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Facts
The assessee, engaged in waterways business, filed its return declaring a loss. The AO made two significant additions: Rs. 14.70 crores for ad-hoc disallowance of 50% expenses under Section 37 and Rs. 20.49 crores for alleged excess purchase value of vessels. The CIT(A) partly allowed the appeal, deleting the ad-hoc expense disallowance and setting the purchase value of vessels based on WDV in the Singapore subsidiary's books, leading to a differential depreciation disallowance of Rs. 4,48,113. The Revenue appealed against the CIT(A)'s order.
Held
The Tribunal upheld the CIT(A)'s deletion of the ad-hoc expense disallowance (Ground 1), finding that the AO failed to appreciate the nature of business expenses and that genuineness was not doubted. Regarding the vessel purchase value (Ground 2), the Tribunal confirmed that the actual cost of vessels in the hands of the transferee company (assessee) should be the carrying value in the transferor's (subsidiary's) books as per Explanation (6) to Section 43(1) of the Act. The CIT(A)'s conclusion that the actual cost was supported by audited financials and independent valuation, with no inflated depreciation claim, was affirmed.
Key Issues
Whether the ad-hoc disallowance of business expenses was justified. Whether the actual cost of vessels acquired from a 100% subsidiary should be determined based on their carrying value in the subsidiary's books under Explanation (6) to Section 43(1) for depreciation purposes.
Sections Cited
143(3), 139(5), 37, 43(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES: F : NEW DELHI
Before: SHRI ANUBHAV SHARMA
Assessment Year: 2015-16 Addl. CIT, Vs M/s JITF Waterways Ltd., Special Range-05, 28, Najafgarh Road, New Delhi. New Delhi. PAN: AABCJ7854M (Appellant) (Respondent) Assessee by : Shri Saksham Singhal, Advocate; Shri Rohit Jain, Advocate & Shri Shaurya Jain, Advocate Revenue by : Ms Monika Singh, CIT-DR Date of Hearing : 22.07.2025 Date of Pronouncement : 30.09.2025 ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Revenue against the order dated 29.10.2018 of the Commissioner of Income-tax (Appeals)-36, New Delhi (hereinafter referred to as the ld. First Appellate Authority or ‘the Ld. FAA’ for short) in Appeal No.281/17-18 arising out of the appeal before it against the order dated 29.12.2017 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the Addl. CIT, Special Range-05, New Delhi (hereinafter referred to as the Ld. AO).
Heard and perused the records. The necessary facts are that the assessee is a public limited company engaged in the business of developing, maintaining and operating of barrages, jetties, port, terminal, canal, waterways for transportation of cargo, goods, passengers and shipping. As for the relevant year, the respondent assessee filed its original return declaring loss of Rs. 80,86,47,512 and claiming Tax Deducted at Source ("TDS") credit of Rs. 76,24,642; the said return was subsequently revised under section 139(5) of the Income-tax Act, 1961 ('the Act') by the assessee claiming TDS credit of Rs.76,70,975. Case of the assessee was selected for scrutiny and assessment was completed vide order dated 29.12.2017 passed under section 143(3) of the Act, after making certain additions/ disallowances, inter-alia, as follows: i. Addition of Rs. 14,70,00,000 under section 37 of the Act on account of disallowance, on an ad-hoc basis, of 50% of various expenses ii. Addition of Rs. 20,49,00,000 on account of alleged excess purchase value of vessels; 3. Being aggrieved, assessee filed appeal before CIT(A), who vide order dated 29.10.2018 partly allowed the appeal and deleted the aforesaid additions/disallowances made in the assessment order. CIT(A) held the purchase value of vessels in the hands of the assessee would be USD 135.46 million as per WDV in the books of the Singapore subsidiary and disallowed differential depreciation amounting to Rs.4,48,113. As such now the revenue is in appeal.
We find that ground No.1 of the appeal of the Department arises out of disallowance which was made by the AO by way of an ad hoc disallowance of certain expenses for which the AO had found that there has been a drop in the revenue. The ld. AR has submitted that the AO failed to appreciate that in the previous year under consideration the assessee earned revenue from two business segments: the first one was running its own vessels and the other was from vessels hired from outside India and the assessee could not procure rehiring segment of the business. This aspect has been appreciated by the ld.CIT(A) and further it was appreciated that the fall in revenue in regular business segment of the assessee is only 25% due to competition/slump in the shipping industry. Further, the CIT(A) has examined and verified the expenses which are mostly fixed expenses. Thus, where the AO had not doubted the genuineness of the expenses, and there has been failure on the part of the AO to understand the nature of expenses in the context of nature of the business, like increase in repair and maintenance due to acquisition of two vessels by the assessee during the relevant year, increasing the total number of vessels from 3 to 5. Tour expenses were made to public sector undertakings and such like aspects. Then, ad hoc disallowance made by the ld. AO has been rightly deleted by the ld.CIT(A) and the same requires no interference.
