2012 (12) TMI 821 - AT - Income Tax

Deduction of interest expense - Against income from non-tonnage activities Tonnage tax Assessee is engaged in shipping business Assessee claim interest expenditure incurred wholly and exclusively for the purpose of its non-tonnage tax activities AO argued that loans availed for shipping activities had been diverted to non-tonnage tax activities Held that - Loans which were availed for ship related activities have been diverted to non-tonnage tax activities. The expenditure incurred for earning such income has to be allowed against such income. Therefore, interest expenditure was incurred wholly and exclusively for the purpose of non-tonnage tax activities and allowed as deduction. In favour of assessee Disallowance u/s 14A Rule 8D Computation of income Applicability of Rule 8D - prospectively or retrospectively - Expenditure incurred in relation to earning of exempt dividend income Held that - Following the decision in case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) that provisions of Rule 8D are applicable from A.Y 2008-09 and cannot be applied retrospectively. Rule 8D applied by the AO to work out the disallowance u/s 14A was not applicable to the year under consideration. In favour of assessee Tonnage taxation Chapter-XII-G - Computation of income from business of operating qualifying ships u/s 115VA - Exclusion from tonnage income - Bad debts recovered - Crude oil refund - General average claims received - Held that - Following the decision in case of Shipping Corporation of India Ltd. (2011 (7) TMI 588 - ITAT, MUMBAI) that when all the ships of the assessee are qualifying ships and when there is no other activity other than core activities and incidental activities, in our opinion, a third category of other business income cannot be created. In favour of assessee Tonnage taxation - Chapter-XII-G - Exclusion from tonnage income liabilities u/s 41(1) of prior periods written back Expenditure claimed in pre-tonnage tax scheme - Held that - Following the decision in case of Shipping Corporation of India Ltd. (2011 (7) TMI 588 - ITAT, MUMBAI) that section 115VA, it is clearly provided that sections 28 to 43C would not over-ride the computation of profits and gains u/s 115VA. As section 41(1) falls within sections 28 to 43C, no separate addition under that section can be made. In favour of assessee

Summary

Issues Involved:
1. Deduction of interest expenses.
2. Disallowance under Section 14A of the Income Tax Act.
3. Contribution towards the major repair fund.
4. Treatment of bad debts recovered, crude oil refund, general average claims, and liabilities of prior periods written back under tonnage tax income.

Issue-wise Detailed Analysis:

1. Deduction of Interest Expenses:
The Revenue challenged the CIT(Appeals)' direction to allow the interest expenses of Rs. 4,52,82,241/-. The assessee, engaged in shipping, property development, and finance, claimed an interest expenditure of Rs. 11,32,79,905/- against non-tonnage activities. The AO attributed Rs. 4,52,88,241/- of this interest to tonnage tax activities, disallowing it as a deduction against non-tonnage income. The CIT(Appeals) found merit in the assessee's detailed submissions, which included loan utilization statements and explanations for treating the interest expenditure as part of non-tonnage activities. The CIT(Appeals) deleted the disallowance, stating that the loans were indeed used for non-tonnage activities. The Tribunal upheld this decision, noting that the AO's own findings supported the assessee's claims and that the CIT(Appeals) had correctly verified the details.

2. Disallowance under Section 14A of the Income Tax Act:
The Revenue raised an additional ground regarding the CIT(Appeals)' computation of disallowance under Section 14A at Rs. 5,98,139/- versus the AO's Rs. 1,30,41,628/-. The AO applied Rule 8D to recompute the disallowance, resulting in an additional disallowance of Rs. 5,98,139/-. The CIT(Appeals), relying on the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd., held that Rule 8D was not applicable for the year under consideration and found the assessee's method of disallowance computation reasonable. The Tribunal upheld the CIT(Appeals)' decision, noting that the AO's application of Rule 8D was incorrect for the relevant assessment year and that the assessee's computation method was fair and reasonable.

3. Contribution towards the Major Repair Fund:
The assessee's ground regarding the disallowance of Rs. 1,89,975/- towards the major repair fund was not pressed during the hearing and was accordingly dismissed.

4. Treatment of Bad Debts Recovered, Crude Oil Refund, General Average Claims, and Liabilities of Prior Periods Written Back under Tonnage Tax Income:
The assessee contended that these items should be treated as part of the tonnage income. The Tribunal noted that similar issues were decided in favor of the assessee in the case of Shipping Corporation of India Ltd., where it was held that such items are to be considered as income from core activities under the tonnage tax scheme. The Tribunal followed this decision and allowed the assessee's grounds, treating the disputed items as part of the tonnage income.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, upholding the CIT(Appeals)' decisions on the issues of interest expenses and disallowance under Section 14A, and treating the disputed items as part of the tonnage income.