2024 (10) TMI 736 - AT - Income Tax

Sundry credit balances written back - Excess provision written back (being 80% of the excess provision written back) - HELD THAT - Assessee has declared certain income relating to earlier years pertained to excess provision/sundry credit written back had been considered as core shipping income of the assessee as defined in Sec. 115V(2) - assessee has also declared sundry creditors written back as its core shipping income from the core activity as defined in Sec. 115V(2) of the Act. AO observed that assessee has opted for Tonnage Tax Scheme w.e.f assessment year 2005-06, therefore, aforesaid income would not qualified to be categorised as shipping income from core activity. Therefore, the assessing officer noticed that out of the sundry credit written back of Rs. 3.32 crores a sum of Rs. 19,58,670/- was pertained to the pre- tonnage tax era, therefore, he brought the same to tax under the normal provision of the Act. Similarly in respect of excess written back of Rs. 62.85 crores the assessing officer observed that a sum of Rs. 24,27,86,267/- pertained to the pre-tonnage tax era and he treated 80% of such excess provision written back as pertaining to the pre-tonnage period and same was taxed under the normal provision of the Act. As relying on assessment year 2007-08 2015 (3) TMI 751 - ITAT MUMBAI issue on hand being squarely covered we find merit in the submission of the assessee and allow the claim of the assessee for treating the income under the core activity, therefore, ground no. 1 of the assessee is allowed. Taxing the sum being 80% of the sundry receipts pertaining to certain receipts recorded under sundry receipts - HELD THAT - During the course of assessment the assessing officer has taxed the sundry receipt under the normal provision of the Act as discussed supra in this order on the ground that tonnage tax scheme was applicable to the income earned from operation of qualified ships and that too from the activities which was listed as core activities. The assessee explained that sundry receipts were related to the operation of ships therefore the same was required to be considered as income from core activities. As in relevant extract of the decision vide 2023 (3) TMI 713 - ITAT MUMBAI pertaining to assessment year 2008-09 ground no.2 of the assessee is allowed excluding the amount on the issue of application money for right to information Act which was not pressed. Sundry receipts should be treated as profit from core activities HELD THAT - The assessee explained that receipt from insurance and PI claim was directly related to the core shipping activity of the assessee in respect of its ships as the same was arised out of insurance claim for damages which was restricted up to the actual expenses incurred by the assessee. Similarly, the house rent was related to the accommodation arranged by the assessee for its employees on lease basis for which it had incurred expenditure on lease rent and recovered from normal house rent from the employees, therefore, same is related to the core activity of the assessee company and these expenses were incurred every year for the purpose of the business of the assessee. Therefore, the part of the amount recovered out of the expenditure is a receipt related to the core activity of the assessee company. Similarly, the bus service were arranged by the assessee for its employees who were working in the assessee company, which is related to the business of the assessee and part of the core activity. With the assistance of ld. Representative we have also gone through the decision in the case of assessee itself for A.Y. 2008-09 2023 (3) TMI 713 - ITAT MUMBAI wherein identical issue on similar fact has been decided in favour of the assessee. Interest income constituted profits from core activities and therefore could not be separately assessed to tax - HELD THAT - With the assistance of the ld. representative we have gone through the decision of ITAT for A.Y. 2008-09 2023 (3) TMI 713 - ITAT MUMBAI held as undisputed that the only business activity pursued by the assessee relates to shipping, and thus the entire receipts are from the shipping activity, which qualifies for computation on a presumptive basis under the tonnage tax provisions. 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. Disallowance of administrative expenses against income from incidental shipping activities - HELD THAT - After referring the aforesaid provision of Sec. 115VI DRP agreed that in respect of profit from incidental activities only the net receipt cannot be treated as income and reasonable allocation of administrative expenditure is required to be made. Also stated in the finding of the DRP that assessee has shown the same on the basis of turnover, therefore, the same is reasonable. Considering submission of the assessee that administrative expenses are required to be incurred for all activities of the assessee company, therefore, we consider that the same is required to be attributed on a reasonable basis to arrive at profit from the incidental activities in the case of the assessee in accordance with the Sec. 115VI - direct the AO to allow the claim of the assessee for allocating the administrative expenditure on the basis of turnover therefore this ground of appeal is allowed. Treatment of commission of disbursement as part of profit and turnover from core activity - HELD THAT - Assessee sometimes takes vessels owned by third parties on a charter basis and further out-charters the same to third parties. In chartering activity, all the expense of the vessels are required to be borne by the ship owner but if the assessee incurs certain expenses on behalf of the vessels owner for managing the vessel, the same are reimbursed to it by the vessels owner along with commission. We have perused the decision of ITAT for A.Y. 2008-09 2023 (3) TMI 713 - ITAT MUMBAI wherein the similar issue on identical fact was decided by the assessee held as per the assessee, such disbursement was pursuant to an agreement with certain ship owners. We have already upheld the taxability of commission on disbursement under Chapter XII-G, which was forming part of the prior period income. 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. Treatment of Profit on bar and shop sales as part of turnover from core activity - HELD THAT - We find that identical issue on similar fact has been adjudicated by the ITAT in the case of the assessee for assessment year 2008-09 2023 (3) TMI 713 - ITAT MUMBAI wherein held as per the assessee, though the receipts have been referred to as incidental in the aforesaid order, what was meant was that it is a receipt from core activity. However, no order modifying the aforesaid findings by the coordinate bench is placed on record. Thus, respectfully following the judicial precedent in assessee s own case, the profit on bar plus shop sales are held as incidental activity of the operation of the qualified ship. Treatment of Sundries core shipping as part of profit and turnover from core activity - CIT(A) held that such receipts are related to core shipping activity and same was treated as part of business receipt of the assessee - HELD THAT - We find that ld. CIT(A) held that such receipts are recovered from the container freight station and include various receipts including reserves on behalf of the customer which indicate that such receipts are related to the core shipping activity. Considering the aforesaid findings of the CIT(A) we don t find any reason to interfere in the decision of ld. CIT(A) therefore, this ground of revenue stand dismissed. Treatment of recovery of water charges as part of profit and turnover from core activity - HELD THAT - Water charges recovery are made from the vessel owners towards supply of fresh water for use by crew staff which showed that this recovery is part of the shipping activity therefore, we don t find any error in the decision ld. CIT(A), therefore, this ground of appeal of revenue are dismissed. Credit of Foreign Taxes paid u/s 90 and 91 - CIT(A) held that tax deducted in countries with whom India does not have a DTAA, the manner of determining the independent rate of tax has been specifically provided by explanation to Sec. 91 and the effective rate of tax determined by the AO was not proper, therefore, AO was directed to follow the same as per Sec. 91 - HELD THAT - We find that similar issue on identical fact has been decided by the ITAT in the case of the assessee itself vide 2015 (3) TMI 751 - ITAT MUMBAI for A.Y. 2007-08 on 21.03.2014 and the matter was restored to the file of the AO after referring the decision of the ITAT on the similar issue for assessment year 2005-06 claim of the assessee for relief u/s 90 and 91 of the Act in respect of foreign taxes paid outside India deserves to be entertained and since the ld. D.R. has also not raised any objection in this regard, the matter should go back to the A.O. for deciding the same afresh after necessary verification. Appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.

