By TIOL News Service
HYDERABAD, JAN 24, 2013: THE issues before the Bench are - Whether gain on currency received from service providers for plying of ships is income incidental to tonnage income; Whether the payment to gratuity fund as per the actuarial valuation are allowable as deduction u/s 43B and Whether expenses on issue of Bonds optionally convertible into equity shares are revenue expenses. And the verdict partly goes in favour of the assessee.
Facts of the case
A.) The assessee company is engaged in business of cargo transport and trading. The assessee had u/s 115VA of the Act, opted to pay taxes under Tonnage tax scheme and thus the income from the operation of qualifying ships was computed in accordance with the provisions of Chapter XIIB of the Act. The assessee having opted to be taxed under the aforesaid provision for its shipping division. In the A.Y. under consideration the AO had completed assessment u/s 143(3) of the Act, based on return of income filed by the assessee by making disallowances on account of unpaid leave encashment liability and depreciation disallowed on revenue expenditure which was treated as capital expenditure. The CIT(A) proposed to revise the assessment u/s 263 in relation to the following four issues, which, according to him made the order of assessment erroneous and prejudicial to the interests of the Revenue.
- The AO failed to assess income from exchange fluctuation reflected in P&L account of the assessee as “income from other sources” and not “business income” since the same was not an income incidental to tonnage income.
- The assessee had payment to a gratuity fund and debited the same to general reserve A/c and not the profit & loss A/c. Thus, the CIT disallowed expenditure on gratuity as non-existence of liability.
- The assessee had incurred and debited expenditure incurred on issue of FCCB’s to securities premium A/c. The FCCB had an option for conversion into share on premium at time of redemption. Owing to the FCCB having characteristic of equity share the expenses on issue of FCCB should have been disallowed as capital expenses.
- Part of loss on sale of assets was not disallowed while computing income chargeable to tax. Thus, the income to that extent was not taxed.
In appeal the assessee argued against the proceedings u/s 263 initiated by the CIT(A). The assessee stated that the AO had applied his mind in the original assessment and thus the revisionary proceedings /s 263 was not correct. It was also further submitted that the order of assessment was neither erroneous nor prejudicial to the interests of the Revenue, and hence the provisions u/s 263 were not attracted. The revenue contended that the above issues were new and not considered by AO on completion of original assessment.
B) The core activity of the assessee was plying of ships and the income earned form such ships was assessed to tax under tonnage scheme. Accordingly, the assessee was of the view that any accretion or loss to the amounts payable to the service provider connected with the plying of qualifying ships will become a part of computation of income from shipping business. It was further submitted that the additional payment made to the service provider or saving in the payment made to the service provider had a direct and immediate nexus with the plying of qualifying ships. Therefore, the gain on currency fluctuation was not an activity independent of plying of ships. The CIT was of the view that the exchange currency was received form parties other than persons paying freight. The assessee argued that the said parties were service providers acting as agent for enabling plying of qualifying ships.
The assesee company had made provision for gratuity liability and based on actuarial valuation payments were made to the approved gratuity fund every year. In the A.Y. under consideration the assessee had paid part of the amount on 26-03-07 and decited the same to general reserves in accordance with the accounting Standard 15 and the balance amount was paid before the due date of filing return of income. The CIT disallowed the said expenses contending that the same were not recorded as a liability in books of accounts by the assessee. The assessee submitted the actuary valuation certificate to support its argument as regards existence of liability.
In the A.Y. under consideration the assessee company had issued unsecured foreign currency convertible bonds (FCCB) for expansion of business, with an option to convert the FCCB into ordinary shares before redemption. The expenses incurred on issue of FCCB were debited to the P&L A/c. The CIT was of the view that the said Bonds qualified as Share capital and thus expenses for issue were capital in nature. The assessee argued that the conversion of FCCB into equity shares was not compulsory but optional. Also, none of the bond holders had exercised such option in the relevant A.Y. Further, on maturity the amounts outstanding had been repaid. Thus, the deletion ought to be deleted.
In appeals, having heard the parties, the Tribunal held that:
A) ++ an order is erroneous if it has been passed on an incorrect assumption of facts or on incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no material or insufficient material so as to affect the merits of the case and thereby cause prejudice to the interests of the revenue. The role of the Assessing Officer under the Income-tax Act, is not only that of an adjudicator, but also of an investigator. He cannot remain passive in the face of a return which apparently may be in order but calls for further enquiry. He must discharge both the roles effectively. The Assessing Officer is required to carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of the material collected by him as also those produced by the assessee before him. In sum and substance, the assessment order passed by the Assessing Officer should reveal that there is proper investigation and enquiry made by the Assessing Officer and he has applied his mind to the material available before him before coming to his conclusions. In the facts of the present case, as already stated earlier, reveals neither application of mind nor proper enquiry or investigation into the issues pointed out by the Commissioner of Income-tax. In this view of the matter, we do not find any merit in the contentions of the assessee with regard to the legality or validity of the impugned order of the Commissioner of Income-tax passed under S.263 of the Act;
B) ++ the Visakhapatnam Bench of the Tribunal in the case of Dredging Corporation of India Ltd, while dealing with identical issue of gain on account of foreign exchange fluctuations,… We find the aforesaid order of the Tribunal to be directly covering the issue as in dispute in the present appeal. Therefore, following the said decision, we hold that the amount of Rs.15, 46,428, being the gain on account of foreign exchange fluctuation is related to the activity of operating qualifying ships and therefore, has to be taxed under the Tonnage Tax Scheme as provided under Chapter XIIG of the Act. In this view of the matter, we are no inclined to sustain the impugned order of the Commissioner of Income-tax passed under S.263 of the Act, insofar as it relates to the gain of Rs.15,46,428 on account of foreign exchange fluctuations is concerned;
++… in our view, the Commissioner of Income-tax was not justified in discarding the evidences produced before him, on doubts and presumptions only without properly verifying them. If the fact of payment of gratuity to the tune of Rs.1,32,95,577 is established from the evidence available on record, then the deduction claimed by the assessee cannot be disallowed invoking the provisions of S.43B. We, therefore, direct the Assessing Officer to verify the bank account, and examine the matter in the light of such other evidence as may be called for by the Assessing Officer, or produced by the assessee in support of its claim of having made the payments in question within the period specified in S.43B, and accordingly determine the issue of allowability of the claim of the assessee. To this extent, the directions of the Commissioner of Income-tax in the impugned order are modified, and the Assessing Officer is directed to redecide this issue, bearing in mind our observations herein above, in accordance with law and after giving reasonable opportunity of hearing to the assessee;
++ though the assessee has claimed that the issuance of FCCBs was for business purpose, and for expansion of the business of the assessee, the fact remains that an option was given to the bond holders to convert the bonds into shares. Therefore, the onus is on the assessee to establish that the FCCBs were not issued for the purpose of expanding the capital base of the company……We find from the record that though the assessee has claimed that vide order sheet entry dated 5.8.2009, the Assessing Officer has enquired about the issue of FCCB and the expenditure claimed in that regard, however, in the assessment order there is not even a whisper on this issue. Nothing is also available on record before us which reveals that the Assessing Officer has applied his mind to this issue and has made an in depth enquiry to find out the exact nature of the expenses claimed. It is also a fact that the Commissioner of Income-tax has not considered the allowability of the expenditure keeping in view the law laid down on these aspects by the Apex Court and others, which were cited before him. That being so, the Commissioner of Income-tax in our view, is not justified in directing the Assessing Officer to outright disallow the expenses incurred in connection with the issue of FCCBs. In this view of the matter, we modify the directions of the Commissioner of Income-tax and direct the Assessing Officer to examine the issue of allowability or otherwise of the expenses incurred by the assessee in connection with the issue of FCCBs, keeping in view the ratio of the various decisions on this aspect, in accordance with law and after giving reasonable opportunity of hearing to the assessee.
(See 2013-TIOL-78-ITAT-HYD)
