2019 (3) TMI 266 - HC - Income Tax

Shipping income assessment - Exchange gain on account of restatement on foreign loan - whether or not covered under the tonnage tax scheme and is taxable as normal business income - categorized as Qualifying Company and Qualifying ship - provision for computation of tonnage income - HELD THAT - If realizing gain on account of foreign exchange fluctuations on account of purchase of ships at Sr No. 2 is to be treated as shippping income, there is so reason as to why notional gain on account of foreign exchange liabilities on account of purchase of ships at Serial No. 1 should also not been given the same treatment. Besides on account of consistency of the treatment of the variation on account of foreign exchange gain / loss arising on loan taken for acquisition of ships would be considered core activity arising out of operating ships. That is so far as gain / loss arising on variation of foreign exchange on purchase of ships is concerned. There is no reason given as to why the gain made as restatement of foreign exchange liability is not a part of shipping business under Section 115VI of the Act. Further the variation in exchange rates on account of loan taken on purchase of ships and which gives rise to profit / loss on account of foreign exchange variation of loan taken would in our view be considered to be a part of core activity of the shipping company entitled the benefit of Chapter XII-G of the Act. Tribunal was justified in deleting the addition made by AO who held that the exchange gain on account of restatement on foreign loan is not covered under the tonnage tax scheme and is taxable as normal business income - Decided against revenue

Summary

Issues:
Challenge to order under Section 260A of Income Tax Act, 1961 for Assessment Year 2008-09 - Whether exchange gain on restatement of foreign loan covered under tonnage tax scheme or taxable as normal business income?

Analysis:
The appeal challenged an order by the Income Tax Appellate Tribunal regarding the treatment of exchange gains by a shipping company under the tonnage tax scheme for the Assessment Year 2008-09. The Assessing Officer had added an amount of ?8.89 crore to the company's income, citing that the gains from foreign exchange fluctuations were not covered under the tonnage tax scheme. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the appeal before the High Court.

The core issue was whether the gains from foreign exchange fluctuations, specifically the notional gain on restatement of foreign exchange liabilities on the purchase of ships, should be considered part of the shipping company's core activities under Section 115VI of the Act. The Tribunal noted that in a subsequent assessment year, similar gains were allowed as part of the core activity of the company, leading to a favorable decision for the respondent.

The High Court analyzed the provisions of Chapter XII-G of the Act, which provides special provisions for income of shipping companies. It highlighted the definition of core activities under Section 115VI, emphasizing income from operating qualifying ships. The Court noted that the gains from foreign exchange fluctuations were directly connected to the core activity of operating ships, as seen in the company's financial entries related to foreign exchange gains.

The Court also referred to the decision in the case of Dredging Corporation of India Ltd, where similar gains were treated as falling under the tonnage tax scheme. The Revenue's argument that only gains from restatement of foreign exchange liabilities should not be considered shipping income was deemed inconsistent and without basis. The Court held that the gains from foreign exchange variations on the purchase of ships should also be treated as part of the shipping income under Section 115VI.

In conclusion, the High Court dismissed the appeal, stating that the gains from foreign exchange fluctuations on the purchase of ships were integral to the core activities of the shipping company and should be considered for the benefit of Chapter XII-G of the Act. The Court found no substantial question of law in the matter and upheld the Tribunal's decision in favor of the respondent.