Foreign exchange gain on ship-acquisition loans was treated as shipping income under the tonnage tax regime.

Notional foreign exchange gain arising on restatement of a loan taken to acquire ships was treated as part of shipping income under Chapter XII-G of the Income-tax Act, 1961. The court noted that tonnage tax is a special regime for income from operating qualifying ships, and that loan-related exchange variation was closely connected, interlinked and integral to that core business activity. It also found no rational basis to distinguish between realised exchange gain and notional restatement gain in this context. Accordingly, the Revenue's challenge to exclusion of the exchange gain from tonnage tax treatment failed, and no substantial question of law arose.

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Issues: Whether the notional foreign exchange gain arising on restatement of foreign loan taken for acquisition of ships is covered within the tonnage tax scheme as shipping income under Chapter XII-G of the Income-tax Act, 1961.

Analysis: Chapter XII-G provides a special regime for shipping companies and computes income from the business of operating qualifying ships on a deemed basis. Under Section 115VI of the Income-tax Act, 1961, relevant shipping income includes profits from core activities, and operating qualifying ships forms part of those core activities. The foreign exchange gain or loss arising from loans taken to acquire ships was treated by the Revenue in later assessment years as part of the same shipping business, and no material distinction was shown for the year in question. The acquisition of ships was held to be closely connected, interlinked and integral to the business of operating qualifying ships, and the distinction between realized exchange gain and notional restatement gain was found to have no rational basis.

Conclusion: The notional foreign exchange gain on restatement of the foreign loan is part of the shipping business and falls within the tonnage tax scheme under Chapter XII-G of the Income-tax Act, 1961.

Final Conclusion: No substantial question of law arose, and the Revenue's challenge to exclusion of the exchange gain from tonnage tax treatment failed.

Ratio Decidendi: Exchange variation arising from loans taken for acquisition of ships is sufficiently connected with the core activity of operating qualifying ships to constitute shipping income under the tonnage tax regime.

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