2019 (3) TMI 1168 - HC - Income Tax

Income arising out of shipping activities - system of allocation of expenses - Addition on account of adjustment of the ratio for allocation of administrative and other expenses between tonnage and non-tonnage activity - By applying direct income proportionate method, the A.O. allocated the administrative expenses to the extent of 73.06 % to the tonnage tax activity and rest 26.94 % to the non tonnage tax business - Tribunal deleted the addition - HELD THAT - Tribunal did not approve the stand taken by the A.O. for reallocation of the administrative expenses rejecting the assessee s treatment which was based on Annual Operating Charter Hire Income method , on the ground that in relation to other expenses namely, total operating expenses, interest and finance charges, the A.O. had accepted the method of accounting adopted by the assessee. Similarly, in relation to depreciation also, the A.O. had not make any adjustments. Only in relation to the administrative expenses, the A.O. made the adjustments We are broadly in agreement with the view taken by the Tribunal. No question of law arises. - Decided against revenue

Summary

Issues:
Challenge to the deletion of addition on account of adjustment of expenses between tonnage and non-tonnage activity.

Analysis:
The case involved a limited company engaged in shipping activities and other business operations. The main issue was the allocation of administrative and other expenses between tonnage and non-tonnage activities for income tax assessment. The relevant provision under Chapter XII-G of the Income Tax Act, 1961, specifically section 115VJ, deals with the treatment of common costs in such scenarios. The Assessing Officer (AO) had rejected the assessee's method of allocation for administrative expenses and reallocated them based on a direct income proportionate method.

The Tribunal, however, disagreed with the AO's reallocation of administrative expenses and deleted the disallowance. The Tribunal noted that the AO had accepted the assessee's allocation method for other expenses like total operating expenses, interest, and finance charges. The Tribunal found the AO's rejection of the assessee's method for administrative expenses unjustified, especially considering the revenue had previously accepted the assessee's allocation method for common overheads. The Tribunal reversed the decision of the Commissioner of Income Tax (Appeals) and ruled in favor of the assessee.

The High Court, in its judgment, upheld the Tribunal's decision, stating that they were in broad agreement with the Tribunal's view. The Court found no legal question to be addressed and dismissed the appeal filed by the Revenue. Therefore, the deletion of the addition on account of adjustment of expenses between tonnage and non-tonnage activity was upheld by the High Court.

In conclusion, the judgment focused on the proper allocation of expenses between tonnage and non-tonnage activities for income tax assessment purposes. The Tribunal's decision to delete the addition of expenses based on the AO's reallocation was supported by the High Court, emphasizing consistency in the treatment of expenses and rejecting arbitrary adjustments by the tax authorities.