12. os itxa 1578 16.doc R.M. AMBERKAR (Private Secretary) IN HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. INCOME TAX APPEAL NO. 1578 OF 2016 Pr. Commissioner of Income Tax-5, Mumbai .. Appellant Versus M/s. M. Pallonji Shipping Pvt Ltd .. Respondent ................... Mr. Sham Walve for Appellant Mr. Jehangir Mistri, Senior Counsel a/w Mr. Ryan Saldanha for Respondent ................... CORAM : AKIL KURESHI & M.S. SANKLECHA, JJ. DATE : FEBRUARY 25, 2019. P.C.: 1. This appeal under Section 260 of Income Tax Act, 1961 ("the Act" for short), challenges order dated 26.8.2015 passed by Income Tax Appellate Tribunal, Mumbai ( Tribunal for short). 2. This appeal relates to Assessment Year 2008-09. 3. Revenue urges following question of law for our consideration:- 1 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc " Whether on facts of case and in law, Tribunal was justified in deleting addition made by Assessing Officer who held that exchange gain on account of restatement on foreign loan is not covered under tonnage tax scheme and is taxable as normal business income?" 4. respondent assessee is engaged in business of shipping. For purpose of its business, it owns ships, boats, barges etc and also hires them. 5. respondent filed return of income on 27.9.2008 declaring income of Rs. 1.62 crore (rounded off). During course of assessment proceedings, Assessing Officer noted that respondent had opted for tonnage tax scheme under Chapter XIIG of Act i.e special provisions relating to income of shipping companies. On verification, Assessing Officer found that amount of Rs. 8.89 crore in aggregate being gain on account of foregin exchange fluctuation and was credited to Profit & Loss Account. gains, Assessing Officer found was on account of notional foreign exchange gain as restatement of liability to purchase ships, actual foreign exchange gain arising at time of actual payment of loan taken to purchase ships and notional foreign exchange gain on account of actual 2 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc restatement of foreign exchange balances on account of debts. According to Assessing Officer, gains on account of exchange rate variation of foreign loan is not covered under Chapter XII-G of Act i.e tonnage tax scheme. Therefore, agreegate amount of Rs. 8.89 crore was brought to tax under normal business income by order dated 24.12.2010 passed under Section 143(3) of Act. 6. Being aggrieved, respondent carried issue in appeal to Commissioner of Income Tax (Appeals) ["CIT(A)" for short]. By order dated 2.1.2012, CIT(A) held that respondent assessee has himself shown foreign exchange gain (notional and actual) agreegating to Rs. 8.89 crore as revenue receipt but Assessing Officer was correct in holding that above gain though revenue in nature is not covered by Chapter XII-G of Act. Thus, appeal of respondent was dismissed by CIT(A). 7. On further appeal, impugned order of Tribunal noted fact that in subsequent assessment year namely 3 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc assessment year 2010-11, on identical facts situation, Assessing Officer has allowed foreign exchange gain / loss arising on account of loan taken for purpose of acquisition of ships as forming part of core activity of respondent assessee and thus, entitled to benefit of Chapter XIIG of Act. It also placed reliance upon decision of its coordinate bench in case of Dredging Corporation of India Ltd Vs. ACIT1 wherein it has been held that gains realized on foreign exchange fluctuation in connection with core activity of assessee would be treated as gains falling under tonnage tax scheme as provided in Chapter XIIG of Act. Thus, allowing appeal of respondent. 8. learned counsel Mr. Walve in support of appeal submits:- a. Exchange gain on account of restatement on foreign loan would not be covered under tonnage tax scheme but would be taxable as normal business income. Thus, appeal is 1 [2011] 13 taxmann.com 37 (Vishakhapatnam) 4 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc restricted to only amount attributable to notional foreign exchange gain on account of restatement of liability of foreign loan taken to purchase ships; and b. activity of purchasing of ships cannot be considered to be core activity of respondent for purpose of shipping income as defined in Section 115VI of Act. 9. On other hand, Mr. Mistri, learned senior counsel on behalf of respondent supports impugned order of Tribunal and submits as under :- a. Assessing Officer himself as per assessment order 2010-11 considered gain arising on loan taken for acquisition of ships as core activity of respondent for purpose of shipping income as defined in Section 115VI of Act. Further