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TMI Blog2011 (7) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources - Held that:- As decided in CIT v/s Lok Holdings [2008 (1) TMI 365 - BOMBAY HIGH COURT] the interest in question cannot be compared with the interest on surplus funds parked in a bank. Loans were advanced to the employees involved in the core activity of an organisation and when certain income is derived form such activity, the same is taxable under the head "Income From Business" as it is expected that the assessee does not have any other business other than business of operating qualifying ships - in favour of assessee. Container related costs and detention charges - income from incidental activity or from core activity - Held that:- When it is accepted that this receipt is nothing but recovery of cost, it would not be open for the Assessing Officer to bring to tax the gross receipt without eliminating the expenditure incurred for earning this income. If this receipt is to be treated as income from incidental activities, then the relatable cost is also to be excluded and only net income considered. As it is a mere reimbursement, there is no income element - in favour of assessee. Allocation of administrative expenditure to income - admittedly assessable under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 115VU(2) of the Act. However, the assessee has not maintained the books of account exclusively for relevant shipping income, as required under the provisions. The assessee is contesting that it has only income from tonnage tax and therefore books of account have been maintained properly but the version of the assessee is not true as will be seen from the discussion made in forthcoming paras. 4. In the Profit and Loss account, the assessee has shown freight income, Carter Hire income, Demurrage, etc. from its own ships as well as chartered-in ships and also from space booked in ships i.e., slot charter. The assessee also have income from profit on sale of ships, sale of other assets, income from prior period adjustments, income from sundry credit written back, sundry receipts, etc. The assessee distributed its profit before tax of Rs. 110003 lakhs, reported in Profit and Loss account (annual report) in three categories namely relevant shipping income (Rs. 8776100000), income from incidental activities in excess of 25% of the turnover from core activities (Rs. 112400000) and income from other sources (Rs. 2211760000). For arriving at above incomes, the assessee has allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business; and (iii) other income. He further explained that the income from shipping business can be of two categories i.e., (i) income subjected to tonnage tax and (ii) non-tonnage tax income. He relied on section 115VA and submits that this is the charging section and it mandates that nothing contained in sections 28 to 43C of the Act would apply when income is computed under chapter-XII-G, and that the income so computed, shall be the profits and gains of such business chargeable to tax. He took the bench through sections 115VI and 115VG, 115VF. 7. Now, coming to ground no.1, the learned Counsel submits that the Assessing Officer made additions of write back of excess provisions, sundry creditors, prior period adjustments, etc. He took the Bench through the facts as brought out by the Assessing Officer and submits that the Assessing Officer has wrongly made an addition under section 41(1) on the ground that these do not relate to core shipping activity. He vehemently contended that when section 115VA specifically mandates that nothing contained in sections 28 to 43C, shall apply when the assessee opts to compute profits and gains of business under this chapter, the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a miss-match is devoid of merit for the reason that there are other provisions in the Act such as section 43B, which allow certain deduction only on actual payment and would lead to a situation where expenditure which pertains to the period of pre-tonnage scheme being claimed during the period of tonnage scheme. 8. Coming to ground no.2, which relates to miscellaneous receipts, the learned Sr. Counsel took this Bench to the order of the Commissioner (Appeals) and strongly disputed the findings therein. On a query from the Bench, the learned Sr. Counsel submits that the Assessing Officer has allowed the expenditure as claimed and there is no tax impact to the assessee in this year though, on principle, the assessee disputes the findings of the Revenue authorities. 9. Similarly, on ground no.3, which is on the issue of insurance receipts and ground no.4, which is on the issue of re-fund of service tax, learned Sr. Counsel submits that the assessee strongly disputes the findings of the Revenue authorities. He submits that though, on principle, they do not agree with the findings of the Revenue authorities, in view of the fact that there is no tax impact in this year, and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 616 (Bom.) and submits that at Page-624, the Court has laid down a norm of 20%. He submits that the same percentage should be taken as a guideline and the claim of the assessee be allowed. 13. On grounds no.8 and 9, learned Counsel submits that he did not wish to press these grounds. 14. On ground no.10, which relates to determination of total turnover from core activities, the learned Counsel submits that income from sale of ships should be considered as income from core activities for the reason that depreciation on the ships have been allowed and claimed as expenditure in earlier years. He reiterated his contentions that all the ships of the assessee are qualifying ships and the entire income from business of operating of ships qualifies for tonnage tax scheme and there is no warrant in excluding these incomes from the total turnover. Similarly, he submits that sundry receipts also form part of total turnover from core shipping activities. 15. Learned Counsel wound up his argument by referring to the Budget Speech of the Hon'ble Finance Minister delivered on 8th July 2004, while presenting the budget for the assessment year 2004-05, as well as Circular no.5 of 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditures have been written back during the year and that this resulted in double benefit to the assessee. He relied on the order of the Assessing Officer and submits that the amounts written back under section 41(1), do not fall under the category of relevant shipping income and, hence, have to be brought to tax under a regular provision. He took this Bench to the findings of the Assessing Officer at Pages-17 and 18 of the assessment order and relied on the same. Similar arguments were advanced in the case of write back of sundry credit balances and prior period income. He referred to the assessment order Page-15/Para-6.16 and submits that the assessee has reported more than Rs. 800 crores as income in the books of account whereas he is offering a sum of only Rs. 18 crores to tax under the tonnage tax scheme. He emphasized the point that wherever expenditure was claimed in the post tonnage period and when such expenditure was written back, no separate addition was made. His claim is that income arising by way of write back of expenditure of earlier years does not fall under the scheme of section 115VG. 19. On grounds no.2, 3 and 4, learned Departmental Representative reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not fall within the parameters and that the claim cannot be allowed. He further submits that Rule-8D, cannot be applied as the expenditure cannot be corelated with the earning of income. He emphasized the fact that interest was earned by the assessee on parking of surplus funds with banks and without any effort or expenditure being incurred by the assessee. 