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2024 (2) TMI 513 - AT - Income TaxDisallowance u/s. 14A - interest expenditure pertaining to tonnage tax business - AO did not accept the assessee s computation of disallowance and proceeded to recomputed the disallowance u/s. 14A r.w.r.8D - HELD THAT - This issue is covered in favour of the assessee by the Tribunal in assessee s own case 2023 (9) TMI 1427 - ITAT MUMBAI as held that interest expenditure pertaining to tonnage tax business has to be excluded while computing disallowance under Rule 8D(2). The said decision has been followed in assessee s own case for A.Y.2009-10, 2010-11, 2012-13 and 2014-15. As investments are more than the reserves for the company itself - From the perusal of the balance sheet we find the aforesaid contention is correct and once it is an admitted fact that assessee has own surplus funds for exceeding the investments made, then no disallowance of interest can be made. This issue now stands covered by the judgment of South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT Accordingly, disallowance made by the ld.AO under Rule 8D(2) is deleted. AO has disallowed a further sum under clause 2(iii) of Rule 8D, being the amount computed 0.5% of the average value of investments held by the assessee - However, the actual expenditure claimed of the Treasury Division based on the divisional Profit Loss Account was only Rs 22,54,612/- The administrative expenditure under clause 2(i) 2(ii) of Rule 8D cannot exceed the actual expenditure incurred by the Treasury Division - This issue is also decided by the Tribunal in assessee s own case for the earlier years. Thus, the enhancement made by the ld. AO over and above the disallowance made by the assessee is uncalled so the same is directed to be deleted. Disallowance u/s. 14A while computing the book profit u/s. 115JB - This issue now stands covered in the favour of the assessee by the decision of assessee s own case in the earlier years whereas the Tribunal has followed the decision of the Special Bench in the case of Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Foreign exchange gain written back on cancellation of vessel construction contract taxed u/s. 28(iv) - HELD THAT - Here in this case the said receipt was in capital account and therefore, prima facie Section 28(iv) is not applicable. The reason being the income which can be taxed u/s. 28(iv) must be not only referable to a benefit or perquisite, but must be arising from business or exercise of profession. Here, assessee is in the business of operation of ships and not in the business of constructing or buying / selling ships. As decided in the case of Mahindra Mahindra Ltd 2018 (5) TMI 358 - SUPREME COURT waiver of loan for acquiring capital assets cannot be taxed as a perquisite u/s. 28(iv) of the Act as receipt in the hands of the assessee are in the form of cash / money and further, the same cannot be taxed as a remission of liability u/s. 41(1) of the Act as waiver of loan does not amount to cessation of trading liability. Thus, we hold that foreign exchange gain written back on cancellation of vessel construction contract which were earlier capitalised in the vessels as capital receipt and outside the purview of chargeability u/s. 28(iv) of the Act. Accordingly, this ground of assessee is allowed. Short grant of TDS credit - We are directing the ld. AO to examine this issue and grant credit in accordance with law. TP adjustment on performance guarantee given on behalf of the AE - HELD THAT - Since, immediately preceding and succeeding years, the Tribunal has held that performance guarantee needs to be benchmarked and therefore, we set aside this issue to the file of the AO / ld. TPO holding that; firstly, 1% per annum cannot be applied as it is too high and without any basis; Secondly, assessee has adequate security and therefore, benchmarking of the performance guarantee needs to be substantially lower than the pure financial guarantee; Thirdly, the assessee has entered into contract on 16/01/2011 with Lamprell Energy Ltd., to construct this. It has given performance guarantee to the said company on 28/02/2011. Thus, the performance guarantee was in existence only for one month during the F.Y.2010-11 and therefore, if at all any transfer pricing adjustment it should be made only for the period of one month. With this direction, this ground of appeal is treated as partly allowed for statistical purposes. Accordingly, assessee s appeal is partly allowed. General average claims - insurance claims received on account of damages to ships which were insured, which were reflected under Miscellaneous Operating Income in the audited Profit Loss Account - AO stated that the said income, in the normal course, would have been liable to tax under Section 41(1) of the Act - HELD THAT - Any loss which is brought forward from a non- tonnage tax year must be set off against the tonnage tax income, even if the shipping company has opted for the tonnage tax scheme. As a corollary thereof, any income which has resulted from any expenditure claimed in an earlier year and which has accrued as the income for the year to which the tonnage tax scheme applies would also most certainly have to be considered as part of the tonnage tax income accordingly. In any case, this issue is covered in favour of the assessee by the Tribunal in assessee s own case for A.Y.2006-07, 2007-08 and 2008-09, respectfully following the same, this issue is passed against the department.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Taxation of foreign exchange gain on the cancellation of vessel construction contracts under Section 28(iv) of the Act. 3. Short grant of TDS credit. 4. Transfer Pricing (TP) adjustment on performance guarantee given on behalf of Associated Enterprise (AE). 5. Attribution of interest expenditure between tonnage and non-tonnage activities. 6. General average claims as part of tonnage tax income. Summary: 1. Disallowance under Section 14A: The assessee challenged the disallowance made by the AO under Section 14A of the Act. The AO recomputed the disallowance using Rule 8D, resulting in a higher disallowance than that computed by the assessee. The DRP directed the AO to consider the aggregate interest expenditure incurred by the assessee pertaining to tonnage and non-tonnage activities for computing the amount liable for disallowance under clause 2(ii) of Rule 8D. The Tribunal found that the interest expenditure attributable to the tonnage tax business should not be considered for disallowance under Rule 8D(2)(ii) and deleted the additional disallowance made by the AO. 2. Taxation of Foreign Exchange Gain: The AO treated the foreign exchange gain on the cancellation of vessel construction contracts as income under Section 28(iv) of the Act. The Tribunal held that the gain was a capital receipt and not chargeable under Section 28(iv), as it arose from the cancellation of contracts for the construction of capital assets (vessels). 3. Short Grant of TDS Credit: The assessee raised the issue of short grant of TDS credit. The Tribunal directed the AO to examine the issue and grant credit in accordance with the law. 4. TP Adjustment on Performance Guarantee: The AO made a TP adjustment for the performance guarantee given by the assessee on behalf of its AE. The Tribunal noted that in earlier years, it was held that performance guarantees need to be benchmarked but at a substantially lower rate than financial guarantees due to adequate security. The Tribunal set aside the issue to the AO/TPO to benchmark the performance guarantee at a lower rate and consider the guarantee period. 5. Attribution of Interest Expenditure: The AO attributed interest expenditure between tonnage and non-tonnage activities. The Tribunal found that the issue was covered in favor of the assessee by earlier Tribunal decisions, which held that interest expenditure directly attributable to the tonnage tax business should not be considered for disallowance under Rule 8D(2)(ii). 6. General Average Claims: The AO excluded general average claims from tonnage tax income, treating them as income under Section 41(1) of the Act. The Tribunal held that such claims should be considered as part of the tonnage tax income, following earlier Tribunal decisions in the assessee's favor. Conclusion: The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed. The Tribunal directed the AO to recompute disallowances and adjustments in accordance with the findings and earlier Tribunal decisions.
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