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TMI Blog2017 (11) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... re not from the core activity of shipping operation but from the interest on House building and other advances. Hence we uphold the order of the Ld. CIT(A) and dismiss the ground of the assessee on this issue. Liquidated damages collected from various contract parties as compensatory payment for failure to execute contract work within the stipulated time - Held that:- Profits and gains for the purpose of industrial undertaking required to be computed as per the provisions of section 28 to 43C of I.T. Act and the deduction required to be allowed u/s 80IA of I.T. Act from the business income. Whereas in the case of tonnage tax as provided u/s 115VI, the income required to be computed as per Chapter XIIG of I.T. Act at the option of the assessee. Once, the assessee opts tonnage tax scheme, the income of the assessee from shipping company required to be computed as provided in Chapter XIIG. Therefore, the decision relied upon by the Ld.AR is distinguishable and not applicable in the assessee's case. Accordingly, we hold that Ld.CIT has rightly confirmed the addition and dismiss the appeal of the assessee on this ground. Interest on arbitration award for Link Road Project, Kochi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nage of the ship under section 115VG. The definition of core activities has been defined as activities from operating qualifying ships and other shipping related activities. Therefore, the interest received on delayed payments and other miscellaneous receipts such as recruitment fee, cancellation of DD, seminar expenses, EMD forfeited, vender registration form/tender form, transportation of pipeline guarantee amount forfeited and miscellaneous receipts (bifurcation under process) cannot be held to be received from the shipping activities. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and the appeals of the assessee are dismissed. Provisions written back - Held that:- The provisions were debited to the Profit & Loss account in the earlier years in which it was created. The provisions are not allowed as deduction as per the act while computing the income of the corresponding assessment year. However, the expenditure debited to Profit & Loss account has no relevance for computation of the income under tonnage tax, as the income is computed as per Section 115VG of the Act and the expenditure is not allowed as deduction irrespective of the expenditure debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of sections 28 to 43C of the Income Tax Act, 1961 (hereinafter called as 'the Act'). However, the resident assessees engaged in the business of dredging/operation of ships have the option to declare the income under tonnage scheme under the provisions of section 115V to 115VZC of Chapter XII-G of the Act. This is known as Tonnage Tax Scheme under which the income is computed at specified rates based on net tonnage of a ship under section 115VG of the Act. There is no dispute that the assessee had opted for this scheme and the same has been accepted by the department. 2.1 For the sake of convenience the facts are extracted from the assessment year 2009-10. For the assessment year 2009-10, the assessee filed the return of income on 23.09.2009 declaring total income of ₹ 41,51,34,970/. The assessing officer assessed the following income as non core income and taken out of the scope of tonnage tax and assessed the profits separately. (Rs. in lakhs) 1) Interest earned on House Building and other advances 35.78 2) Sundry Receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to the addition of ₹ 35.87 lakhs relating to interest on house building and other advances. This issue is involved in the assessment years 2009-10, 2010-11 and 2011-12. The amounts separately assessed were ₹ 35.87 lakhs for the A.Y. 2009-10, ₹ 29.74 lakhs for the A.Y. 2010-11 and ₹ 18.01 lakhs for the A.Y. 2011-12. The assessing officer during the assessment proceedings found that the assessee had included the interest earned on house building advance amounting to ₹ 35.78 lakhs in the core activity of dredging and computed the income as per the provisions of section 115 VG of I.T. Act, but not offered the same separately to tax. The assessing officer viewed that the interest on house building advance is not from the core activity of dredging and required to be assessed as income other than core activity. Therefore, the receipts on account of interest earned on house building advances had been reduced from the tonnage tax receipts and assessed separately as receipts from non core activities. Aggrieved by the order of the assessing officer, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the order of the assessing offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Pandian Chemicals Ltd. reported [262 ITR 278] in the assessee's case following the reasoning that liquidated damages are not forming part of the core activity of shipping. Subsequently, Hon'ble High Court of Mandhya Pradesh Indore Bench in the case of CIT Vs. Prakash Oils Ltd. (2011) [58 DTR 0279] held in connection with computing the profits u/s 80IA liquidated damages are directly derived from industrial undertaking and eligible for deduction u/s 80IA. Therefore, following the decision of Hon'ble Madhya Pradesh High Court, Ld.AR vehemently argued that the liquidated damages required to be included in the core income and should not be assessed separately as income other than core income. 