Income Tax Appellate Tribunal - Mumbai
Tolani Shipping Co.Ltd, Mumbai vs Asst Cit Cen Cir 17 & 28, Mumbai on 28 February, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "J", MUMBAI
BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER
AND
SHRI RAJESH KUMAR, ACCOUNTANT MEMBER
ITA No. A.Y. Appellant Respondent
DCIT,
2582/Mum/10 2003-04 Tolani Shipping Co. Ltd., Cen. Circle-17,
10-A, Bakhtawar, Nariman MUMBAI
Point,
6325/Mum/11 2005-06 MUMBAI ACIT,
[PAN: AAACT 4127 C] Cen. Circle-17,
1481/Mum/11 2005-06 MUMBAI
ACIT, Tolani Shipping Co. Ltd.,
1589/Mum/11 2005-06 Cen. Circle-17 & 28, 10-A, Bakhtawar,
MUMBAI Nariman Point,
Asst. Commissioner of MUMBAI
8051/Mum/11 2006-07 Income Tax-5(3), [PAN: AAACT 4127 C]
MUMBAI
Tolani Shipping Co. Ltd., ACIT,
10-A, Bakhtawar, Nariman Cen. Circle-17,
8077/Mum/11 2006-07 Point, MUMBAI
MUMBAI
[PAN: AAACT 4127 C]
Tolani Shipping Co. Ltd.,
Asst. Commissioner of 10-A, Bakhtawar,
2149/Mum/12 2007-08 Income Tax-5(3), Nariman Point,
MUMBAI MUMBAI
[PAN: AAACT 4127 C]
Tolani Shipping Co. Ltd., ACIT,
1168/Mum/12 2007-08 10-A, Bakhtawar, Nariman Cen. Circle-17,
Point, MUMBAI
1755/Mum/14 2009-10 MUMBAI DCIT, Circle-17,
[PAN: AAACT 4127 C] MUMBAI
3313/Mum/15 2009-10 Deputy Commissioner of Tolani Shipping Co. Ltd.,
Income Tax-5(3)(2), 10-A, Bakhtawar,
1160/Mum/15 2010-11 MUMBAI Nariman Point,
MUMBAI
[PAN: AAACT 4127 C]
Tolani Shipping Co. Ltd., Deputy Commissioner of
1243/Mum/15 2010-11 10-A, Bakhtawar, Nariman Income Tax-5(3)(2),
Point, MUMBAI
7087/Mum/16 2008-09 MUMBAI ACIT, Circle-5(3),
[PAN: AAACT 4127 C] MUMBAI
Appellant By : Shri Neelkant Khandelwal, AR
Respondent By : Shri A. Mohan, DR
2
Tolani Shipping Co. Ltd.,
Date of Hearing : 12-12-2018 Date of Pronouncement :- 28-02-2019
ORDER
Per Rajesh Kumar, Accountant Member:
These appeals are filed by both Assessee and Revenue. Since the issues are almost common in all these appeals, we have heard them together and adjudicated by this common order.
ITA No. 8077/Mum/2011 AY 2006-07:
2. We would like to first decide the issues involved in the present appeals on merits. Accordingly, we are taking up ITA No. 8077/Mum/2011, deciding the grounds on merits first. In this appeal, the assessee has raised the following grounds:
"1. APPELLANT IS A SHIPPING COMPANY AND APPROVED TO BE TAXED UNDER THE PROVISIONS OF TONNAGE TAX SCHEME UNDER CHAPTER XIIG OF THE ACT:
The Learned A.O. as well as Learned CIT(A) have erred in overlooking that Appellant is a Shipping Company and has been granted option to be taxed under the TONNAGE TAX SCHEME under Chapter XIIG of the Act and Section 115VA of the Act begins with a non- obstinate clause which reads as "NOTWITHSTANDING anything to the contrary contained in Sections 28 to 43 C in the case of a Company, the income from business of operating Qualifying Ships may at its option be computed in accordance with the provisions of thus Chapter and such 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" and therefore income of the Appellant Company has 3 Tolani Shipping Co. Ltd., to be computed as per the provisions of Chapter XIIG and no adjustment can be made applying the provisions of Sections 28 to 43C suggested by TRANSFER PRICING OFFICER acting u/s.92 considering ARM'S LENGTH PRICE in connection with shipping freight taxable under Sections 28 to 43C of the Act.
2. DOUBLE FICTION IS NOT PERMITTED UNDER INCOME-TAX ACT:
The Learned A.O. as well as the Learned CIT(A) have erred in not following the judgements of different Courts wherein it is held that while computing Taxable Income there cannot be double fiction of computing Taxable Income and when income of shipping Company is taxed under the provisions of Tonnage Tax Scheme by considering the registered tonnage capacity of the ships irrespective of income by way of freight received, no adjustment can be made under Section 92 under the provisions of Transfer Pricing considering the ARM'S LENGTH PRICE and therefore action of Learned A.O. is contrary to law when he is computing Taxable Income under Tonnage Tax Scheme on the bases of Tonnage capacity of ships and agai9n making addition to the same under the provisions of Transfer Pricing considering the reasonableness of freight received or freight paid in terms of ARM'S LENGTH PRICE which amounts to double fiction of business.
3. The Learned A.O. as well as Learned CIT(A) have erred in not considering that when income of shipping business is computed under the provisions of Tonnage Tax Scheme, as income from business, no adjustment can be made to Tonnage Tax Scheme income on account of receipts of freights as adjustments to Tonnage Tax Scheme can be made only of the amounts which has been computed as per the method provided under the Tonnage Tax Scheme u/s.llSVG and not the amount of freight received as there is direct conflict between FICTION U/S.115VA of Tonnage Tax Scheme and computation of Income u/s.28 to 43C and therefore applying both the provisions will amount to FICTION UPON FICTION which is against the provisions of the Act.
4. The Learned CIT(A) has erred in coming to the conclusion in para 4.4.2 of Appeal Order that provisions of Tonnage Tax Scheme do not override the provisions of Transfer Pricing under Section 92 to 92F as provisions of Transfer Pricing are special provisions and are on elevated position as compared to provisions under Tonnage Tax Scheme.
5. The Learned CIT(A) has erred in mentioning in para 4.4.3 of Appeal Order that in scheme of things under the Income-tax Act the income from 4 Tolani Shipping Co. Ltd., international transactions are to be treated as an additional and separate source of income under international transaction overlooking that there is no such provisions in Income-tax Act as treating the income on account of international transactions as separate source of income as the provisions of Transfer Pricing is a method of arriving at Taxable Income and the same cannot be considered as separate source of income.
6. The Learned CIT(A) has erred in considering in para 8.4 sub para xi that interest on loan given to subsidiary Company should be worked out at a rate of interest at LIBOR plus 200 basis points as against interest at LIBOR plus 100 basis points charged by Appellant overlooking that loans utilized by subsidiary Company was for short period of three months and the Appellant was not running any risk as the loan was giving loan to its wholly owned subsidiary Company and the prevailing rate of interest under CUP Method was LIBOR plus 100 basis points as the Appellant Company itself has availed a term loan of USD 15,000,000 from DVB Merchant Bank (Asia) Ltd. at LIBOR plus 100 basis points for seven years vide agreement dated 14.1.2005 and the same is comparable transaction and has to be accepted.
7. The Learned CIT(A) has erred in confirming the disallowance of expenditure to the extent of Rs. 18,24,9467- U/S.14A on the ground of expenditure incurred for earning income which is tax-free overlooking that expenditure can be disallowed provided that the same is claimed by the Appellant in Computation of Income and when the Appellant has not claimed any such expenditure the question of disallowance does not arise as the Company is engaged in shipping business and the Company is taxed as per the provisions of Tonnage Tax Scheme under Chapter XIIG of the Act and the Tonnage Tax Scheme provides that income of Shipping Company approved under Tonnage Tax Scheme has to be computed on the basis of registered Tonnage capacity of the ship at fixed rates irrespective of the income earned by way of freight income or expenditure incurred in earning freight income and therefore the question of disallowing expenditure u/s. 14A does not arise. (Hon'ble Mumbai ITAT in the case of Birla Sunlife Insurance Co. Ltd. and the Hon'ble Supreme Court in the case of Life Insurance Corporation of India vs. CIT 51 ITR 773 (SC))
8. The Learned A.O. as well as Learned CIT(A) has erred in including tax-free interest on Government Bonds amounting to Rs.2,46,050/- as taxable interest income eventhough vide letter dated 9.9.2009 the Appellant claimed that the same is not taxable overlooking that income 5 Tolani Shipping Co. Ltd., which is not taxable cannot be included in Taxable Income in Assessment Order.
9. The Learned A.O. has erred in not allowing deduction of Securities Transaction Tax amounting to Rs.20,39,671/- u/s.88E as a rebate u/s.88E nor allowed as a deduction while computing short-term and Long-term Capital Gain and Learned CIT(A) has erred in not allowing the same on the ground that the said claim was not made in second revised return overlooking that the Appellant had not claimed deduction in computing Capital Gain in original Return of Income and in first Revised Return the Appellant increased the Capital Gain to that extent and claimed the same as deduction u/s.88E but by oversight in 2nd Revised Return the claim u/s.88E remained to be claimed which was claimed by way of ground No. 15 in appeal before Hon'ble CIT(A) but in para 11.3 of appeal Order the Learned C1T(A) rejected the ground of appeal.
10. The Learned A.O. has erred in not allowing deduction of Municipal Taxes as well as Society charges amounting to Rs.75,549/- while computing income under the head PROPERTY INCOME eventhough the same was claimed before A.O. vide letter dated 9.9.2009 and the said claim has been rejected by the Learned CIT(A) vide para 12.3 of the appeal Order only on the ground that the said claim was made in the letter dated 9.9.2009 but not claimed in the Return of Income.
11. The Learned A.O. has erred in including sum of Rs.25,12,533/- under the head MISCELLANEOUS INCOME overlooking the facts that the same was refund of INCOME-TAX for Assessment Years 1993-94 and 1994-95 and not Miscellaneous Income as submitted before Learned A.O. and the Learned CIT(A) rejected the claim in para 13.3 of appeal Order on the ground that the said claim was not made in the Return of Income filed.
12. Appellant craves leave to submit precised (summary) grounds of appeal add and or alter the above grounds of appeal".
3. In Ground No. 6, the assessee has challenged the order of CIT(A) on the issue of upholding the order of the AO partly by sustaining the addition on account of interest on loan 6 Tolani Shipping Co. Ltd., from Associated Enterprise (AE) at LIBOR+200 basis points as against LIBOR+300 points made by the AO, whereas the assessee has benchmarked the said international transaction with its AE at LIBOR+100 basis points.
3.1. The facts in brief are that the assessee is engaged in the business of owning and operation of vessels and managing vessels of its AE. Assessee entered into various Contracts of Affreightments with external parties for transporting their cargo from one place to another place. Besides, assessee also outcharters its own vessels to AE on which it earns freight income. Assessee is also rendering technical management services in respect of vessels nominated by Tolani Shipping (Singapore) Pte. Ltd., (hereafter referred to as TSSPL), a 100% subsidiary of Tolani Shipping Co. Ltd. During the year, assessee- company has entered into agreement with TSSPL vide agreement dt. 01-12-2005, whereby loan of US$ 60 Lakhs was advanced under the condition that same was to be repaid by the AE within one year from the date of its disbursement. The said loan was advanced to AE at LIBOR+100 basis points p.a. to be applied on the outstanding loan amount. The said loan was repaid along with interest of US$ 88,543.33 (equivalent to Rs. 39,26,985/-) 7 Tolani Shipping Co. Ltd., on 19-03-2006. The assessee has benchmarked the said transaction using CUP method. Assessee borrowed a term loan of US$ 1,50,00,000 from DVB Merchant Bank (Asia) Ltd., at LIBOR+100 basis points for a period of seven years vide agreement dt. 14-01-2005. According to assessee since the rate charged by the said bank to the assessee was LIBOR+100 basis points, therefore, the assessee-company has lent money to its AE at a fair rate and is an Arm's Length Price (ALP) for the said transaction. According to the Transfer Pricing Officer (TPO), price charged by the assessee from the AE is not an ALP for the reason that CUP method requires high degree of comparability, whereas in the case of assessee, there were geographical differences between controlled and uncontrolled transactions, whereas according to assessee, the TPO has overlooked the very fact that DVB Merchant Bank (Asia) Ltd., is an international bank and is operating in the international market and arena. The said bank is operating from Singapore and assessee-company has also given loan to its AE, operating in Singapore. Therefore, the question of geographical difference does not arise and observation of TPO are against the facts of the case while the rate of interest charged by the assessee to the AE is at arm's 8 Tolani Shipping Co. Ltd., length. However, the AO brushing aside the submissions of assessee made an adjustment/addition to the tune of Rs. 10,23,204/- by benchmarking the transaction with AE at LIBOR+300 basis points as proposed by the TPO. 3.2. In the appellate proceedings, Ld. CIT(A) partly allowed the appeal of assessee, after considering the submissions of assessee, as reproduced in para 8.3 of the appellate order by observing and holding as under:
"8.4 I have considered the facts of the case and submissions of the appellant as against the observation/findings of the AO/TPO in their orders. The contentions raised, by the appellant as against its ground, of appeal are being discussed and decided as under:
i. There is no dispute to the fact that for the loan which has been advanced to the AE interest is to be charged at the ALP rate.
ii. Further the method applied by the appellant has also not been disputed by the TPO.
iii. Only dispute is in respect of the rate of interest and its comparability with the rate charged to the AE by the appellant.
iv. Appellant has charged interest at LIBOR + 100 basis points whereas the TPO has arrived at the rate of LIBOR + 300 basis points.
v. There is no dispute about the fact of the difference in the time of agreement for the controlled and uncontrolled transaction and further the amount of loan being vastly different in these two agreements.
vi. It is also a fact that the loan to the AE was granted for purchase of the ship. Further it is the fact that the AE came into existence only in the financial year 2002-03, where as the 9 Tolani Shipping Co. Ltd., appellant is a pretty old company and is operations for more man 30 years.
vii. It may be mentioned here that if the AE was also as reputed and had sound financial credibility, it would have approached the bank for loan on its own, but that is not the fact of the case. Further the appellant itself took loan from the bank of much larger sum, which shows its financial credibility and general reputation.
viii. Given the facts which have been discussed, the CUP used by the appellant is not found to be acceptable.
ix. The TPO has applied rate of LIBOR + 300 basis point out has not mentioned where from such rate has been chosen and on what basis the same has been adopted. The TPO only mentioned that it is gathered that the average rate of interest prevailing during the period under consideration is close to LIBOR + 300 basis point. In this regard it would of importance to see the guidelines of the RBI, which prescribes all in cost ceiling for ECB which is as under:
"As per the circular No. 60 dated 31.3.2004 of the RBI the all-in-cost ceiling for ECB is as under :
Minimum Average Maturity Period All-in-cost Ceiling over six
month LIBOR
Three year and up to five years 200 basis point
More than five years 350 basis point
Further as per the circular No. 5 of the RBI dated 01.08.2005, the all-in- cost ceiling is as under:
Minimum Average Maturity All-in-cost Ceiling over six month
Period LIBOR
Three year and up to five years 200 basis point
More than five years 350 basis point
x. It is the fact of the case that the loan to the AE is short term loan and is for the period of one year. The all in cost ceiling of RBI would be closest rate for short term loan in foreign currency which would be LIBOR + 200 basis point which is applicable from 01.08.2005. Thus the period of the transaction under consideration would be covered by the circular No. 5 of the RBI dated 01.08.2005 and according to which rate 10 Tolani Shipping Co. Ltd., which could be taken and which would be nearest to the transaction of the appellant would be LIBOR + 200 basis point, which what is considered suitable to be adopted instead of LIBOR + 300 basis point which has been adopted by the TPO, for which no basis has been given.
Accordingly the AO/TPO is directed to work out the adjustment to arrive at the ALP of the interest received by the appellant by adopting rate of interest at LIBOR + 200 basis points.
xii. This ground of appeal is accordingly partly allowed".
3.3. Ld. AR vehemently argued before the Bench that the CIT(A) has grossly erred in partly sustaining the addition qua the interest on loan advanced to AE in Singapore by directing the AO to bench mark the loan transaction at LIBOR+200 basis points, whereas the price charged by the assessee to the AE was an ALP which was benchmarked by the assessee on the basis of CUP method. The said method was the most suitable method in the present circumstances as the assessee has borrowed money from DVB Merchant Bank (Asia) Ltd., which is operating from Singapore, from where the AE of the assessee is also running and operating its business. Ld. AR further contended that the reasons cited by the TPO and AE of geographical difference is of no importance and weight as both the assessee and the said international bank are operating from the same country i.e., Singapore.
11
Tolani Shipping Co. Ltd., 3.4. Ld. DR submitted that since the loan was advanced by the DVB Merchant Bank (Asia) Ltd., at LIBOR+100 basis points, the TPO as well as AO and finally CIT(A) erred in sustaining addition to the extent as calculated @ LIBOR+200 basis points.
3.5. Ld. AR submitted that in view of these facts, the transaction of assessee with the AE has been benchmarked at LIBOR+100 basis points, which is correct and justified in the background of these circumstances. Ld. AR prayed that the order of CIT(A) is to be set aside on this issue and AO is directed to delete the addition.
3.6. Ld. DR on the other hand relied heavily on the order of AO specifically in view of the fact that the Revenue has also challenged a similar deletion of addition from LIBOR+300 basis points to LIBOR+200 by the CIT(A). Ld. DR contended that lending by the assessee to the AE was correctly benchmarked as LIBOR+300 basis points for various reasons such as risk associated with lending geographical difference and also the fact that the price charged to the AE should have been comparable to the price at which the assessee would have lent the money to the 12 Tolani Shipping Co. Ltd., third party. Therefore, the Ld. DR prayed that the order of AO needs to be affirmed on this issue. Ld. DR relied on the following decisions:
i. ITAT, Pune Bench in the case of Capgemini Technology Services India Ltd., Vs. Dy.CIT [90 taxmann.com 191] (Pune-Trib);
ii. ITAT, Mumbai Bench in the case of Parle Biscuits (P) Ltd., Vs. Dy.CIT [46 taxmann.com 11] (Mumbai-Trib); iii. ITAT, Pune Bench in the case of iGate Computer systems Ltd., Vs. Addl.CIT [65 taxmann.com 44] (Pune-Trib); iv. ITAT, Mumbai Bench in the case of Bhansali & Co., Vs. ACIT [54 taxmann.com 131] (Mumbai-Trib);
3.7. We have heard the rival submissions and perused the material on record including the impugned order including decisions cited by the parties. We observe from the record that assessee has borrowed the money from DVB Merchant Bank (Asia) Ltd., at LIBOR+100 basis points. The said bank is operating from Singapore, from where the AE of the assessee is also operating. Assessee has benchmarked the transaction with AE at LIBOR+100 basis points on the same rate of interest at 13 Tolani Shipping Co. Ltd., which the assessee has borrowed money from DVB Merchant Bank (Asia) Ltd. The TPO benchmarked the transaction at LIBOR+300 basis points on the ground that they have geographical differences and the Ld. CIT(A) partly allowed the appeal of assessee by directing the AO to charge interest at LIBOR+200 basis points. After considering the facts of the case in totality and decisions relied upon by the Ld. DR, we find merits in the contention of Ld. AR that there was no geographical difference as observed by the TPO for the reason that DVB Merchant Bank (Asia) Ltd., Singapore and assessee is operating from the same country i.e., Singapore. In our opinion, assessee has rightly followed the CUP method to benchmark the international transaction at the same rate at which it borrowed the loan from the bank, thereby incurring no extra cost nor earning any income on the transaction from the AE. We are of the considered view that the transaction by assessee with AE has rightly been benchmarked on CUP basis at LIBOR+100 basis points as the DVB Merchant Bank (Asia) Ltd., Singapore has lent the money to assessee at the same rate at which the assessee lent the money to its AE meaning thereby had the AE borrowed funds from the Bank directly , these would have been available 14 Tolani Shipping Co. Ltd., at the same rate of interest i.e. Libor + 100 basis point. In our view, the order of CIT(A) cannot be sustained on this point for this reason that the AE of the assessee and DVB Merchant Bank (Asia) Ltd., is operating from the same country, so the reasons sought by the TPO and CIT(A) are not reasonable, accordingly we direct the AO the delete the addition. The ground no. 6 is allowed.
