NEW DELHI: The Commissioner of Income Tax (Appeals), a quasi-judicial appellate authority, has asked the Central Board of Direct Taxes to look at treating discounts received by Indian airlines on purchase of aircraft as commission while computing their taxable income, a move that could further hurt an industry that has just started to come out of troubled times.

Based on this view, the CIT has issued notices to InterGlobe Aviation, asking the operator of Indigo Airlines why its taxable income should not be increased by more than Rs 400 crore for the assessment years 2008-11 to include the discounts it received.

InterGlobe had presented these discounts as capital receipts, which are exempted from income tax, but the commissioner rejected the plea and served the notices of enhancement.

An Indigo spokesperson told ET that the notices were issued as part of pending appeal proceedings against the assessment orders for the three years. The company, which recently went public, had disclosed information about these notices in the IPO prospectus. If the CIT's final order goes against it, InterGlobe can still appeal before the appellate tribunal and, if necessary, approach the Supreme Court.

On October 16, Vijay Kumar, one of the CITs (Appeals), wrote to the chairperson of the Central Board of Direct Taxes stating that the ownership of the assets (aircraft and engines) is with the lessor (purchaser), and therefore the lessee (airlines that take aircraft on lease rentals) who is not the owner of the asset cannot assume such a receipt as capital. Airlines often sell aircraft immediately after taking delivery of them and then lease back, a practice that allows them to free up capital. While purchasing aircraft in bulk, they also get huge discounts from the manufactures on the list price.

This discount is nothing but a commission received for fixing a bulk deal for aircraft and engines between the manufacturers and the lessors, the CIT wrote. The lessee (airline) is not entitled to claim any depreciation on these assets, he added.

The CIT asked the CBDT chief to take a view of this issue and circulate it across the department so that an appropriate and uniform stand could be taken by all the assessing officers, all over the country.

The notices sought an explanation from the company on the enhancement of income proposed by the CIT (Appeals). The company has filed submissions and explanations to the CIT (Appeals) and is waiting to address arguments in the appeal proceedings on the next date of hearing, the Indigo spokesperson said.

The CIT (Appeals) wrote to the CBDT chief that airlines are end users of the planes - they first negotiate the price with the manufacturers and later on find out a lessor who buys the planes and the engines for the lessee. This is a longdrawn process and the so-called special discount is offered only on the basis of the actual delivery of the aircraft or engines.

Most of the airlines, including Indigo, have taken aircraft on a lease basis and are paying fixed rentals to the lessors on the basis of the cost of aircraft and engines. The discount is credited and paid to the airlines at the time of the actual delivery of aircraft - the lessee is getting this commission every time the delivery of an aircraft or engines is taken. The airline companies typically take aircraft on lease for six years and credits are treated as capital receipts on a proportionate basis from the date of delivery.

In the case of InterGlobe, it is seen that credits on the basis of the delivery of the aircraft and engines were first proportionately reduced from the lease rent payable to the lessor in the profit and loss account. Later on this amount was reduced from the taxable income while making the computation of income, the CIT communication said.