for assessment year 2009-10, loss on account of foreign exchange fluctuation was allowed as part of tonnage income. It is submitted that on account of consistency, no fault can be 5 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc found with impugned order of Tribunal allowing respondent's appeal; b. Reliance is placed upon decision of Tribunal in case of Dredging Corporation of India Ltd (supra) wherein it has been held that gains realized on foreign exchange fluctuation in connection with core activity of assessee would be treated as gains falling under tonnage tax scheme as provided in Chapter XIIG of Act. 10. We may note that Chapter XII-G of Act is special chapter relating to income of shipping companies. It inter alia provides to tax income of shipping companies on deemed basis i.e on basis of tonnage of vessels. In terms of Section 115VF of Act, deemed income is to be computed on basis of tonnage income and shipping income referred to Section 115VI shall not be chargeable to tax. Section 115VI of Act inter alia refers to profits and gains of shipping companies obtained from core activities of Company. Sub-section 2 of Section 115VI of Act inter 6 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc alia provides as core activity income from "operating qualifying ships." It is on basis of aforesaid provisions that Assessing Officer for assessment years from 2009-10 and 2010-11 consistently accepted view that gain / loss on foreign exchange variation would be covered within meaning of core activities of shipping business of respondent assessee. 11. We find that respondent had claimed following gain on account of foreign exchange fluctuation as noted in order dated 2.1.2012 of CIT(A) claimed by respondent as part of its shipping business is as under:- Particulars Amount (Rs.) Explanation Notional gain on account of restatement 5,91,41,900(*) These are entires passed in order of foreign exchange liabilities on to comply with Accounting Standard 11 account of purchase of ships as on - 'The effects of Changes in Foreign end of year. Exchange Rates.' Realized gains on foreign exchange on 2,78,79,481(*) This is entry passed at time of account of purchase of ships. repayment during year of loans taken for purchase of ships. Gains on foreign exchange fluctuations 19,13,239 These arise basically on account of in balances on account of debtors etc, movement in debtors' accounts. arising from shipping activates Mr. Walve, learned counsel appearing for Revenue, on instructions, states that this appeal is only restricted to Serial No. 1 above. notional gain on 7 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc account of restatement of foreign exchange liabilities on account of purchase of ships as on end of year. Therefore, according to Revenue before us foreign exchange gain / loss on account of Serial No. 2 & 3 above would form part of shipping income. Revenue has not been able to give any rationale for submitting that gain arising in view of exchange variation on purchase of ships is taxable as shipping business and gain as reinstatement of foreign exchange liability is not taxable as shipping business. This itself would warrant no interference of impugned order dated 26.8.2015 of Tribunal. 12. We also note that Assessing Officer has allowed gain made on account of foreign exchange variation for acquisition of ships as being part of core activity of respondent assessee's shipping business in its order for assessment year 2010-11. Thus holding that it falls within meaning of core activity of shipping business under Section 115VI (1) and (2) of Act. Revenue has not been able to show as to any material difference in subject assessment year to subsequent years when it 8 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc has been accepted as shipping business which would warrant different view in this appeal. 13. Further, impugned order also placed reliance on decision of Tribunal in case of Dredging Corporation of India Ltd (supra). In aforesaid decision, Tribunal recorded fact that income earned on account of foreign exchange fluctuation was activity which was generated from activity of operating ships as defined in Section 115VI of Act. On being specifically asked, Mr. Walve, learned counsel for Revenue states that he is not aware whether decision of Tribunal in case of Dredging Corporation of India Ltd (supra) has been challenged before Andhra Pradesh High Court. However, we find that from Tribunal decision in Dredging Corporation of India Ltd (supra), it is not clear as to whether gain on exchange fluctuation was on account of carrying out dredging activity or for purchase of dredges. Thus, we do not reply upon it. Be that as it may, independent of decision of Tribunal in decision Dredging Corporation of India Ltd (supra), we are of view that activity of 9 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc loss or gain on account of exchange variation is in nature of core activity of respondent. 14. Chapter XII-G of Act contains special provisions relating to income of shipping companies. As per Section 115VA, income of company from business of operating qualifying ships, at its option, be computed in accordance with provisions of said chapter. term 'Qualifying Company' is defined in Section 115VC and term "Qualifying ship" is defined in Section 115VD of Act. For being categorized as 'Qualifying Company', one of requirements is that company owns at least one qualifying ship. Section 115VB of Act pertains to operating of ships and provides that company shall be regarded as operating ship if it operates any ship whether owned or chartered by it. Section 115VE of Act contains provisions for manner of computation of income under tonnage tax scheme. Section 115VG makes provision for computation of tonnage income. Section 115VI pertains to relevant shipping income. As per sub-clause (i) of sub- section (1), relevant shipping income of tonnage tax 10 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc company would mean its profits from core activities referred to in sub-section (2). Sub-section (2) of Section 115VI lists core activities of tonnage tax company which includes its activities from operating qualifying ships. 15. From such provisions, it can be seen that qualifying company can take advantage of provisions contained in said chapter for computing its income arising from business of operating qualifying ships. Though term 'Operating Ships' takes within its fold case of company which operates ship whether owned or even chartered by it, for company to be categorized as qualifying company, one of requirements is that it owns at least one qualifying ship. Owing ship for purpose of operating is thus integral part of qualifying company to be engaged in business of operating qualifying ships. 16. In case of CIT Vs. Bokaro Steel Ltd2, Supreme Court examined case where company was in process of constructing and erecting its plant. While this process was going on, company had earned from 2 (1999) 36 ITR 315 (SC) 11 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc different activities income including rent from quarters let out to employees of contractors. In such background, it was held that amount was directly connected and incidental to construction of plant by assessee and therefore, capital receipt. Similarly in present case, we find that assessee's act of acquiring ships was closely connected, interlinked and integral to its core activities of operating qualifying ships. 17. We see no reason to interfere with impugned order of Tribunal, as Revenue itself contends that its appeal is restricted only to Serial No. 1 referred to herein above i.e on account of restatement of foreign exchange liabilities on purchase of ships and it makes no grievance on realized gains on foreign exchange on account of purchase of ships referred to at serial No. 2 above. This distinction itself is without any basis. If realizing gain on account of foreign exchange fluctuations on account of purchase of ships at Sr No. 2 is to be treated as shippping income, there is so reason as to why notional gain on account of foreign exchange liabilities on account of purchase of ships at Serial No. 1 12 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: 12. os itxa 1578 16.doc should also not been given same treatment. Besides on account of consistency of treatment of variation on account of foreign exchange gain / loss arising on loan taken for acquisition of ships would be considered core activity arising out of operating ships. That is so far as gain / loss arising on variation of foreign exchange on purchase of ships is concerned. There is no reason given as to why gain made as restatement of foreign exchange liability is not part of shipping business under Section 115VI of Act. Further variation in exchange rates on account of loan taken on purchase of ships and which gives rise to profit / loss on account of foreign exchange variation of loan taken would in our view be considered to be part of core activity of shipping company entitled benefit of Chapter XII-G of Act. 18. In above view, question as proposed does not give rise to any substantial question of law. Thus, not entertained. Appeal is dismissed. [ M.S. SANKLECHA, J. ] [ AKIL KURESHI, J ] 13 of 13 ::: Uploaded on - 04/03/2019 ::: Downloaded on - 05/03/2019 11:53:12 ::: Pr. Commissioner of Income-tax-5, Mumbai v. M. Pallonji Shipping Pvt Ltd