4. The issue raised in Ground No. 7 is against confirmation of addition of Rs. 18,24,946/- by the CIT(A) as made by the AO u/s. 14A r.w. Rule 8D by ignoring the fact that assessee is covered by Tonnage Tax Scheme.
4.1. The facts in brief are that AO, during the course of assessment proceedings, observed that assessee has earned dividend income from mutual funds to the tune of Rs. 10,50,63,582/- which was claimed exempt u/s. 10(34) of the Act. Similarly, the assessee has earned Long Term Capital Gain on equity shares of Rs. 99,76,921/- and claimed the same as exempt u/s. 10(38) of the Act, while no corresponding disallowance of expenses were made u/s. 14A. Accordingly, AO calculated the disallowance under Rule 8D at Rs. 45,54,204/- 15
Tolani Shipping Co. Ltd., under Rule 8D(2)(iii) by applying 0.5% to the average investments and added the same to the income of assessee.
4.2. In the appellate proceedings, Ld. CIT(A) partly allowed the appeal of assessee after considering the contentions of assessee, which has been reproduced by the appellate authority in para 9.3 by observing and holding as under:
"9.4 I have considered the facts of the case and submission of the appellant as above. These grounds of appeals are being discussed and decided as under:
(i) It is a fact of the case that the appellant has made some investment against which he has earned an income which is not forming part of the total income of the appellant.
Accordingly, the provisions of section 14A of the Act, is clearly applicable in respect of disallowances of corresponding expenditure debited by the appellant in its P & L A/c. Apart from the direct costs that may have been incurred in respect of employee's salary handling this work in the company, there would costs associated with the infrastructural facilities used for investments, there would be certain direct and indirect expenses relating to such investments, such as expenses relating to portfolio management, supervisory charges, audit charges, taxation and law charges etc. Therefore, it cannot be said that there are no costs/expenses attributable to earning of the income which is not forming part of the total income, and accordingly the disallowance has to be worked out in view of section 14 A of the Act.
(ii) The AO at para 5 on page 17 of his order has stated that that the as per provisions of Sec 14A, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income. Hence, the expenditure on exempt income was calculated as per Rule 8D and accordingly Rs. 45,54,204/- was disallowed and added to the total income.
16
Tolani Shipping Co. Ltd.,
(iii) The AO has arrived at the disallowance based on. Rule 8D of the I. T. Rules, 1962. In the case of Godrej & Boyce Mfg. Co. Ltd. Bombay vs. DCIT Range 10(2), Mumbai and Anr. the Hon'ble High Court of Bombay have held that the Rule 8D of I.T. Rules, 1962 is applicable from A.Y. 08-09 but they have also held that the A.O. is duty bound to determine the expenditure which has been incurred in relation to the income which does not form part of the-total income under the Act on a reasonable basis or method consistent with all the relevant facts and circumstances of the case. The adoption of reasonable basis or method consistent with all the relevant fact is to arrive at certain level of objectivity in determination of expenditure attributable to earning of income which is not forming part of the total income.
(iv) In view of the decision of Hon'ble court in Godrej & Boycee Mfg. Co. Ltd. (Supra), where it has been held that the AO is duty bound to work out the disallowance in terms of section 14A on a reasonable basis or method consistent with the facts of the case, the; appellant vide notice dated 13.09.2011 was asked to submit certain detail as under and was asked to show cause as to why based on the details, the amount of disallowance be not worked out, as under :
Expenditure incurred by way of interest during the previous year which is not directly attributable to any particular income or receipt other than 1 above - A The weighted monthly average value of investment, income from which does not or shall not form part of the total income, as appearing is the balance sheet of the -B The average of total assets as appearing in the balance sheet of the appellant as on the first day and the last day of the previous year - C An amount equal to one-half percent of the monthly weighted average of the value of investment, income from which does nto or shall not form part of the total income -D The amount of expenditure directly relating to income which does not form part of the total income -E The computation of disallowance for the purposes of section 14A was proposed as: A*B/G + D+E.
(v) In response, the appellant submitted its reply vide its letter dated 15.09.2011, where in it has been submitted as under: 17
Tolani Shipping Co. Ltd., "We are to submit that the Learned AO while computing the disallowance u/s 14A restricted the disallowance of expenditure computed at one half per cent of the average of the value of investment at the opening and close of the year, income from which does not or shall not form part of the total income and disallowed a sum of Rs. 45,54,204/- u/s 14A computed us per provisions of Rule 8D.
We are to submit that the appellant had not incurred any expenditure directly for earning tax free income which can be disallowed u/s 14A. Further, the appellant has also not incurred any interest expenditure which is attributable to earning tax free income since all the loans have, been availed for acquisition of ships and therefore the same have not betn used for purchase of investments yielding tax free income. The Learned AO has accepted the submission of the appellant and he restricted the disallowance of expenditure computed at one half per cent of the average of the value of investment at the. opening and close of the year, income from which does not or shall not form part of the total income.
That the appellant company is covered by the provisions of Tonnage. Tax Scheme - Chapter XIIG wherein income of the shipping company is taxed on the basis of registered tonnage of ships without considering the freight income earned We have to state that while computing Tonnage Tax income, expenditure is neither claimed nor allowed and therefore there is no question of disallowing expenditure u/s. 14A. Informatively, dividend income, interest income etc. have been offered under Income from Other Sources and the Company has not claimed any expenditure against income shown under the head Income from Other Sources. We are to submit that expenses can be disallowed only when expenses have been claimed. Therefore, when no expense has been claimed, the question of disallowance does not arise.
Without prejudice to our above submissions, we give below information in the format as requested by your goodself;
S. Particulars Amount (in Rs.)
NO.
i The amount of expenditure directly relating to Nil
income which does not form part of the total
income
ii Expenditure by way of interest during the Nil
previous year which is not directly
attributable to any particular income or receipt 18 Tolani Shipping Co. Ltd., iii An amount equal to one half percent of the 18,24,946 monthly weighted average of the value of investment, income form which does not or shall not form part of the Total Income
(vi) In view of decision of Hon'ble court in the case of Godrsj& Boyce Mfg. Co. Ltd. (Supra), the AO is duty bound to work out disallowance under section u/s 14A. Further in the facts of the case the principle of apportionment is applicable as it is not possible to determine the actual expenditure incurred in relation to tax free income. The quantum of disallowance has to be arrived at on reasonable basis or method consistent with the facts of the case. In tb.3 light of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Limited (Supra), it is duty of the assessing officer to determine the quantum of disallowance on a reasonable basis or method consistent with all the relevant facts and circumstances of the case. As Rule 8D is not applicable for the year under consideration, the method which is thought to be consistent with facts and circumstances of the case was the one which was proposed to the appellant vide this office notice dated 13.09.2011 and same is followed. As per the same, the disallowance is worked out to Rs.
18,24,946/-.
(vii) The AO has made a total disallowance under section 14A of Rs. 45,54,204/-. Accordingly as a consequence of this ground of appeal, the appellant gets relief of Rs.27,29,258/-i.e. (Rs. 45,54,204 - Rs. 18,24,946)".
Thereby sustaining the addition to the extent of Rs. 18,24,946/-. 4.3. Ld. AR argued before the Bench that the assessee has not claimed any expenses as deduction, while computing taxable income under any of the heads of income and therefore, there is no question of disallowance of any expenses which is attributable to income of dividend u/s. 14A of the Act. Ld. AR submitted that 19 Tolani Shipping Co. Ltd., the income is computed on presumptive/deemed basis on the tonnage capacity of the ship irrespective of shipping income earned or shipping expenditure incurred. Therefore, while making computations of tonnage income, no expenses have been claimed and therefore the order of CIT(A), upholding the disallowance to the tune of Rs. 18,24,946/- is incorrect and should be set aside. Ld. AR in defense of his arguments relied on the following decisions:
a. Varun Shipping Co. Ltd., [17 ITR (Trib) 587]; b. Tag Offshore Ltd. [49 Taxmann.com 209];
c. Raj Shipping Agencies Ltd., [38 taxmann.com 345] Ld. AR submitted that in the above decisions of the Co-ordinate Benches, it was held that where the income of the assessee is computed under Tonnage Tax Scheme, no disallowance u/s. 14A of the Act is attracted. Finally, Ld. AR prayed the Bench that the ratio laid down by the Co-ordinate Benches may be followed and AO be directed to delete the disallowance.
4.4. Ld. DR relied on the order of AO and submitted that even if the income of assessee is computed under Tonnage Tax Scheme, it is presumed that the expenses incurred in connection 20 Tolani Shipping Co. Ltd., to that are automatically taken care of and therefore, there is no force in the arguments of the Ld. AR that the assessee has not claimed any expenses while computing the income under Tonnage Tax Scheme. Ld. DR prayed that the order of AO should be restored on this issue.
4.5. After hearing both the sides and perusing the material on record including the decisions cited by the Ld. AR, we observe that the income of the assessee has been computed under Tonnage Tax Scheme. Ld. AR referred to Pg. No. 139 of the Paper Book taking us through the order passed u/s.
115VP(3)(1) of the Act pointing out that the department has approved the Tonnage Tax Scheme by the assessee under Clause(1) of Sub-Section (3) of Section 115VP of the Act. The relevant order is reproduced below:
Name of the assessee : M/s. Tolani Shipping Co. Ltd., Address : 10-A, Bhakhtawar, Nariman Point, Mumbai-400 021 PAN No. : AAACT4127C Date of order : 29/11/04 Order under section 115VP(3)(1) of the I.T. Act, 1961 M/s. Tolani Shipping Company Ltd has filed an application on 05/10/04 in form no. 65 exercising the option for the Tonnage Tax 21 Tolani Shipping Co. Ltd., Scheme in accordance with the provision of sub-section (1) of the section 115VP of the Income tax Act with effect from the A.Y. 2005-06.
After verification, the assessee was found eligible to make option for Tonnage Tax Scheme. Tonnage Tax opted by the company is approved under clause (1) of sub-section (3) of Section 115 VP of the Income tax Act, 1961. The provision of Chapter XII G shall apply in the case of the assessee from the A.Y. 2005-06.
