ITO 5(1)(3), MUMBAI vs. CGU LOGISTIC LTD, MUMBAI

आदेश / O R D E R Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order

dated 28/08/2014 of the Ld. First Appellate Authority,

Mumbai. The only ground raised in the present appeal in

holding that the provisions of section 43A is applicable in

the case when the assessee has opted the tonnage tax

scheme and offered its income u/s 115VG of the Income

Tax Act, 1961 (hereinafter the Act) on the basis of tonnage

of qualifying ship and further erred in holding that the

assessee had offered Foreign Exchange Fluctuation Gain

under the TT Scheme and is covered under the provisions

of chapter XIIG of the Act, whereas, Foreign Exchange

Fluctuation Gain is not covered under the preview of

tonnage tax activities mentioned in section 115V-I-1(2) and

115V-1(5) read with Rule-11 of I.T. Rules.

Ganesh Bare, defended the conclusion drawn in

assessment order, whereas, the ld. counsel for the

assessee, Shri Kishor Chaudhari, defended the impugned

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order by claiming that the impugned issue is covered by the

decision of the Tribunal in CGU Logistic Ltd. vs ITO (ITA

No.1053/Mum/2014) Assessment year 2010-11, order

dated 16/05/2014. This factual matrix was not

controverted by ld. DR.

2.1. We have considered the rival submissions and

perused the material available on record. In view of the

above assertion, we are reproducing hereunder the relevant

portion from the aforesaid order of the Tribunal, dated

16/05/2014 for ready reference:-

“Challenging the order dated 09.12.2013 of the CIT(A)-1,Mumbai assessee-company has raised following grounds of appeal: Under-mentioned grounds of appeal are taken without prejudice to one another 1.The AO & CIT (A) have erred in adding the Forex gain of Rs the total income of the assessee. 2.The AO & CIT (A) have erred in concluding that Section 43A does not apply to the assessee and that the amount of Rs 7,53,03,000 is not a capital receipt. 3.The AO & CIT (A) have erred in ignoring the direct nexus of the forex gain with the business of the assessee and taxing the same under the head “ Income from Other Sources”. 4.The AO & CIT (A) have failed to appreciate that Accounting Standard AS 11 mandated that the notional forex gain be accrued as income for the relevant assessment year and that the accounting treatment would have no impact on the income as computed under the Income Tax Act. 5.The AO & CIT (A) have failed to appreciate that the forex gain on revenue account of Rs 23,11,470 is already included in the tonnage

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income of the assessee and any addition for the same is not warranted. 6.The CIT (Appeal) factually erred in observing that the ECB loan has remained unutilized and that no ship has been purchased. 7. The AO & CIT (A) have erred in ignoring the following cases cited by the assessee: CIT vs Woodword Governor India P. Ltd (312 ITR 254) M/S Gati Ltd vs A CIT 2013 (1) TMI 621 Dredging Corporation of India Ltd vs A CIT 2011(7) TMI 584

During the course of hearing before us, Authorised Representative (AR) did not press grounds no. 1,3,4,6 & 6. Therefore, these five grounds stand dismissed as not pressed.

2.Assessee-company,engaged in the business of Shipping, filed its return of income on 08.10. 2010,declaring total income at Rs 10.63 lakhs.AO finalised the assessment u/s.143(3) of the Act on 25.03.2013 determining the total income of the assessee at Rs.7.86 Crores. 3.First effective Ground of appeal(GOA-no.2)is about foreign exchange fluctuation gain(FEFG). Ground no.5 is also inter connected with the ground no.2.Both the additions are related to gain on exchange fluctuation. Out of Rs.7.76 Cores Rs.7.53 Crores and Rs.23.11 lakhs are on account of capital account and revenue account respectively. We would deal both the items together.

