2022 (9) TMI 550 - AT - Income Tax

Exemption under Tonnage Tax Scheme - disallowance of other operating revenue claimed by the assessee as exempt income - Scope of core activity or incidental activity of shipping - AO observed that the assessee company had clubbed the other operating revenue earned with the revenue from Core Dredging Services and claimed exemption as per the provisions of Tonnage Tax Scheme - HELD THAT - The income received and claimed by the assessee as exempt income, do not fall under the purview of Tonnage Tax either in core activity or incidental activity of shipping as per the provisions of Chapter XII-G and the same is to be added as income from non-core activity of dredging operations. As regards the liquidated damages the source of such income is payment for failure to execute the contract works within the stipulated time and not the shipping activity either core or incidental. Though the liquidated damages may be incidental business income but the same is not the profit from core activities or incidental activities which have been defined in the Act. They are not directly received from the shipping activity but are compensatory in nature collected from the contractors for failure to execute contract. Therefore, liquidated damages cannot be held to be from the core activity of the shipping and does not form part for computation in tonnage tax. No infirmity in the orders passed by the lower authorities and respectfully following the decision laid down by the Hon ble Tribunal in assessee s own case for the previous relevant assessment years 2018 (10) TMI 497 - ITAT VISAKHAPATNAM we uphold the order of the lower authorities and dismiss the appeal of the assessee on this ground. Nature of receipts - receipts on account of sale of scrap, sale of empties, sale of waste oil, exchange difference and machinery scrap sales - AO treated the receipts from the above activities as non core receipts and accordingly brought to tax - HELD THAT - It is evident that the Tribunal in assessee s own case 2018 (10) TMI 497 - ITAT VISAKHAPATNAM decided the issue against the revenue on the same issue stating that D.R did not controvert or bring any other order to support that the income was from non core activity. Therefore we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.

Summary

Issues Involved:
1. Disallowance of exemption under the Tonnage Tax Scheme for various incomes.
2. Classification of income from sale of scrap, empties, waste oil, exchange difference, and machinery scrap sales as core or non-core business income.

Detailed Analysis:

Disallowance of Exemption Under Tonnage Tax Scheme:
The assessee, a public sector undertaking engaged in offshore dredging activities, filed its return of income for A.Y. 2015-16, claiming exemption under the Tonnage Tax Scheme. The AO disallowed exemptions for various incomes, including recovery towards leased quarters, staff car recoveries, sale of tender documents, liquidated damages, rent on hiring of quarters/offices, and miscellaneous income, treating them as non-core activities. The AO's decision was based on the observation that these incomes did not correlate with the core or incidental activities defined under the Tonnage Tax Scheme.

The CIT(A) upheld the AO's decision, noting that this issue had been consistently disputed and decided against the assessee in previous years. The Tribunal, upon appeal, also upheld the CIT(A)'s decision, referencing its earlier rulings that such incomes cannot be considered connected with the dredging activity. The Tribunal cited previous decisions where similar receipts were not deemed part of the core activity under the Tonnage Tax Scheme.

For liquidated damages, the Tribunal reiterated that such income, being compensatory for failure to execute contracts on time, does not arise from core or incidental shipping activities and thus cannot be included under the Tonnage Tax Scheme.

Classification of Income from Sale of Scrap and Other Items:
The revenue appealed against the CIT(A)'s decision to classify income from the sale of scrap, empties, waste oil, exchange difference, and machinery scrap sales as part of the core business. The AO had treated these receipts as non-core income and taxed them accordingly.

The CIT(A) directed the AO to delete the additions, relying on previous Tribunal decisions in the assessee's favor for similar issues in earlier assessment years. The Tribunal upheld the CIT(A)'s decision, referencing its earlier rulings where such receipts were considered directly related to the core activity of operating qualifying ships. The Tribunal cited the case of Core Healthcare Ltd., where the sale of empty containers was treated as income directly relatable to the manufacturing activity, drawing a parallel to the assessee's situation.

The Tribunal concluded that the income from the sale of scrap and other items has a direct nexus with the dredging activity and should be considered part of the core activity under the Tonnage Tax Scheme.

Conclusion:
The appeals and cross-objections were dismissed, and the Tribunal upheld the orders of the lower authorities, maintaining the classification of various incomes as either core or non-core under the Tonnage Tax Scheme based on established precedents and the specific definitions within the Income Tax Act. The Tribunal's decisions were consistent with its earlier rulings in the assessee's own cases for previous assessment years.