Sd/-
(PANKAJ VIDYARTHI) Addl. Commissioner of Income-tax Central Rg.4, Mumbai Once the department has allowed the option to the assessee under Clause (1) Sub-section (3) of Section 115VP of the Act, then, we are of the view that disallowance u/s. 14A will not be attracted. The similar view has also been upheld by the various decisions, relied on by the Ld. AR as stated supra. 4.5.i. We, therefore, respectfully following the decision of the Co-ordinate Bench, direct the AO to delete the disallowance u/s. 14A r.w. Rule 8D. Ground of appeal no. 7 is allowed.
5. The issue raised in Ground No. 8 is against the order of AO and CIT(A) including tax free interest on Government Bonds amounting to Rs. 2,46,050/- as taxable interest income even though vide letter dt. 09-09-2009 the assessee claimed that same is not taxable.22
Tolani Shipping Co. Ltd., 5.1. The facts in brief are that assessee while computing the income, erroneously offered to tax, the tax free interest income of Rs. 2,46,050/- on account of interest received from 6.85% tax free bonds. The said interest is exempt u/s. 10(15)(iv)(h) of the Act and should not have been part of the taxable income as well as book profits under MAT provisions. Assessee brought the facts to the notice of AO vide letter dt. 09- 09-2009 but the request of the assessee went unheaded before the AO.
5.2. In the appellate proceedings, the CIT(A) upheld the action of AO by observing and holding as under:
"10.3. In this regard it is stated that it is the appellant who had filed the return of income where such income was offered to tax and accordingly the claim which has been made before the AO neither in the return nor the appellant has claimed such income as exempt by way of revised return. Therefore relying on decision of Hon'ble Apex Court in the case of Goetz India Ltd (157 Taxmann 1), this ground of appeal is dismissed."
5.3. Ld. AR vehemently submitted before the Bench that the income which is not part of the total income under the regular provision as well as under the special provisions under MAT, cannot be brought to tax even if the assessee has erroneously offered the said income to tax while filing return of 23 Tolani Shipping Co. Ltd., income. Ld. AR submitted that the assessee has specifically brought to the notice of the AO vide letter dt. 09-09-2009 requesting that income to the extent of Rs. 2,46,050/- was erroneously returned as income and taxes got paid thereon and requested the AO to exclude the same from the income of assessee. But the same was not excluded either by the AO or by the CIT(A) on the ground that assessee has not claimed as per return filed before the AO nor any revised return has been filed by the assessee in support of its claim. The assessee relied on old CBDT circular no. 14(XL-35) of 1955, that the department should not take the benefit of assessee's ignorance.The assessee also relied on a decision of the Bombay High Court in the case of Balmukund Achraya [310 ITR 310] Therefore, Ld. AR prayed before the Bench that AO be directed to exclude the same from the taxable income of the assessee.
5.4. Ld. DR relied on the orders of the authorities below. 5.5. After hearing both the sides and perusing the material on record before us, we are of the view that the income which is totally exempt from tax i.e., tax free interest income on 6.85% tax free bonds cannot be included in the income and 24 Tolani Shipping Co. Ltd., brought to tax. In our opinion, such a claim of assessee could have been admitted at the appellate stage by the CIT(A). But unfortunately, it was not done. We therefore relying on the aforesaid CBDT circular and jurisdictional High court decision are of the considered view that the income which is exempt and does not fall in the charging provisions of the Act has to be excluded from the total income. In this regard, we direct the AO to exclude the amount of Rs. 2,46,050/- from the total income of assessee. This ground no. 8 is allowed.
6. The issue raised in Ground No. 9 is not pressed, therefore, the same is dismissed.
7. The issue raised in Ground No. 10 is against the order of the CIT(A), not allowing deduction of Municipal Taxes amounting to Rs. 75,549/- while computing total income. 7.1. The facts in brief are that assessee, while computing the income, forgot to claim the Municipal Taxes of Rs. 75,549/- from property income. Realizing his mistake, assessee vide letter dt. 09-09-2009, made a claim before the AO, which did not find favour and ultimately, the same was rejected by the AO. 25
Tolani Shipping Co. Ltd., 7.2. In the appellate proceedings, the CIT(A) also rejected the appeal of assessee on this issue by holding that neither the claim was made by assessee in the return of income nor any revised return was filed. In this connection, Ld. AR of the assessee relied on the decision of Goetze India Ltd., [157 Taxman 1] for the said claim.
7.3. After hearing both the sides and perusing the material on record before us and decision relied on, we find that assessee can make a plea, claiming deduction which was not claimed or inadvertently left from being claimed before the AO. In this case, assessee has vide letter dt. 09-09-2009, requested the AO to allow the deduction of municipal taxes to an extent of Rs. 75,549/-, while computing the total income, but the same was rejected. Ld. CIT(A) also rejected the claim stating that assessee has not claimed this amount in its return of income filed. The AO denied claim of assessee on the ground that it is not made in the return of income or revised return and thus following the decision of the Hon'ble Apex Court in the case of Goetze India Ltd., [157 Taxman 1], CIT(A) rejected the same. In our opinion, the First Appellate Authority is well within its jurisdiction to accept the fresh claim made by assessee even if 26 Tolani Shipping Co. Ltd., not made in the return of income or as per the revised return. We ,therefore following the CBDT circular no14(XL-35) of 1955 and Bombay High Court decision in the case of Balmukund Acharya(supra), reverse the order of CIT(A) on this issue and direct the AO to allow the deduction of municipal taxes to the tune of Rs. 75,549/-. This ground of appeal no. 10 is allowed.
8. The issue raised in Ground No. 11 is against the order of the CIT(A), rejecting the claim of assessee to an extent of Rs. 25,12,477/- under the head 'Miscellaneous Income' should not be included in the income of assessee as the same repesented the refund of income tax for AYs. 1993-94 and 1994-
95. 8.1. The facts in brief are that during the year, assessee received the following refund of income tax and interest thereon:
Assessment Tax Refund Interest u/s. Total Rs.
Year Rs. 244A (Rs)
1993-94 9,44,759 6,40,735 15,85,494
1994-95 15,67,718 10,63,225 26,30,943
Total: 25,12,477 17,03,960 42,16,437
The assessee duly shown the interest earned on the refunds u/s. 244A of the Act to the tune of Rs. 17,03,960/- under the head 27 Tolani Shipping Co. Ltd., 'interest' and the same was offered to tax accordingly. However, the refund of principal amount of Rs. 25,12,477/- was wrongly shown under the head 'Miscellaneous Income' and the same was also offered to tax. During the assessment proceedings, assessee vide letter dt. 09-09-2009, submitted to the AO that an amount of Rs. 25,12,477/- should be excluded from the income of assessee as the same represents the refund of income tax exclusive of interest thereon for AYs. 1993-94 & 1994-95. However, the AO did not agree to the contention of assessee. 8.2. In the appellate proceedings, CIT(A) also upheld the action of AO by observing that the assessee has not made claim either in the original return of income or by way of revised return of income and just following the decision in the case of Goetze India Ltd., [157 Taxman 1] (supra), appeal of the assessee was dismissed.
8.3. Having regard to the rival contentions and perusing the material on record before us and decision(s) relied on, we are of the view that even if the assessee has inadvertently and erroneously offered refund of income tax in his total income, there is no bar in making correction of mistake in the return of 28 Tolani Shipping Co. Ltd., income. Ld. CIT(A) is not correct in denying the said relief to assessee. In our view, when the refund is an asset of the assessee, which has been given by the department on account of being excess payment by assessee of tax and therefore, same cannot be included in the income of assessee. In our view, the Ld. CIT(A) should have directed the AO to exclude the said income tax refund from the income of the assessee, but wrongly relying on the decision in the case of Goetze India Ltd., [157 Taxman 1] (supra), upheld the action of AO. In our view, the claim of assessee could have been entertained by the appellate authority as the ratio laid down in the case of Goetze India Ltd., [157 Taxman 1] (supra) is not applicable to the appellate authorities. We therefore, direct the AO to exclude an amount of Rs. 25,12,477/- from the income of assessee. Accordingly, this ground of appeal no. 11 is allowed.
9. Ground Nos. 1 to 5 by the assessee are of legal nature challenging the applciablility of Transfer Prixing provisions to Tonnage Tax Scheme are not be adjudicated as all the issues have been decided on merits.
In the result, this appeal of assessee is partly allowed. 29
Tolani Shipping Co. Ltd., ITA No. 8051/Mum/2011 AY 2006-07(Revenue Appeal):
10. This appeal is filed by the Revenue. In this appeal, Revenue has raised the following grounds:
"1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition/adjustment of Rs. 9,69,74,059/- made by the Assessing Officer/Transfer Pricing Officer on account of profit split method, ignoring that the Transfer Pricing Officer rejected the CUP method after giving detailed reasons in the order passed u/s. 92CA(3) of the I.T. Act, 1961.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment/addition of Rs. 16,46,859/- made by the Transfer Pricing Officer/Assessing Officer on account of Technical Management fees without appreciating that the Transfer Pricing Officer made the adjustment not on the sufficiency of the mark up but on the inclusion of the increase in operating cost which was not taken into account by the assessee.
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in restricting the disallowance of Rs. 45,24,204/- made by the Assessing Officer u/s. 14A/Rule 8D to Rs. 18,24,946/- and further holding that the provisions of Rule 8D are applicable only for and from A.Y. 2008-09 onwards.
4. The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
5. The appellant craves leave to amend or alter any ground or add any other ground which may be necessary".
11. The issue raised in first ground of appeal is against deleting the addition/adjustment of Rs. 9,69,74,059/- by the CIT(A) as made by the AO/TPO by applying profit split method, ignoring the fact that TPO has rejected the CUP method after 30 Tolani Shipping Co. Ltd., giving detailed reasons in the order passed u/s. 92CA(3) of the Act.
