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TMI Blog2025 (4) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... hether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in relying on the judicial pronouncement of the Hon'ble Special Bench, Delhi ITAT in the case of Vireet Investments while deleting the addition made by the AO on account of expenses related to exempt income, whose facts are completely different from the present case?" 4. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in reversing the non-tonnage income as tonnage income ignoring the fact that the assessee failed to satisfy the first condition specified in 115VD(a) in order to be a qualifying ship for the purpose of TTS that the ship should be a sea going ship or vessel ?" 5. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in reversing the non-tonnage income as tonnage income ignoring the fact that the assessee has been given preferential treatment under the TTS with a particular purpose in mind which is the promotion of Indian Shipping Industry. If the ship is not put to use for the specified purpose, definitely the same would not become eligible for the preferential treatment?" 6. "Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the denial of Tonnage Tax Benefit by the ld. AO. For the sake of ready reference, appeal for the A.Y.2012-13 is being taken at first. 5. The brief facts are that assessee company is engaged in business of shipping operations since 1994, however, it has been stated that assessee was into this business from the year 1974, The assessee company owns and operates various types of operating platform supply vessels, offshore supply vessels, anchor handling tugs, anchor handling tugs supply vessels, etc. These vessels are owned by the assessee company and are also given on charter for offshore activities ranging. It has been stated that most of the companies were even chartered out to clients (public sector and limited company) for long term tenure. At this point it would be relevant to mention various types of vessels owned and operated by the assessee, which are illustrated in brief here under:- Platform Supply Vessel. The PSV is designed for supplying offshore drilling rigs and production platforms with necessary equipment, stores and drilling consumables. These are typically cement, barite and bentonite transported as dry powders; drill water, oil or water based liquid mud, methanol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed and it continues till date. In all the previous years" assessee's claim under TTS has been allowed and accepted by the department. In support, assessment orders from Assessment Years passed u/s. 143(3), since A.Y.2005-06 has been placed on record before us alongwith different applications in Form No.65, D.G. Shipping certificate certifying the tonnage of the vessels, etc. 7. For the A.Y.2012-13 assessee had declared total income of Rs. 12,52,54,524/- under normal provisions and book profit of Rs. 15,23,08,685/-. The assessment order u/s. 143(3) was passed accepting the returned income and TTS benefit. Thereafter, a search and seizure operation u/s.132 was conducted in the case of the assessee and accordingly, notice u/s.153A was issued on 29/12/2018. In the return of income, income which was assessed u/s 143(3) was declared as the return in response to notice u/s.153A. However, in this case assessee has preferred a writ petition before the Hon'ble High Court against the issuance of notice u/s.153A and Hon"ble High Court vide its order dated 29/10/2021 set aside the notice and directed the ld. AO to issue a fresh notice u/s.153A and in pursuance of such direction, fresh notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same should have a valid certificate. That implies, the primary condition is that the ship should be a sea going vessel and to say that the same is to be ignored just because it satisfied the second condition would be fallacious argument. To take the argument further, any ship or vessel would be eligible for the tonnage tax scheme if it is certified and is not falling in the negative list. That would need an understanding whether there is any difference between "ship/vessel" and "seagoing ship/vessel". The guidance is provided by the General Clauses act which defines "ship" and 'vessel". "Ship" has been defined in section 3(55) of the General Clauses act, 1897 as every description vessel used for navigation and not exclusively propelled by oars whereas "vessel" has been defined in section 3(63) of the same Act to include any ship/boat/vessel used for navigation. That implies, navigation anywhere may be a feature of the ship but to be 'seagoing', it has to satisfy certain additional qualifications and that is "proceeding beyond the smooth/partially smooth waters" or proceeding beyond the port limits. And seized evidence conclusively establishes that the assessee doesn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, there can be no verification of claims of deduction