2024 (2) TMI 513 - AT - Income Tax

ITAT Mumbai allows tonnage tax business deductions under section 14A/Rule 8D, rules foreign exchange gains capital receipts

The Great Eastern Shipping Co. Ltd. Versus The Asst. Commissioner of Income Tax, Circle -5 (3) (2), Mumbai

The Great Eastern Shipping Co. Ltd. Versus The Asst. Commissioner of Income Tax, Circle -5 (3) (2), Mumbai - TMI Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Taxation of foreign exchange gain on the cancellation of vessel construction contracts under Section 28(iv) of the Act.3. Short grant of TDS credit.4. Transfer Pricing (TP) adjustment on performance guarantee given on behalf of Associated Enterprise (AE).5. Attribution of interest expenditure between tonnage and non-tonnage activities.6. General average claims as part of tonnage tax income.Summary:1. Disallowance under Section 14A:The assessee challenged the disallowance made by the AO under Section 14A of the Act. The AO recomputed the disallowance using Rule 8D, resulting in a higher disallowance than that computed by the assessee. The DRP directed the AO to consider the aggregate interest expenditure incurred by the assessee pertaining to tonnage and non-tonnage activities for computing the amount liable for disallowance under clause 2(ii) of Rule 8D. The Tribunal found that the interest expenditure attributable to the tonnage tax business should not be considered for disallowance under Rule 8D(2)(ii) and deleted the additional disallowance made by the AO.2. Taxation of Foreign Exchange Gain:The AO treated the foreign exchange gain on the cancellation of vessel construction contracts as income under Section 28(iv) of the Act. The Tribunal held that the gain was a capital receipt and not chargeable under Section 28(iv), as it arose from the cancellation of contracts for the construction of capital assets (vessels).3. Short Grant of TDS Credit:The assessee raised the issue of short grant of TDS credit. The Tribunal directed the AO to examine the issue and grant credit in accordance with the law.4. TP Adjustment on Performance Guarantee:The AO made a TP adjustment for the performance guarantee given by the assessee on behalf of its AE. The Tribunal noted that in earlier years, it was held that performance guarantees need to be benchmarked but at a substantially lower rate than financial guarantees due to adequate security. The Tribunal set aside the issue to the AO/TPO to benchmark the performance guarantee at a lower rate and consider the guarantee period.5. Attribution of Interest Expenditure:The AO attributed interest expenditure between tonnage and non-tonnage activities. The Tribunal found that the issue was covered in favor of the assessee by earlier Tribunal decisions, which held that interest expenditure directly attributable to the tonnage tax business should not be considered for disallowance under Rule 8D(2)(ii).6. General Average Claims:The AO excluded general average claims from tonnage tax income, treating them as income under Section 41(1) of the Act. The Tribunal held that such claims should be considered as part of the tonnage tax income, following earlier Tribunal decisions in the assessee's favor.Conclusion:The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed. The Tribunal directed the AO to recompute disallowances and adjustments in accordance with the findings and earlier Tribunal decisions.