2012 (5) TMI 73 - AT - Income Tax

Disallowance of common cost - assessee before us is a company engaged in the business of providing services to the shippers and charterers by operating and maintaining a fleet of dry bulk carriers in various sizes. The income from these ships was computed, under the tonnage scheme under section 115VG - Held that the provisions of Section 115 VF, when an assessee options for taxation under the tonnage scheme, the tonnage income is computed under section 115 VG and the income so computed shall be deemed to be the profits chargeable under the head profits and gains from business and profession and the relevant shipping income referred to in sub section (1) of Section 115 V-I shall not be chargeable to tax As evident from a plain reading of the above statutory provision, where a tonnage tax company also carries on any business or activity other than the tonnage tax business, common costs attributable to tonnage tax business are concerned are to be determined on a reasonable basis. However, with regard to the depreciation, the allocation of costs have to take into account use of such asset for tonnage tax business and the other business.Assessing Officer is said to have accepted the same formulae, as is rejected in this assessment year, for apportionment of expenditure in the immediately succeeding assessment year, in our humble understanding, cannot act as a estoppel against the specific provisions of law. The provisions of law under section 115 VJ have not been taken into account by the authorities below. Appeal is allowed by way of remand to AO

Summary

Issues:
1. Correctness of apportionment of common expenses for non-shipping business.
2. Consideration of common expenses in assessment order.
3. Method of apportioning common expenses between shipping and non-shipping business.
4. Acceptance of computation of income in subsequent assessment year.

Issue 1 - Correctness of Apportionment of Common Expenses for Non-Shipping Business:
The appellant contested the correctness of the CIT(A)'s decision regarding the apportionment of common expenses for non-shipping business. The Assessing Officer disagreed with the appellant's method of apportioning expenses, leading to a dispute over the deduction of proportionate expenses. The appellant's claim of Rs. 1,01,80,626 was reduced to Rs. 53,02,884 by the Assessing Officer, resulting in a disallowed balance amount of Rs. 48,77,742. The CIT(A) upheld the Assessing Officer's decision, emphasizing that expenses under the tonnage tax scheme cannot be allowed as a deduction when the assessee has income from both shipping and other sources of business.

Issue 2 - Consideration of Common Expenses in Assessment Order:
The Assessing Officer noted discrepancies in the assessee's computation of income from activities other than shipping business. The appellant's method of apportioning expenses was challenged, leading to a disagreement over the deduction claimed for proportionate expenses. The Assessing Officer recomputed the expenses for non-shipping business, resulting in a reduced deduction and a disallowed balance amount. The CIT(A) supported the Assessing Officer's decision, stating that direct expenses for shipping activities and a portion of common expenses related to shipping activities should be excluded when determining the deduction for non-shipping business.

Issue 3 - Method of Apportioning Common Expenses Between Shipping and Non-Shipping Business:
The dispute centered around the basis for allocating common costs between shipping and non-shipping business. Section 115VJ mandates determining common costs on a reasonable basis when a tonnage tax company engages in activities other than tonnage tax business. However, the authorities erroneously equated 'reasonable basis' with 'proportionate basis,' which is not always appropriate, especially for passive incomes like interest and rent. The Tribunal emphasized that all common costs cannot be allocated on a proportionate basis and remanded the matter to the Assessing Officer for reassessment in line with the correct legal provisions.

Issue 4 - Acceptance of Computation of Income in Subsequent Assessment Year:
The appellant raised concerns regarding the Assessing Officer's acceptance of the computation of income in the subsequent assessment year, which was in contrast to the decision made in the current assessment year. The Tribunal clarified that the acceptance in a previous year cannot override the specific provisions of the law and directed the Assessing Officer to reevaluate the matter considering the correct legal position without putting the appellant in a disadvantaged position.

In conclusion, the Tribunal allowed the appeal for statistical purposes and directed a fresh adjudication by the Assessing Officer, ensuring the appellant is not worse off due to the appeal. Additionally, the treatment of service charges recovery under the tonnage tax scheme was highlighted for further examination to avoid misconceptions regarding its taxability.