regards the notice under Section 148 for AY 1999-2000, the Court finds that it was issued even while the proceedings which commenced with the notice under Section 143(2) issued on 26th December 2000 were not yet closed. In other words, even without passing the further consequential order under Section 143(3), a notice under Section 148 was issued to RJA on 23rd February 2006 asking it to file a return for AY 1999-2000. This was impermissible in law and there are at least two decisions of this Court that support the Assessee. These are KLM Royal Dutch Airlines v. Additional Director of Income Tax (2007) 292 ITR 49 (Del) and Commissioner of Income Tax v. Ved & Co. (2008) 302 ITR 328(Del). This is, therefore, another reason why the notice under Section 148 for AY 1999-2000 is unsustainable in law.

Accordingly appeals disposed of.