3.1.During the assessment proceedings, Assessing Officer (AO) found that the assessee had shown foreign exchange gain of Rs.7,76,14,470/- , that in computation income it had shown only interest income under the head ‘Income from Others Sources’ that it had worked book loss at Rs. 59.64 lakhs.AO was of the opinion that the foreign exchange gain credited to the Profit & Loss A/c was nothing to do with shipping business carried out by the assessee, that the gain approved to the assessee was to be taxed u/s. 56(1) of the Act as ‘Income from Other Sources’. He issued a show cause notice to the assessee and asked it as to why the FEFG amounting to Rs.7.76 crores should not be taxed as ‘Income from Other Sources’ since the said gain was not earned from shipping business. Assessee vide its letter dated 25.03.2013 filed detailed reply in this regard. After considering the submission of the

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assessee, AO held that assessee had opted in Tonnage tax scheme, that the FEFG did not form part of capital asset, that it was not in nature of capital receipt, that the assessee had claimed depreciation to WDV method, that provisions of section 43A were not applicable as the assessee had opted for Tonnage tax ,that FEFG was similar to the interest on deposits. Finally, he made an addition of Rs. 7.76 crores to the income of the assessee.

4.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).It was submitted that in the Profit & Loss A/c assessee had shown a notional/ unrealised gain of Rs.7.76 crores on FEFG, that the gain had arising due to revaluation of ECB Loan taken by it for the purpose of fixed assets, that the FEFG consisted of capital account(Rs. 7.53 Crores and on balance of ECB loan taken for fixed assets)and on revenue account (Rs. 23,11,470/-)on other balances, that the accounting treatment given by the assessee was as per the accounting standard(AS)-11,that amount in dispute on account of ECB loan was a capital receipt and was not liable to tax, that Rs. 23.11 lakhs were included for the Tonnage tax income that was offered to tax and could not be considered again, that total amount of Rs. 7.76 crores should not be taxed under the head ‘Income from Other Sources’, that ECB loan was used by the assessee for purchase of fixed asset, that as per the law such gain was not liable to tax, that it was to be adjusted against cost of asset, that section 43A was amended w.e.f. 01.04.2003, that as per the amended provisions gain or loss on foreign exchange fluctuation on capital account had to be considered on realisation basis and not on accrual basis, that amount in question could not be treated as ‘Income from other sources’ that it was related to business.

5.After considering the submission of the assessee and the assessment order,FAA held that the assessee had credited Rs. 7.76 crores towards FEFG, that same had not been included for the computation of income for the year under consideration, that the assessee was making repayment of half yearly basis, that accrual were arising of the regular business of shipping of the assessee, that the nature of accrual was admittedly on account of fluctuation in exchange rate which called for computation under the head ‘income from other sources’, that the decision delivered by the Hon’ble Supreme Court in the case of

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Woodward Governor India P. Ltd.(223 CTR 1) was not applicable to the issues before him. Referring to the decision Autokest Ltd. 116 Taxmann, he held that accretions to the amount of loan either by way of interest or due to foreign currency rate of fluctuation were similar on account of such loan remaining unutilised and earning income on its own account,that such gain were taxable separately as revenue receipt/income from other sources u/s. 56 of the Act.

6.Before us, Authorised Representative (AR) submitted that provisions of section 43A of the Act were applicable with regard to the amount in question, that Rs. 7,53,03,000/- was a capital receipt and not liable to tax, that Rs. 23,11,470/- was included in Tonnage tax income so it could not be considered for taxation again, that FEFG pertained to repayment of ECB loan used for purchase of fixed asset, that the assessee had purchased a ship, that the ship was sold during the AY 2013-14,that at time of disposal of ship FEFG/foreign exchange fluctuation loss was considered before arriving at the taxable income, that FAA had ignored the provisions of amended section 43A,that foreign exchange gain/loss arising in the previous years had been accepted by the department as a part of business income, that there was no reason to treat the same differently in the year under consideration. He referred to pages no.71, 6, 4 of the paper book. He also referred to the letter dated 25.03.2013 addressed to the AO. He filed calculation of short term capital loss and depreciation as per the Act for the year ending on 31.03.2013.He relied upon the decisions of Gati Ltd. (2013(1)TMI621)of Hyderabad Bench of ITAT and Dredging Corporation of India Ltd. 2011(7)TMI 584.DR supported the order of the FAA.

