2025 (3) TMI 707 - AT - Income Tax

Considering interest income as income from shipping activity - Lien Marked Fixed Deposits - Income from core shipping activities under the Tonnage Tax Scheme - HELD THAT - As per the assessee the fixed deposits were placed with the banks out of commercial expediency with a view to advance its business interest in the sole business carried out on by it of operating qualifying ships. Thus the assessee claims that interest earned on such deposits should be regarded as profits and gains on business. As in the present case it is undisputed that the only business activity pursued by the assessee relates to shipping. Thus there cannot be any dispute regarding the fact that the various facilities availed by the assessee from the banks with respect to which it has placed fixed deposits as a lien are also for the purpose of effectively and efficiently running its business of operating qualifying ships. Therefore we are of the considered view that the interest earned by the assessee from such fixed deposits maintained with the banks which are marked as lien is inextricably linked with the business of operating qualifying ships and therefore should be treated as an item of receipt from core activity of a tonnage ship company. Conditional Fixed Deposits out of funds raised by way of Public Offering - The funds generated by the assessee from the public offering were also for the purpose of part-financing of capital expenditure on ship building projects and since some of the contracts were rescinded the refund received was agreed to be redeployed vide shareholders resolution towards various other ship building projects including acquisition of vessels. From the details as noted audited financial statements it is evident that out of the amount of Rs. 330.65 crore an amount of Rs. 196.80 crore was utilized for acquiring the equity portion of various ships and vessels. The amount pending utilization for the said purpose has been placed by the assessee as fixed deposits with the banks on which the assessee has earned interest income. Therefore we are of the considered view that the interest arising on the said fixed deposits is in the nature of business income since the only business carried out by the assessee is that of operation of qualifying ships. Fixed Deposits placed to comply Facility Agreement - In the present case there is no dispute regarding the fact that the fixed deposits were placed with the bank in view of the agreement entered into by it with the lender from whom the loan was received by the assessee for the purpose of acquiring ships and vessels. Thus we are of the considered view that the fixed deposits maintained with the bank are inextricably linked with the business of the assessee of operating qualifying ships and the interest earned by the assessee on fixed deposits placed with the banks complying with the covenants in the loan agreement entered for the purpose of acquiring ships and vessels is in the nature of business income of the assessee and relates to core shipping activity. Fixed Deposits placed for meeting Working Capital Requirement - We find that the interest income earned from fixed deposits of funds which are required for meeting the working capital requirement and repayment of loans was held to be in the nature of business income since the funds are nothing but the funds required for running the shipping business by the Co-ordinate Bench of the Tribunal in assessee s own case for the assessment year 2008-09. Therefore respectfully following the decision rendered in assessee s own case the interest income earned from fixed deposits placed with the banks for meeting working capital requirement in the year under consideration is held to be in the nature of business income and relates to the core shipping activity. Therefore AO is directed to treat the interest income as part of the profits from core shipping activities carried on by the assessee. Accordingly Ground No. 1 raised in assessee s appeal is allowed. Disallowance made u/s 14A r.w. Rule 8D - HELD THAT - We find that the CIT(A) deleted the disallowance made under section 14A r.w. Rule 8D of the Rules by placing reliance upon the decision of the Co-ordinate Bench of the Tribunal in M/s Varun Shipping Company Ltd. 2011 (11) TMI 370 - ITAT MUMBAI In the absence of any contrary decision being brought on record we find no infirmity in the findings of the learned CIT(A) on this issue which are based on the judicial pronouncement by the Coordinate Bench of the Tribunal. Accordingly the same is upheld and Grounds No. 1 and 2 raised in Revenue s appeal are dismissed. Disallowance of administrative expenditure incurred towards earning income from incidental activities - HELD THAT - We find that while considering a similar issue of disallowance of administrative expenses against income from incidental shipping activities the Co-ordinate Bench of the Tribunal in assessee s own case in The Shipping Corporation of India Ltd. 2024 (10) TMI 736 - ITAT MUMBAI DR could not show us any reason to deviate from the aforesaid decision rendered in assessee s own case and no change in facts and law was alleged in the relevant assessment order. Therefore we find no infirmity in the impugned order passed by the learned CIT(A) on this issue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the interest income earned by the assessee should be treated as income from core shipping activities under the Tonnage Tax Scheme.
• Whether the disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962, is applicable to the assessee, which is subject to tax under Chapter XII-G of the Income Tax Act.
• Whether the administrative expenses should be allocated against income from incidental activities, and if so, on what basis.