23. Referring to grounds no.8 and 9, learned Departmental Representative relies on the order of the Commissioner (Appeals). 24. On ground no.10, the learned Departmental Representative submits that sale of ships cannot be treated as core activity of the assessee company. He points out that while income of the business is taxed under the head "Income From Business", the selling of a ship is taxed only under the head "Capital Gains". Even under presumptive taxation, profit on sale of ships is subject to tax under capital gains and it does not fall within purview of sections 28 to 43C of the Act. Hence, he submits that the receipt cannot be treated as covered under the core activity. He prayed that the order of the Commissioner (Appeals) be upheld. 25. In reply, the learned Sr. Counsel pointes out that the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (j) "tonnage income" means the income of a tonnage tax company computed in accordance with the provisions of this Chapter; (k) "tonnage tax activities" means the activities referred to in subsections (2) and (5) of section 115V-I; (l) "tonnage tax company" means a qualifying company in relation to which tonnage tax option is in force; (m) "tonnage tax scheme" means a scheme for computation of profits and gains of business of operating qualifying ships under the provisions of this Chapter. Tonnage income. 115VF. Subject to the other provisions of this Chapter, the tonnage income shall be computed in accordance with section 115VG and the income so computed shall be deemed to be the profits chargeable under the head "Profits and gains of business or profession" and the relevant shipping income referred to in sub-section (1) of section 115V-I shall not be chargeable to tax. Computation of tonnage income. 115VG. (1) The tonnage income of a tonnage tax company for a previous year shall be the aggregate of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nage income under this Chapter. Relevant shipping income. 115V-I. (1) For the purposes of this Chapter, the relevant shipping income of a tonnage tax company means- (i) its profits from core activities referred to in sub-section (2); (ii) its profits from incidental activities referred in sub-section (5): Provided that where the aggregate of all such incomes specified in clause (ii) exceeds one-fourth per cent of the turnover from core activities referred to in sub-section (2), such excess shall not form part of the relevant shipping income for the purposes of this Chapter and shall be taxable under the other provisions of this Act. (2) The core activities of a tonnage tax company shall be- (i) its activities from operating qualifying ships; and (ii) other ship-related activities mentioned as under:- (A) shipping contracts in respect of- (i) earning from pooling arrangements; (ii) contracts of affreightment. Explanation.-For the purposes of this sub-clause,- (a)"pooling arrangement" means an agreement between two or more persons for providing services through a pool or operating one or more ships and sharing earnings or operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, then, the relevant shipping income under this section shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the relevant shipping income in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such income on such reasonable basis as he may deem fit. Explanation:- For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch on sale in the open market. (8) Where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the tonnage tax company more than the ordinary profits which might be expected to arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have been influenced by the fact that the assessee has an income of Rs. 800 crores in its Profit and Loss account and whereas he has offered only Rs. 18 crores to tax under the tonnage tax scheme. The decision whether a particular income has to be brought to tax or not, cannot be based on such a view of the matter. The legislature in its wisdom provided the manner of computation of income under the tonnage tax scheme. In section 115VA, it is clearly provided that sections 28 to 43C would not over ride the computation of profits and gains under section 115VA. As section 41(1) falls within sections 28 to 43C, no separate addition under that section can be made. As section 41(1) seeks to bring to tax certain specified items of receipts under the head "profits and gains of business" the scheme should not be invoked while computing profits and gains of business under Chapter-XII-G. Hence, we are of the opinion that the argument of the assessee should succeed. 30. With the introduction of chapter-XII-G, the entire methodology of taxing income from the business of operating qualifying ships has changed and recourse to the normal provisions of the Act in a peace-meal manner is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssable as business income." 33. Applying the proposition laid down in the aforesaid case law to the facts of the present case, we uphold the contentions of the learned Sr. Counsel that the interest in question cannot be compared with the interest on surplus funds parked in a bank. Loans were advanced to the employees involved in the core activity of an organisation and when certain income is derived form such activity, in our opinion, the same is taxable under the head "Income From Business" as it is expected that the assessee does not have any other business other than business of operating qualifying ships and as it has no other activity as contemplated under chapter-XII-G, we uphold the contention of the assessee that this income cannot be brought to tax separately and it is business income from core activity. Hence this ground is allowed. 34. Coming to ground no.6, we find that the assessee has recovered certain costs incurred by it on container business.. At Para-10.2/Page-45 of the Commissioner (Appeals)'s order, a clear finding is given that the receipt is in question relates to recovery of container related costs and recovery charges. Reference has been made to Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such income." 37. As the expenditure being claim by the assessee cannot be said to have been laid down or expended wholly and exclusively for the purpose of making or earning such income, we uphold the finding of the Revenue authorities in this regard. In our opinion, the Assessing Officer has rightly held that the assessee would not have incurred the expenditure claimed for earning income. The estimation of Rs. 1,00,000 by the Assessing Officer, in our opinion, is reasonable. Coming to reliance placed by the learned Sr. Counsel, on the decision of Hon'ble Jurisdictional High Court Chinai and Co. Pvt. Ltd. (supra), we are of the opinion that these are factual matters and the same cannot be taken as a binding precedent. In view of the above discussion, we uphold the finding of the Commissioner (Appeals) and dismiss ground no.7, raided by the assessee. 38. Grounds no.8 and 9 are dismissed as not pressed. 39. Coming to ground no.10, as already stated, the assessee has no other activity which would result in income. It also does not have any other business. Thus, the income is from core activity only. Nevertheless, the income in question is taxable under the head "Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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