7.We have heard the rival submissions and perused the material before us. The undisputed facts of the case under consideration are that the assessee had taken a loan for acquiring a ship, that part payment for purchasing the ship was made from its own sources, that the assessee was repaying the loan as per the agreement, that the AO as well as the FAA treated the FEFG/loss differently, that they were of the opinion that gains on fluctuation of foreign exchange was similar to the interest receipt. In our opinion, there is basic difference between interest receipts and FEFG. Section 43A of the Act, specifically deals with the change in the rate of exchange of currency.

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8.We find that section 43A of the Act,was inserted by the Finance (No.2)Act, 1967,with effect from 01.4.1967.The section mandates that if at any time there is a change in the rate of exchange, it may be given effect by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. The section was amended w.e.f. 01.04.2003.According to the amended section, any addition to and deduction from the actual cost of a capital asset resulting from exchange fluctuation shall be only at the time of actual discharge of the liability and not to be adjusted with reference to the amount payable and outstanding at the end of the each year on the basis of the mercantile system of accounting. It has further been provided that the method of accountancy being followed by the assessee would not be relevant. Any adjustment which has already been allowed as a deduction prior to April 1, 2003, shall not be allowed again on account of exchange fluctuation at the time of actual payment. Hon’ble Supreme Court in Woodward Governor India P. Ltd.(supra)has held that the amendment to Sec.43A of the Act, were applicable prospectively. Here, we would like to reproduce the amended provisions and same read as under:

“43A.Special provisions consequential to changes in rate of exchange of currency.—Notwithstanding anything contained in any other provision of this Act,where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset)at the time of making payment– (a)towards the whole or a part of the cost of the asset ; or (b)towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of

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accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from– X X X X X and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid .. 9.From the available facts it is clear the matter is covered by clause (b) of the section which deals with the repayment of the whole or a part of the moneys borrowed. As stated earlier, a ship was purchased by the assessee raising loan in foreign exchange and it was repaying loan every year. It was a chance that in year under appeal there was gain on account of fluctuation in foreign exchange. In our opinion the amended provision take care of such FEFG/loss. As per the provisions of the said section at the time of disposal of the asset loss/gain on fluctuation of foreign exchange has to be considered and not otherwise. In the case under consideration in the two earlier years when the assessee had suffered the loss on account of fluctuation, AO had not allowed such losses. But, in the year under appeal when there was a gain because of the fluctuation, AO decided to tax it. He has not given any reason for deviating from the path taken by him in the earlier years. When the facts and circumstances of the amounts pertaining to FECG/loss for the earlier years and the year and consideration were same there was no justification in treating them differently. If the loss suffered by the assessee on fluctuation was not considered by the AO for arriving at the taxable income in those years,then he should have not taxed the gain on fluctuation. AO.s, as representatives of State, are expected to collect due taxes only. Therefore treating positive and negative incomes of similar kind of transaction of an assessee at different yard sticks would go against the basic principle of recovery of ‘due’ taxes.In these circums -tances,we are unable to endorse the view of the FAA that Rs.7.53 Crores,arising out of the fluctuation of exchange, should be taxed under the head business income. As far as addition of Rs.23.11 lakhs is concerned, we would discuss it in the next paragraph.Basic principles of tax jurisprudence prohibit double taxation of any income one hand and on the other does not allow double deduction. So, considering the facts and circumstances of the matter we are of the opinion that as per the provisions of amended section 43A of the Act, income on FEFG

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(Rs.7.53 Crores) was not taxable in the year under consideration. Therefore, reversing the order of the FAA, we decide ground no.2 in favour of the assessee.

