2014 (2) TMI 940 - AT - Income Tax

ITAT Upholds Depreciation Claim for Ship, Directs Deletion of Additional Lease Rent

The Assistant Commissioner of Income Tax Versus M/s. Water Ways Shipyard Pvt. Ltd. Dempo Odyssey Co-op.

The ITAT upheld the CIT(A)'s decisions, allowing the depreciation claim for the ship and directing the deletion of the additional lease rent amount added ... Allowability of Depreciation on ship – Whether the ship was put to use for the purpose of business – Held that:- The Ship M.V. Maanav Star was purchased and was delivered to the new owner on 24th August, 2004 and the vessel departed from ‘Rue Wharf’ to ‘Rye Anchorage’ and the vessel was grounded on port of U.K. on 11.09.2004 - The vessel was used from 24th October 2004 till 30th March, 2005 and assessee has received the freight and hire charges - The assessee has earned the income after returning from Moroni - The vessel came to Mumbai and was loaded cargo at Mumabi and sailed to port Mina Rashid, Dubai - Thereafter, vessel had gone to various places thus, the vessel has earned the total freight charges which is reflected in the profit and loss account – thus, the assessee has used this vessel for carried out the business – the CIT(A) is justified in his action – Decided against Revenue. Deletion made on account of lease rent of luxury cruiser – Accrual of rent and System of accounting – Held that:- The assessee has accounted the rent only at 50% of the total lease rent – the assessee has received the lease rent from March-April - The assessee has received lease rent from M/s. Advani Hotels & Resorts (I) Ltd. for period of 16th March 2005 to 15th April 2005 - The assessee has received the amount but as the assessee was following Mercantile System and the Assessment Year ending on March- Thus, assessee has shown the lease rent for A.Y. 2006-07 and remaining rent was shown in the subsequent year - CIT(A) verifying this accounts has deleted the addition – there is no need to interfere in the findings of the CIT(A) – Decided against Revenue. Issues involved:1. Depreciation allowance on a ship not put to use for business purposes.2. Addition of lease rent on luxury cruiser.Issue 1: Depreciation allowance on a ship not put to use for business purposes:The appeal was filed by the revenue against the order of CIT(A)- Panaji for the Assessment Year 2005-06. The department contended that the ship M.V. Maanav Star was not put to use for business during the relevant year, questioning the allowance of depreciation amounting to Rs. 91,39,468. The Assessing Officer argued that the vessel was not utilized as evidenced by its grounding and subsequent repairs. However, the CIT(A) allowed the depreciation claim after reviewing documentary evidence provided by the appellant, establishing that the ship was indeed used for business purposes during the relevant period. The CIT(A) directed the AO to grant the depreciation amount, emphasizing that the vessel had been employed to carry out business activities, earning significant income through freight charges. The ITAT concurred with the CIT(A)'s decision, noting the vessel's operational history and income generation, leading to the dismissal of the revenue's appeal on this ground.Issue 2: Addition of lease rent on luxury cruiser:The second ground of appeal involved the addition of lease rent received from a luxury cruiser leased to a specific entity. The AO raised concerns regarding the lease rent discrepancy, where the appellant accounted for only a portion of the total rent received. The AO added the differential amount to the appellant's total income, prompting an appeal to the CIT(A). The CIT(A) analyzed the lease agreement terms and the accounting treatment, concluding that the appellant's method of accounting for 50% of the lease rent for the relevant assessment year was appropriate due to the financial year ending on March 31st. As the lease rent was payable monthly, confusion arose regarding the accounting period, leading to the discrepancy in reported income. The CIT(A) directed the AO to delete the additional amount added to the appellant's income, aligning with the appellant's accounting treatment. The ITAT upheld the CIT(A)'s decision, emphasizing the correct accounting principles applied by the appellant, resulting in the dismissal of the revenue's appeal on this ground.In conclusion, the ITAT upheld the CIT(A)'s decisions regarding both issues, allowing the depreciation claim for the ship and directing the deletion of the additional lease rent amount added to the appellant's income. The detailed analysis of the operational history of the ship and the accounting treatment of lease rent supported the decisions, leading to the dismissal of the revenue's appeal in its entirety.