2018 (12) TMI 582 - HC - Income Tax

High Court: Drilling rig qualifies as a ship under tax law + Rule 8D not mandatory for expense disallowance

The Pr. Commissioner of Income Tax-5 Versus Jagson International Ltd.

The High Court ruled that a drilling rig qualifies as a ship under Section 115VD of the Income Tax Act, aligning with a previous decision. The court ... Drilling rig as a qualifying ship within the meaning of Section 115VD - Held that:- This issue is covered against the Revenue by decision of the Delhi High Court dated 8th November, 2012 the Commissioner of Income Tax, New Delhi versus Jagson International Limited. [2012 (11) TMI 594 - DELHI HIGH COURT] in the case of offshore installations which are stationed at one place, the very nature of the activity in which the assessee engaged is to carry out operations in different places; necessarily, at least for a short duration the vessel has to be stationed at one place. In these circumstances, Revenue’s contentions that the vessel is nothing but “offshore installations” has no merit, in the case of Matdrills of the kind put to use by the assessee - reasoning and findings of the Appellate Commissioner and the Tribunal cannot be found fault with - Decided in favour of the assessee Disallowance under Section 14A - Held that:- Supreme Court in Godrej Boyce Manufacturing Company Limited versus Deputy Commissioner of Income Tax Mumbai & Anr. [2017 (5) TMI 403 - SUPREME COURT OF INDIA] after referring to Section 14A has held that Rule 8D is in the nature of best judgment determination as it prescribes a formula for determination of the expenditure incurred in relation to income that does not form part of the total income under the Act, in a situation where the assessing officer is not satisfied with the claim of the assessee. The jurisdictional requirement for invoking Rule 8D is recording of satisfaction by the assessing officer that having regard to the accounts of the assessee placed before him, it is not possible to generate requisite satisfaction with regard to the correctness of the claim of the assessee. It is only then that the provisions of Sub-section 2 and 3 to Section 14A read with Rule 8D of the Rules or best judgment determination can be applied. This statutory mandate is not satisfied in the present case. Issues:1. Qualification of a drilling rig as a qualifying ship under Section 115VD of the Income Tax Act.2. Disallowance of expenses under Section 14A of the Income Tax Act using Rule 8D.Qualification of Drilling Rig:The High Court addressed the issue of whether a drilling rig qualifies as a ship under Section 115VD of the Income Tax Act. The court referred to a previous decision that ruled against the Revenue, stating that a drilling rig is indeed considered a qualifying ship. The matter is pending before the Supreme Court, and the High Court decided to treat the issue as disposed of in line with the previous ruling until the Supreme Court's decision. The court emphasized that parties could apply for further action after the Supreme Court's judgment. This decision aligned with earlier orders passed in similar cases.Disallowance of Expenses under Section 14A:The second issue involved the disallowance of expenses totaling specific amounts in two assessment years under Section 14A of the Income Tax Act using Rule 8D. The court noted that the assessing officer had treated Rule 8D as mandatory without justifying the disallowance made by the assessee. The court cited a Supreme Court judgment emphasizing that Rule 8D is a best judgment determination and should only be invoked when the assessing officer is unsatisfied with the assessee's claim. The court found that the assessing officer did not meet the statutory requirement for invoking Rule 8D in this case. Consequently, the court declined to issue notice on this aspect and disposed of the appeals without costs.