2009 (11) TMI 661 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of proportionate interest and other expenses under Section 14A of the Income-tax Act, 1961.
2. Treatment of interest income as "Income from other sources" vs. "Business income."
3. Addition of purchase values of vessels sold within a specific period under Section 33AC.
4. Disallowance of deduction claimed under Section 33AC of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Interest and Other Expenses under Section 14A:
- Ground No. 1: The assessee's counsel did not press this ground during the hearing. Consequently, it was rejected as not pressed.

2. Treatment of Interest Income as "Income from Other Sources" vs. "Business Income":
- Ground No. 2(a): The Commissioner of Income-tax (Appeals) confirmed the Assessing Officer's action of treating interest income as "Income from other sources" instead of "Business income."
- Ground No. 2(b): The authorities did not net off the interest paid against the interest income.
- ITAT's Decision: The ITAT referred to its previous decision in the assessee's case for the assessment year 2000-01. The matter was set aside to the file of the Assessing Officer for re-verification and fresh adjudication, following the same directions as in the earlier year.

3. Addition of Purchase Values of Vessels Sold within a Specific Period under Section 33AC:
- Ground No. 3(a): The Commissioner of Income-tax (Appeals) confirmed the addition of Rs. 89,30,258, being the purchase values of vessels sold within eight years from the acquisition date, despite the amended retention period of three years.
- Ground No. 3(b): The authorities failed to appreciate the amended clause (c) of sub-section (3) of section 33AC, which reduced the retention period from eight years to three years.
- Ground No. 3(c): Disallowance of Rs. 25,00,000 in respect of the sale of a vessel to DB Girdhari was confirmed, even though no deduction under section 33AC was claimed in earlier years.
- ITAT's Decision: The ITAT held that the amended provision of section 33AC(3)(c), effective from 1-4-2004, would be applicable. Since the ships were sold after three years but within eight years, there was no violation of section 33AC(3)(c). The addition of Rs. 89,30,258 was deleted.

4. Disallowance of Deduction Claimed under Section 33AC:
- Ground No. 4(a): The Commissioner of Income-tax (Appeals) confirmed the disallowance of the deduction of Rs. 13,80,00,000 claimed under section 33AC.
- Ground No. 4(b): The authorities made various observations contrary to the facts and provisions of the Income-tax Act.
- Arguments by Assessee's Counsel:
- Preference Share Capital: It should be considered part of paid-up share capital.
- General Reserve: The balance should not be reduced by amounts transferred from the capital redemption account and section 33AC reserve utilized account.
- Section 33AC Reserve: Once utilized for acquiring new ships, it can be transferred to general reserve.
- ITAT's Decision:
- Preference Share Capital: It is part of paid-up share capital.
- General Reserve: The Assessing Officer's reduction of Rs. 7,13,50,000 was factually incorrect. The correct amount transferred from the capital redemption account was Rs. 4,82,50,000.
- Section 33AC Reserve: The assessee was entitled to transfer the section 33AC reserve to the general reserve after its utilization for acquiring new ships.
- Remand to Assessing Officer: The matter was restored to the file of the Assessing Officer for re-computation of deduction under section 33AC, considering the preference share capital, creation of capital redemption reserve, and the transfer from section 33AC reserve utilized account.

Conclusion:
The appeal of the assessee was allowed in part, with specific directions for re-adjudication by the Assessing Officer on certain points.