2018 (6) TMI 1785 - AT - Income Tax

Taxability of Capital gain - Profit on sale of vessels of the division tonnage - taxability as per provisions of section 50(1) 50(2) or not? - Special provision for computation of capital gains in case of depreciable assets - HELD THAT - As in one of the situation, the value of such transfer is more than the value of block of assets, the excess is chargeable to tax under the head capital gains . In the given case, the excess i.e. profit is reduced from the block of assets and Block continue to have assets value and both situations highlighted in section 50(1) 50(2) are not attracted. Therefore, as per Income Tax Act, this transaction has not generated any capital gains. Income has to be determined strictly as per the provisions of I.T. Act and not as per Companies Act/Book profit. Only in specific situation book profit is considered for only determining the taxable income u/s 115JB. In no other situation, the book profit is considered to bring an income which is not as per the provisions of I.T. Act. Just because a separate income is disclosed by the assessee, it does not mean that it should be brought to tax over looking the actual provisions of income tax. Therefore, the profit on sale of vessels of the division tonnage is not taxable as the provisions of section 50(1) 50(2) are not attracted. Therefore, the addition made by the AO is deleted. Deduction u/s 80IA - deduction denied with regard to Karaikal Port, for which the CIT(A) in AY 2010-11 rejected the claim of assessee due to non submission of certificate - HELD THAT - Since the assessee has submitted a certificate from the port authority certifying that they have entered into an agreement with the assessee for O M of the port in AY 2009-10 itself, we set aside the order of CIT(A) and direct the AO to allow deduction u/s 80IA to Karaikal port also. Disallowance u/ 14A r.w.r. 8D - HELD THAT - It is clear that we have to include those investments which has generated income and exclude those investments, which have not generated income. AO had taken the total investment instead of those investments, which have generated income. Accordingly, we direct the AO to calculate the disallowance of interest with prescribed formula. The main reason is that as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which is exempt from tax. The relevance is the expenditure in relation to income. The quantification has to be undertaken in relation to the exempt income. The investment which has not generated exempt income should be excluded from the calculation of ratio to determine the disallowance. Similarly, for the administrative expenses, 0.5% of average investments from which the exempt income is received should be considered instead of average of the total investments - considering the above discussion, we direct AO to recalculate the disallowance as per rule 8D(iii) as per the above guidance. Accordingly, ground raised by assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of profit on the sale of tonnage vessels.
2. Eligibility for deduction under Section 80IA.
3. Disallowance under Section 14A.

Detailed Analysis:

1. Taxability of Profit on Sale of Tonnage Vessels:

The assessee, engaged in the business of Cargo Lighterage and Port O&M Operations, filed its return of income for AY 2008-09, declaring profits under normal provisions and book profits under Section 115JB. Upon reassessment, the Assessing Officer (AO) observed that the profit from the sale of tonnage vessels, amounting to ?5,43,03,629, was declared as other income in the tonnage income, which is not taxable. The AO contended that this profit should be classified as 'Income from Other Sources' rather than as exempt tonnage income. The assessee argued that the profit on the sale of tonnage assets should be computed under Section 50, which did not result in any taxable capital gains. The AO, however, added the amount as 'Income from Other Sources.'

Upon appeal, the CIT(A) upheld the AO's decision without addressing the main contention of the assessee. The Tribunal found that the profit on the sale of depreciable assets should be considered under 'Income from Capital Gains' as per Section 50, and since the conditions under Section 50(1) and 50(2) were not met, no capital gains arose. The Tribunal concluded that the profit on the sale of vessels is not taxable as income from other sources and deleted the addition made by the AO.

2. Eligibility for Deduction Under Section 80IA:

For AY 2011-12 and 2012-13, the assessee claimed deductions under Section 80IA for income derived from operating and maintaining port infrastructure. The AO disallowed the deduction, stating that the assessee's activities were in the nature of works contracts, which are not eligible for deduction under the amended provisions of Section 80IA. The CIT(A), following the Tribunal's decision in the assessee's own case for AY 2009-10 and 2010-11, directed the AO to allow the deduction for specific ports but disallowed it for Karaikal Port due to the non-submission of a certificate.

The Tribunal, referencing its earlier decision, noted that the assessee had submitted the required certificate for Karaikal Port in AY 2009-10 and directed the AO to allow the deduction under Section 80IA for Karaikal Port as well.

3. Disallowance Under Section 14A:

For AY 2012-13, the AO disallowed ?25,95,980 under Section 14A, related to the expenditure incurred in earning exempt income. The AO calculated the disallowance by taking the total investment instead of only those investments that generated income. The CIT(A) upheld the AO's decision.

The Tribunal directed the AO to recalculate the disallowance by considering only the investments that generated exempt income, as per Rule 8D. The Tribunal emphasized that the disallowance should be based on the expenditure related to the exempt income and not on the total investments.

Conclusion:

The Tribunal allowed the appeals for all three assessment years, directing the AO to:
1. Delete the addition of ?5,43,03,629 as 'Income from Other Sources' for AY 2008-09.
2. Allow the deduction under Section 80IA for Karaikal Port for AY 2011-12 and 2012-13.
3. Recalculate the disallowance under Section 14A for AY 2012-13 based on the investments that generated exempt income.