2012 (6) TMI 809 - AT - Income Tax

Summary

Issues Involved: Disallowance and applicability of section 14A of the Income Tax Act.

Issue of Disallowance under Section 14A:
The case involved the disallowance of expenses attributable towards earning exempt income, specifically focusing on dividend income declared by the assessee. The Assessing Officer (A.O.) computed the disallowance u/s 14A, read with Rule 8D, at Rs. 45,71,250. However, the CIT(A) reduced this disallowance to 5% of the dividend income, amounting to Rs. 4,90,396. The department appealed against the CIT(A)'s decision, while the assessee filed cross objections arguing that section 14A should not be applicable to the presumptive tax regime of section 115VG, which mandates ignoring the profit and loss account.

Applicability of Section 14A on Tonnage Tax Scheme:
The Tribunal considered the nature of the assessee's business, which involved shipping activities under the "Tonnage Tax Scheme" governed by Chapter XII-G of the Income Tax Act. Under this scheme, tonnage income from qualifying ships is computed as per specific provisions, disregarding the actual profit and loss account. The Tribunal referred to a previous decision in the assessee's case for the assessment year 2008-09, where it was established that expenses incurred for the purpose of the business are deemed to have been allowed under Chapter XII-G. Therefore, the Tribunal held that the provisions of section 14A cannot be applied to the Tonnage Tax Scheme, as Chapter XII-G operates as a distinct code on its own.

Decision:
After considering the arguments from both sides and the precedent set in the assessee's previous case, the Tribunal ruled in favor of the assessee. It was held that no disallowance should be made under section 14A in the present case due to the unique provisions of the Tonnage Tax Scheme. Consequently, the appeal filed by the department was dismissed, and the cross objection filed by the assessee was allowed.

This judgment clarifies the non-applicability of section 14A on the Tonnage Tax Scheme, emphasizing the distinct nature of Chapter XII-G in computing income for businesses engaged in shipping activities.