In regard to ground No.2, arising out of addition of Rs.20.49 crores made by the AO on account of alleged excess purchase value of vessels, the case of the assessee is that assessee purchased two vessels only MV Jindal Varuna and MV Jindal Tarini for USD 1,65,20,000 [Rs.66.21 crores Rs.40,08 USD] in the year 2008-09; To start operations in Singapore (largest shipping market in South East Asia), assensee incorporated a 100% subsidiary by the name of M/s JITF Shipping & Logistics (Singapore) Pte. Ltd. The above mentioned vessels were purchased by JITF Shipping & Logistics (Singapore) Pte. Ltd on 07.02.2012 at an aggregate price of USD 1,36,23,887 (in rupees, the vessels were sold at Rs.67.11 crores @49.26/USD). It was pointed that the assessment order incorrectly mentions the transaction value as Rs.60.76 crores by taking the exchange rate @44.60/ USD. The subsidiary company capitalized the vessels in its books of accounts. The subsidiary company incurred substantial expenses on these vessels as per international shipping norms/ regulations which require complete dry docking of the vessel twice in an interval of 5 years. The subsidiary company incurred a total sum of USD 31,05,562 as addition to these vessels on dry docking of these vessels so as to make them worthy of sailing which were capitalized by the subsidiary. Chart depicting details of the carrying amounts of vessels in the books of JITF Shipping & Logistics (Singapore) Pte Ltd was given and same is reproduced below;
It submitted for assessee that the carrying amount of the two vessels in the books of JITF Shipping & Logistics (Singapore) Pte. Ltd as on 29.09.2014 as per the financial statements was USD 1,35,46,018. The assesse was not able to get a beakthrough in Singapore and failed in procuring business due to fierce competition in Singapore. The subsidiary company started incurring heavy losses and in order to curtail these losses, the management of subsidiary company finally decided to discontinue the operations in Singapore market.
The assessee company acquired the above mentioned vessels from subsidiary at USD 1,35,82,476 (Rs.83.47 crores @61.4560/ USD]. The aforesaid vessels were also valued by an independent valuer at USD 1,41,40,215 on 03.05.2014. Copy of the valuation report (s) are placed at Pgs 79-80 of PPB
Consequently, the vessels were capitalized by the assessee at the actual cost of USD 1,35,82,476 by applying applicable exchange rate of Rs.61.4560 per USD [i.e, Rs. 83,47,25,000/-)
Although the ld. DR has defended the order of the AO, we find that the AO noted that the transaction between the holding company and its 100% subsidiary to apply the provisions of Explanation (6) to section 43(1) of the Act. However, the AO adopted the purchase value of vessel on 07.02.2012 as the actual cost of the vessel and the ld.CIT(A) has held that the carrying value of vessels in the books of the subsidiary on the date of transfer, i.e., 29.09.2014 shall be the actual cost in the hands of the assessee. Accordingly, he directed that the excess amount be reduced from actual cost of the vessel. Thus, depreciation amounting to Rs.4,48,113/-, i.e., 20% of Rs.22,40,564/- was disallowed. After taking into consideration the provisions of Explanation (6) to section 43(1) of the Act, there is no doubt that the actual cost of capital asset in the hands of the transferee company, i.e., the purchaser is to be taken to be the same as in the hands of the transferor as if it continues to hold capital asset for its business. It is undisputed that carrying value of the vessels in the hands of JITF Shipping & Logistics Pte Ltd. (transferor) as on the date of transfer, i.e., 29.09.2014 was USD 1,35,46,018/- which is substantiated by the audited financial statements of the transferor and that amount should be considered to be the actual cost of the vessel. The ld. AR has also demonstrated that the two vessels were also valued by an independent valuer and this has not been countered by the AO to establish that the actual cost of vessels recorded by the assessee was substantially higher than the market value of the vessels. The ld. AR has also demonstrated that actual cost of the vessels in the hands of the assessee is less than the original purchase price of the vessels in terms of USD. Thus, there is no substance of any inflated value to claim higher depreciation. At the same time, the devaluation of rupee also impacted the actual cost in the hands of the assessee. Thus, the conclusions of ld.CIT(A) require no