Tonnage Tax Scheme limits section 14A disallowance where no expenditure was shown against exempt dividend income.

Section 14A disallowance read with rule 8D was held unsustainable where the assessee was taxed under the Tonnage Tax Scheme and had not claimed any expenditure against non-shipping income. The special computation regime under Chapter XIIG applies a presumptive method for qualifying ship operations, so normal disallowance principles do not operate in the same manner. The record further showed no expenditure claimed against exempt income and investments supported by own funds, leaving no factual basis to attribute expenditure to dividend income. The disallowance was deleted in favour of the assessee.

---

---

Issues: Whether disallowance under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 could be sustained in respect of dividend income where the assessee was assessed under the Tonnage Tax Scheme and had not claimed any expenditure against the non-shipping income.

Analysis: The assessee was covered by the special computation regime under Chapter XIIG of the Income-tax Act, 1961. Under that scheme, income from the business of operating qualifying ships is computed on a presumptive basis and the normal computation provisions, including disallowance principles under section 14A, do not apply in the same manner. The record also showed that no expenditure had been claimed against the exempt or non-shipping income and that the investments were supported by own funds. In these circumstances, the basic condition for invoking section 14A, namely expenditure incurred in relation to exempt income, was absent.

Conclusion: The disallowance under section 14A read with rule 8D was not sustainable and its deletion was . The issue was decided in favour of the assessee and against the Revenue.

---