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2014 (12) TMI 224 - AT - Income TaxTreatment of foreign currency gain - Business income from separate business activity or not Held that - Both the authorities have held that such a gain is not out of shipping activity but it has to be considered as separate business income - the only business activity which is being carried out by the assessee is shipping business i.e., operation of ships, which is its core activity - The foreign exchange gain has arisen to the assessee on account of sundry creditors and debtors which were in the course of shipping business only - the nature of transactions are charter hire income, charter hire deposits and insurance during the course of transaction of goods - once the assessee s shipping income is taxed under a special provision, then also, it will not make a difference as only the shipping income is to be taxed - There can be no separate assessment on foreign exchange gain on the ground that it is different from operation of ships - the foreign exchange gain or loss directly relates to the export and same is qualified for the purpose of deduction - any foreign exchange gain or loss has to be in relation to the shipping income - There is no basis for separately taxing it as some other kind of business activity thus, the order of the CIT(A) is upheld Decided in favour of assessee. Disallowance u/s 14A Held that - The interpretation of the AO that sub section (3) independently provides that in case no claim of expenditure has been made by the assessee than also the disallowance u/s 14A has to be made, is completely misplaced and is legally not tenable - only when the precedent conditions of sub section (1) are satisfied, then only provisions of sub section (2) and (3) will come into foreplay, for the purpose of determination of quantum of disallowance - no disallowance u/s 14A is warranted when the assessee has not claimed any expenditure, towards taxable income i.e., it has not claimed any deduction of expenditure debited in the Profit & Loss account while computing the total income Decided in favour of assessee.
Issues Involved:
1. Treatment of foreign currency translation gain. 2. Disallowance under section 14A of the Income Tax Act, 1961. Issue-Wise Detailed Analysis: 1. Treatment of Foreign Currency Translation Gain: The primary issue revolves around whether the foreign currency translation gain of Rs. 26,06,402 should be treated as business income from a separate business activity or as part of the shipping business under the Tonnage Tax scheme. - Facts and Contentions: The assessee, engaged in the operation of ships, declared its income under the Tonnage Tax scheme. The Assessing Officer (AO) added the foreign currency translation gain to the total income, arguing it arose from business activities other than shipping, to which section 115VA applies. The Commissioner (Appeals) upheld this view, stating that the gain was a normal business profit or loss unrelated to the shipping business. - Assessee's Argument: The assessee contended that the foreign currency gain arose from transactions related to the shipping business, such as charter hire deposits and sundry creditors/debtors, and should be considered part of the core shipping activity. The assessee relied on judicial precedents, including CIT v/s Ambar Exports and CIT v/s Infosys Technologies Ltd., to support the claim that foreign exchange gains directly related to the primary business activity should not be treated separately. - Tribunal's Decision: The Tribunal agreed with the assessee, noting that the foreign exchange gain arose from transactions integral to the shipping business. It held that such gains or losses are incidental to the business activity and should derive their character from the underlying business. Consequently, the gain should not be separately taxed as business income. The Tribunal reversed the decision of the Commissioner (Appeals), allowing the assessee's appeal on this ground. 2. Disallowance under Section 14A: The second issue concerns the disallowance of expenses under section 14A related to the exempt dividend income. - Facts and Contentions: The AO disallowed Rs. 11,45,445 under section 14A, applying 0.5% of the average investment. The Commissioner (Appeals) reduced this disallowance to Rs. 1,86,085, reasoning that a reasonable disallowance should be made even if the provisions of rule 8D were not applicable for the assessment year 2007-08. - Assessee's Argument: The assessee argued that no expenditure was claimed in the Profit & Loss account, as the income was computed under the Tonnage Tax scheme, which does not consider such expenses. The assessee maintained that since no expenditure was claimed, no disallowance under section 14A should be made. The assessee cited the Tribunal's decision in ACIT v/s Varun Shipping Co. Ltd. to support this position. - Tribunal's Decision: The Tribunal examined the provisions of section 14A and concluded that disallowance under this section is warranted only when the assessee has claimed an expenditure related to exempt income. Since the assessee did not claim any such expenditure, the Tribunal held that no disallowance under section 14A was warranted. Consequently, the assessee's appeal on this ground was allowed. Department's Appeal: - Grounds Raised: The Department challenged the reduction of disallowance under section 14A by the Commissioner (Appeals) and the reliance on the judgment in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. - Tribunal's Decision: Given that the Tribunal had already decided no disallowance under section 14A was warranted, the Department's appeal was rendered infructuous and dismissed. Conclusion: The Tribunal allowed the assessee's appeal, holding that the foreign currency translation gain should be treated as part of the shipping business income under the Tonnage Tax scheme and that no disallowance under section 14A was warranted as no expenditure was claimed. The Department's appeal was dismissed as infructuous.
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