2012 (6) TMI 132 - AT - Income Tax

Tribunal: Interest income from FDs not under Tonnage Tax Scheme; reassessment of sundry balance & excess provision.

The Tribunal ruled that interest income from Fixed Deposits (FDs) placed as collateral security by a shipping company was not covered by the Tonnage Tax ... Treatment of interest income from FDRs under Tonnage Tax Scheme - the assessee had received interest income on FDs which he had not offered for taxation and had instead taken the sum as covered under Tonnage Scheme – assessee contested that he had borrowed funds from bank for shipping activities placing the FDRs with the bank as collateral securities and the interest income received was conclusively linked to the shipping activity - Held that:- Placing FDRs with bank cannot be considered as activity for operating ships or activity of shipping contract or shipping trades -it can be considered as an incidental activity but under the Tonnage Tax Scheme, the incidental activities have been separately defined in Rule- and which clearly does not contain the activity of placing FDRs - under the Tonnage Tax Scheme, only profit from core activities and profit from incidental activities are included and as regards the interest income, the source of such income is FDR and not the shipping activity either core or incidental – against assessee. Only the net interest income should be assessed as assessee had used borrowed funds for making the FDRs – Held that:- While computing interest income expenses incurred for earning interest income have to be excluded - restore the submission of the assessee regarding netting of income to the file of CIT(A) for deciding the same after necessary examination and after hearing the assessee – in favour of assessee. Assessment of other income consisting of sundry balance written back, excess provision written back and miscellaneous income - AO assessed such income as income from other sources in addition to income under Tonnage Scheme – Held that:- Since the CIT(A) had not adjudicated the issue the matter should be sent back to CIT(A) for fresh adjudication and after allowing opportunity of hearing to the assessee. Issues:1. Treatment of interest income under Tonnage Tax Scheme.2. Assessment of other income as income from other sources.Issue 1: Treatment of Interest Income under Tonnage Tax SchemeThe dispute in this case revolves around the treatment of interest income received on Fixed Deposits (FDs) by the assessee, who was engaged in operating ships, under the Tonnage Tax Scheme. The Assessing Officer (AO) contended that the interest income from FDs placed as collateral security was not related to core shipping activities and should be assessed as income from other sources. The assessee argued that the interest income was linked to the shipping activity as it was earned in connection with obtaining loans for purchasing vessels. The assessee maintained that the interest income should be covered by the Tonnage Scheme. The Commissioner of Income Tax (Appeals) did not accept the assessee's contentions and upheld the AO's decision. The Appellate Tribunal agreed with the authorities below, ruling that placing FDs for obtaining loans was not an activity related to operating ships or shipping contracts, and therefore, the interest income from FDs should be separately taxed in addition to the income computed under the Tonnage Scheme.The Tribunal analyzed the definition of core activities under the Tonnage Tax Scheme, which includes activities from operating qualifying ships and other ship-related activities specified in the Act. Placing FDs for obtaining loans was not considered a core activity or an incidental activity under the scheme. The Tribunal concluded that the interest income from FDs, being the source of income, was not profit from core or incidental activities as defined in the Act. Therefore, the interest income had to be taxed separately from the income under the Tonnage Scheme. The Tribunal also directed the Commissioner of Income Tax (Appeals) to examine the assessee's alternate plea for taxing only the net interest income after deducting expenses.Issue 2: Assessment of Other Income as Income from Other SourcesThe second dispute, relevant only for the assessment year 2005-06, involved the assessment of other income, including sundry balance written back, excess provision written back, and miscellaneous income. The AO assessed these items as income from other sources, in addition to the income under the Tonnage Scheme, as they were deemed unrelated to core or incidental activities of shipping under the Tonnage Scheme. The assessee challenged this decision before the Commissioner of Income Tax (Appeals), who did not pass any order on this issue. Consequently, the Tribunal remanded the issue back to the Commissioner of Income Tax (Appeals) for fresh adjudication after examining the nature of the income and providing the assessee with an opportunity to present its case.In conclusion, the Tribunal partially allowed all the appeals of the assessee for statistical purposes, addressing the disputes related to the treatment of interest income under the Tonnage Tax Scheme and the assessment of other income as income from other sources.