Foreign exchange gain in shipping stays part of business income, and section 14A needs claimed expenditure first.

Foreign currency translation gain arising directly from shipping operations retains the character of business income connected with the core activity and cannot be carved out as separate taxable income merely because shipping profits are computed under the tonnage tax scheme. Section 14A disallowance is not attracted where no expenditure has been claimed in computing total income; the disallowance machinery under sub-sections (2) and (3) operates only after that foundational condition is met. On these principles, both additions were deleted and the assessee obtained relief on both issues.

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Issues: (i) Whether foreign currency translation gain arising in the course of shipping operations could be taxed as separate business income apart from income computed under the tonnage tax scheme; (ii) Whether disallowance under section 14A was permissible where the assessee had not claimed any expenditure in computing total income.

Issue (i): Whether foreign currency translation gain arising in the course of shipping operations could be taxed as separate business income apart from income computed under the tonnage tax scheme.

Analysis: The assessee's only business was operation of ships, and the foreign exchange gain arose from sundry creditors, debtors, charter hire deposits and related cross-border transactions connected with that business. Such gain or loss was incidental to the underlying shipping activity and derived its character from that activity. It could not be detached and treated as an independent business receipt merely because the shipping income itself was computed under a special deeming regime.

Conclusion: The foreign currency translation gain was not separately assessable as business income; the addition was deleted in favour of the assessee.

Issue (ii): Whether disallowance under section 14A was permissible where the assessee had not claimed any expenditure in computing total income.

Analysis: The assessee had computed shipping income under the tonnage tax scheme and had not claimed the expenditure debited in the profit and loss account while computing taxable income. Section 14A applies only where expenditure is incurred in relation to exempt income and is claimed in computing total income. The mechanism in sub-sections (2) and (3) operates only after the foundational requirement of a claimed expenditure under sub-section (1) is satisfied. In the absence of any claimed expenditure, no disallowance could be made.

Conclusion: No disallowance under section 14A was warranted; the assessee succeeded on this issue as well.

Final Conclusion: Both additions were deleted, the assessee's appeal was allowed, and the Revenue's appeal failed.

Ratio Decidendi: Foreign exchange gain arising directly from the assessee's core business activity retains the character of that business income, and section 14A cannot operate unless expenditure has first been incurred and claimed in computing total income.

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