TMI Blog2011 (5) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... JJ. Dr. Anita Sumanth for the Appellant. Tapas Kumar Datta for the Respondent. ORDER N.S. Saini, Accountant Member. This is an appeal filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Chennai-I, in C.No. 218(12)/CIT-I/263/2009-10 dated 25-1-2010. 2. The assessee has taken the following the grounds of appeal. I. Grounds on Jurisdiction (a) The order of the Commissioner of Income-tax, dated 25-1-2010 is illegal, erroneous and liable to be quashed. (b) The Commissioner of Income-tax ought not to have revised the order of assessment dated 7-12-2007 passed under section 143(3) of the Income-tax Act when the twin conditions 'erroneous' and 'prejudicial to the interests of the Revenue' prescribed under section 263 have not been satisfied. (c) The Commissioner of Income-tax ought to have seen that by virtue of the impugned order, the depreciation available to the appellant in fact increases. Accordingly, section 263 cannot be called into operation. (d) The Commissioner of Income-tax ought not to have invoked jurisdiction under section 263 when the issue of eligibility for tonnage tax was a matter that ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following reasons. 2. The total income of the assessee company was determined as NIL and tonnage income of Rs. 5,72,904 was determined under section 143(3). The assessee company was a co-owner with 20 per cent of ownership of the ship "Gem of Ennore" as per the co-ownership agreement dated 25-9-2001 filed in ITMR of assessment year 2005-06. 3. As per this agreement, M/s. West Asia Martime Ltd., Chennai was authorized as executive authority for the purpose of carrying on business on behalf of this assessee-company. 4. Clause 6(b) of this agreement, authorize M/s. West Asis Martime Ltd. (WAM) Chennai to charter the vessel to M/s. Poompuhar Shipping Corporation Ltd., Chennai (PSC) on the terms as already agreed between PSC and WAM for transporting thermal coal from Pardip Port to Ennore Port. 5. As per section 115VD, a sea going ship or vessel, the main purpose for which it is used is the provision of goods or services of a kind normally provided on land is not a qualified ship for the purpose of computation of tonnage income. 6. As per section 115VC(c), the assessee company should own at least one qualifying ship. In this case, the assessee owns only a part of the ship an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above approval is subject to compliance of various conditions as prescribed in Chapter XIIG of the Income-tax Act dealing with special provisions relating to Income of shipping companies". The approval given by the Additional Commissioner is a qualified one and it is not intended that he should go into the details of eligibility at the initial stage. (ii) Secondly the assessee has stated in the application in Form No. 65 under rule 11P filed before the Additional CIT that the company owns 1 qualifying ship without stating that the assessee is only part owner of the ship and also that the management and operation of the ship is done by West Asia Martime (P.) Ltd. (iii) Similar issue on the restriction of the powers of the Assessing Officer once the approval given under the statute with regard to the eligibility by a higher authority was considered by the Karnataka High Court in the case of Weizmann Homes Ltd. v. CIT [2004] 265 ITR 601. The Court, in the context of approval given by the Board under section 36(1)(vii) and binding nature of such approval on the Assessing Officer held that 'grant of approval by itself does not directly provide for direct concession to the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 263 ITR 255. I, therefore, set aside the order of the Assessing Officer for the impugned assessment year with the direction to him to pass a speaking order after considering the issues discussed above relating to application of tonnage tax scheme to the assessee in accordance with law." 4. The Learned Authorized Representative for the assessee submitted as under:- "Brief Facts The Appellant is engaged in shipping business and is the co-owner of a ship by name "MV Gem of Ennore" having 20 per cent share along with an entity by name, M/s. West Asia Maritime Ltd. and two others. The appellant opted for the provisions of Tonnage Tax Scheme introduced in the Income-tax Act with effect from 2005 onwards. As per the provisions of section 115VP, an application was filed by the appellant seeking approval for opting for the Tonnage Tax Scheme. Approval under section 115VP(3) was granted by the authorities and in terms of the provisions of section 115VP(5) required the approval "shall" apply from the assessment year relevant to the previous year in which the option for Tonnage Tax Scheme is exercised. This approval was granted by the Additional Commissioner after due application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner and accepting the claim for opting the Tonnage Tax Scheme. The finding of the Commissioner of Income-tax that the conditions under sections 115VD and 115VC(c) are not complied with is incorrect on facts and in law and proceeds on an incorrect appreciation of the statutory provisions (iii) Section 115VD prescribes the parameters for determining what would be a "qualifying ship". A ship is excluded from the definition if it is a sea going ship or vessel if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land. The intent behind the insertion of the aforesaid clause has been elaborated in the discussion of Core Committee at the time of introduction of Chapter XIIB in the Income-tax Act. It was noted that some companies, in order to avail the beneficial provisions of Tonnage Tax Scheme provided on a ship services like restaurants, hotels, shops and super markets, casinos, financial service providers etc. which are normally services that are provided on land and claimed the benefit in respect of income arising therefrom. To avoid the abuse of this provision, section 115VD(i) has been included which requires that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 10 crores (Approx.) is not available for set off in terms of the provisions of section 115VM(2). The order of the Assessing Authority passed in consequence of the Commissioner's order under section 263 of the Income-tax Act, dated 31-12-2010, is placed herewith as Annexure "B". The Assessing Authority rejecting the option for Tonnage Tax Scheme has computed the taxable income at Rs. 3,25,14,087, set it off against the carried forward depreciation and determined the taxable amount at NIL. A balance of nearly Rs. 7 crores (approx) being the unabsorbed shipping depreciation loss is still available for set off against the income for the later years. This is possible only since the Tonnage Tax Scheme is made inapplicable to the appellant. Prejudice is thus caused to the department. Even under the computation of income under section 115JB the amount determined is a refund of Rs. 5,64,210. Thus, the impugned order under section 263 of the Income-tax Act does not establish any prejudice caused to the Revenue by the order of assessment dated 7-12-2007. The condition of prejudice being caused to the revenue by virtue of the order of assessment under section 143(3) is thus not satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 115VC(c) are violated. Assessee's reponse The Commissioner of Income-tax has faulted the order of assessment dated 7-12-2007 on the ground that the scheme would require that the qualifying company shall own the whole of the qualifying ship, while the appellant owns only 20 per cent of "MV Gem of Ennore" and accordingly this statutory provision has not been complied with. This contention is incorrect insofar as Chapter XIIG itself recognizes co-ownership of the ship and statutorily provides for situations where the vessels are co-owned or co-chartered under section 115VH and for computation in cases of joint ownership, operation and joint usage. This establishes clearly that the scheme would be available even to an assessee owning a ship either by itself or jointly with others. Reliance is placed on Circular No. 2 of 2005 (reported in 276 ITR (St.) 147) at Page 186 wherein it is clarified that even in cases of charter of a vessel, two or more parties may be involved) (ii) Chapter XIIG nowhere requires that the benefit of Tonnage Tax Scheme is available only to an entity that owns 100 per cent of a vessel. In fact section 115VH itself statutorily provides for joint operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of various conditions as prescribed in Chapter XIIG of the Income-tax Act dealing with special provisions relating to Income of shipping companies". The approval given by the Additional Commissioner is a qualified one and it is not intended that he should go into the details of eligibility at the initial stage. (ii) Secondly the assessee has stated in the application in Form No. 65 under rule 11P filed before the Additional CIT that the company owns 1 qualifying ship without stating that the assessee is only part owner of the ship and also that the management and operation of the ship is done by West Asia Martime (P.) Ltd. (iii) Similar issue on the restriction of the powers of the Assessing Officer once the approval given under the statute with regard to the eligibility by a higher authority was considered by the Karnataka High Court in the case of Weizmann Homes Ltd. v. CIT 265 ITR 601. The Court, in the context of approval given by the Board under section 36(1)(vii) and binding nature of such approval on the Assessing Officer held that 'grant of approval by itself does not directly provide for direct concession to the petitioner. It is further subject to strict scrutiny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue under consideration it is considered useful to extract some of the relevant provisions of the Act as under:- "115VA. Computation of profits and gains from the business of operating qualifying ships. Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company, the income from the business of operating qualifying ships, may, at its option, be computed in accordance with the provisions of this 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". *115VB. Operating ships. For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter : Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years. *115VD. Qualifying ship. For the purposes of this Chapter, a ship i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax scheme, and a copy of such order shall be sent to the applicant : Provided that no order under clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard. (4) Every order granting or refusing the approval of the option for tonnage tax scheme under clause (i) or clause (ii), as the case may be, of sub-section (3) shall be passed before the expiry of one month from the end of the month in which the application was received under sub-section (1). (5) Where an order granting approval is passed under sub-section (3), the provisions of this Chapter shall apply from the assessment year relevant to the previous year in which the option for tonnage tax scheme is exercised." 9. Section 115VC envisages that a qualifying company owns at least one qualifying ship. This has been enacted with reference to the fact that such qualifying company may operate other qualifying ship by chartering the qualifying ships. We find that the stress is on owing of a qualifying ship and has not been provided that it should fully own a qualifying ship and on partly owning a qualifying ship the assessee will not be a qualifying company. 10. Still furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al then it cannot be held that such approval was granted by making only a preliminary enquiry without satisfying as was the competent authority duty bound to do, without any relevant material. As the said order of the Additional Commissioner of Income-tax is still in force, not set aside by any higher authority in our considered opinion it cannot be disputed by the Revenue that the assessee company was not a qualifying company or the company which was not eligible for tonnage tax scheme. 14. We find that the Learned Commissioner of Income-tax has brought no material on record after going through the agreement dated 25-9-2001 referred in show cause notice that the assessee company has chartered out on bare boat charter cum demise terms or on bare boat charter terms for a period exceeding 3 years to any other person. Thus we do not find any material on the basis of which it has been held that the Learned Assessing Officer has not examined the fact that the assessee company was engaged in operation of the ship during the year or not. In our considered opinion, provision of section 263 cannot be resorted for making a roving or fishing enquiry without bringing on record some material ..... X X X X Extracts X X X X X X X X Extracts X X X X
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