10.Now,we would take up the issue related with the balance amount i.e.Rs.23.11 lakhs. It is not disputed by the AO or the FAA that the amount in dispute had not arisen to revenue account. From the records, it is clear that other dues in foreign exchange resulted in accrual of the said amount. We are of the opinion that same cannot be taxed as FEFG, because the assessee had offered it under the TTS.

10.a.We find that section 115VP deals method and time of opting for TTS,Section 115VQ is about period for which tonnage tax option remains in force. Renewal of TTS is subject matter of section 115VR.Circumstanes and conditions where in tonnage tax scheme cannot be opted are the subject matter of Section 115VS.As per the provisions of section 115VT every assessee has to transfer profits to tonnage tax reserve account at a fix rate and has to utilise it for specific purpose, once he opts of TTS. Companies opting for TTS have to comply with minimum training requirement as required by Section 115VU.Limit for charter in of tonnage has been determined by section 115VV.Maintenance and audit of accounts of the TTS companies is governed by the provisions of section 115VW of the Act, whereas section115VX determines tonnage. Amalgation is subject matter of section 115VY.Next section i.e. Section 15VZB takes care of the tonnage tax companies which are found to be a party to any transaction or arrangement that amounts to an abuse of the scheme. Last section,section115VZC,deals with exclusion from TTS. From the above it is clear that chapter XII-G is a complete code in itself and it provides for non applicability of section 28 to 43C of the Act i.e. chapter IV of the Act,when income is to be computed as per the provisions of the said section. Chapter-XII-G, was introduced by the Finance (No.2)Act,2004,with effect from April 1,2005,and it provides for TTS, which is optional. The Notes on Clauses appended to the Finance (No.2) Bill,2004,referring to clause 28 as regards the introduction of section 115VA specifically states that the provision relates to the computation of profits and gains of the shipping business. Tonnage tax was intended to make the industry

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internationally competitive and also to induce more ships to fly the Indian flag. As the whole of FEFG is covered by the provisions of chapter XII-G of the Act,there is no justification in computing it under a different chapter or section.We find that similar question has been dealt with by the Hyderabad Bench of ITAT in the case of Gati Ltd.(supra) as under:

“We have heard the rival submissions and perused the material available on record. It is not in dispute that the assessee has opted for computation of his income from shipping business under the Tonnage Tax Scheme under Chapter XIIG of the Act. The issue before us is whether the amount of Rs.15,46,428 received on account of foreign exchange fluctuation is to be considered as part of the shipping business and to be taxed under Chapter XIIB of the Act as claimed by the assessee or it should be treated as income from other sources having no nexus with the shipping operation as held by the Commissioner of Income-tax.It is the contention of the assessee that the income of Rs.15,46,428 arose due to the difference in the exchange rate on account of payment of freight arising out of operation of qualifying ships and therefore, it is part of the profit relating to the activity of operating qualifying ships coming within the Tonnage Tax Scheme provided under Chapter XIIG of the Act. S.I15VA.Chapter XIIG of the Act gives an option to the assessee to compute the profits from the business of operating qualifying ships in, accordance with the provisions contained under the said Chapter. From the details of gain/loss on account of foreign exchange fluctuation relating to the activities of operating the qualifying ships for the year under appeal, which are at pages 94 to 111 of the paper- book, it is evident that there is a net credit surplus of Rs.15,46,428. The said list comprises of different items like excess amount paid due to exchange fluctuations for services taken from the service provider in relation to the operation of qualifying ships, excess amount payable due to exchange fluctuations on the outstanding amount payable to service provider, saving in payment due to exchange fluctuations in respect of amounts paid to service provider, saving due to exchange fluctuations in respect of amounts payable to service provider remaining outstanding, freight amounts received or receivable in excess from the customers due to exchange fluctuation in the course of

