By TIOL News Service

MUMBAI, DEC 26, 2018: THE ISSUE AT HAND IS - Whether penalty can be imposed on a PSU engaged in the shipping business, whose profits from sale of ships & fixed assets had correctly been classified as income from core shipping activites. NO IS THE ANSWER.

Facts of the case

The assessee company is a PSU engaged in merchant shipping business. It declared income under tonnage tax scheme u/s 115V. It was claimed by the assessee that all the ships operated by the assessee were qualified ships and valid certificates was produced before the AO. Further, the assessee also offered in addition to tonnage income, under the head 'Income from other sources'. Further, it was also noted that the assessee allocated and claimed administrative expenses against interest income of Rs 172.11 crores. Hence, the allocation of administrative expenses was claimed to be done in the ratio of turnover u/s 115VJ dealing with treatment of common costs. During the assessment, the AO noted that the assessee u/s 115VJ as to treatment of common costs where tonnage tax companies also carries on any business activity other than tonnage tax business. However, the AO disallowed u/s 57(iii) as only those costs which were expended wholly and exclusively for the purposes of making or earning such income can be allowed. Subsequently, it was also observed by the AO that interest income derived from parking of surplus funds was to be treated as income from other sources and not business income as such income cannot have an immediate nexus with business.

Further, the AO observed that penalty was exigible in this case as assessee had furnished inaccurate particulars of income u/s 271(1)(c) while filing return and assessee could not discharge its onus, penalty was therefore levied by the AO thereto for claiming expenses u/s 115VJ and claiming an amount of Rs 12.39 crores of sale of ships and fixed assets as turnover of core shipping business activity for the purposes of calculating excess of incidental activities, penalty passed by the AO u/s 271(1)(c). On appeal, the CIT(A) upheld the order of AO.

On appeal, the Tribunal held that,

++ the penalty u/s 271(1)(c) in the instant case before the Court is not exigible with respect to the claim of the assessee for deduction of administrative expenses against income from interest on deposits and dividend income as explanations as were submitted by the assessee were bonafide explanations as to interpretation of a newly inserted special scheme of taxation for shipping companies has taken the assessee out of clutches of penalty provisions as were contained in Section 271(1)(c) and hence no hesitation in deleting the penalty as levied by the AO u/s 271(1)(c) and confirmed by CIT(A) with respect to the claim of the assessee for deduction of administrative expenses against income from interest on deposits and dividend income. The assessee succeeds on these two issues on which penalty was levied by AO and as was confirmed by CIT(A);

++ further, the issue of treating profit on sale of ships as well as profits on sale of other fixed assets being treated as income from core shipping activities by the assessee was also decided against the assessee by all the three authorities concurrently i.e. AO, CIT(A) and the Tribunal. The assessee has treated profit on sale of ships as well profit on sale of other assets to be income from core shipping businesses. All the three authorities including Tribunal has decided both the issue concurrently against the assessee in quantum assessment proceedings and appeals arising therefrom;

++ thus, the Court held that penalty u/s 271(1)(c) in the instant case before the Court is not exigible as explanations by the assessee were bonafide explanations which has taken it out of clutches of penalty provisions as were contained in Section 271(1)(c) of the 1961 Act and hence no hesitation in deleting the penalty as levied by the AO u/s 271(1)(c) and confirmed by CIT(A) with respect to the claim of the assessee for treating income from sale of fixed assets as well income by way of profit from sale of other fixed assets to be income from core shipping activities albeit the said claim stood rejected by all the authorities concurrently including Mumbai-tribunal in assessee's own case for AY 2006-07.

(See 2018-TIOL-2483-ITAT-MUM)