4.2 On the other hand, Ld. DR argued that Chapter XII-G relating to income from shipping companies is separate code by itself. The section provides for what is core income u/s 115VI and what is the income incidental to shipping activity in Rule11R of I.T. Act. The complete meaning of income from the shipping activity and incidental activity are given in section 115VI and Rule 11R and the method of computation of income is provided for in Section 115VG. Ld. DR taken our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is clearly defined in section 115 VI and Rule 11R. We have carefully considered the argument of the Ld. D.R. and the Ld. A.R. and also gone through the orders of the Hon'ble ITAT. Since the Ld. D.R. disagreed, we are of the considered view that section 115VI and Rule 11R defined the income from shipping and incidental activities very clearly and there is no ambiguity in the Act and there is no need for separate interpretation using the word 'derived from'. Accordingly, we decide the issue whether liquidated damages forms part of core income or not? The liquidated damages are collected from the various contractors as compensatory payment for failure to execute the contract works within the stipulated time. Those are the receipts compensatory in nature but not from the activity of shipping. The income from shipping activity for the purpose of computation of tonnage tax is defined in section 115VI as under: Relevant shipping income. 115VI. (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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification. (5) The incidental activities shall be the activities which are incidental to the core activities and which may be prescribed4 for the purpose. (6) Where a tonnage tax company operates any ship, which is not a qualifying ship, the income attributable to operating such non-qualifying ship shall be computed in accordance with the other provisions of this Act. (7) Where any goods or services held for the purposes of tonnage tax business are transferred to any other business carried on by a tonnage tax company, or where any goods or services held for the purposes of any other business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case, the consideration, if any, 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 transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies are included, which means that core activities and incidental activities should be the source of profit to be included under tonnage scheme. 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 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. The reliance placed by the Ld.AR in the case of Prakash Oils Ltd of Hon'ble High Court of Madhya Pradesh is related to the computation of profits and gains derived from industrial undertaking u/s 80IA but not related to the tonnage tax u/s 115VI of I.T. Act. Profits and gains for the purpose of industrial undertaking required to be computed as per the provisions of section 28 to 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might have utilized the amount and have enjoyed the yield of the utilization and on the other hand have deprived the claimants from the lawful use of their money. The yield of the amount ' required to be returned to the claimants. The claimants claim have been allowed as described above. The respondents are liable to pay the claim amount with interest at the rate of 15% per annum (The rate of Interest viz., 18% per annual as claimed by the claimants is apparently on the higher side) from 1.7.1993 till the date of payment or 15.5.2008 whichever is earlier. The Respondents will be liable to pay the claim amount with interest @18% per annum from 1.7.1993 till the date of payment if the claimed amount with interest @15% per annum is not paid by 15.05.2008. 6.6.2.2. From the perusal of the award it could be seen that the Cochin Port Trust has not settled the bills raised by this appellant within the agreed time frame. Hence the arbitrator has accepted the appellant's claim for interest and has directed Cochin Port Trust to pay interest at 15% latest by 15.05.2008, and in the event of failure to pay by 15.05.2008 to pay higher interest at 18% per annum- Thus it is evident t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax. The AO in his order giving effect to the ITAT's order has subjected interest income of ₹ 801/- lakhs to assessment. 6.6.2.4. The ARs further clarified that as Cochin Port did not pay interest within the stipulated time, interest was computed at 18% which resulted in the additional amount of ₹ 54 lakhsduring this relevant year. It may be noted that the provision made for F.Y2007-08 was ₹ 801 lakhs and For FY.2008-09 was ₹ 855 lakhs. As it is seen that the AO vide his order dtd.28.032013 had already assessed the interest income of Rs,801 lakhs in AY. 2008-09, the additional Interest income accrued to the -appellant of ₹ 54 laklhs during the year only need to be assessed for this year. Accordingly the addition made to the extent of ₹ 54 lakhs is confirmed, and the addition made to the extent of ₹ 801 lakhs fbr this year is deleted as it has already been subjected to assessment in A.Y.2008-09. 