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operating qualifying ships, freight amounts short received or receivable from the customers due to exchange fluctuation in the course of plying of qualifying ships. Keeping in view the aforesaid items, the observation of the Commissioner of Income-tax that the gain arising from foreign exchange fluctuations do not represent receipt transactions is not correct. In our view, the gain on account of foreign exchange fluctuations is in the course of operating qualifying ships and therefore, part of the profit derived from such business. The Visakhapatnam Bench of the Tribunal in the case of Dredging Corporation of India Ltd. (supra), while dealing with identical issue of gain on account of foreign exchange fluctuations, held, vide order dated 25.7.2011, as follows- “9.3 The gains realized on the foreign exchange fluctuation normally take the colour of the primary transactions. It has been stated that the assessee has entered into certain transactions in foreign currency in connection with its core activity of dredging. Accordingly the exchange difference arising out of such activities should be treated as related to the core activity of dredging. Similar view has been taken by the Bangalore Bench of the ITAT in the case of ITC Hotels V/s. Dy. Commissioner of Income-tax (2007) (107 TTJ(Bang) 955).Accordingly, in our view, the learned CIT(A) is right in holding that the same are related to the activity of operating qualifying ships.” We find the aforesaid order of the Tribunal to be directly covering the issue as in dispute in the present appeal.Therefore, following the said decision, we hold that the amount of Rs.15, 46,428, being the gain on account of foreign exchange fluctuation is related to the activity of operating qualifying ships and therefore, has to be taxed under the Tonnage Tax Scheme as provided under Chapter XIIG of the Act. In this view of the matter, we are no inclined to sustain the impugned order of the Commissioner of Income-tax passed under S.263 of the Act, insofar as it relates to the gain of Rs.15,46,428 on account of foreign exchange fluctuations is concerned.”

Respectfully, following the same we decide ground no.5 in favour of the assessee.

As a result, appeal filed by the assessee stands partly allowed.”

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2.2. We find that the Tribunal in the aforesaid order

dated 16/05/2015 as made an elaborate discussion with

respect to method and time of opting for TTS and section

115VQ is with respect to period for which tonnage tax

option remain enforce. While coming to the conclusion, the

Bench has already relied upon the decision from Hyderabad

Bench of the Tribunal in the case of Gati Ltd. It is also

noted that section 43A of the Act, was inserted by the

Finance (No.2)Act, 1967,with effect from 01.4.1967.The

section mandates that if at any time there is a change in

the rate of exchange, it may be given effect by way of

adjustment of the carrying cost of the fixed assets acquired

in foreign currency. The section was amended w.e.f.

01/04/2003. According to the amended section, any

addition to and deduction from the actual cost of a capital

asset resulting from exchange fluctuation shall be only at

the time of actual discharge of the liability and not to be

adjusted with reference to the amount payable and

outstanding at the end of the each year on the basis of the

mercantile system of accounting. It has further been

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provided that the method of accountancy being followed by

the assessee would not be relevant. Any adjustment which

has already been allowed as a deduction prior to April 1,

2003, shall not be allowed again on account of exchange

fluctuation at the time of actual payment. Hon’ble Supreme

Court in Woodward Governor India P. Ltd.(supra)has held

that the amendment to section 43A of the Act, were

applicable prospectively.

Fluctuation gain amounting to Rs.45,21,546/- taxed as

income from other sources by the Assessing Officer is

concerned, we are of the view that the impugned amount is

not taxable because applicability of the provisions of

section 43A is concerned, considering the factual matrix

that the assessee is taxable on tonnage tax basis and for

Assessment year 2010-11, the issue was considered and

the Tribunal vide order dated 16/05/2014 decided in

favour of the assessee. Since, the facts are identical,

therefore, in the appeal of the Revenue, we find no merit,

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consequently, we affirm the stand of the Ld. Commissioner

of Income Tax (Appeal).

Finally, the appeal of the Revenue is dismissed.

This order was pronounced in the open in the presence

of ld. representatives from both sides at the conclusion of

the hearing on 25/05/2016.

Sd/- Sd/- (Rajendra) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 25/05/2016

f{x~{tÜ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant (Respective assessee) 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai, 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai