HIND OFFSHORE P.LTD,MUMBAI vs. DCIT 5(1)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D” MUMBAI

BEFORE SHRI AMARJIT SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER)

ITA No. 3408/MUM/2016 Assessment Year: 2009-10

Hind Offshore Pvt. Ltd., DCIT-5(1)(2), Mumbai. No 1-C, Gr Floor, Wakefield Vs. House, NarottamMorarji Road, Ballard Estate, Mumbai-400001 PAN No. AAACK0362N Appellant Respondent

Assessee by : Mr. Amar Gahlot & Ms. Neha Sharma, ARs Revenue by : Mrs. Jothilakshmi Nayak, Sr. DR Date of Hearing : 19/12/2019 Date of pronouncement : 16/03/2020

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-10, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) r.w.s. 147 of the Income Tax Act 1961, (the ‘Act’).

2 ITA No. 3408/Mum/2016.

1) The learned CIT (A) erred in confirming the reopening of the completed assessment u/s 148 by the AO, as the AO had no jurisdiction to issue such notice after the relevant matter of allocation of other income had been duly considered, examined in detail & thereafter accepted by the then AO while completing the assessment u/s 143(3) on 28.12.2011. The fact that the AO had then examined and applied her mind to the computation of tonnage income and allocation of 36.4403% of other income towards exempt tonnage income is clear from perusal of the response of the appellant to notice u/s 142(1) dt. 15/12/2011 issued prior to completion of the original assessment. a The learned CIT (A) erred in observing that : "This point was never a matter of discussion during the course of original assessment proceedings" despite the fact that it was specifically brought to his notice during Appellate proceedings that the assessee has submitted the relevant information in the form of a statement in response to Notice u/s 142(1) dated 15.122011 issued by the AO. b The learned CIT(A) erred in reaching the conclusion that the issue of allocation of other income was never a matter of discussion during the course of the original assessment proceedings despite being made aware of the computation of income by the AO herself in the assessment order u/s 143(3) dt.28/12/2011 in which she has specifically considered and included the exempt tonnage income at the figure of Rs.21,57,22,468/-, which is computed as per the statement filed before the AO in response to notice u/s142(1) dt. 15/12/2011. This computation by itself shows and establishes that the AO has considered and applied her mind to the issue of allocation of other income of Rs.5,03,07,943/-. c The learned CIT(A) erred in not taking note of the fact that the AO erred in issuing notice u/s 148 despite all the relevant material having been submitted by the Appellant during the assessment proceedings, and which were duly considered by the AO. d The learned CIT(A) erred in not taking note of the fact that the AO erred in issuing notice u/s 148 without bringing into the records any further/additional

3 ITA No. 3408/Mum/2016.

or new tangible evidence to show that income has escaped assessment. Thus the learned CIT(A) failed to note that the reassessment proceedings have been initiated u/s 148 purely on the basis of ‘change of opinion' of the AO. e The learned CIT (A) erred in not taking note of the fact that a plain reading of the reasons recorded for issue of Notice u/s 148 itself shows that the AO has referred only to the material available on record, submitted along with the return of income and during the course of assessment proceedings. Thus the AO has issued notice u/s 148 on precisely the same material, information and account statements available before the completion of the assessment u/s 143(3) and which had already been considered by his predecessor. f The learned CIT (A) erred in not taking note of the fact that all relevant details were filed by the Appellant during the course of the original scrutiny assessment proceedings and therefore this is a case where the impugned material was explicitly available to the AO who thereafter accepted the claim of the appellant after due application of mind, and further, that there has been no default on the part of the assessee in furnishing all the relevant material/information. 2) The learned CIT(A) erred in confirming the stand of the AO that the other incomes amounting to Rs.5,03,07,943/- are not derived either from the core or incidental activities of the Appellant, and consequently erred in holding that the proportionate amount of Rs.1,83,32,362/-cannot be allocated u/s 115VI(1) towards exempt Tonnage Income. (a) The learned CIT(A) erred in not appreciating the fact that an amount of Rs.3,75,65,113/-, being part of the gross amount of other income of Rs.5,03,07,943/-, comprised of 'Exchange Rate Difference' on Foreign Currency Term Loans obtained for acquisition of ships, and therefore represented an item of income derived from the core activities of shipping of the Appellant company. (b) The Learned CIT(A) erred in not appreciating the fact that an amount of Rs.20,32,448/-, being part of the gross amount of other income of Rs.5,03,07,943/-, comprised of “Bank Interest" on FDRs compulsorily deposited in banks for obtaining Bank Guarantees submitted to ONGC as Performance Guarantee, Bid

4 ITA No. 3408/Mum/2016.

Bond Guarantee, etc. for tendering the appellant’s ships on hire to ONGC Ltd. Thus the interest income is derived from FDRs which had to be compulsorily obtained for earning the charter hire receipts from the conduct of shipping activities by the Appellant. (c) The learned CIT(A) erred in not appreciating the fact that an amount of Rs.29,74,116/-, being part of the gross amount of other income of Rs.5,03,07,943/-, comprised of 'Insurance Claims' on vessels of the Appellant from which shipping income was earned. Thus the income by way of insurance claims was derived directly from the core activities of operations of ships. (d) The learned CIT(A) erred in not appreciating the fact that an amount of Rs.60,68,210/-, being part of the gross amount of other income of Rs.5,03,07,943/-, comprised of 'Sundry Cr/Dr. Balances written off’ relating to creditors/debtors who were basically vendors of the appellants and who provided goods & services for conduct of the core business of shipping of the appellant. Thus the income by way of sundry balances written off is derived directly from the core activities of shipping of the appellant. 3) The learned CIT(A) erred in rejecting the appellants claim for considering the return of income filed in response to the notice u/s 148, in which the appellant has revised the originally returned income and claimed the 'Exchange Rate Difference' of Rs.3,75,62,113/-as capital expenditure. (a) The learned CIT(A) failed to appreciate that the exchange rate difference of Rs.3,75,62,113/-,claimed as capital expenditure in the revised return, was in fact the very item of income, part of which was now being alleged to have escaped taxation, and in respect of which the AO has issued the notice u/s 148. The learned CIT(A) ought to have held that since the subject escaped income was the very income for which the appellant was claiming an alternate relief in the revised return filed in response to notice u/s 148, the claim could not have been rejected outright by the AO. (b) The learned CIT(A) failed to appreciate that the claim of the appellant made in the revised return filed in response to notice u/s 148 was in fact not only relatable to

5 ITA No. 3408/Mum/2016. the item of income sought to be taxed as escaped income by the AO, but in fact was the very same item of income, and therefore the claim of the appellant ought to have been dealt with on merits by the AO.

Hire Charges income Amount Percentage of total income

Income from qualifying ships Rs.36,79,00,741 36.44%

Income from non-qualifying ships Rs.64,16,97,974 63.55%

Total Rs.1,00,95,98,715

For the year under consideration, the total receipts earned by the assessee, besides the hire charges amounted to Rs.5,03,07,945/- which is attributable to qualifying as well as non-qualifying ships as shown below:

6 ITA No. 3408/Mum/2016.

Nature of other Qualifying ships Non-qualifying ships Total (Rs.) income (36.44%) (Rs.) (63.55%) (Rs.) Difference in forex 1,36,87,744 2,38,74,369 3,92,29,423

Interest on deposits 7,40,624 12,91,824 20,32,448 Writing back sundry 22,11,274 38,56,936 60,68,210 creditors and debtors

Insurance claims 10,83,777 18,90,339 29,74,116 Dividend received and 1,365 2,381 3,746 Ors.

Total 1,83,32,363 3,19,75,582 5,03,07,943

The ground for reopening, as mentioned earlier, was that the amount of Rs.1,83,32,363/- claimed as other income as part of relevant shipping income from qualifying ships is not derived from core or incidental activities. In reply to the reassessment notice, the assessee besides objecting to the same also made a claim of refund of Rs.81,14,935/- by filing a revised return, being tax paid on account of capital receipt in the form of gains of forex.

The reassessment was completed vide order dated 29.11.2014 by the AO and the total income was determined at Rs.36,20,96,330/- by disallowing Rs.1,83,32,363/- as exempt income.

It is recorded by the AO that in response to notice u/s 148, the assessee filed the revised return on 25.04.2014 and reduced the total taxable income from Rs.30,19,62,010/- to Rs.27,80,640/- and claimed a refund of Rs.1,10,62,830/-. In response to a query raised by the AO to explain the reduction in income to the extent of Rs.2,38,74,370/-, the assessee filed a reply vide letter dated 20.11.2014 explaining that the amount of Rs.3,75,62,113/- is shown under other income, as this is the exchange gain on

7 ITA No. 3408/Mum/2016. the repayment/closure of loans pertaining the vessels. Further it was stated that the amount considered under tonnage tax is Rs.1,36,87,634/- ; amount included in the taxable income and tax fully paid on Rs.2,38,74,479/- ; therefore, refund is due to the company as tax is not payable on the above amount of Rs.2,38,74,479/- due to being capital receipt. Further, it was stated before the AO that the assessee has filed revised return claiming refund of Rs.1,10,62,830/-.

However, the AO was not convinced with the above explanation of the assessee for the reason that while computing the non-taxable shipping income u/s 115VI(1), the assessee has taken into consideration an amount of Rs.1,83,32,362/- which represents a portion (0.364403 x 5,03,07,943) of the other income amounting to Rs.5,03,07,943/- credited to the P&L account as shown in “Schedule J”, thereto comprising of interest on FDR and other investments, insurance claim and miscellaneous income etc. In response to a query raised by the AO to explain that the above income is derived either from the core or from the incidental activities as per section 115VI, the assessee filed a reply dated 20.11.2014 stating as under :

“The other income comprising of interest on FDR and other investment, insurance claim and miscellaneous income etc. are derived from the normal business activities carried on in the normal course of business and are core activities of the business. The breakup of the other income as follow:

Exchange rate difference Rs.3,92,29,423/- Bank interest on FDR & other investment Rs.20,32,448/- Insurance claim Rs.29,74,116/- Sundry dr/cr written off Rs.60,68,210/-

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Dividend received Rs.3081/- Other Rs.665/- Total Rs.5,03,07,943/- However, the AO was not convinced with the above explanation of the assessee for the reason that as per the provisions relating to the taxation of shipping companies opting for the tonnage tax scheme, the presumptive income computed u/s 115VG is taxed instead of the relevant shipping income u/s 115VI(1). Further the AO held that the relevant shipping income means profit from the core activities referred to in sub-sections (2) & (5) respectively of section 115VI r.w. Rule 11R of the Income Tax Rules, 1962. Observing that the above other income is not derived either from the core activities or from the incidental activities, the AO made a disallowance of Rs.1,83,32,362/-.

“6.2. I have carefully considered the facts and circumstances of the case and the submissions of the Id. AR. The claim of the appellant is that it has inadvertently claimed the exchange gain which has arisen on the loans taken for acquiring capital asset (vessel). Since the reassessment proceedings are open now by issue of notice under section 148, the appellant has put his claim by filing a revised return in response to notice under section 148 for withdrawing such exchange gain from "other income" as it is not a revenue receipts. The AO has refused to entertain such claim since such claims cannot be entertained during the course of reassessment proceedings as there was no escapement of income. Further it will lead to refund by pushing the income below the returned income. I'm in full agreement with the decision of the AO. Firstly, as the AO has rightly pointed out that during the course

9 ITA No. 3408/Mum/2016. of reassessment proceedings only the issues related to "escapement of income" should be looked into. The claim of the appellant do not fit into escapement of income. Even though such claim could be entertained during the course of regular assessment proceedings under section 143(3) but not during the course of reassessment proceedings, especially when there is no escapement of income from the point of view of the AO. Secondly, it is the satisfaction of the AO which matters for the reassessment proceedings. The claim of a refund by the appellant is not a point of satisfaction of the AO. The reassessment proceedings will start only with the satisfaction of the AO. Since the AO has not satisfied with the claim of the appellant he has rightly denied to entertain the appellant's plea during the course of reassessment proceedings. Thirdly, the facility of reassessment proceedings are exclusively available to the revenue but not to the assessee. The assessee can seek corrections under other proceedings like, filing revised return, filing rectification, filing revision petition et cetera but not under reassessment proceedings.

6.2.1 In view of the above discussion I confirm the disallowance made by the AO. and dismiss the ground raised by the appellant as not maintainable.”

10 ITA No. 3408/Mum/2016. therefore, the allocation towards tonnage income u/s 115VI(1) made at the time of the original assessment was absolutely an order.

It is further stated that one of the specific questions asked by the AO along with notice u/s 142(1) dated 15.12.2011 was “furnish how tonnage and non-tonnage income has been computed?”; another query raised by the AO was “how expenses have been apportioned b/w tonnage and non-tonnage activities?” Thus the Ld. counsel submits that the AO had applied her mind and then apportioned/allocated 36.4403% of the “other income” towards exempt tonnage income u/s 115VI(1) of the Act. It is clarified that in response to the notice u/s 142(1) dated 15.12.2011 issued by the AO, the assessee had filed detailed statements, ledger accounts, certificates etc. vide letter dated 19.12.2011, which included a statement of “calculation of tonnage income for FY 2008-09” which clearly showed the allocation of 36.4403% of “other income” of Rs.5,03,93,795/- towards exempt tonnage income.

On merits, the Ld. counsel submits that the breakup of the items constituting ‘other income’ of Rs.5,03,93,795/- shows that these have been derived from the core activities of ‘shipping’ of the appellant-company and are incidental to the shipping activities and hence part of such income has been rightly allocated towards exempt tonnage income u/s 115VI(1) of the Act.

In the statement of facts filed before the Tribunal, the Ld. counsel submits that on receipt of notice u/s 148 dated 18.03.2014, the assessee realized that it had wrongly offered the entire amount of exchange rate difference of Rs.3,75,65,113/- as income in the books of accounts as well as while computing taxable income under the Act, whereas, the same was eligible for being capitalized u/s 43A of the Act. Since, the exchange rate difference

11 ITA No. 3408/Mum/2016. was the very item of income which was now being alleged by the AO to have escaped taxation, the assessee sought to revise the original income by capitalizing the above amount. Accordingly, in the return filed in response to notice u/s 148, the assessee reduced the returned income.

The Ld. counsel explains that during appellate proceedings before the Ld. CIT(A), it was submitted that even though the return filed in response to notice u/s 148 shows lower income than the originally returned income, the Ld. CIT(A) may give directions to the effect that the assessed income, after giving effect to his order can in no case go below the originally returned income, to which proposition the appellant is fully agreeable to.

It is explained that the AO has rightly reopened the assessment by issuing notice u/s 148 of the Act as the assessee, while computing the non taxable relevant shipping income u/s 115VI(1), had taken into consideration an amount of Rs.1,83,32,362/- which represents a portion of the other income amounting to Rs.5,03,07,943/- credited to the P&L account and as the above income is not derived either from the core or from the incidental activities, the portion thereof should not have been allowed to be forming part of the relevant shipping income. Thus the learned D.R. explains that as the amount of Rs.1,83,32,362/- had escaped assessment within the meaning of section 147, the AO has rightly issued notice u/s 148 of the Act.