6.6.3 Transaction with Essar Steel Ltd 6.6.3.1. It may be noted that the AO had made an addition of ₹ 94 lakhs being the interest income earned from Essar Steels Ltd. Shown under 'sundry receipts from core activity&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncretized in favour of the appellant by the Settlement Agreement. Hence, I am of the view that the interest receipts are not the direct outcome of the appellants dredging activity and do not have immediate nexus with the appellant's dredging activity. It is also pertinent to note that the Hon'ble ITAT, Visakhapatnam followed the ratio laid down by the Hon'ble Apex Court in the ease of Pandian Chemicals while deciding the criteria as to what would constitute receipts derived from core shipping activity. Following the same principle, it could be concluded that as the appellant became entitled to interest on the unsettled amounts on the basis of the settlement agreement, which is a step removed from the dredging activity, such interest Income cannot be considered to be derived from core shipping activity. Hence it is held that the interest income earned from Essar Steel Ltd as per the settlement is liable for taxation as receipt from non-core activity. Admittedly the amount was received during the year, and there is no dispute regarding the year of assessment. However, in View of the clarification given vide letter dated 29.05.2013 and also with reference to the amount re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and not related to the year under consideration. Therefore this receipt cannot be included for tonnage tax purpose and should be taxed separately in addition to the profits under tonnage tax scheme. 5.4 The assessee had received the arbitration award in connection with Link Road Project Kochi for delay in settlement of bills. The assessee submitted the bills, but due to delay in settlement, the arbitrator has awarded the interest for the delayed period of unsettled amounts. The income from the arbitration award on principal amount is the core income. The interest on arbitration award is not directly from the shipping activity but is compensatory in nature akin to the interest on deposits. This is one step away from the shipping activity and is not covered for the purpose of core income within the meaning of section 115VI or Rule 11R of I.T. Rules. As discussed earlier in Para No.4 in liquidated damages, Chapter XIIG is a complete code by itself and the income from shipping activity is defined in section 115VI of I.T. Act and the incidental activity is defined in Rule 11R of I.T. Rules. There is no ambiguity in identification of direct sources of income since it is provided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and dismiss the assessee's appeal. This issue is involved for the assessment year 2009-10 and 2008-09. The assessee's appeals for both the years are dismissed. 6. The next issue is related to the following receipts. These issues are involved for the assessment year 2010-11 and 2011-12 as per the details given under: 2010-11 2011-12 (a) Recovery towards lease quarters 1.13 8.84 (b) Staff car recoveries 0.12 0.25 (c) Fee for RTI 0.04 0.02 (d) Sale of tender documents 1.54 1.67 (e) Mess charges - 0.01 (f) Rent for hiring quarters / offices 1.46 1.64 (g) Late attendance receipts 0.62 0.66 6.1 The Ld.AR argued that the above receipts form part of income from shipping and requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on towards the expenditure for earning the above receipts of non core income. The Ld.CIT(A) has dismissed this ground of the assessee following the order of this Tribunal in ITA 6 to 8 and 15 to 17/Vizag/2011 cited supra. The Hon'ble ITAT in the assessee's own case cited supra decided the issue against the assessee as under : 10.1 The assessee has also taken a stand that if any item of receipts is not considered as receipts relating to the core activity of dredging, then the deduction towards the expenditure incurred towards earning such receipts should be allowed as a deduction and accordingly only net income should be charged to tax. The tax authorities have pointed out that all the expenses incurred by the assessee shall be deemed to have been allowed while computing the income of the assessee under the special provisions of the Act, cited above and hence there cannot be any further deduction of the same expenditure. We agree with the observations of tax authorities in this regard. If the claim of the assessee is allowed, then it would amount to double deduction of the same expenditure, which is not permitted under the Act. Accordingly we dismiss this ground of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,700/- 2,400/- Reimbursement of Taxi Hire charges /crane hire charges - 1,844/- 8,333/- Provision for expenses booked now reversed - - 4,50,000/- Transportation of pipeline guarantee amount forfeited - 1,00,000/- - 3. Miscellaneous Receipts (bifurcation under process) 67,500/- 1,57,148/- 1,21,478/- 9.2 The assessee had included the above receipts in the core income in the original assessments made u/s 143(3) of the I.T. Act. The above receipts were categorized under the head 'other income'. The issue has travelled to the Tribunal and the ITAT in it's earlier order in appeal Nos.6 to 8/Vizag/2011 and 15 to 18/Vizag/2011 dated 25.7.2011 remitted the matter back to the file of the Assessing Officer, since the assessee has not furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for taxation of receipts other than from operation of qualifying ships in the assessee's own case which would be binding on the AO and the appellate authority. Accordingly, the plea raised by the AR is rejected as without merits. 10. Interest on foreign exchange ₹ 83,33,048/- for A.Y.2006-07 and ₹ 4,74,337/- for A.Y.2007-08 10.1. The AO noted that the assessee had entered into dredging agreement with M/s Ganah Bahrain, as per which the assessee is entitled to interest if the payment was not made by the party within the stipulated time. The AO noted that the impugned receipts are only in the nature of compensatory payment for the breach committed by M/s.AIGanah Bahrain and is not related to the core shipping activity of the assessee, and hence made the impugned addition. In this regard the assessee made the following written submissions. Under this ground, the issue urged is regarding addition to total income on account of interest received from a customer for delayed payment for services rendered by the appellant. The appellant had dredging agreement with M/s AI Ganah Bahrain. There was a delay in making payments for the dredging services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) Provision for expenses reversed Are in accordance with the directions and decision rendered by the Hon'ble ITAT in ITA No.6 to 8/Vizag/2011 and ITAT Nos.17/Vizag/2011 and accordingly these additions are upheld. 9.3 We have heard both the parties and perused the material placed on record. While deciding the issue with regard to the liquidated damages and arbitration award, we have elaborately discussed the issue what constitutes core income. The assessee has opted for tonnage tax scheme under the provisions of 115VI under Chapter XIIG of I.T. Act. This is known an tonnage tax scheme under which the income is computed at specified rate, net tonnage of the ship under section 115VG. The definition of core activities has been defined as activities from operating qualifying ships and other shipping related activities. Therefore, the interest received on delayed payments and other miscellaneous receipts such as recruitment fee, cancellation of DD, seminar expenses, EMD forfeited, vender registration form/tender form, transportation of pipeline guarantee amount forfeited and miscellaneous receipts (bifurcation under process) cannot be held to be received from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the purchase cost, in other words bringing down the purchase price of raw material, or it could be treated as income directly relatable to the activity of industrial undertaking. The net result would be the same-either the cost of raw material gets reduced and thus increases profits of manufactured products on sale or the sale price of containers is directly added to swell the total profits. Therefore, in the light of the decision of this High Court in the case of Dy.CIT v. HarjivandasJuthabhaiZaveri [2002] 258 ITR 785 , there was no infirmity in the impugned order of the Tribunal . Applying the above said ratio, the income received by the assessee on sale of scraps and sale of assets could be treated as income directly relatable to the activity of operating qualifying ships. Accordingly, we affirm the order of Learned CIT(A) on these two types of income. 9.1 The amount received on insurance claim was held to be derived from industrial undertaking by Hon'ble Delhi High Court in the case of CIT v. Sportking India Ltd . [2010] 324 ITR 283/[2009] 183 Taxman 312. By following the ratio of the said decision, we uphold the decision of Learned CIT(A) on this issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Profit Loss account in the earlier years in which it was created. The provisions are not allowed as deduction as per the act while computing the income of the corresponding assessment year. However, the expenditure debited to Profit Loss account has no relevance for computation of the income under tonnage tax, as the income is computed as per Section 115VG of the Act and the expenditure is not allowed as deduction irrespective of the expenditure debited to the Profit Loss account. Therefore, debiting of expenditure to the Profit Loss account and reversal of expenditure has no relevance in computation of income under tonnage tax scheme when the income is being determined under the special provisions applicable to the assessee. Therefore, there is no case for excluding the items or provision written back from the core income and to tax separately. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld. 15. The next issue in Ground Nos. 9 to 11 in the A.Y 2011-12 is the Employees Contribution to PF. The assessing officer made the addition of ₹ 3,16,363/- u/s 36(1)(va) of I.T. Act. Ld. CIT(A) deleted the addition as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees' and employer's contributions were covered under amendment to S.43B. Relying on the decision of the Hon'ble Supreme Court in the case of M/s. Alom Extrusions Ltd. (319 ITR 306), the Hon'ble Bombay High Court in the above mentioned case has held as under: In this manner, the amendment provided by Finance Act, 2003 put on par the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to various Employees' Welfare Funds on the other. All this came up for consideration before the Hon'ble Supreme Court in the case of Alom Extrusions Ltd. The Tribunal in the case at hand relied upon the said judgement. There is no reason to fault the order passed by the Tribunal. We are of the view that the decision of the Supreme Court in Alom Extrusions Ltd. Applies to employees' contribution as well as employer's contribution. Question Nos.2, 3 4 are accordingly answered in faovur of the assessee and against the revenue. 9.2.5 In the light of the above judicial pronouncements, I hold that the assessee would be entitled for deduction of the employees contribution of PF made before the due date for filing of the return ..... 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