2020 (4) TMI 858 - AT - Income Tax

Reopening of assessment u/s 147 - addition of excess allowance of income from tonnage tax - computing the non taxable relevant shipping income u/s 115VI(1) - HELD THAT - The notice u/s 148 has been issued by the AO in the instant case, within a period of four years from the end of the relevant assessment year. As the AO formed an opinion that the above income is not derived either from the core or from the incidental activities as envisaged u/s 115VI, he has rightly issued notice u/s 148 of the Act. Thus, we dismiss the grounds of appeal raised by the assessee against the reopening made by the AO. Section 115VF provides that a tonnage tax company shall offer its tonnage income computed as per the Act for tax and it further gives exemption from tax to the relevant shipping income of such tonnage tax company. The relevant shipping income has been defined in section 115VI of the Act, as profit derived from core activities or incidental activities. While the incidental activities are exhaustive list provided in Rule 11R of the I.T. Rules, the core activities are inter alia activities from operating ships. We find that in the instant case the interest income on fixed deposits with the banks arises because of bank guarantee that the assessee has given to its clients, including Performance guarantees, bid bond guarantees etc. If the assessee was not undertaking the business of operating ships, it would not have received the interest on fixed deposits kept as guarantees - fixed deposits made in pursuance of guarantee which lead to interest income is directly related to the activity of the assessee of operating ships - these bank guarantees pertain to qualifying as well as non qualifying ships and in the absence of clear bifurcation between the guarantees, the interest income has to be apportioned at 36.44% to determine the part of the relevant shipping income for the assessee. The assessee has claimed 36.44% of the total receipt from insurance claim amounting to ₹ 29.74 lakhs as exempt income. In the instant case, the sums pertaining to insurance claim are amounts expended for the repair of the vessel parts and regular maintenance of the vessels. These vessels are deployed for the business of the assessee of operating ships. As the insurance claim are directly related to operation of ships, they have to be considered while arriving at the profits of the tonnage tax company under the Act. Certain expenditure incurred towards repairs and maintenance of vessels and other core activities relating to operation of ships was no longer required to be paid which lead to writing back of the creditors. As it pertains to qualifying as well as non-qualifying ships, the portion pertaining to relevant shipping income had to be appropriated on 36.44% basis. The writing back of sundry creditors or debtors give rise to income arising due to the activity of operating ships and, therefore, the receipts due to writing back has to be considered when determining profits arrived from core activities u/s 115VI. As mentioned earlier, the assessee had obtained loan in the foreign currency, the repayment of which lead to accrual of gain due to fluctuation in foreign exchange rate and the loan had been taken by the assessee for acquiring vessels which are its business asset. Hence, the gain being a capital receipt is not chargeable to tax. We set aside the order of the Ld. CIT(A) and delete the addition of excess allowance of income from tonnage tax made by the AO - assessee is entitled to claim of refund, which is subject to its contentions as stated in the Statement of Facts dated 13.05.2016 filed before the Tribunal that however, during appellate proceedings before the learned CIT(A), it was submitted that even though the return filed in response to notice u/s 148 shows a lower income than the originally returned income, the learned CIT(A) may give directions to the effect that the assessed income after giving effect to his order can in no case go below the originally returned income, to which proposition the appellant is fully agreeable to and direct the AO to work it out. - Appeal is partly allowed.

Issues Involved:
1. Jurisdiction to issue notice under Section 148.
2. Allocation of other income towards exempt tonnage income under Section 115VI(1).
3. Validity of revised return filed in response to notice under Section 148.

Detailed Analysis:

1. Jurisdiction to Issue Notice Under Section 148:
The assessee challenged the reopening of the assessment under Section 148, arguing that the Assessing Officer (AO) had no jurisdiction to issue such notice since the matter of allocation of other income had already been considered and accepted in the original assessment completed under Section 143(3). The assessee contended that the reopening was based on a "change of opinion" and not on any new tangible evidence. The Tribunal, however, upheld the reopening, stating that the AO had issued the notice within four years from the end of the relevant assessment year and had formed an opinion that the income was not derived from core or incidental activities as envisaged under Section 115VI.

2. Allocation of Other Income Towards Exempt Tonnage Income Under Section 115VI(1):
The assessee claimed that certain other incomes, such as exchange rate differences, bank interest on FDRs, insurance claims, and sundry balances written off, were derived from core or incidental shipping activities and should be allocated towards exempt tonnage income. The Tribunal analyzed each component:

- Exchange Rate Difference: The Tribunal found that the gains from exchange rate pertained to the activity of operating qualifying ships since the loan in foreign currency was obtained to acquire vessels used in core shipping activities. Thus, the foreign exchange gains were related to shipping income and exempt.

- Bank Interest on FDRs: The interest income on fixed deposits was found to be directly related to the activity of operating ships, as these deposits were made to secure bank guarantees necessary for the shipping business. The Tribunal held that this income should be apportioned at 36.44% towards exempt tonnage income.

- Insurance Claims: The sums received from insurance claims were for the repair and maintenance of vessels used in the shipping business. The Tribunal held that these claims were directly related to the operation of ships and should be considered while determining profits from core activities.

- Sundry Balances Written Off: The Tribunal found that the writing back of sundry creditors or debtors was related to the core activity of operating ships and should be apportioned at 36.44% towards exempt tonnage income.

3. Validity of Revised Return Filed in Response to Notice Under Section 148:
The assessee filed a revised return in response to the notice under Section 148, claiming a refund by capitalizing the exchange rate difference as capital expenditure under Section 43A. The CIT(A) rejected this claim, stating that such claims could not be entertained during reassessment proceedings as they did not relate to the "escapement of income." The Tribunal, however, referred to the decision in CIT vs. Caixa Economica De Goa, which allows the assessee to claim deductions for any expenditure directly related to the income sought to be assessed as escaped income. The Tribunal directed the AO to work out the refund, subject to the condition that the assessed income cannot go below the originally returned income.

Conclusion:
The Tribunal set aside the order of the CIT(A) and deleted the addition of excess allowance of income from tonnage tax of ?1,83,32,362 made by the AO. The Tribunal also held that the assessee is entitled to claim a refund, subject to the condition that the assessed income after giving effect to the order cannot go below the originally returned income. The appeal was partly allowed.

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