11.1. The facts in brief are that assessee has entered into a contract with a Government undertaking for transporting cargo from Queensland, Australian ports to Indian ports at freight rate Per Metric Tonne as and when cargo is available. At the time Government undertaking asks the assessee to make available the ships, if assessee does not have own ships available due to preoccupation and pre-engaged with existing commitments, then the assessee makes arrangement to incharter vessel of similar capacity from associate concerns/third party in order to provide the same to the said Government undertakings so that assessee does not suffer any losses on account of non honouring the contractual obligation/commitments. In that event, assessee availed the vessels from the associate concern in Singapore. For that purpose, assessee has to obtain permission from DG Shipping, a regulator for Indian Shipping Companies and prove with evidence that similar Indian ships are not available for lower freight at which the Singapore subsidiary offers vessel. In order to meet such an eventuality, the assessee entered into an agreement with the associate concern at Singapore to make 31 Tolani Shipping Co. Ltd., available the ships to the Govt Undertaking when assessee's ships are not available. Accordingly to AO such transactions during the year needed to be bench marked and he accordingly referred the matter to the TPO after obtaining requisite approvals u/s. 92 of the Act. The TPO passed order u/s. 92CA(3) on 27- 10-2009, making the following adjustment:
Adjustment Amount (Rs)
1. Technical Management Fees 16,46,859
2. Interest on loan advanced to 10,23,204
Associated Enterprises
3. Inchartering of vessels 9,43,03,996
Total 9,69,74,059
11.2. The AO , accordingly, issued show cause notice to
the assessee as to why the said addition should not be made to the income of the assessee which was replied by assessee vide letter dt. 06-10-2009, giving detailed objections to such adjustment and the said letter has been reproduced by the AO from Pg. 2 to 16 of the assessment order. Finally, the AO rejecting the contentions of assessee, made additions to the income of assessee of the aforesaid three additions. 11.3. In the appellate proceedings, Ld. CIT(A) allowed the appeal of assessee, deleting the addition of Rs. 9,69,74,059/- after considering the contentions and submissions of assessee, 32 Tolani Shipping Co. Ltd., which has been reproduced by the CIT(A) in para 5.3 of the appellate order by observing and holding as under:
"5.4. I have considered the facts of the case and submissions of the appellant as against the observation/findings of the APO/TPO in their orders. The contentions raised by the appellant as against their grounds of appeal are being discussed and decided as under:
i. It is observed that the appellant had carried out transportation of cargo through its own ships. Out of the voyages that the appellant company carried out in respect of transportation of cargo, it is seen that only in case of 7 voyages, the AE's ship were engaged. This was because the ships of the appellant company were not available at the specific time when the Charterers called for transport of cargo from specific port. It is obvious that if the appellant company was not able to present the ship at the nominated time and place, it would have to suffer for non performance of contract with the government undertaking and would have to incur financial loss including the payment of damages.
ii. Conclusion regarding comparability in Transfer Pricing are subject to analysis of four factors determining comparability. They are:
a) Characteristics of property or services
b) Functional Analysis
c) Contractual Terms
d) Economic Circumstances The TPO has specially ignored the contractual terms which had made the appellant liable to make available ships as per contract, as and when it required. Thus hiring of AE ships for 7 voyages was a business compulsion and not an exercise for assisting the AE in getting business. The rate at which the appellant has paid to the AE compares favourably with the prevailing market rate as concluded by the Trans Chart, New Delhi, which is a chartering wing of Ministry of Surface Transport, Govt. of India. The market fixtures determined by the Transfer Chart are based on actual data of charges and often referred by the brokers in India who are in its panel.
Thus the date provided by the Trans Chart is widely and routinely used in the ordinary course in the industry to negotiate prices for uncontrolled sources.
33
Tolani Shipping Co. Ltd., iii. The action of the TPO in resorting of Profit Split method is not a justified method. There is nothing on record to suggest that the operations of the related party are highly integrated so as to make the evaluation on individual basis difficult. Nor it can be said that both the party own valuable non-intangible assets for which no comparable data is available. It is also seen that the CIT(A) on the same facts and circumstances for the earlier years had come to the conclusion that no adjustment was required to be made. The same decision stands for the current year also.
iv. To sum up, the CUP method (external) is the best method for comparability of the transaction. The rate of Trans Chart are quite favourable/higher as compared to the rates charged by the appellant to it's AE [point (h) of para 5.3 above]. The hire of the 7 voyages from A.E. ships, was to fulfil the contractual terms and not a poly to boost the business of the A.e. Thus taking into account all the facts and circumstances, including the decision taken in the earlier year, the addition of Rs. 9,69,74,059/- is deleted".
11.4. At the outset, we would like to mention that addition on account of interest charged from AE on the loan advanced was adjudicated by us herein above vide para No.3.7 upholding the CUP method for banking transactions and also upholding LIBOR+100 basis points. Therefore, the addition of Rs. 10,23,204/- is covered by the said decision on this issue. We accordingly dismiss this limb of the ground no. 1 of the Revenue. 11.4.i. So far as the addition of Rs. 16,46,859/- on account of Technical Management Services and Rs. 9,43,03,996/- for inchartering of vessels by assessee belonging to the AE are concerned , the same have been dealt with by the CIT(A) in a very 34 Tolani Shipping Co. Ltd., comprehensive manner, giving detailed findings and reasons for deleting the addition.
11.5. We find that similar addition was made in the earlier years and deleted by the appellate authority. The Ld. CIT(A) followed the earlier years' orders allowed the ground in favour of the assessee. After perusing the facts on record and order of the Ld. CIT(A), we do not find any reason to deviate therefrom the conclusion drawn by the First Appellate Authority. Accordinly the ground of the revenue is dimissed.
12. The issue raised in Ground No. 2 has already been decided by us while deciding Ground No. 1, hereinabove and requires no separate adjudication. Ground is dismissed.
13. The issue raised in Ground No. 3 is against the reduction in disallowance by CIT(A) as made by the AO u/s. 14A r.w. Rule 8D to Rs. 18,24,946/- as against Rs. 45,24,204/-by the AO.
13.1. We have already decided the issue of disallowance u/s. 14A r.w. Rule 8D are not applicable to the assessee in the assessee's appeal in para no.4.6 by holding that provisions of section 14A r.w.r 8D not applicable as the income of assessee is 35 Tolani Shipping Co. Ltd., assessed to tax under Tonnage Tax Scheme. Therefore, this ground of the Revenue is accordingly dismissed.
14. In the result, this appeal of Revenue is dismissed. ITA No. 2582/Mum/2010 AY 2003-04:
15. This appeal is filed by the assessee. The issue raised in Ground Nos. 1 to 7 are against the order of CIT(A), upholding the order of AO in making addition of Rs. 6,27,30,353/- to the book profits on account of profit on sale of depreciable assets, whereas as per the Income Tax rules, sale price is deductible from written down value of Block of Assets and therefore there is no profit on sale of fixed assets while calculating the book profit u/s. 115JB of the Act. During the year the assessee has sold its second hand Vessel M.V. Prabhu Puni to 100% subsidiary M/S Tolani Shipping (Singapore) Pvt Ltd. for a sales consideration of US. $ 9,50,000 equivalent to Rs. 45,32,45,000/- which was reduced from the block of assets. The assessee has not made the claim while filing the return of income but made the claim before the AO vide letter dated 10.02.2006 during the course of assessment proceedings. The revised computation filed by the assessee are as under:-
36
Tolani Shipping Co. Ltd., Profit before Tax as per Profit and Loss A/C Rs. 156,377,243 Less: Profit on Sale of Vessel(Net) Rs.62,730,353 Book Profit Rs. 93,646,890 However the AO did not consider the submissions of the assessee and rejected the said claim. Thus the book profits were computed after taking into account the profit on sale of vessel to subsidiary company.
15.1. In the appellate proceedings ld CIT(A) dismissed the appeal of the assessee after taking into account the contentions of the assessee as under:
"5.4 For the computation of tax under section 115JB of the I.T. Act, the appellant has to prepare the profit and loss account as per provisions of Companies Act. If it is so, the profit on sale of depreciable asset has to be part of Block profits. Section 115 JB lists out certain incomes to be excluded from the profit worked out on the basis of provisions of Companies Act. The income at issue is not all listed in such excluded items. The provision is so clear and hence it is necessary to adopt literal interpretation. In this regard reliance is placed on the following observations of the Hon'ble ITAT Special Bench in the case of Aztech Software vs. Asst. C.I.T., 224 ITR (AT) 32 (Bang.) (SB):
"Where the language used by the Legislature is clear and unambiguous, the plain and natural meaning of the words should be supplied to he language used and recourse to any rule of interpretation to unfold the intention is permissible only where the language is ambiguous. Courts are not required to look into the object or intention of the Legislature by resorting to aids to interpretation where the language of the provision is clear and unambiguous. Consequently the meaning of each word used by the Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting provision of a statute.37
Tolani Shipping Co. Ltd., In my view, the profit on sale of depreciable assets cannot be excluded from the Book profits for the purpose of section 115JB of the I.T. Act. The Hon'ble Supreme Court in the case of Apollo Tyres in 255 ITR 273 has held that the A.O. cannot disturb the Book profit computed under the provisions of the Companies Act except the items of income listed in section 115JB of the I.T. Act.
5.5 The Hon'ble ITAT in the case of Frigsales (supra) has decided the issue in favour of the assessee relying on the provisions of section 115JB(5) of the I.T. Act which reads as follows:
(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.
The computation of book profit is provided in section 115JB of the I.T. Act. Section 115JB(5) coveys clearly that the issues which are dealt in section 115JB of the I.T. Act cannot be covered by the other provisions of the I.T. Act. In view of this, in my opinion the profits from depreciable assets cannot be deducted for the purpose of Book profit u/s. 115JB of the I.T. Act irrespective of the fact whether the profit on sale of depreciable assets are taxed or not under the normal provisions of the I.T. Act.
5.6 It is also not correct to say that profit from the sale of depreciable assets is always not taxed. Such profits may also be taxable in view of provisions of section 50, 50A, 50B of the I.T. Act. I am of the view that because of this fact only the profit from sale of depreciable asset is not excluded in section 115JB of the I.T. Act.
Further in my view, it may not be correct to say that the profits from sale of depreciable asset is exempt under the Income Tax Act. It is not so. If any profit arises from the transfer of any capital asset irrespective of whether it is eligible for depreciation or not is taxable under section 45 of the I.T. Act. The quantification is only dealt by section 50 or 50A or 50B of the I.T. Act.
If the sale price of a depreciable asset is less than the WDV of the block of assets (in which the asset which was sold was a part) then the capital gain will be Nil. If the sale price exceeds the WDV of the block of assets, then the excess will be capital gains. Nowhere in section 50 of the Act it is mentioned that capital gains on depreciable asset is not taxable or exempt. 5.7 The Hon'ble Supreme Court in the case of Apollo Tyres has held as follows:
38
Tolani Shipping Co. Ltd., "Therefore, we are of the opinion, the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J." Even with regard to 115JA, the Hon'ble Madras High Court in the case of CIT vs. Kovai Maruti Paper & Board (P) Ltd., 294 ITR 57 (Mad) and Hon'ble Delhi High Court in the case of CIT v. C.J. International Hotels Ltd. 15 DTR (Del.) 166 have held so.
5.8 Respectfully following the Hon'ble Supreme Court, Hon'ble Madras High Court and Hon'ble Delhi High Court and also due to the fact that the profit from sale of depreciable asset is not exempt under normal provisions of the Income Tax Act (para 5.6 of this order) I hold that the profits from sale of ships cannot be excluded from the Book profits for the purpose of section 115JB of the I.T. Act."
15.2. The Ld. AR of the assessee argued that the issue is squarely covered in favour of assessee by the decision of the Co-
ordinate Bench in the case of Shivalik Venture (P) Ltd., Vs. DCIT [60 taxmann.com 314] (Mumbai-Trib) wherein it has been held that profit arising from transfer of capital asset by the assessee to wholly owned subsidiary company is liable to be excluded from the net profit and the net profit so arrived at should be taken as profit for the purpose of computation of book profit under Explanation 1 to section 115JB of the Act. Ld. AR 39 Tolani Shipping Co. Ltd., vehemently submitted before us that Ld. CIT(A) has grossly erred in upholding the order of AO in not excluding the profit on sale of depreciable assets while computing book profits under the provisions of Section 115JB of the Act. Ld. AR contended that profit arising on transfer of capital asset to subsidiary is not treated as income u/s 2(24) of the Act since it does not enter the computational provision at all under the normal provision of the Act, therefore, the same should not be considered for the purpose of computing book profit under section 115JB of the Act. The Ld. A.R. took us through the definition of term 'income' and submitted that under clause (vi) capital gain is included in the definition of income which is chargeable under section 45 of the Act. Ld. A.R. submitted that the term transfer is defined in section 2(47) of the Act and only profit and gain arising from the transfer of capital assets shall be chargeable to tax under section 45 of the Act. The Ld. A.R. submitted that the expression transfer as defined under section 2(47) of the Act inter alia includes sale, exchange or relinquishment of assets. And thus sale of fixed assets by the assessee should normally fall under the definition of transfer as given in section 2(47) of the Act. However, the Ld. A.R. submitted that the capital gain in case of 40 Tolani Shipping Co. Ltd., depreciable assets is dealt with by the provision of section 50 of the Act which provides that even if a transaction falls under the definition of transfer as per provision of section 2(47) of the Act they shall not be chargeable to tax under section 45 of the Act in view of the provision of section 50 of the Act. Accordingly, the gains and profits arising on said transfer of depreciable assets by the company is not chargeable to tax under section 45 of the Act and following the same analogy the said profits and gains is not chargeable to tax under section 45 of the Act and consequently can not be considered as income at all under the definition of income given in section 2(24) of the Act. The Ld. A.R. submitted that sale of capital asset by the assessee to its subsidiary should normally fall in the definition of transfer as given in section 2(47) of the Act but section 47 specifically provides certain exemptions by holding that certain transactions shall not be regarded as transfer, meaning thereby even if a transaction falls under the definition of transfer as per the provision of section 2(47) yet they shall not be chargeable under section 45 of the Act in view of specific provisions of section 47. The Ld. A.R. vehemently submitted that the transfer of assets by a company to wholly own subsidiary company is not considered a transfer 41 Tolani Shipping Co. Ltd., under section 47 of the Act and accordingly the profit arising from the said transfer is not chargeable to tax under section 45 of the Act and if the said profits and gains are not chargeable to tax under section 45 same would not be considered as income at all under the definition of income given in the section 2(24) of the Act. Without prejudice argument taken by the ld AR is with regard to the fact when the block of assets is existing in the books of assessee and no profit is determined while computing the depreciation as per the Income Tax Act, the same cannot be included while computing book profits u/s. 115JB of the Act. Ld. AR submitted that this issue has been settled in favour of assessee by a series of decisions. In the case of Shivalik Venture (P) Ltd., Vs. DCIT [60 taxmann.com 314] (Mumbai-Trib) (supra), the Co-ordinate Bench has decided that the profit arising from sale of capital assets is liable to be excluded from the net profit i.e., net profit, in the Profit & Loss A/c should be reduced by the amount of profit arising on transfer of capital asset and amounts so arrived at should be taken as net profit in the Profit & Loss A/c for the purpose of computation of book profit under Explanation (1) to Section 115JB of the Act. Ld. AR finally prayed that in view of the decision of the Co-ordinate Bench of the 42 Tolani Shipping Co. Ltd., Tribunal, the order of CIT(A) be set aside and the AO be directed to exclude the profit on sale of depreciable assets while computing book profits u/s. 115JB of the Act.
15.3. Ld. DR on the other hand relied on the orders of authorities below by submitting that Section 115JB of the Act is a complete code in itself and therefore, there is no room for any adjustment what-so-ever beyond what has been mentioned in the section itself. Therefore, the Ld. DR prayed that the order of CIT(A) was perfectly in accordance with law and deserves to be upheld.
15.4. We have heard the rival contentions and perused the material on record before us. It is an undisputed fact that during the year assessee has sold vessel i.e., depreciable asset, on which it has shown profit of Rs. 6,27,30,353/- in the Profit & Loss A/c. While computing book profits u/s. 115JB of the Act , the assessee reduced the said figure on the ground that profit on sale of depreciable assets will be form part of book profit when the Block of Assets to which the said asset pertains is not eliminated from the books or is still existing in the books of account. Ld. DR on the other hand relied on the orders of the 43 Tolani Shipping Co. Ltd., authorities below. We have perused the decision in the case of Shivalik Venture (P) Ltd., Vs. DCIT [60 taxmann.com 314] (Mumbai-Trib) (supra), wherein the similar question has come up for adjudication before the Co-ordinate Bench, the same has been decided by the Co-ordinate Bench by stating as under:
"11. We have heard rival contentions and perused the record. There is no dispute that the profit arising on transfer of a capital asset by the assessee to its wholly owned Indian subsidiary company was not assessed as "Capital Gain" while computing total income under normal provisions of the Act. The contention of the assessee is that the same is also required to be excluded while computing "Book Profit" u/s 115JB of the Act for the reasons cited by it. The contention of the revenue is that the provisions of sec. 115JB are a self contained code and the "Book Profit" has to be strictly computed in accordance with the provisions stated therein.
12. The provisions of sec. 115JB shall come into operation, only if the income tax payable under the normal provisions of the Act by an assessee, being a company, is less than the prescribed percentage of "book profit". The expression "Book Profit" is defined under Explanation 1 to sec. 115JB of the Act. According to this Explanation "book profit"
means the net profit shown in the profit and loss account for the relevant previous year prepared under sub-section (2) (i.e., prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956..), as increased/reduced by the items listed out in the Explanation. In the instant year, the provisions of sec. 115JB come into operation for the assessee, since the tax payable by the assessee under the normal provisions of the Act is less than the amount of tax prescribed u/s 115JB of the Act.
13. Though the assessee has credited the profit and loss account with the profits arising on transfer of a capital asset to its subsidiary company, yet it has excluded the same from the net profit while computing "book profit" in terms of sec. 115JB of the Act. Admittedly, the said profit is not an item of exclusion prescribed under the Explanation 1 to sec. 115JB of the Act. The contentions advanced by the assessee in support of its action are twofold, viz., 44 Tolani Shipping Co. Ltd.,
(a) it has clearly stated in the Notes forming part of accounts that the said profit is not includible for computing book profit u/s 115JB of the Act, even though it is credited to Profit and Loss account. The profit and loss account prepared in accordance with the provisions of Part II to Schedule VI of the Companies Act should be read along with the 'Notes forming part of accounts'. Hence the net profit shown in the Profit and loss account shall be first adjusted to take care of the qualifications given in the Notes. Thereafter only, the provisions of Explanation 1 to sec. 115JB should be applied.
(b) the gain arising on transfer to assets to subsidiary company does not fall under the definition of "income" at all. Hence, once a particular receipt is not regarded as income at all, the question of bringing the same to tax under any o* provisions of the Act does not arise.
14. It is an undisputed fact that the assessee has attached a note in the Notes forming part of accounts explaining therein that the profits arising on transfer of capital asset to its subsidiary company is, in its opinion, not coming within the purview of sec. 115JB of the Act. It is contended that the Profit and loss account should be read along with the Notes forming part of accounts and the net profit should be understood as the net profit shown in the profit and loss account as adjusted by the notes given in the Notes to the accounts. In this regard, the assessee has placed reliance on the decision rendered by the Hon'ble Delhi High Court in the case of Sain Processing &Wvg. Mills (P) Ltd (supra). In the case before Hon'ble Delhi High Court, the assessee therein issue did not charge depreciation to the Profit & Loss account, but disclosed the same in the Notes forming part of accounts. However, while computing book profit u/s 115J of the Act, it claimed the amount of depreciation as deduction from the Net profit disclosed in the Profit and loss account. The Hon'ble High Court considered the aforesaid aspect of the controversy in the following words:--
The answer to this poser is found in sub-section (6) of section 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act.
As already noted it is obligatory under clause 3(iv) of Part II to Schedule VI to the Companies Act to give information with regard to depreciation, which has not been provided for along with the quantum of arrears. 45
Tolani Shipping Co. Ltd., According to us, once this information is disclosed in the notes to the accounts it would clearly fall within the ambit of the Explanation to section 115 J of the Act which defines "book profit" to mean "net profit as shown in the profit and loss account for the relevant assessment year".
To our minds, as long as the depreciation which is not charged to the profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression "shown" in the profit and loss account, as notes to accounts form part of the profit and loss account by virtue of sub-section (6) of section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub- section (6) of section 211 of the Companies Act, are read in conjunction with sub section (1 A) as well as the Explanation to section 115J of the Act.'