2. ISSUE-WISE DETAILED ANALYSIS

Interest Income as Core Shipping Activity

• Relevant Legal Framework and Precedents: The Tonnage Tax Scheme under Chapter XII-G of the Income Tax Act allows income from the operation of qualifying ships to be taxed on a presumptive basis. The assessee contended that interest income from deposits should be treated as part of core shipping activities, relying on precedents from its own previous cases and the decision in CIT v/s Varun Shipping Co Ltd.
• Court's Interpretation and Reasoning: The Tribunal noted that the assessee's claim was supported by earlier decisions where interest income from deposits, made out of funds required for business but temporarily idle, was considered as business income related to core shipping activities.
• Key Evidence and Findings: The Tribunal examined the nature of the deposits, which included lien-marked deposits, conditional deposits from public offerings, and deposits to comply with loan covenants. It found these were linked to the business of operating qualifying ships.
• Application of Law to Facts: The Tribunal applied the principles from previous decisions, concluding that the interest income was indeed part of the business income from core activities.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's reliance on earlier decisions from different contexts, emphasizing the need to consider the specific business circumstances of the assessee.
• Conclusions: The Tribunal directed that the interest income should be treated as part of the profits from core shipping activities.

Disallowance under Section 14A

• Relevant Legal Framework and Precedents: Section 14A disallows expenditure incurred in relation to earning exempt income. The Tribunal considered the applicability of this section to a company taxed under the Tonnage Tax Scheme.
• Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision, which relied on precedent that disallowance under section 14A is not applicable when income is computed under the Tonnage Tax Scheme.
• Key Evidence and Findings: The Tribunal found no contrary decisions presented by the Revenue to challenge the CIT(A)'s findings.
• Application of Law to Facts: The Tribunal confirmed that only expenses related to the business of operating ships are allowable under the Tonnage Tax Scheme, precluding section 14A disallowance.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's arguments, citing lack of applicable precedents.
• Conclusions: The Tribunal upheld the deletion of the disallowance under section 14A.

Allocation of Administrative Expenses

• Relevant Legal Framework and Precedents: Section 115VI allows for the allocation of expenses between core and incidental activities. The Tribunal considered whether administrative expenses should be allocated against incidental activities.
• Court's Interpretation and Reasoning: The Tribunal followed its earlier decisions allowing reasonable allocation of administrative expenses based on turnover.
• Key Evidence and Findings: The Tribunal noted that the assessee had consistently allocated expenses reasonably based on turnover, a method previously accepted.
• Application of Law to Facts: The Tribunal applied the precedent of reasonable allocation, affirming the CIT(A)'s decision to allow the allocation of expenses.
• Treatment of Competing Arguments: The Tribunal found no new arguments from the Revenue to challenge the established method of allocation.
• Conclusions: The Tribunal upheld the allocation of administrative expenses as reasonable and in accordance with the law.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that interest income from deposits, linked to the business of operating qualifying ships, should be treated as part of core shipping activities. It emphasized that "income by way of interest arising from the said deposits is in the nature of business income and relates to the core shipping activity."
• The Tribunal confirmed that disallowance under section 14A is not applicable when income is computed under the Tonnage Tax Scheme, stating that "no addition to such income can be made by way of disallowance u/s 14A on account of any expenditure incurred in relation to earning of exempt dividend income."
• The Tribunal upheld the allocation of administrative expenses against incidental activities based on turnover, affirming that "reasonable allocation of administrative expenditure is required to be made."
• The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, directing the AO to treat the interest income as part of the profits from core shipping activities.