2017 (8) TMI 640 - AT - Income Tax

Addition made u/s. 14A - Held that - We noticed that the assessee has held investments in three schemes of mutual funds and all of them have been liquidated during the year. Accordingly we are of the view that there is merit in the contentions of the assessee that the provisions of Rule 8D(2)(iii) of the I.T. Rules should not be applied in the facts and circumstances of the case. Since the assessee has received dividend income and since there were activities relating to liquidation of mutual funds we are of the view that some amount should be disallowed u/s 14A of the Act. Accordingly in order to put this issue at rest we modify the order passed by Ld CIT(A) on this issue and direct the Assessing Officer to make a disallowance of 5000/- out of administrative expenses to meet the requirements of 14A of the Act and in our view the same would meet the ends of justice. Addition relating to foreign exchange gains - income disclosed on non-qualifying ship - Held that - In the instant case assessee has accounted for the foreign exchange differences arising on ECB loan as per the Accounting Principles and hence the same is required to be ignored for the purpose of computing total income as per the provisions of section 43A of the Act as held in the case of Vodafone East Ltd (2015 (9) TMI 1358 - ITAT KOLKATA). In respect of foreign exchange gain difference arising on other items we noticed that the assessee has allocated the gain between the qualifying ships and non-qualifying ships. Income from qualifying ships is computed under tonnage tax scheme. Since the exchange difference on other items have arisen out of shipping business it will form part of shipping income. Since the income from qualifying ships was computed under tonnage tax scheme no separate addition is required to be made in respect of foreign exchange gain allocated to qualifying ships. In view of the foregoing discussions we are of the view that there was no requirement to make any further addition on account of foreign exchange gains over and above that was offered by the assessee as relating to nonqualifying ship. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition made u/s. 14A of the I.T. Act
2. Addition relating to foreign exchange gains

Issue 1: Addition made u/s. 14A of the I.T. Act:
The appellant, engaged in shipping business, challenged the addition made under section 14A of the Act. The appellant earned exempt dividend income and argued against disallowance under Rule 8D due to having interest-free funds exceeding investments. The ITAT found merit in the appellant's contentions, considering the excess own funds over investments. Referring to the HDFC Bank Ltd. case, the ITAT directed a nominal disallowance of ?5,000 for administrative expenses under section 14A, rejecting the CIT(A)'s decision.

Issue 2: Addition relating to foreign exchange gains:
Regarding foreign exchange gains, the AO added ?9.21 crores to the appellant's income, disputing its relation to shipping activities. The appellant claimed a net gain of ?7.68 crores after foreign exchange loss and relied on the Tag Offshore Ltd. case. The CIT(A) partially confirmed the addition, considering the nature of the gain. The appellant argued that the gain from an ECB loan should be governed by section 43A, citing the Vodafone East Ltd. case. The ITAT agreed with the appellant, directing the AO to delete the addition related to the ECB loan. Concerning gains from other items, the ITAT held that the appellant's allocation between qualifying and non-qualifying ships sufficed, and no further addition was necessary.

In conclusion, the ITAT partly allowed the appeal, deleting the additions made under both issues. The judgment emphasized the applicability of relevant legal provisions and precedents to determine the taxable income accurately.