12 ITA No. 3408/Mum/2016. Further it is stated that as per the provisions relating to the taxation of shipping companies opting for the tonnage tax scheme, the presumptive income computed u/s 115VG is taxed instead of the relevant shipping income u/s 115VI(1) and the relevant shipping income means profit from the core activities referred to in sub-sections (2) and (5) respectively of section 115VI read with Rule 11R of the Income-tax rules 1962. Explaining that the above income is not derived either from the core activities or from the incidental activities , the learned D.R. submits that the order passed by the learned CIT(A) confirming the addition of Rs.1,83,32,362/- made by the AO be affirmed.

The facts for reopening this year are different from the years in ITA No. 183 & 1971/Mum/2015 relied on by the Ld. counsel and thus distinguishable. In the instant case the AO had completed the assessment u/s 143(3) on 28.12.2011 determining the total income at Rs.34,37,63,970/-. The AO reopened the assessment by issuing notice u/s 148 dated 18.03.2014. We are of the considered view that the AO has rightly issued notice u/s 148 as the assessee, while computing the non taxable relevant shipping income u/s 115VI(1), had taken into consideration an amount of Rs.1,83,32,362/- which represents a portion of the other income amounting to Rs.5,03,07,943/- credited to the P&L account. The notice u/s 148 has been issued by the AO in the instant case, within a period of four years from the end of the relevant assessment year. As the AO formed an opinion that the above income is not derived either from the core or from the incidental activities as envisaged u/s

13 ITA No. 3408/Mum/2016. 115VI, he has rightly issued notice u/s 148 of the Act. Thus, we dismiss the grounds of appeal raised by the assessee against the reopening made by the AO.

However, we find that the gains from exchange rate pertain to the activity of operating the qualifying ships; this is because the loan in foreign currency was obtained to acquire the vessels which were utilized in the core activities of operating ships. Further, the assessee does not carry any other business that involves foreign currency transaction which can be used to claim as source for foreign exchange gain and thus being only involved in activity of operating ships, the foreign exchange gains are in relation to shipping income. Further we find that while total foreign exchange gains amount to Rs.3.92 crores, the same has been appropriated towards gains due to qualifying ships on the basis of 36.44% and hence, such gains amounting to Rs.1.36 crores pertaining to qualifying ships will form part of relevant shipping income and will be exempt.

Section 115VF provides that a tonnage tax company shall offer its tonnage income computed as per the Act for tax and it further gives exemption from tax to the relevant shipping income of such tonnage tax company. The relevant shipping income has been defined in section 115VI of the Act, as profit derived from core activities or incidental activities. While the incidental activities are exhaustive list provided in Rule 11R of the I.T. Rules, the core activities are inter alia activities from operating ships. We find that in the instant case the interest income on fixed deposits with the banks arises because of bank guarantee that the assessee has given to its clients, including Performance guarantees, bid bond guarantees etc. In other words, if the

14 ITA No. 3408/Mum/2016. assessee was not undertaking the business of operating ships, it would not have received the interest on fixed deposits kept as guarantees. Thus, the fixed deposits made in pursuance of guarantee which lead to interest income is directly related to the activity of the assessee of operating ships. Further, it is found that these bank guarantees pertain to qualifying as well as non qualifying ships and in the absence of clear bifurcation between the guarantees, the interest income has to be apportioned at 36.44% to determine the part of the relevant shipping income for the assessee.

The assessee has claimed 36.44% of the total receipt from insurance claim amounting to Rs.29.74 lakhs as exempt income. In the instant case, the sums pertaining to insurance claim are amounts expended for the repair of the vessel parts and regular maintenance of the vessels. These vessels are deployed for the business of the assessee of operating ships. As the insurance claim are directly related to operation of ships, they have to be considered while arriving at the profits of the tonnage tax company under the Act.

It is found that certain expenditure incurred towards repairs and maintenance of vessels and other core activities relating to operation of ships was no longer required to be paid which lead to writing back of the creditors. As it pertains to qualifying as well as non-qualifying ships, the portion pertaining to relevant shipping income had to be appropriated on 36.44% basis. The writing back of sundry creditors or debtors give rise to income arising due to the activity of operating ships and, therefore, the receipts due to writing back has to be considered when determining profits arrived from core activities u/s 115VI of the Act.

15 ITA No. 3408/Mum/2016. As mentioned earlier, the assessee had obtained loan in the foreign currency, the repayment of which lead to accrual of gain due to fluctuation in foreign exchange rate and the loan had been taken by the assessee for acquiring vessels which are its business asset. Hence, the gain being a capital receipt is not chargeable to tax.

7.1 At this moment we refer to the decisions relied on by the Ld. counsel. In CIT vs. Caixa Economica De Goa (1994) 210 ITR 719 (Bom.), it is held that :

“In reassessment proceedings, the assessee cannot reagitate claims already assessed, however, it is open to the assessee to put forward claims for deductions for any expenditure which is relatable to the income which is sought to be assessed as escaped income in the reassessment proceedings. In the instant case, the income in the form of subsidy was paid to the assessee in connection with the assessee’s liability to incur the expenditure of paying interest on the loans which the assessee had taken from the Central Government. Therefore, the expenditure incurred by the assessee in paying the interest on Central Government loans was directly relatable to the subsidy income. Hence, it was open to the assessee to put forward this expenditure and any other expenditure which might be directly connected with the subsidy in the reassessment proceedings though the assessee could not reagitate any other claim which was already considered in the assessment proceedings.” In Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC), it is held that where profit or loss arises to an assessee on account of appreciation or depreciation in value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in business. It further held that if foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Thus the revenue or capital nature of loss or

16 ITA No. 3408/Mum/2016. gain on account of foreign exchange will depend on whether it is held as trading asset or capital/fixed asset.

In TAG Offshore Ltd. vs. ACIT (2014) 49 taxmann.com 209 (Mumbai- Trib.), it is held that foreign exchange gain arising to an assessee engaged in the shipping business arises from shipping activity and cannot be taxed separately.

In Dredging Corporation of India Ltd. vs. ACIT (2011) 13 taxmann.com 37 (Vishakapatnam), it is held that the amount received pursuant to insurance claims is directly relatable to activity of ‘operating qualifying ships’.

In Svitzer Hazira (P) Ltd. vs. DCIT (2017) 60 ITR (T) 69 (Mum), it is held that foreign exchange difference arising out of shipping business will form part of shipping income and for such difference pertaining to qualifying ships, no separate addition was required to be made.

In Shipping Corporation of India vs. ACIT (2011) 133 ITD 290 (Mum), it is held that writing back of credit balances in the books of assessee operating ships is his income from core activity.

In view of the above factual matrix and the ratio laid down in the above decisions, we set aside the order of the Ld. CIT(A) and delete the addition of excess allowance of income from tonnage tax of Rs.1,83,32,362/- made by the AO. We further hold that in view of the ratio laid down in the above decisions, the assessee is entitled to claim of refund, which is subject to its contentions as stated in the ‘ Statement of Facts’ dated 13.05.2016 filed before the Tribunal that “however, during appellate proceedings before the learned CIT(A), it was submitted that even though the return filed in response to

17 ITA No. 3408/Mum/2016. notice u/s 148 shows a lower income than the originally returned income, the learned CIT(A) may give directions to the effect that the assessed income after giving effect to his order can in no case go below the originally returned income, to which proposition the appellant is fully agreeable to” and direct the AO to work it out.

Order pronounced in the open Court on 16/03/2020. Sd/- Sd/- (AMARJIT SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 16/03/2020 Wakode, Sr.P.S.

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai