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TMI Blog2025 (3) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... ing qualifying ships. Therefore, we are of the considered view that the interest earned by the assessee from such fixed deposits maintained with the banks, which are marked as lien, is inextricably linked with the business of operating qualifying ships and therefore, should be treated as an item of receipt from core activity of a tonnage ship company. Conditional Fixed Deposits out of funds raised by way of Public Offering - The funds generated by the assessee from the public offering were also for the purpose of part-financing of capital expenditure on ship building projects, and since some of the contracts were rescinded, the refund received was agreed to be redeployed, vide shareholders' resolution towards various other ship building projects, including acquisition of vessels. From the details, as noted audited financial statements, it is evident that out of the amount of Rs. 330.65 crore, an amount of Rs. 196.80 crore was utilized for acquiring the equity portion of various ships and vessels. The amount pending utilization for the said purpose has been placed by the assessee as fixed deposits with the banks on which the assessee has earned interest income. Therefore, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the judicial pronouncement by the Coordinate Bench of the Tribunal. Accordingly, the same is upheld and Grounds No. 1 and 2 raised in Revenue's appeal are dismissed.
Disallowance of administrative expenditure incurred towards earning income from incidental activities - HELD THAT:- We find that while considering a similar issue of disallowance of administrative expenses against income from incidental shipping activities, the Co-ordinate Bench of the Tribunal in assessee's own case in The Shipping Corporation of India Ltd. [2024 (10) TMI 736 - ITAT MUMBAI] DR could not show us any reason to deviate from the aforesaid decision rendered in assessee's own case and no change in facts and law was alleged in the relevant assessment order. Therefore, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department of Public Enterprises. In its return of income, the assessee offered the interest income as income from other sources. As is evident from the record, the assessee claimed administrative expenses against the income declared under the head "Income from Other Sources", which mainly includes interest income. However, the AO rejected the claim of the assessee and disallowed the administrative expenditure claimed by the assessee. In its appeal before the learned CIT(A), the assessee for the first time raised the plea that the interest income of Rs. 84,01,13,062 constitutes profit from core activities, and therefore, could not be assessed to tax. The learned CIT(A), vide impugned order, by relying upon the decision of the Hon'ble Supreme Court in Goetze India Ltd. v/s CIT, reported in [2006] 284 ITR 323 (SC), rejected the plea of the assessee on the basis that the assessee has not filed a revised return claiming deduction of interest income. Being aggrieved, the assessee is in appeal before us. 6. We have considered the submissions of both sides and perused the material available on record. At the outset, we find that the Hon'ble Supreme Court in Goetze India Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping income and administrative expenses are to allocated amongst the different business activities of the assessee on a reasonable basis in terms of the provisions of section 115VJ of the Act. However, we find that the lower authorities disagreed with the submissions of the assessee on the basis that apportionment of common cost as envisaged in section 115VJ(1) of the Act was amongst other "business" or "activity" carried out by the tonnage tax company and such activity ought to be a business related activity. Further, the claim of the assessee was also rejected on the basis that the income from interest was mainly derived by the assessee from surplus funds kept in the banks and other financial institutions and this investment was not made by the assessee on account of any business exigency. Therefore, the income earned on account of interest was held to be chargeable to tax under the head "income from other sources". We find that even before the Tribunal, the assessee submitted that the investment in fixed deposit was made out of its income from shipping business and interest earned thereon very much formed the part of core shipping business of the assessee. The Co-ordinate Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any plea that the interest income earned by it is taxable as business income. Even though it was consistently claimed to have been earned from the tonnage tax business. Accordingly, we are of the considered view that the reliance placed by the learned DR on the aforesaid decision of the Co-ordinate Bench for the assessment years 2005- 06 and 2006-07 is completely misplaced. In this regard, the following observations of the Hon'ble Supreme Court in CIT v/s Sun Engineering Private Limited, reported in [1992] 198 ITR 297 (SC), become relevant: - "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. In the present case, it is 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 the Hon'ble jurisdictional High Court in CIT vs Varun Shipping Co Ltd, [2011] 324 ITR 263 (Bom.) 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. As a result, ground No. 4 is partly allowed. In view of our aforesaid findings, the other aspects raised in ground No. 4 are rendered academic and therefore require no separate adjudication." 12. From the statement showing position of investment of funds in fixed deposits as on 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the financial year 2010-11, it had floated a public offer comprising of, inter alia, fresh issue of 4,23,45,365 equity shares. The proceeds from the issue of said shares of Rs. 582.54 crore were fully utilized in the financial year 2011-12 as per the object of the issue for part-financing of capital expenditure on nine ship-building projects. However, for various defaults committed by the shipyards, during the period from January, 2014 to May, 2014, the assessee rescinded contracts for four shipping building projects and re-negotiated the payments in respect of two of them. The investment in the rescinded contracts out of the said proceeds was Rs. 330.65 crore, which was entirely received from the respective shipyards. As per the assessee, the shareholders, vide their resolution passed through postal ballot on 11/02/2017, approved the proposal to redeploy the said sum received as refund from shipyards towards various other ship-building projects including off-shore assets and LPG Vessels and also for acquisition of any other vessels. Further, based on the approval granted by the shareholders, the assessee could also utilize the sum towards the balance payments remaining due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, it has availed a loan from the Bank of Nova Scotia Asia Ltd. for an amount of USD 35,712,000 for the purpose of acquiring ships and vessels. In this regard, a facility agreement was entered into on 24/12/2008, which came to be amended by a Side Letter dated 29/01/2009, and further amended and supplemented by a First Supplemental Agreement dated 17/05/2013. Vide Side Letter dated 06/01/2015, the assessee agreed that it shall maintain Minimum Unencumbered Cash of USD 100,000,000 at all times when it is in the Breach of the Debt Service Coverage Ratio. The assessee was in breach of said covenant and to comply with the said requirement, the assessee had to place a fixed deposit with the bank to an extent of Rs. 650 crore to be maintained as Minimum Unencumbered Cash available with it at all times. On such fixed deposits, the assessee earned interest income which has been claimed as income from operating qualifying ships. Having considered the submissions, we find that the assessee made a due disclosure in this regard in its audited financial statements in Note 38(b) at page 153 of the paper book-3. In the present case, there is no dispute regarding the fact that the fixed deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that the interest income earned from fixed deposits of funds which are required for meeting the working capital requirement and repayment of loans was held to be in the nature of business income since the funds are nothing but the funds required for running the shipping business, by the Co-ordinate Bench of the Tribunal in assessee's own case for the assessment year 2008-09 cited supra. Therefore, respectfully following the decision rendered in assessee's own case, the interest income earned from fixed deposits placed with the banks for meeting working capital requirement in the year under consideration is held to be in the nature of business income and relates to the core shipping activity. 18. Therefore, in view of our aforesaid findings, the AO is directed to treat the interest income of Rs. 84,01,13,062 as part of the profits from core shipping activities carried on by the assessee. Accordingly, Ground No. 1 raised in assessee's appeal is allowed. 19. In view of the aforesaid findings, Ground No. 2 raised in assessee's appeal is rendered academic, therefore is left open. 20. In the result, the appeal by the assessee is allowed. ITA No.1971/Mum./2024 Revenue's Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance made under section 14A r.w. Rule 8D of the Rules on the basis that the aforesaid disallowance cannot be made in the case of the assessee, since it is subjected to tax under Chapter XII-G of the Act. The relevant findings of the learned CIT(A), vide impugned order, reproduced as follows: - "8.3 Decision: The appellant's submission made on this ground is perused and considered on the merit. There is merit in the submission of the appellant that disallowance u/s. 14A of the Act cannot be made in the case of an assessee subject to tax under Chapter 12G of the Act. There is merit in the submission of the appellant that the facts and laws on this ground is covered by the Judgement of Hon'ble Mumbai ITAT in the case of M/s. Varun Shipping Company Ltd. vs Addl. CIT [ITA No. 5576/Mum/2011, order dt. 30 November 2011]. The relevant extract of the decision of the Hon'ble ITAT clearly stipulates as under: "7. ... It is observed that the assessee is mainly engaged in the business of operation of ships and its income from the said business was declared and assessed as per the special provisions contained in Chapter XIIG which lay down tonnage tax scheme. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed its income in accordance with the provisions of Chapter XIIG of the Act and opted for tonnage tax scheme (TTS). Hence, the addition of Rs. 53.04.895/- is deleted." Being aggrieved, the Revenue is in appeal before us. 26. Having considered the submission of both sides and perused the material available on record, we find that the learned CIT(A) deleted the disallowance made under section 14A r.w. Rule 8D of the Rules by placing reliance upon the decision of the Co-ordinate Bench of the Tribunal in M/s Varun Shipping Company Ltd v/s Addl. CIT, in ITA No. 5576/Mum/2011, vide order dated 30.12.2011. In the absence of any contrary decision being brought on record, we find no infirmity in the findings of the learned CIT(A) on this issue, which are based on the judicial pronouncement by the Coordinate Bench of the Tribunal. Accordingly, the same is upheld and Grounds No. 1 and 2 raised in Revenue's appeal are dismissed. 27. The issue arising in Ground No. 3, raised in Revenue's appeal, pertains to the deletion of disallowance of administrative expenditure incurred towards earning income from incidental activities. 28. The brief facts pertaining to this issue, as emanating from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities referred to in subsection (2), such expenses 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. After referring the aforesaid provision of Sec. 115VI the Id. 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. It is 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 the aforesaid fact and 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 of the Act. Therefore, we 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." 31. The learned DR could not show us any reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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