Tonnage tax scheme bars separate section 14A disallowance where qualifying ship income is computed under special provisions.

Tonnage tax treatment under Chapter XII-C applied where the assessee's vessel used for transporting thermal coal within India was held to be a qualifying ship under section 115VD, so the special shipping regime was available. The Tribunal also held that, once income from qualifying ship operations is computed under the tonnage tax mechanism, business expenses are governed by that special computation and no separate disallowance under section 14A can be made in relation to exempt income. On both issues, the assessee succeeded and the Revenue's challenge failed.

---

---

Issues: (i) Whether the assessee was entitled to the benefit of the tonnage tax scheme under Chapter XII-C of the Income-tax Act, 1961 on the facts of its shipping operations; (ii) Whether a separate disallowance under section 14A of the Income-tax Act, 1961 could be made where income is computed under the tonnage tax scheme.

Issue (i): Whether the assessee was entitled to the benefit of the tonnage tax scheme under Chapter XII-C of the Income-tax Act, 1961 on the facts of its shipping operations.

Analysis: The issue was governed by the earlier decision in the assessee's own case, where the ship operated by the assessee for transporting thermal coal within the country was held to be a qualifying ship under section 115VD. On that basis, the assessee was held entitled to the statutory tonnage tax regime.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether a separate disallowance under section 14A of the Income-tax Act, 1961 could be made where income is computed under the tonnage tax scheme.

Analysis: The Tribunal followed the view that once income from the business of operating qualifying ships is computed under the special provisions of Chapter XIIG and the tonnage tax scheme, only the expenses relatable to that business are deemed to be allowed. In that situation, no further disallowance under section 14A is warranted in relation to exempt income, because the special computation mechanism itself governs the allowability of business expenditure.

Conclusion: The separate disallowance under section 14A was not permissible and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on both issues, and the order of the lower appellate authority was sustained.

Ratio Decidendi: Where income is computed under the tonnage tax provisions for qualifying ships, the special statutory computation excludes a further separate disallowance under section 14A for expenditure relatable to exempt income.

---