THE COMMISSIONER OF INCOME TAX vs. SOUTH INDIA CORPORATION LTD.

Appeal filed by the assessee before the Commissioner was allowed vide Annexure B order.

The Revenue preferred appeal before the Tribunal and vide Annexure C order dated 31.07.2008 the order of the Commissioner was confirmed. That order is impugned before us.

The following questions of law arise for consideration: “1.Whether, on the facts and in the circumstances of the case and on an interpretation of section 33AC of the Income Tax Act, the Commissioner of Income Tax (Appeals) is right in law in holding “what the section requires is that an assessee should not be a Fly-by-night operator to acquire a ship only with the intention of claiming a deduction “(at the end of para 2 of his order) and is not the affirmation of the same by the Tribunal the ultimate in perversity ?

Whether, on the facts and in the circumstances of the case does the assessee qualify for deduction under Section 33AC of the Income Tax Act ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in finding that “Therefore, the assessee qualifies for section 33AC deduction” and is not the finding unsupported by materials, without independent consideration, perverse and whimsical ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in sustaining the order of the Commissioner of Income Tax (Appeals) allowing depreciation on cost of fees paid to Registrar of Companies as no new asset eligible for depreciation had come into existence ?

Whether, on the facts and in the circumstances of the case and also in view of the fact that the assessee is only doing the business of handling and transportation and not doing the integrated businesses of “handling, storage and transportation” is not the assessee precluded from claiming deduction under section 80-1B in view of Section 80-1B(IIA) ?

Whether, on the facts and in the circumstances of the case and since the assessee is only doing the integrated business of handling and transportation and in view of Sec.80-1B(IIA) the assessee is entitled to claim deduction under Sec.80(1B) of the Income Tax Act ?”

The impugned order is challenged by the Revenue first, for the reason that deduction under Section 33AC was allowed. The appellant contends that for claiming deduction under the said provision, the assessee should be a Government company or a public company with the main object of carrying on the business of operation of ships. There is nothing to substantiate that the assessee company was formed with the main object of carrying on the business of shipping so as to claim that deduction.

It is also pointed out that the Tribunal has faulted in allowing depreciation on the cost of fee paid to the Registrar of Companies as no new assets have come into existence. It is also submitted that the Tribunal failed to notice that the assessee is not eligible to deduction as per Section 80-IB as it is not doing the integrated business of handling storage and transportation, but only handling and transportation. That apart, no separate books of accounts were maintained by the assessee and no report in Form No.10CCB of the undertaking were filed, which are also conditions prescribed for allowing deduction under the said provision.

Per contra, the assessee would support the impugned order and contend that the company has four ships acquired between 1995-96 to 2001-02. The Memorandum of Association would also indicate that shipping is an activity in which the company is involved.

We heard Sri. Jose Joseph, learned Standing Counsel, Government of India (Taxes) and Sri. S. Sridhar, learned Counsel appearing for the assessee.

The Memorandum of Association of the company is one of the documents relied on by the assessee to indicate that the company is involved in shipping business. What is required under the Section is that shipping ought to be the main object of the Company.

The requirement under the Section would be satisfied only if the assessee could prove that the shipping business is the main activity of the company. It may be true that the profits and income derived by the company includes income from ships as well. But that is not sufficient for it to come within the purview of the provision to claim deduction under Section 33AC of the Act. Shipping is only one of the objects of the company and not the main object at any rate. The first ship was acquired by the company only in 1995. Had the main object of the company been shipping, it would not have waited for so long to acquire a ship. Clearing and forwarding or being stevedores, is not shipping. They are only activities related to shipping.

Earning profit from the shipping business alone is not sufficient. In order to qualify for deduction under Section 33AC, the assessee has to prove that the main object of the assessee was carrying on business of operation of ships. Undoubtedly, shipping is one of the objects of the company, which includes various types of business as mentioned in the Memorandum and Articles of Association. But that would not suffice unless there is proof regarding the major income of the company being derived from shipping business to conclude that the assessee is a company with the main object of doing the business of shipping. The AO has pointed out that the revenue earning from shipping is only 14% of the total revenue. We cannot agree with the appellate authority and the Tribunal on the point that any profit associated with the shipping business can also be termed as “profits derived from shipping”. The assessee has no case that the company was set up with the main object of carrying on business of shipping.

The next ground is the deduction claimed under Section 80-IB. The claim was disallowed by the AO on the ground that there is no storage activity carried out by the assessee. The assessee had produced copies of the invoices relating to Food Corporation of India (FCI), which was relied upon by the appellate authority and the Tribunal. That according to the Tribunal indicates that the contract was not solely for handling food grains, but for storing the food grains as directed by the FCI and that no rebuttal evidence is forthcoming. It is pointed out that the contract with the FCI not only relates to handling food grains, but also storing food grains. On facts, the appellate authority as well as the Tribunal have concluded that the claim allowed under Section 10-IB of the Act is sustainable. We find no reason to interfere with that finding.

Regarding allowing of depreciation on the cost of fees paid to the Registrar of Companies also is a question based on facts, which has been answered in favour of the assessee by the appellate authority as well as the Tribunal.

In the result, while setting aside the deductions allowed under Section 33CA; the rest of the impugned order is confirmed. For the foregoing reasons, the appeal is allowed in part. No order as to costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE