2025 (4) TMI 908 - AT - Income Tax

Denial of Tonnage Tax Benefit - whether the conditions of qualifying ship is satisfied in the case of the assessee according to the provision of the Act? - HELD THAT - For computing income audit report has to be filed u/s.115VW which provides for filing of Form No.65 duly certified by the Auditor which here in this case auditor has duly filed and certified the tax tonnage income. Nowhere it has been disputed or brought on record that assessee s income is not from time charter. In fact there is a categorical finding by the ld. CIT (A) wherein hiring income from time charter of vessels given on hire to M/s. USCL and other companies have been given. Such hiring income from time charter falls in the category of core activities. It is not necessary that only carrying any cargo passengers alone is to qualify for the TTS. What is to be required to be seen before giving benefit of TTS is that it should be a qualifying ship and Section 115VI defines the relevant shipping income to compute the tax tonnage for which Auditor has to certify the relevant shipping income under the head tax tonnage whether it is qualified as a tax tonnage or does not qualify. Here in this case assessee has also offered its income partly under TTS and also under non-TTS which is duly certified by the auditor in Enclosure B( 2) in Form 66. Accordingly we hold that the claim of the assessee qua the income for tax tonnage scheme has to be allowed and to that extent finding of the ld. AO is reversed and order of the ld. CIT (A) is confirmed. Thus this issue is decided in favour of the assessee. Victualling expenses which AO had added - These payments are made for man day at fixed amount to meet the victualling cost. The purchase of victualling materials are made directly from the vendors and delivered on board to the vessels and the funds are transferred to the bank accounts of the agencies appointed for marine base office activities. The agents were appointed to withdraw the amount from the bank account and cash advances to the base Managers / vessel masters to use cash for purchasing victualling material from the vendors. It is also seen that assessee has furnished vessel-wise monthly summary of material details. It is also seen that before the ld. AO detailed submissions in respect of said expenses were also made vide letter dated 30/11/2019 for the A.Y. 2016-17 which is also impugned before us. The said submission also contained the attendant sheet of the crew on board and the amounts paid to them alongwith documentary evidences. Once these expenses are part of a normal business activity and is prevalent in the shipping industry where the company provides food snacks and beverages to the crew members on board it cannot be held that it is for non-business purpose. Accordingly we upheld the order of the ld. CIT(A) in deleting the said addition. Disallowance of sundry and sales promotion expenses - AO noted that assessee has debited sundry expenses and sales promotion expenses for which assessee has not filed any submissions - assessee had suomoto disallowed 50% and the ld. Counsel sated that disallowance has to be restricted only to that part of income which not eligible to the part under TTS - HELD THAT - We do not find any infirmity in the order of the ld. CIT (A) because even if the disallowance has to be made then the same has to be restricted to the part of income which is completed under those incomes which is not eligible to be taxed under TTS. Thus any way disallowance has been confirmed albeit it has been restricted to be disallowed from the income from non-TTS income. Accordingly the ground raised by the Revenue is dismissed. Interest of FD margin not allowed as tonnage income - AO while passing the order u/s 153A of the Act did not provide netting off of the interest expenses which was part of tonnage income calculation - HELD THAT - Though there is a nexus of fund deployed for the business purpose i.e. for acquiring ships and for placing performance guarantee margin vis-a-vis each contract with the banking and financial institutions. Since these margin deposits are integral part of core activities of operating qualifying ships and it is the part of the business requirement to provide the bank guarantees. However the part of the assessee s income is chargeable to tax under tonnage tax and where tax is levied under presumptive rate accordingly it presume that all the expenses has been subsumed in the calculation and will have no impact on calculating the taxable income. Thus any interest claimed for the calculation for tonnage tax scheme cannot be allowed because once the presumptive tax is applicable on tonnage tax then no separate interest expenses can be allowed. The interest income has to taxed separately under the head income from other sources and any interest expenses which is directly related to interest income has to be netted and accordingly we direct the ld. AO to net off interest income from interest expenses and balance should be taxed as income from other sources. In the result ground No.3 raised by the assessee is partly allowed. Disallowance made for deemed dividend u/s. 2(22) (d) - HELD THAT - Cost of shares invested was USD 300 and money received was USD 300 thereby being no income or gain in the hands of the assessee and hence no capital gain. There is no income arising out of reduction in the share capital up to the value of principal invested. We find that this issue has neen discussed in the decision of Tata Sons Limited 2024 (1) TMI 1036 - ITAT MUMBAI wherein assessee s shareholding in Tata Telecom Services Ltd. was reduced pursuant to the scheme of arrangement and restructuring and no consideration was paid by TTSL to the assessee and long term capital loss arising to the assessee on account of deduction of capital was allowed to the set off against the other long term capital gain. Since the facts have not been discussed properly by the ld. AO or by CIT (A) accordingly this matter is restored back to the file of the ld. AO and to decide afresh in line with the principle laid down in the decision of Tata Sons Ltd. (supra) wherein it was held that reduction of share capital is to be treated as capital loss . Accordingly the ground is partly allowed for statistical purposes.

Summary

The judgment involves multiple appeals filed by both the assessee and the Revenue concerning the assessment orders passed under Section 153A read with Section 143(3) for the assessment years 2012-13 to 2017-18. The core issues revolve around the denial of Tonnage Tax Scheme (TTS) benefits, disallowance of certain expenses, and treatment of interest income and deemed dividends.

1. Issues Presented and Considered:

• Whether the CIT(A) was correct in deleting the addition made by the AO regarding expenses related to exempt income.
• Whether the CIT(A) was justified in reversing non-tonnage income as tonnage income under the TTS.
• Whether the CIT(A) was right in deleting the addition on account of victualling expenses.
• Whether the CIT(A) was correct in restricting disallowance on account of sundry expenses and sales promotion.
• Validity of assessment orders passed under Section 153A without incriminating material found during the search.
• Whether the interest on FD margin should be considered as part of tonnage income.
• Whether deemed dividend under Section 2(22)(d) was correctly assessed.

2. Issue-Wise Detailed Analysis:

Tonnage Tax Scheme (TTS) Eligibility:

• Legal Framework: The TTS under Chapter XII-G of the Income Tax Act provides for a presumptive tax regime for shipping companies. Section 115VD defines "qualifying ship" as a sea-going ship of 15 net tonnage or more, registered under the Merchant Shipping Act, with a valid certificate.
• Court's Interpretation: The Tribunal noted that the assessee's vessels met the criteria of "qualifying ship" as they were certified as sea-going ships by competent authorities and had valid tonnage certificates.
• Key Evidence and Findings: The assessee provided certificates and registration documents under the Merchant Shipping Act. The Tribunal found no evidence that the ships operated solely within port limits.
• Application of Law to Facts: The Tribunal concluded that the assessee's ships qualified under the TTS and reversed the AO's denial of the scheme benefits.
• Competing Arguments: The Revenue argued that the ships did not carry cargo or passengers and were not used beyond port limits. The Tribunal dismissed these arguments, stating that the statutory definition did not impose such conditions.
• Conclusion: The Tribunal upheld the CIT(A)'s decision to grant TTS benefits to the assessee.

Disallowance of Expenses:

• Victualling Expenses: The Tribunal upheld the CIT(A)'s decision to delete the disallowance of victualling expenses, noting that these were standard industry expenses for crew sustenance and adequately documented.
• Sundry and Sales Promotion Expenses: The Tribunal agreed with the CIT(A) to restrict disallowance to non-TTS income, as the assessee had already disallowed 50% of these expenses in its return.

Interest on FD Margin:

• Legal Framework: The interest income on FD margins was initially considered part of tonnage income by the assessee.
• Court's Interpretation: The Tribunal directed netting off interest income against interest expenses, allowing the balance to be taxed as "income from other sources."
• Conclusion: The Tribunal partially allowed the assessee's appeal on this issue.

Deemed Dividend under Section 2(22)(d):

• Facts: The AO treated the differential amount from the sale of property to a subsidiary as deemed dividend.
• Court's Interpretation: The Tribunal upheld the CIT(A)'s decision to restrict the addition to the difference between the sale price and the property's fair market value as determined by a registered valuer.
• Conclusion: The Tribunal dismissed the Revenue's appeal on this issue.

3. Significant Holdings:

• Tonnage Tax Scheme: "Once the appellant is a 'Qualifying Company' and the vessels operated by it fulfill the condition of 'Qualifying Ship', the benefit of TTS cannot be denied."
• Expenses Disallowance: The Tribunal confirmed the CIT(A)'s approach to restrict disallowance to non-TTS income, acknowledging the assessee's partial disallowance in its return.
• Interest Income Treatment: The Tribunal allowed netting off interest income and expenses, emphasizing that presumptive tax under TTS subsumes all related expenses.
• Deemed Dividend Assessment: The Tribunal supported the CIT(A)'s reliance on a registered valuer's report to determine the fair market value for deemed dividend calculations.

The Tribunal's decision comprehensively addressed the issues raised, affirming the CIT(A)'s orders in most respects while providing clarity on the application of the Tonnage Tax Scheme and treatment of specific income and expenses.