TaxTMI 
TaxTMI 
2024 (8) TMI 1246
X X X X Extracts X X X X
X X X X Extracts X X X X
....rred in law in rejecting the claim of the assessee u/s. 80I in respect of the ship Prabhu Das on the ground that there would be a notional deduction of the allowance granted u/s. 33AC from the profile of the ship Prabhu Das in view of the fiction contained in Section 80I (6)? (ii) Whether the Tribunal erred in law in confirming the order of DCIT & CIT(A) in denying the said claim on the interpretation of Sectio 80I (6) which is contrary to the Circular no.281 dated 22.9.1980 which restricts the fiction of notional deduction of losses. 3. The Learned counsel for both sides agree that answering the aforesaid questions of law would be dispositive of Income Tax Appeal No. 128 of 2007 as well. Background and Context: 4. In a nutshell, at all times relevant to these appeals, Section 33AC of the Act allowed a company engaged in the business of operating ships to deduct an amount not exceeding the total income, and credit the same to a reserve, which could be utilized within the next eight years to acquire a new ship for business purposes. Section 80-I of the Act allowed another deduction of 25% of the profits and gains "derived from a ship", that met the qualifying crite....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... eight years next following the previous year in which the amount was credited- (a) for acquiring a new ship for the purposes of the business of the assessee; and (b) until the acquisition of a new ship, for the purposes of the business of the assessee other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India." (3) to (4) ***** [Emphasis Supplied] 9. From a plain reading of the foregoing, it would become clear that:- a) Section 33AC applies to any public limited company with the main object of carrying on the business of operating ships; b) Pursuant to Section 33AC (1), such a company is allowed a deduction by way of a debit to the profit and loss account, of an amount not exceeding the total income; c) Such amount as is debited to the profit and loss account would be credited to a reserve account; d) Pursuant to Section 33AC(2), the use to which such reserve may be put is primarily the acquisition of a new ship within the next eight years; and e) The new ship acquired must be for purposes of the business of the com....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessment year for which the determination is to be made." (7) to (10) ***** [Emphasis Supplied] 11. From a plain reading of the foregoing, it would become clear that:- a) Section 80-I (1) is available to companies whose gross total income includes profits and gains derived from a ship that qualifies under Section 80-I(3); b) Under Section 80-I(3), the ship that would be covered by Section 80-I is one that is used wholly for business purposes; was not owned by a person resident in India and used in Indian territorial waters before its acquisition by the assessee; and was brought into use by the assessee at any time between 1st April, 1981 and 31st March, 1991; c) While computing the total income of such company, a deduction of 25% of the profits and gains derived from the ship would be allowed; d) For computing the profits and gains derived from the ship, pursuant to provisions of Section 80-I (6), the profits and gains must be computed as if the ship were the only source of income of the assessee during the relevant previous year. Core Issue and the Computations: 12. In the instant case, at all times relevant to these ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved of the eligibility of the Appellant-Assessee to effect a deduction under Section 33AC in the sum of Rs. 2.5 Crores. After such deduction, the AO arrived at a net business income amount of Rs. 65,28,776/-. To such amount, income from capital gains and income from other sources were added, aggregating to an amount of Rs. 2,15,64,382/-. Thereafter, the AO set out to compute the deduction allowed under Section 80-I as a percentage of profits derived from Prabhu Das. The AO computed the excess of receipts over expenses from the operation of Prabhu Das, and arrived at a gross income amount of Rs. 1,38,06,689/-. From this amount, a sum of Rs. 4,79,904/- was removed on the premise that such amount was a receipt attributable to the earlier year. Thereby, the AO arrived at an income figure of Rs. 1,33,26,785/-, and after deductions, computed the net profits and gains from Prabhu Das as Rs. 75,20,175/-. The AO ruled that since Section 80-I (6) provides for computing the profits and gains from the ship as if the ship was the only source of income for the Appellant- Assessee, the deduction of Rs. 2.50 Crores availed of under Section 33AC must be reduced from the profits and gains from Prabh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....these Sections, it must be factored into the computation of the profits, which is then the base for computation of the deduction under Section 80-I of the Act. Besides, the ITAT ruled that the reference to "total income" in Section 33AC is only for purposes of computing a cap on the quantum of the deduction. 20. Therefore, it will be seen that the legal position that the deduction made under Section 33AC would need to be reduced from the income of the qualifying ships to arrive at the profits derived from such ships for purposes of Section 80-I, constitutes the law declared in three concurrent iterations - by the AO, the CIT-A and the ITAT. Submissions by Counsel for the Parties: 21. Mr. Nitesh Joshi and Mr. Atul Jasani advanced submissions on behalf of the Appellant-Assessee. Mr. Akhileshwar Sharma countered them on behalf of the Respondent-Revenue. 22. Mr. Joshi submitted that the deduction allowed under Section 80-I of the Act was to the extent of 25% of profits and gains derived from the ship Prabhu Das. The term "profits and gains" is the difference between the income and expenditure relating to Prabhu Das. Citing case law declared in the context of industrial unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is end, he would submit, there has to be a proportionate attribution of the amount deducted under Section 33AC to Prabhu Das, and only such attributed amount must be reduced from the income derived from Prabhu Das, for computing the deduction of 25% allowed under Section 80-I. Mr. Joshi would also argue that Section 33AC was amended with effect from 1st April, 1996 to change the linkage from "total income" to "profits and gains derived from the operation of ships". This, he would submit, underlines the pre-amendment legal position being what has been canvassed by him. 25. Mr. Sharma, on behalf of the Respondent-Revenue would submit that the deduction allowed under Section 33AC is permitted only because the Appellant-Assessee is engaged in the shipping business. Therefore, it is only logical that the said amount must be reduced from the profits and gains from the ship, before computing the deduction under Section 80-I. Section 80-I (6) would point to the need to compute the profits and gains of a ship as if the ship in question is the only source of income of the Appellant-Assessee during the relevant financial year. The deduction and the reserve under Section 33AC also relates o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ew ship for business purposes i.e. purely for shipping business operations. Therefore, the deduction under Section 33AC is inextricably linked to the business of shipping, and is a debit with a direct nexus to shipping operations. 29. It is also noteworthy that the allowance under Section 33AC is a precursor to determining whether the income derived from shipping operations has led to a profit. Consequently, the amount for which an assessee seeks allowance under Section 33AC is reduced from the income earned in the shipping business. It is debited to the profit and loss account, just as any other expenditure would be debited to the profit and loss account. The deduction allowed under Section 33AC is not linked to whether there is a profit or a loss in the shipping business - much like any expenditure in a business being a precursor to determining if the business has generated a profit or a loss. The profit or loss is an outcome of the credits and debits, which includes the deduction under Section 33AC. Just as the amount by which the size of credits to the profit and loss account exceeds the size of debits, constitutes the profit, one of the debits to the profit and loss account....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 80-I (1), the base amount on which the 25% deduction is to be computed is the profits and gains from a ship. The jurisdiction of Section 80-I is attracted when "the gross total income of an assessee includes any profits and gains derived from...a ship". Once the provision is attracted, the deduction of 25% of such profits and gains (derived from a qualifying ship) is allowed. If, after giving effect to the deduction under Section 33AC, there is no profit derived from a ship (the income having been denuded by the pre- profit debit under Section 33AC), there cannot be a base amount on which the deduction under Section 80-I can be allowed. 32. Fifth, Section 33AC (2) mandates that the reserve created out of the deduction may be used primarily for acquiring a new ship for purposes of the business of the assessee; and until such acquisition of a new ship, it may be used only for business purposes other than for distribution by way of dividend or profits. Therefore, the legislative intent is clear that the amount of deduction under Section 33AC cannot partake the character of a profit. Put differently, it is not an amount charged from the profits, but an amount charged from the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....requiring a direct nexus between the profits and gains in question, and the business from which such profits and gains are derived^1. For example, if an assessee were to deploy profits made from operating a ship, into financial investments, it could lead to the assessee earning income from capital gains or income from other sources. Such income cannot be permitted inflate the base amount on which the 25% allowance under Section 80-I of the Act is to be computed. Likewise, the case law cited, indeed declares that expenses and debits to the profit and loss account, which do not relate to the business in question cannot be taken into account. However, in our opinion, such case law is of no help to the Appellant-Assessee since, for the reasons articulated above, we have found that the deduction allowed under Section 33AC is indeed directly linked to shipping operations and aimed at sustaining earnings from shipping operations (by enabling a reserve in order to acquire a new ship). A deduction for such purpose, in our opinion, not only meets the nexus test, but is also reasonable, logical and commercially commonsensical. 36. To avoid prolix reproduction of the case law cited, we have....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to Prabhu Das under Section 33AC must be factored in, when computing the deduction under Section 80-I. 39. We disagree. Section 80-I indeed refers to "a ship", but in our opinion, that does not mean it would relate to just one ship (in the singular). The phrase used in Section 80-I is "profits and gains derived from an industrial undertaking, or a ship, or the business of a hotel". In our opinion, the phrase "a ship" has to also be read in the context of the other words in the same phrase, namely "an industrial undertaking" and "the business of a hotel". These are not phrases meant to be used in respect of one undertaking or one hotel property, but to the business of a qualifying undertaking or a qualifying hotel. 40. The reference to "a ship" would need to be regarded as a reference to any ship that qualifies for the section. Section 80-I (1) uses the phrase "to which this section applies" and Section 80-I(3) provides that the section would apply to "any ship" that meets the three criteria stipulated in that sub-section. In a nutshell, the ship ought to be used wholly for business purposes; it should not have been owned by a person resident in India and used in Indian terr....