2023 (3) TMI 713 - AT - Income Tax

Interest on housing loans given to employees - income from core shipping activity - core shipping income - Why not to be categorised as from core shipping activity as per provisions of section 115VI(2) ? - HELD THAT - We find that while dealing with the interest income on loans/advances to employees for vehicles and computers, the coordinate bench of the Tribunal in assessee‟s own case in the Shipping Corporation of India Ltd vs ACIT 2011 (7) TMI 588 - ITAT, MUMBAI , held that this income cannot be brought to tax separately and it is business income from core activity.Thus interest income on housing loans given to the employees is held to be income from core shipping activity and thus, is not separately chargeable to tax. Insurance and P I claims - It is an undisputed fact that all the ships owned and in-chartered by the assessee are qualified ships. From the aforesaid facts, it is evident that the receipt of Insurance and P I claim by the assessee is in respect of its 2 ships, which were damaged in preceding years but post-tonnage tax era. The assessee first incurred the cost of the repair, which was thereafter claimed as per the insurance policy. Since the receipt of the Insurance and P I claim is directly in relation to the core shipping activity of the assessee in respect of its ships, which are qualifying ships, therefore the receipt is covered under section 115VI of the Act. Course fees - As per the assessee though the said receipt is in incidental income in accordance with clause (iv) of Rule 11R of the Income Tax Rules, 1962, since the threshold of 0.25% of the turnover from core activities is already crossed, the said amount would be chargeable to tax. Accordingly, the same is held to be taxable under the provisions of the Act as per proviso to section 115 VI(1) of the Act. Recovery of the container-related cost credited as prior period income was treated as income of the pre-tonnage tax era and taxable as income from the incidental activity - Since the aforesaid receipt is mere reimbursement of expenditure, therefore respectfully following the judicial precedent rendered in assessee‟s own case assessment year 2007-08 2011 (7) TMI 588 - ITAT, MUMBAI the same is not in the nature of income. Terminal handling charges and commission on disbursement CIT(A) vide impugned order deleted the addition on account of income under normal provisions of the Act of the pre-tonnage tax era. Since the terminal handling charges and commission on disbursement are essentially part of core shipping activities, therefore we find no infirmity in the impugned order on this issue. Addition in respect of sundry receipts - AO held tonnage tax scheme is applicable for the income earned from the operation of qualified ships and that too from the activities which have been listed as the core activity of operation of ships - Since the assessee does not have any other business other than the business of operating qualifying ships and as it has no other activity as contemplated under Chapter XII-G, we are of the considered opinion that the income cannot be brought to tax separately and it is the income from the core activity. Receipt of rent on furniture, company's bus service, contribution for employees' new post-retirement medical scheme, and penal charges levied on employees are is in respect of employees involved in the core activity of the business of the assessee, we are of the considered opinion that same is not taxable under the normal provisions of the Act. Refund of Director's fees - Such Directors are paid their remuneration and as per the terms of employment, Directors‟ sitting fees are recovered. Since the assessee‟s only business is operating the qualifying ships therefore the aforesaid refund is also related to its core activity and thus cannot be taxed under the normal provisions of the Act. Commission on disbursement which the assessee earned over and above the disbursement amount paid to the agents, Captain, and crew of ships when the ship is abroad - Since this commission is also of a similar nature and that too pertaining to the post tonnage tax era, therefore, same forms part of core shipping activity. Receipt on account of Insurance and P I claims , which relates to the qualifying ship also forms part of the core shipping activity. Liquidated damages are recoveries from the shipyard or maintenance agencies. The entire dry-dock expenses incurred on the operation of qualifying ships are debited to the revenue account, whereas the liquidated damages are credited. Since the liquidated damages on account of delay or deficiency in service in respect of the qualifying ships, therefore, we are of the considered opinion that such receipt is part of the core shipping activity of the assessee. Sundry receipts - Assessee submitted additional evidences in relation to volume incentives from CFS, additional free days charges, container damage/maintenance charges, documentation charges, ship-owners expenses recovery, additional terminal handling charges, non-manifested charges, and other receipts - We allow the admission of the additional evidence filed by the assessee. Since the aforesaid evidence was not placed before the lower authorities, therefore the same could not be examined during the assessment proceedings. Accordingly, we deem it appropriate to remand this issue of taxability of sundry receipts under Chapter XII-G to the file of the AO for de novo adjudication after the necessary examination of details filed by the assessee. Profit on bar plus shop sale are held as incidental activity of the operation of the qualified ship. Adjusting the turnover by reducing the sundry receipts and profit on sale of assets - We find that the coordinate bench of the Tribunal in assessee‟s own case for the assessment year 2007-08 2011 (7) TMI 588 - ITAT, MUMBAI held that the profit on the sale of assets is taxable under the head capital gains and thus the same cannot be considered as turnover in view of the provisions of section 115VA of the Act and consequently, out of the purview of chapter XII-G. Thus the reduction of profit on sale of assets from turnover is upheld. Considering income by way of interest and dividend as income from core shipping activity - We find that in CIT vs Varun Shipping Co Ltd 2008 (9) TMI 591 - BOMBAY HIGH COURT held that where the assessee borrowed certain amount for its business purpose and earn interest on unutilised portion of the loan, interest income is taxable as business income. Thus, since the funds are nothing but the funds required for running the shipping business, which has been invested by the assessee, and interest income is earned, therefore, we are of the considered opinion 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. Levy of interest under sections 234D - We deem it appropriate to remand this issue to the file of the Assessing Officer for de novo adjudication, after verification of whether any refund was granted to the assessee. If the claim of the assessee is found to be true, the Assessing Officer is directed to delete the interest levied under section 234D. Taxability of reimbursement of overheads for managed vessels - Since the receipt pertains to the managed vessels, therefore, the same is from the core activity of shipping and thus will form part of the turnover for the purpose of working out incidental income in excess of 0.25% of the turnover of the core activity.

Summary

Issues Involved:
1. Addition on account of prior period expenses.
2. Addition in respect of sundry receipts.
3. Adjustment to calculate turnover.
4. Disallowance of expenses related to interest and dividend income.
5. Levy of interest under section 234D.
6. Allowing tonnage tax provisions on sundry creditors written back.
7. Deletion of addition on account of excess provision written back.
8. Taxability of reimbursement of overheads for managed vessels.

Summary of Judgment:

1. Addition on account of prior period expenses:
The Assessing Officer (A.O.) categorized prior period income into three groups: income from other sources, excess income from incidental activity, and taxable under normal provisions. The CIT(A) granted partial relief by deleting the addition of Rs. 26,519/- but upheld the remaining additions. The Tribunal upheld the CIT(A)'s decision, holding that interest on housing loans given to employees is income from core shipping activity, and insurance claims are directly related to core shipping activity. The course fees were held taxable, while recovery of container-related costs was considered mere reimbursement and not income. Terminal handling charges and commission on disbursement were deemed part of core shipping activities.

2. Addition in respect of sundry receipts:
The A.O. taxed sundry receipts under normal provisions, allowing administrative costs at 20%. The CIT(A) upheld this, but the Tribunal provided detailed rulings on each receipt. It held that house rent from employees, rent on furniture, bus service, contributions for employees' medical schemes, and penal charges are related to core activities and not taxable separately. Refund of Director's fees and commission on disbursement were also held as core activities. Insurance claims and liquidated damages related to qualifying ships were part of core activities. Sundry receipts were remanded for further examination. Profit on bar and shop sales was held as incidental activity.

3. Adjustment to calculate turnover:
The Tribunal upheld the reduction of profit on sale of assets from turnover, following its previous decision. Sundry receipts were to be included in turnover if found to be from core activities.

4. Disallowance of expenses related to interest and dividend income:
The Tribunal admitted the additional ground regarding interest and dividend income. It dismissed the claim for dividend income as not pressed but held that interest income from deposits required for business purposes was business income and related to core shipping activity.

5. Levy of interest under section 234D:
The issue was remanded to the A.O. for de novo adjudication to verify if any refund was granted to the assessee. If no refund was granted, interest under section 234D should be deleted.

6. Allowing tonnage tax provisions on sundry creditors written back:
The Tribunal upheld the CIT(A)'s decision, following its previous ruling that write-backs of sundry creditors are income from core activity and cannot be treated differently based on the tax regime.

7. Deletion of addition on account of excess provision written back:
The Tribunal upheld the CIT(A)'s decision, following its previous ruling that excess provisions written back are part of core activities.

8. Taxability of reimbursement of overheads for managed vessels:
The Tribunal held that reimbursement of overheads for managed vessels is from core activity and forms part of the turnover for calculating incidental income.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, while the appeal by the Revenue was dismissed.