2011 (11) TMI 370 - AT - Income Tax

Dis-allowance of expenses u/s 14A incurred in earning exempt income - dividend income exempt u/s 10(34) received during the year shipping business asseesse contending since income is assessed under tonnage tax scheme, no addition could be made on account of disallowance u/s 14A - addition made on account of impairment loss and provisions for exchange rate variation to the book profit of the company u/s 115JB - assessee contending that as per the provisions of section 115VO, the book profit derived from the activities of a tonnage tax company is liable to be excluded from the book profit of the company for the purposes of section 115JB Held that - If at all the assessee has claimed any such expenditure in computation of profit of business of shipping, the same are to be taken as disallowed when the income of the said business is finally computed in accordance with the provisions of Chapter XIIG and no separate disallowance on account of such expenditure u/s 14A can be made. We, therefore, delete the disallowance made by the AO u/s 14A and confirmed by the CIT(Appeals). It is observed that both the amounts in question which were added back by the AO for the purpose of computing book profit of the assessee in accordance with the provisions of section 115JB admittedly related to the activities of a tonnage tax company and the same were already deducted by the assessee for the purpose of computing book profit derived from the said activity. In these circumstances, we are of the view that the same should have been added back even for the purpose of computing book profit derived from the activities of a tonnage tax company which is eligible for exclusion from the book profit for the purpose of section 115JB Decided in favor of assessee.

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules.
2. Addition to book profit under Section 115JB on account of impairment loss and provision for exchange rate variation.

Issue-wise Detailed Analysis:

Issue 1: Disallowance under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules

The first issue pertains to the disallowance of Rs. 44,07,875/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 14A of the Income-tax Act, read with Rule 8D of the Income-tax Rules. The assessee, a company engaged in the business of hiring and operation of ships, declared income from shipping business under the tonnage tax scheme as per Section 115VP and also claimed dividend income exempt under Section 10(34). The AO disallowed the expenditure related to earning the exempt dividend income, calculated as per Rule 8D, and added it to the shipping business income.

The CIT(A) upheld the AO's decision, stating that the assessment of total income cannot be in parts and any income earned other than from shipping activities must be taxed. The CIT(A) also referenced the Bombay High Court's decision in Godrej Boyce Mfg Co. Ltd., which confirmed the applicability of Rule 8D from the Assessment Year 2008-09.

The Tribunal, however, found merit in the assessee's contention that the income from the business of operating ships, computed under the special provisions of Chapter XIIG, only allows expenses incurred for the said business. Consequently, no addition to such income can be made by way of disallowance under Section 14A for any expenditure incurred in relation to earning exempt dividend income. The Tribunal deleted the disallowance made by the AO and confirmed by the CIT(A), allowing the first ground of the assessee's appeal.

Issue 2: Addition to Book Profit under Section 115JB on Account of Impairment Loss and Provision for Exchange Rate Variation

The second issue involves the addition of Rs. 12,62,29,000/- for impairment loss and Rs. 50 crores for provision for exchange rate variation to the book profit of the assessee company under Section 115JB of the Act. The AO added these amounts to the book profit, stating they were provisions for meeting unascertained liabilities and diminution in the value of assets, respectively, as per Explanation 1 to Section 115JB.

The assessee argued that these amounts, related to the shipping business, should be excluded while computing the book profit under Section 115VO if they were to be excluded under Section 115JB. The CIT(A) upheld the AO's decision, stating that the provisions were not for ascertained liabilities and thus should be added back while computing the book profit under Section 115JB.

The Tribunal observed that both amounts were related to the activities of a tonnage tax company and were deducted for computing book profit derived from the said activities. The Tribunal found the AO's approach inconsistent, as he made adjustments to the book profit under Section 115JB but did not make similar adjustments to the book profit derived from shipping activities under Section 115VO. The Tribunal directed the AO to make the necessary adjustments by adding back the two amounts to the book profit derived from the activities of a tonnage tax company, which should be excluded from the book profit of the assessee company for the purposes of Section 115JB. The Tribunal allowed the second ground of the assessee's appeal.

Conclusion:

In conclusion, the Tribunal allowed the appeal of the assessee on both grounds, deleting the disallowance under Section 14A and directing the AO to make appropriate adjustments to the book profit under Section 115JB.