AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 224
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....bjected to tax u/s 115VA, no expense was claimed in the first place which could have been disallowed." 2. Facts in brief:- The assessee is engaged in the business of operation of ships. It has declared its receipts from charter hire earning at Rs. 136,35,90,840. However, the assessee opted for Tonnage Tax scheme under section 115VA, Chapter-XIIG. In the return of income, the assessee had shown income from shipping business i.e., under Tonnage Tax deemed income at Rs. 2,32,898, and other income of Rs. 28,24,761, which worked out as under:- Income (Loss) from business: Rs. 2,32,898 Tonnage Tax Deemed Income Other Income Dividend on Investments Rs. 37,21,710 Less: Exempt Rs. Rs. (-)37,21,710 Interest on Bank Margin Deposits Rs. 6,30,454 Other Interest Income Rs. 21,94,307 Rs. 28,24,761 Total:- Rs. 30,57,659 3. The Assessing Officer noted that other income shown by the assessee consists of dividend from mutual fund and equity shares at Rs. 37,21,710, which has been claimed as exempt; further, the interest on bank m....
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....een claimed by the assessee, therefore, no disallowance should be made under section 14A. Relying upon the decision of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, (2010), 328 ITR 081 (Bom.), he held that a reasonable disallowance should be made when the provisions of rule 8D, are not applicable in the assessment year 2007-08. Therefore, relying upon the decision of the Tribunal in VIP Industries Ltd. v/s DCIT, ITA no.7242/Mum./2008, ITA no.1004/Mum. /2008, he held that 5% of dividend income is a reasonable basis for the purpose of disallowance. Accordingly, he restricted the disallowance to Rs. 1,86,085. 6. Before us, the learned counsel, Ms. Rachana Agarwal, submitted that the assessee's only business is operation of ships i.e., carrying out shipping activity. Foreign currency fluctuation gain have arisen out of sundry creditor and debtors in the course of shipping activity only and such a gain or loss in foreign exchange will form part of the same business. It is not the business of the assessee to trade in foreign exchange and, therefore, if there is any gain or loss in forex, the same will derive its character from the underlying strat....
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....ench, in ACIT v/s Varun Shipping Co. Ltd., ITA no.2167/Mum./2011, order dated 29th July 2012. 8. On the other hand, the learned Departmental Representative, on the issue of disallowance of trading foreign currency translation gain as business income, separate from shipping activity, he submitted that the shipping income of the assessee has been assessed under a specific provision of Tonnage Tax scheme which is a deeming provision, therefore, the gain which has arisen on account of foreign exchange fluctuation cannot be said to be taxed under Tonnage Tax scheme. It does not fall within the core activity of the assessee's business but an incidental activity and, therefore, the learned Commissioner (Appeals) has rightly confirmed the said addition. 9. Regarding section 14A, the learned Departmental Representative submitted that once the assessee had earned income which is exempt from taxation, then disallowance under section 14A, is triggered and has to be necessarily made. The assessee has debited huge expenditure in the Profit & Loss account and some of the expenditure can be said to be attributable for the earning of the exempt income. Under section 115VA, while computing the....
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....ent from operation of ships. In the context of computation of deduction under section 80HHC, as cited by the learned counsel, the Courts have invariably held that the foreign exchange gain or loss directly relates to the export and same is qualified for the purpose of deduction. The same logic will follow here also and, therefore, any foreign exchange gain or loss has to be in relation to the shipping income. There is no basis for separately taxing it as some other kind of business activity. Thus, we are not inclined to agree with the reasoning and conclusion drawn by the learned Commissioner (Appeals) and the same is accordingly reversed. Ground no.1, raised by the assessee is allowed. 11. Ground no.2, relates to disallowance made under section 14A. 12. Here in this case, both the Assessing Officer as well as the learned Commissioner (Appeals) have held that once the assessee has earned exempt income, then it is a natural corollary that it entails disallowance under section 14A. The logic of the Assessing Officer is that sub-section (3) of section 14A, specifically provides that the disallowance should be determined in relation to a case where the assessee claims no expendit....
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....n assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] From the reading of the above provisions, it is evident that sub-section (1) provides that for the purpose of computing the total income under Chapter-IV, dealing with the computation of income under various heads of income, no deduction shall be allowed in respect of the expenditure which has been incurred by the assessee in relation to the income which does not form part of the total income under the Act i.e., income which are exempt from tax. The triggering point for disallowance under section 14A is sub-section (1). It envisages that first of all the expenditure must have been incurred by the assessee in relation to the exempt income and, secondly, such expenditure must have been claimed by the assessee as deduction while computing his total income under the Act. The provisions contained in sub-section (2) and (3) only comes into foreplay on the second stage when deduction of expenses have been claimed by the assessee while computing of the total income as envisaged in sub-section (1). The provisions of sub-section (2) & (3) mere....