or exemption by the income tax department if the technical certifications are available from respective authorities which is not only actually incorrect but also legally untenable. The certifications are essential documents is carry out certain activities and sometimes constitute prima facie proof. But whether a tax benefit is being claimed unduly is for the department to verify and therefore, we do have the verifications and the remedial provisions including cancellation/ disallowance of claim for the deductions and exemptions in the IT Act itself. To say that if the Charity Commissioner has not found faults with a Charitable Trust, the same cannot be denied exemption even if the actual activities are found to be in contravention of Sec. 12A of the Act would be absurd. To say that the project is approved by the local authority is enough to prove that the assessee is eligible for claim u/s 801B of the Act, would also be incorrect. The claim of the assessee falls in this league as it says that if MSA has granted registration, the same is the final word for TTS. 5.2.2.3. The assessee has further tried to argue that the sec 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip", the same is defined in S. 115V(1) as "seagoing ship means a ship if it is certified as such by the competent authority of any country After a careful consideration of the definition, I find that all the conditions laid down in S.115VD (a), (b), (c) stand fulfilled. There is no finding in the assessment order that the vessels operated by the appellant are of less than 15 net tonnage or that they are not "seagoing ship" as per the definition laid down in the Act. The contentions that vessels should be proceeding beyond specified limits and not merely capable of proceeding beyond or that they should be carrying any cargo or passengers do not emanate from the definitions. In fact, S.115VD clearly lays down certain exclusions. According to the appellant, "the ships are involved in the movement of men and materials from shore to marine related activities. The vessels of the appellant do not fall under any of the exclusions. It is also noted that dredgers were initially specifically excluded under TTS but included under TTS w.e.f. AY 2006-07. Dredgers are most certainly not Involved in carrying passengers or cargo. Thus, this supports the viewpoint that carriage of passengers or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y.1995-96 to A.Y. 2004-05; and thereafter, from A.Y.2005-06 onwards assessee was granted benefit of Tonnage Tax Scheme after considering the Form No.65, certificate of Registration under the Merchant Shipping Act, 1958, certificate of international tonnage issued under the provision of convention on the Tonnage Measurement of Ships, 1969, and other statutory requirements and compliances. It is after examining these details, order u/s.115VP of the Act has been passed wherein assessee's ships were held to be "qualifying ships" and option for exercising Tonnage Tax Scheme u/s.115VP was approved. The approval u/s.115VP still continues which makes assessee eligible for TTS. It is also not in dispute that assessee ships are registered and has obtained license under Merchant Shipping Act 1958 by Director General Shipping wherein assessee's ships/ vessels have been certified as "qualifying ship". Apart from certificate from DG shipping, various other necessary approvals have been obtained including from the Income Tax department from time to time. The main case of the ld. AO is that the first condition specified u/s.115VD(a) that same should be "sea going ship" or vessel and the second co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered outside India, the license has to be issued by the Director General of ship; and * lastly, it should have a valid certificate in respect of such ship indicating its net tonnage in force, that is, the sea going ship should be certified by the competent authority about the tonnage. The "seagoing ship" has been defined, a ship if it is certified as such by the competent authority. If the ship or vessel is certified by the competent authority then it is entitled to qualify under TTS. 15. Then there is a negative list which has been provided under the head "but does not include".................. Prior to 01/04/2006, the "dredgers" were also excluded from the negative list which inter alia means that "dredger" now qualifies as a ship if it is a sea going vessel of 15 net tonnage or more and other conditions are also satisfied. This amendment itself dislodges the logic of the AO that shipping activity is only confined to carrying cargo and passengers. Ergo, if three conditions mentioned in Section 115VD are satisfied, then it is a "qualifying ship" and any income from qualifying ship would be entitled for computation of tonnage income. In the later part we will deal with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the vessels had a valid certificate from the DG shipping. The activities of the assessee include hiring income which was mainly time charter of vessels given on hire to various entities. One important fact brought on record and also been discussed by the Ld. CIT(A) that assessee has qualified its income from shipping activity, partly under tonnage tax scheme and partly under non-tonnage tax scheme which has been duly certified by the auditor as per Enclosure B to Form 66. Nowhere, the assessee"s Form 66 which is a mandatory requirement in terms of Section 115VI (6) has been rejected. Thus, if any income does which does not qualify under section 115VD or any income under section 115VI assessee has offered as normal business income and no TTS benefit has been taken. Apart from that assessee's ships are involved in the movement of men and materials from the shore to marine related activities and it does not mean that it has not deployed the vessels in the sea waters. Further, once in all the earlier years assessee has been given the benefit of tonnage tax scheme then, no different view can be taken. In the so called e-mails and other seized documents, the only inference which ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea. Even if it is inland waters of the sea then also how it can be treated if it is not a sea going ship. Thus, when assessee's vessels are certified as sea going ship by the competent authority under the statute and also holds the tonnage certificate and duly certified by the DGA shipping under MSA and also approved by the Income Tax Department, then it cannot be disqualified by the AO on his own reasoning and interpretation. Nowhere the language of the statute gives any such condition or definition as inferred by the AO. AO cannot give a restrictive meaning otherwise provided under the Act. 19. Coming to the definition of relevant shipping income, Section 115VI provides that relevant shipping income of a tonnage tax company means profit from core activities which includes activities from operating qualifying ships and other ship related activities like shipping contracts in respect of earning from pooling arrangements; contracts of affreightment; specific shipping trades, being- (i)on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on board; (ii) slot charters, space charters, joint charters, feeder services, container box leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sum of Rs. 3,27,27,894/-. The ld. CIT(A) has deleted the addition on the ground that assessee has furnished vessel-wise monthly summary of details and the cash expense are negligible which is only to the amount of Rs. 2,30,548/- out of total expenses of Rs. 3,27,27,894/- and none of the expenses have reached the limit of Section 40A(3). 21. After hearing both the parties and on perusal of the material placed on record, it is seen that these expenses incurred towards beverages, snacks, lunch and dinner for the personnel / crew on board of the vessel at high sea round the clock. 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 which has been placed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t eligible to be taxed under TTS and he also noted that ld. AO has made a mistake by including one extra digit in A.Y.2013-14 erroneously. Accordingly, he restricted he disallowance in the following manner:- Particulars Sales promotion & sundry expenses A.Y. 2012-13 A.Y. 2013-14 A.Y. 2014-15 A.Y. 2015-16 A.Y. 2016-17 Disallowance by AO 76,61,552 6,47,79,916 74,14,478 80,40,738 53,45,263 Disallowance confirmed 4,26,954 3,50,796 9,09,722 5,36,582 5,42,737 24. After hearing both the parties and on perusal of the material placed on record it is seen that these expenses mainly comprise of complimentary gifts and presents to business associates, however, no details were given. The 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mandate providing margin deposits. In support of the claim, the assessee had demonstrated the nexus of fund deployed for the business purpose i.e. for acquiring ships/vessels and for placing performance guarantee margin vis a vis each contract with banks and financial institution. The ld. AO has not considered these documents to decide this issue. He further submitted that the margin deposits are integral to part of the core activity of arranging financial resources for operating qualifying ships and they do not constitute an independent source of income but rather an inseparable part of assets deployed for the operation of qualifying ships. Further, without providing the bank guarantees, the charterers would not move ahead with the charter of ships thus impacting the revenue. Since the income of the assessee is chargeable to tax as per tonnage tax scheme, the said presumptive income assumes that all the expenses have been subsumed in the calculation and will have no impact on calculating the taxable income. Therefore, any interest income which can be directly related to interest expenses are to considered after providing the netting off of interest income from interest expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 raised by the assessee is partly allowed. A.Y.2014-15 34. In A.Y.2014-15 in the Revenue's appeal, same three issues have been raised i.e. denial of tonnage tax benefit, disallowance of sales promotion and sundry expenses and victualling expenses. Since all these issues have been decided in favour of the assessee in the appeal for A.Y.2012-13, the appeals raised by the Revenue are dismissed. 35. In so far as assessee's appeal in ground No.1 relates to validity of assessment u/s.153A, the same has been dismissed as infructuous and in so far as sales promotion and sundry expenses, the same is dismissed in view of our finding given in A.Y.2012-13. 36. Ground No.3 relates to interest on FD margin not allowed as tonnage income, same has been decided against assessee however, in view of our direction netting off the interest expenses from the interest income is to be allowed. Accordingly, ground No.3 is partly allowed. 37. In the result, appeal of the Revenue is dismissed and appeal of the assessee is partly allowed. A.Y.2015-16 38. In A.Y.2015-16 in the Revenue's appeal same three issues have been raised, i.e., denial of tonnage tax benefit, disallowance of sales promotion and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of GSOPL for the F.Y.2015-16 was also filed. Apart from that further documents were filed like, statutory documents of the assessee, i.e., promising maritime limit, FIRC copy of receipt of funds of USD 2 million for the purpose of remittance alongwith bank statement crediting the said money, acknowledged copy of form, Overseas Direct Investment (ODI) part III comprises with the authorised dealer i.e. Standard Chartered Bank for submission to the RBI alongwith financial statement as on 31/03/2016 seeking reduction in number of shares have been filed. The assessee in the original return of income has duly shown said reduction of share capital in the capital gain schedule as the assessee company was of the view that reduction in share capital does not entitle any income by way of dividend and more particularly deemed dividend. Thereafter, the assessee company after seeking opinion from legal counsel to see appropriateness of the position taken in the original return of income decided to offer Rs. 1,02,48,576/- as "income from other sources" as dividend income in order to avoid any litigation with the Income Tax Department. The second impact was taken in the capital gain schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as raised the grounds pertaining denial of tonnage tax benefit and victualling expenses which has been decided against Revenue in the earlier appeals and accordingly, this issue is decided against the Revenue. 50. Ground No.2 relates to deemed dividend u/s.2(22)d wherein Revenue has challenged that ld. CIT(A) erred in restricting the addition on account of deemed dividend u/s.2(22)d of the Act from Rs. 14,29,55,824/- to Rs. 1,32,00,000/- 51. The brief facts qua the issue are that assessee is 100% shareholder of Underwater Services Company Ltd. The assessee transferred the property / office premises to USCL for a consideration of Rs. 30 Crores and the stamp duty value of the property was Rs. 15,70,44,176/-. The ld. AO did not accept the valuation and taxed the differential amount of Rs. 14,29,55,824/- u/s.2(22)d. The reasoning given by the ld. AO is as under:- "From the reply filed by the assessee it is seen that at the time of agreement, M/s Samson Maritime Limited, was in requirement of fund for its business purpose, whereas its subsidiary Company viz., Underwater Services Co Ltd, had sufficient fund by way of reserve profit. If the USCL had transferred the fund to SML by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the property, verification of documents etc., Since, there was no specific reason as to how the price of Rs. 30 Crores was arrived, he therefore held that only difference of Rs. 1.32 Crores can be added, i.e., to the extent value of the property has been ascertained by the Valuer at Rs. 28.68 Crores, accordingly same should be taxable u/s.2(22)d as against the addition of Rs. 14,29,55,824/- made by the AO. Now for the balance amount of Rs. 1,32,00,000/- assessee is in appeal. 54. After considering the relevant facts as discussed in the impugned order and submissions made by the parties, it is seen that during the relevant assessment year assessee had sold commercial property to subsidiary company USCL. Earlier assessee has purchased the same property for Rs. 23 Crores whereas stamp duty value was Rs. 13 Crores. This property has again been sold to its subsidiary company in A.Y.2017-18 at Rs. 30 Crores whereas the stamp duty value of Rs. 15,70,42,176/-. Thus, the market value of the property even at the time of purchase and sale was far more than the stamp duty value. Assessee has got the valuation done by a Registered Valuer who has valued the property at Rs. 28,68,00,000/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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