Summary

Issues Involved:

1. Tax treatment of sundry credit balances and excess provisions written back.
2. Taxation of sundry receipts under core or incidental activities.
3. Treatment of interest income as part of core activities.
4. Disallowance of administrative expenditures against income from other sources and incidental activities.
5. Credit of foreign taxes under Sections 90 and 91 of the Income Tax Act.

Detailed Analysis:

1. Tax Treatment of Sundry Credit Balances and Excess Provisions Written Back:

The primary issue was whether the sundry credit balances and excess provisions written back should be considered as income from core activities under the Tonnage Tax Scheme. The assessing officer categorized certain income as non-core activities, arguing that they pertained to the pre-tonnage tax era and thus should be taxed under normal provisions. The CIT(A) upheld this view citing provisions like Section 115VZB and Section 176(3A). However, the ITAT found merit in the assessee's argument, referencing prior ITAT decisions in favor of the assessee for earlier assessment years, which treated such write-backs as income from core activities. The Tribunal ruled that these amounts are part of core activities, thus allowing the assessee's claim.

2. Taxation of Sundry Receipts Under Core or Incidental Activities:

The assessing officer initially taxed sundry receipts under normal provisions, arguing they were unrelated to core shipping activities. The CIT(A) upheld this, but the ITAT overturned the decision, referencing prior favorable rulings for the assessee. The Tribunal recognized that sundry receipts, including cleaning charges, container maintenance, and port handling charges, were integral to core shipping activities. Consequently, the ITAT allowed these to be treated as core activities, thus exempting them from normal taxation.

3. Treatment of Interest Income as Part of Core Activities:

The assessee argued that interest income from deposits related to shipping reserves should be considered part of core activities. The assessing officer treated this as income from other sources. The ITAT, referencing the decision in CIT vs. Varun Shipping Co Ltd, agreed with the assessee, recognizing that interest earned on funds temporarily placed in deposits for shipping operations should be considered core activity income. Thus, the interest income was ruled to be part of core shipping activities.

4. Disallowance of Administrative Expenditures Against Income from Other Sources and Incidental Activities:

The assessing officer disallowed administrative expenses claimed against income from incidental activities, citing Section 115VI. The ITAT, however, agreed with the assessee's argument that administrative expenses are necessary for all business activities and should be allocated reasonably. The Tribunal directed the AO to allow these expenses based on turnover, thus siding with the assessee's approach.

5. Credit of Foreign Taxes Under Sections 90 and 91:

The assessing officer denied credit for foreign taxes paid, arguing that such credits are only allowable for taxes paid in countries without a Double Taxation Avoidance Agreement (DTAA) with India. The CIT(A) disagreed, directing the AO to follow Section 91 provisions. The ITAT upheld this decision, referencing past ITAT orders that allowed for such credits after necessary verification. The Tribunal restored the matter to the AO for fresh verification, allowing the ground for statistical purposes.

Conclusion:

The ITAT largely ruled in favor of the assessee, allowing claims related to core activities under the Tonnage Tax Scheme and directing appropriate treatment of interest income and administrative expenses. The Tribunal also facilitated the credit of foreign taxes, subject to verification, aligning with prior judicial precedents. The revenue's appeal was dismissed, while the assessee's appeal was partly allowed.