15. The decision rendered by Hon'ble Delhi High Court, cited above, was followed by the Pune "A" Bench of the Tribunal in the case of K.K. Nag Ltd. (supra). In this case, the incremental liability towards leave encashment was not debited to Profit and Loss account, but otherwise disclosed in Notes to Accounts. The Tribunal held that the said liability would have to be deducted while determining "Book Profits" under section 115JB of the Act.
16. We notice that an identical issue was considered by the Visakhapatnam bench of ITAT also in the case of Hindustan Shipyard Ltd v. Dy. CIT [20101 6 ITR (Trib) 407. In the case of assessee therein, it was noticed that the Government of India, by an order dated 24.3.99, had waived loan and interest accrued thereon to the tune of Rs.591.13 crores which was otherwise payable by that assessee. However, the said company did not incorporate the effect of such waiver in its books of account, though it disclosed the details of waiver in the notes on accounts. The assessing officer noticed that the assessee would be liable to pay tax as per the provisions of Section 115JA of the Act, (Minimum Alternative tax), if the waiver benefits are incorporated in the books of account accordingly he included the waiver benefits in the book profit. The Tribunal, after considering the decision of Hon'ble Delhi High Court in the case of Sain Processing &Wvg. Mills (P) Ltd. (supra), held that the Assessing Officer is entitled to include the waiver benefit that was disclosed in the notes on accounts.
17. We shall now examine about the ratio of all the above said decisions vis-d-vis sec. 115JB of the Act. Since the term "Book Profit" is defined in Explanation-1 to sec. 115JB, we need to refer the same, which starts with the following expression:--
46
Tolani Shipping Co. Ltd., " For the purposes of this section, "book profit" means the net profit as shown in the Profit and Loss account for the relevant previous year prepared under sub-section (2), as increased by--"
In sec. 115JB(2), it is provided that the profit and loss account shall be prepared in accordance with the provisions of part II of Schedule VI to the Companies Act, 1956. So the profit and loss account prepared as per the provisions of Companies Act is required to be considered for the purpose of provisions of sec. 115JB of the Act, meaning thereby the interpretation given to the various provisions of Companies Act are relevant here. We have noticed that the starting point for computation of "book profit" is the "Net profit as shown in the Profit and Loss account".
In the above said three decisions, it has been held that the items disclosed in the Notes to accounts are required to be adjusted to the Net profit disclosed in the Profit and loss account. In order to understand the significance of "Notes to accounts" or "Notes forming part of accounts", we may refer to the provisions of sec. 211(6) of the Companies Act, which read as under:--
"(6) For the purpose of this section, except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto giving information required by this Act and allowed by this Act to be given in the form of such notes or documents."
Hence, in the case of Sain Processing &Wvg. Mills (P) Ltd (supra), the Hon'ble Delhi High Court observed as under, after considering the provisions of Companies Act:-(extracted below again at the cost of repetition) 'According to us, once this information is disclosed in the notes to the accounts it would clearly fall within the ambit of the Explanation to section 115J of the Act which defines "book profit" to mean "net profit as shown in the profit and account for the relevant assessment year". To our minds, as long as the depreciation which is not charged to the profit and account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression "shown" in the profit and loss account, as notes to accounts form part of the profit and loss account by virtue of sub-section (6) of section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub- section (6) of section 211 of the Companies Act, are read in conjunction with sub section (1 A) as well as the Explanation to section 115J of the Act'.
47
Tolani Shipping Co. Ltd., Hence, in the decision given by Hon'ble Delhi High Court (supra) and also other two decisions rendered by the Tribunal (supra), it has been held that the notes given in the Notes forming part of accounts have to be read along with the Profit and Loss account, meaning thereby the items having effect over the Net profit shown in the Profit and Loss account, but otherwise disclosed in the Notes to accounts should be adjusted to the said Net profit. Such kind of adjustment is held to be falling "within the ambit of the expression 'shown' in the profit and loss account". The ratio of these decisions is that the expression "net profit as shown in the profit and loss account" should not be understood as the net profit disclosed in the profit and loss account, but the net profit adjusted to the effects of notes given in the Notes forming part of accounts. Hence the Court as well as Tribunals, in the above cited cases, held that the depreciation, incremental liability on leave encashment, loan waiver benefits have to be adjusted to the profit/loss shown in the Profit and loss account, which means that the "Net profit shown in the profit and loss account" is the figure arrived at after making such kind of adjustments. From these discussions, it follows that, for the purpose of making such kind of adjustments, it is not necessary that those items should have been specified in items of "increase" or "reduction" given in the Explanation 7, since the "net profit"
itself is arrived at by adjusting the effects of notes given in the Notes to accounts, i.e., the same forms part of the process of arriving at "Net Profit" at the source level".
15.4.i. Since the facts of the case before us are same as decided by the Co-ordinate Bench in the case of the Shivalik Venture (P) Ltd., Vs. DCIT [60 taxmann.com 314] (Mumbai-Trib) (supra), respectfully following the same, we direct the AO not to include the profit on sale of Vessel while computing book profits u/s. 115JB of the Act.
16. The issues raised in the assessee's appeals in Ground Nos. 1 & 2 in AY 2005-06, ground nos 1 to 5 in AY 2007-08 & 2008-09, Addl. Ground no. 1 in AY 2009-10 and ground Nos.10 48 Tolani Shipping Co. Ltd., to 12 in AY 2010-11 are legal issues relating to applicability of Transfer Pricing and are identical to ground Nos. 1 to 5 in AY 2006-07 which have not been adjudicated by us for the reasons that the issues on merits have been decided. Therefore similarly the legal issues in all these appeals of the assessee are not being adjudicated as stated hereinabove.
17. The issue in assessee's appeal in ground No. 3 in AY 2005-06, ground no 6 in AY 2007-08 & 2008-09, Ground No. 4 in AY 2009-10 and Ground No. 1 to 5 in 2010-11 are identical to issue as decided by us in Ground No. 7 in AY 2006-07 and therefore, our decision on ground no. 7 in /ay 2006-07 would, mutatis mutandis, apply to these appeals as well. Accordingly, the issue raised by the assessee in these grounds qua applicability of provisions 14A to tonnage tax company is decided in favour of the assessee.
18. The issue of interest on income tax refund in assessee's appeal in Ground No.4 in AY 2005-06, addl. Ground No.1 AY 2007-08 and Ground No.12 in AY 2008-09 is identical to the issue in ground no. 11 in AY 2006-07 which has been decided in favour of the assessee. Therefore our decision would, 49 Tolani Shipping Co. Ltd., mutatis mutandi, apply to the above grounds also. Accordingly the above grounds are allowed.
19. Ground of appeal No. 7 for the AY. 2007-08 in assessee's appeal is extracted below:
"The CIT(A) has erred in confirming the disallowance of Short Term Capital Loss of Rs. 1,13,497/- under section 94(7) on the ground of dividend stripping."
19.1. After having heard the arguments of both the parties and perusing the facts on records , we observe that the ld CIT(A) has passed a reasoned and speaking order as per the provisions of the Act. We, therefore, do not find any reasons to disturb the order on this issue. Ground of appeal No. 7 is decided against the assessee.
20. The issue raised in assessee's appeal in this ground No. 10 in AY. 2008-09 is similar to the issue as decided by us in the AY. 2007-08 in ground of appeal No. 7. Therefore our decision on Ground No.7 in AY 2007-08 would be applicable for Ground No. 10 in AY. 2008-09 as well. The AO is directed accordingly.
50
Tolani Shipping Co. Ltd.,
21. Ground of appeal No. 8 in AY. 2008-09 in assessee's appeal is against the order of CIT(A) not allowing the set-off of Long-term Capital Loss arising on account of units of mutual funds on which STT has been paid against Long-term Capital Gains on which no STT is paid 21.1. After hearing both the sides and going through the facts of the case and after carefully perusing the decision of the co-ordinate Bench of the Mumbai Tribunal in the case of Raptakos Brett & Co Ltd. ITA No. 3317/Mum/2009 & 1692/Mum/2010, we agree contentions of the Ld. AR that this ground of appeal is covered in favour of the assessee. We therefore, respectfully, following the same, allow Ground No. 8 of the assessee.
22. Ground of appeal No. 9 in AY. 2008-09 in assessee's appeal is against not allowing cost of acquiring shares of foreign subsidiary company to be increased while computing LTCG when the sale price of ship increased under Transfer Pricing provisions.
51
Tolani Shipping Co. Ltd., 22.1. The facts in brief are that during the year the assessee sold some shares of its Singapore AE allotted in lieu of the value of ships transferred to the said AE during the financial year 2003-04. The price of the ship was increased to Rs. 50,00,00,000/- in place of Rs. 45,32,45,000/- by making TP adjustments as per tribunal order in ITA No. 1491/Mum/2008 for AY 2003-04 order dated 30.04.2013. The assessee submitted before the AO that the price of the share should be taken at Rs. 50,00,00,000/-.The ld CIT(A) did not adjudicate the issue. 22.2. The Learned AR submitted that the assessee has sold shares of its Associate Company during the year. The Assessee contended that that initially, the assessee had been allotted shares of its Associate Company, in lieu of the value of ship transferred to the Associate Company during the previous year ended 2003-04. The ITAT by order dated 30-04-2013, ITA No. 1491/M/2008 for A.Y.2003-04, determined the price of ship at Rs.50,00,00,000/- instead of Rs.45,32,45,000/- The Ld.AR therefore argued that since the shares were allotted initially against the value of the ship, therefore, in the event of any addition to the value of the ship, determined on account of Transfer Pricing provisions, there should be corresponding 52 Tolani Shipping Co. Ltd., increase in the cost of the shares of the subsidiary company and subsequently. The revised cost of shares at Rs.50 crores should be considered instead of Rs.45.32 crores for determining the Long-term Capital Gains.
22.3. We have heard the rival contentions and perused the materials on records carefully including the decision of the coordinate bench dated 30-04-2013 passed on this issue increasing the value at which ship was transferred to the AE at Rs. 50.00 Cr . In our opinion if the price of the ship is increased by making TP adjustments, then the value of shares allotted in lieu of ship transferred should be increased by the corresponding amount. Accordingly we direct the AO to take the cost of acquisition at Rs. 50 Crores. The Ground No. 9 of the assessee is allowed.
23. Ground of appeal No 11 for the AY. 2008-09 in assessee's appeal is against the order of CIT(A) confirming addition of Rs.76,84,762/- being disallowance U/S 14A while computing Book Profit U/S.115JB.
53
Tolani Shipping Co. Ltd., 23.1. The facts in brief are that the AO has made addition /adjustment to the book profits while computing book profit u/s 115JB of the Act for the disallowance as made u/s 14A of the Act. After hearing the rival contentions of the parties and going through the facts on records, we observe that no disallowance can be made u/s.115JB of the Act on account of disallowance made u/s 14A r.w. Rule 8D. The case of the assessee is covered by the ratio laid down in the following decisions:
(i) CIT vs. Bengal Finance & Investments Pvt. Ltd Appeal No.337 of 2013 dated (Bombay High Court)
(ii) Essar Teleholdings Ltd. Appeal No. 438 of 2012 dated 07-08-2014
(iii) Asst. CIT vs. Vireet Investments P. Ltd (2017) 82 Taxmann.com 415 (Delhi-Trib) (SB)
(iv) Bharat Petroleum Corporation Ltd. vs. Asst. CIT (2018) 63 ITR (TRIB) 244 (Mum) Since the facts of the assessee's case are similar to the facts of the above decisions, we accordingly allow Ground No. 11 of the assessee by directing the AO to delete the disallowance. 54
Tolani Shipping Co. Ltd.,
24. Ground No. 13 in AY 2008-09 is against the order of ld CIT(A) including profit on sale of ship u/s.115JB (MAT) as the same is not covered by Explanation 1 to Section 115JB(2) and therefore the profit on sale of ship should be reduced from Book Profits considered u/s.115JB.
24.1. This ground has already been adjudicated in Ground of appeal No. 1 and 2 for the AY. 2003-04 and Ground of appeal No. 7 for the year under consideration in assessee's appeal. The additions on Transfer pricing adjustment and section 14A have been deleted and 94(7) has been upheld. The AO is directed accordingly.
25. As regards the additional grounds raised by the assessee of appeal for the AY. 2005-06, it is contended by the Ld AR that the additional grounds of appeal have been taken as the same inadvertently have not been taken in the original grounds of appeal. It is contended by the Ld. AR that in these additional grounds, it is either that the incomes that have been offered to tax in the return of income are exempt from tax or are covered by the Tonnage Tax Scheme and therefore, should not have been offered to tax in the return of income. The Ld AR therefore, 55 Tolani Shipping Co. Ltd., contends that the additional grounds of appeal should be admitted and disposed of.
25.1. The additional grounds of appeal are -
(i) Interest Income received from 6.85% IIFCL Tax-free Bonds which are exempt u/s. 10(15)(iv)(h) of the Income-tax Act, 1961 and therefore the same are not taxable. -- Rs.2,29,647/-
(ii) Interest Income received from staff members employed for shipping business covered under Tonnage Tax Business and therefore the same is part of shipping business income not taxable as Income from Other Sources -- Rs. 1,86,621/-
(iii) Interest Income received from Tolani Bulk Carriers Ltd., as subsidiary company of the Assessee engaged in shipping business and therefore the same is business income of the Assessee Company - Rs. 15,46,074/-
(iv) Interest Income on security deposit on account of cases pertaining to custom duty which are part of shipping business covered under Tonnage Tax scheme - Rs.56,250/-
(v) Interest Income on fixed deposits with Bank against Bank Guarantee given to custom authorities which is part of the Tonnage Tax income -- Rs.18,635/-
(vi) Interest Income on account of delayed payment of freight by Vishakhapatnam Steel Plant which is part of Tonnage Tax Scheme
- Rs.16,116/-
25.2. We have heard the rival contentions on the admission of additional grounds and also perused the facts emanating out of the records before us. After taking into account the contentions of the representatives and the facts on records, we 56 Tolani Shipping Co. Ltd., are of the view that issues raised by way of additional grounds do not require any further verification. The issue raised are in respect of incomes which are such that are prima facie either exempt or are covered by the Tonnage Tax Scheme and were inadvertently not taken in the original grounds of appeal. However we restoring these additional grounds to the file of the AO to decide the same after verifying the claim of the assessee as per facts and law.
26. Similar additional grounds of appeal are raised by the assessee for the AY. 2007-08 which are reproduced as under:-
(i) Interest Income received from 6.85% IIFCL Tax-free Bonds which are exempt u/s.10(15)(iv)(h) of the Income-tax Act, 1961 and therefore the same are not taxable. - Rs.2,46,050/-
(ii) Interest Income received from staff members employed for shipping business covered under Tonnage Tax Business and therefore the same is part of shipping business income not taxable as Income from Other Sources -- Rs.3,37,050/-
(iii) Interest Income received on account of delayed freight payment as decided by Arbitrator -Rs.5,93,454/-
(iv) Interest Income on security deposit and Bank guarantees on account of cases pertaining to custom duty which are part of shipping business covered under Tonnage Tax scheme -
Rs.28,52,858/-
26.1. Since we have already restored these ground to the file of the AO in AY. 2005-06, we are therefore restoring these for 57 Tolani Shipping Co. Ltd., the AY. 2007-08 also. The AO is directed to decide these grounds as per law and facts after giving reasonable opportunity to the assessee.
27. The Ground Nos. a to d in AY 2005-06, ground no. 1 for AY 2007-08 and 2008-09, ground no. (ii) in AY 2009-10 all revenue appeals are identical to one as decide by us in ground no. 1 in AY 2006-07 in revenue appeal which has been dismissed by us. Therefore our decision on ground no. 1 in AY 2006-07 would, mutatis mutandis , apply to these grounds as well. Resultantly the grounds in the respective assessment years are dismissed.
28. The ground no. 2 for AY 2007-08 and 2008-09, ground no. (i) in AY 2009-10 & 2010-11 all revenue appeals are identical to one as decide by us in ground no. 2 in AY 2006-07 in revenue appeal which has been dismissed by us. Therefore our decision on ground no. 2in AY 2006-07 would, mutatis mutandis apply to these grounds as well. Resultantly the grounds in the respective assessment years are dismissed.
29. The ground No. 3 for AY 2007-08, ground no. 4 for AY 2008-09 both revenue appeals are identical to one as decide by 58 Tolani Shipping Co. Ltd., us in ground no. 3 in AY 2006-07 in revenue appeal which has been dismissed by us. Therefore our decision on ground no. 3 in AY 2006-07 would, mutatis mutandis , apply to these grounds as well. Resultantly the grounds in both assessment years are dismissed.
30. The ground No. 3 in revenue appeal is against the order of CIT(A) deletion the addition as income from the other sources on account of interest from loans given to employees, sundry balances written back and interest income on short term deposits.
30.1. The facts in brief are that the assessee treated the interst on loan to employees Rs.496480/-, sundry balances written off Rs.59877/- and interest income of Rs.1,26,59,058/- as income from business. The AO came to the conclusion that the said income are not connected to the core business of the assessee and hence assessed the same as income from other source.
30.2. The Ld. CIT(A) allowed the appeal of the assessee after considering the contention of the assessee by observing and holding as under:
59
Tolani Shipping Co. Ltd., 6.2 The appellant submitted that housing loans and vehicles given to employees and the interest received thereon is income from core activity and therefore the same is business income as held by the Hon'ble Mumbai ITAT in the case of Shipping Corporation of India vs. ACIT 133 ITD 290. 6.3 The appellant further submitted that addition of interest on loans to employee was deleted by DRP for A.Y. 2010-11. Since the facts of the case remains the same, addition of interest of income of Rs.496480/- to income from other sources is deleted.
6.4 With regard to the addition of sundry balances written back amounting to Rs.59877/-, the appellant submitted that sundry balances written back is income from core activities and interest derived from such activity is taxable under the head Income from business and it can not be taxed separately.
6.5 the appellant relied on the Hon'ble Mumbai Tribunal in the case of Shipping Corporation of India vs. ACIT 133 ITD 290 wherein similar addition of write back of sundry credit balances was deleted by Hon'ble ITAT. Since the facts of the case remain same, addition of sundry balances written back of Rs.59877/- to income from other sources is deleted.
.....................
......................
6.10 I have considered the above judgments submitted by the appellant and the contention by the appellant. The submission made by the appellant that these deposits were short term deposits made temporarily when funds were lying idle for a short tenure is found tenable. The appellant has substantial borrowing and has paid interest of over Rs.20 cr. The interest has been earned on short term deposits only, in respect of funds which were to be used for business purpose by the appellant. In Varun Shipping Co. Ltd. 334 ITR 263 Bom. the company was to buy a new ship for which it had borrowed funds and had obtained RBI approval and it earned interest on the unutilized portion of this amount. AO brought this amount to tax as income from other sources. However, ITAT held that this activity was a part of appellant's business and hence interest earned was liable to be treated as business income. The finding of ITAT was upheld by Bombay High Court in the above decision. I find that case of the appellant is covered by the Bombay High Court in the case of Varun Shipping as quoted above. Respectfully following the judgment, addition of interest income of Rs.1,26,59,058/- as income from other sources is deleted." 60
Tolani Shipping Co. Ltd., 30.3. We have heard the rival arguments and perused the material on records including the decision of the ld CIT(A) and the decisions relied by the ld AR. We find the ld CIT(A) has passed a very reasoned and speaking order and there is no reason to deviate from the findings of the ld CIT(A). Accordingly the ground raised by the revenue is dismissed.
31. The issue in ground No. (ii) and (iii) in AY 2010-11 in revenue appeal is similar to the one as decided by us in ground no. 3 in AY 2008-09 in revenue's appeal and therefore our decision on ground No. 3 in AY 2008-09 would, mutatis mutandi, apply to these grounds also. Accordingly, the ground no. (ii) and (iii) are dismissed.
32. In result the appeals of the assessee are partly allowed, whereas the appeals of the Revenue are dismissed.
Order pronounced in the open court on 28.02.2019 Sd/- Sd/-
(MAHAVIR SINGH) (RAJESH KUMAR)
याियक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
मुंबई/Mumbai; /Dated : 28.02.2019
दनांक
TNMM &
61
Tolani Shipping Co. Ltd.,
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु (अपील) / The CIT, Mumbai
4. आयकर आयु / CIT(A), Mumbai
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard file आदेशानुसार/ BY ORDER, स यािपत ित //True Copy// उप/सहायक पंजीकार (Dy./Asst. Registrar) आयकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai