Reassessment after completion of assessment u/s 143(3) cannot be termed as regular assessment and interest u/s 234D not chargeable
Dredging Corporation of India Ltd. Vs. ACIT (ITAT VISAKHAPATNAM)
The assessee was given refund while processing the return u/s. 143(1) and further refund was given after assessment u/s. 143(3). In reassessment proceedings u/s. 147, the refund given earlier became collectible from the assessee. The Assessing officer levied interest u/s. 234D on such excess refund amount. The learned CIT(A) held that the interest u/s. 234D is not chargeable in the hands of the company in reassessment proceedings.
The Tribunal upheld the CIT(A)’s order and noted as under :
(a) On a plain reading of section 234D, it is noticed that the interest u/s. 234D is leviable only if the refund granted to the assessee u/s. 143(1) of the Act becomes collectible in the order passed under regular assessment.
(b) As per the sec. 2(40) read with explanation to sec. 234D, ‘regular assessment’ is defined to mean assessment order passed u/s. 143(3) or u/s. 144 or where the assessment has been made for the first time u/s. 147 or u/s. 153A. Thus, reassessment proceedings u/s. 147 after completion of the assessment u/s. 143(3) is excluded form the purview of ‘regular assessment’.
(c) Such exhaustive definition of ‘regular assessment’ when considered in the light of the fact that in the appellant company’s case the assessment u/s. 147 has been made not for the first time, but after the completion of an assessment u/s. 143(3), the same cannot be termed as regular assessment, and consequently, the provisions of sec. 234D cannot apply in the appellant company’s case.
INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM
ITA Nos.6 to 8/Vizag/2011 – Assessment Year: 2006-07 to 2008-09
M/s Dredging Corporation of India Ltd. Vs. ACIT
ITA Nos.15 to 17/Vizag/2011 – Assessment Year: 2006-07 to 2008-09
DCIT Vs . M/s Dredging Corporation of India Ltd.
These cross appeals are directed against the common order dated 11.11.2010 passed by Learned CIT(A), Visakhapatnam and they relate to the assessment years 2006-07 to 2008-09. Since main issue agitated in these appeals is identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
2. The Assessing Officer, in all the three years under consideration, treated certain types of income earned by the assessee as incomes not generated from the business of operating qualifying ships. The appeals filed by the assessee before the learned CIT (A) were partly allowed. Hence both the parties are in appeal before us on issues decided against each of them.
3. The facts relating to the case are stated in brief. The assessee company is carrying on the business of undertaking dredging operations through dredgers. The Chapter XII-G of the Income Act, which encompasses sections 115V to 115VZC, contains special provisions for computing income of shipping companies in an alternative method known as “Tonnage tax scheme”, provided the assessee is in the business of operating “Qualifying ships” as prescribed in the above said chapter. For the sake of convenience, we extract below Section 115VA of the Act which is charging section under the above said chapter:
“115VA. Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company, the income from the business of operating qualifying ships, may, at its option, be computed in accordance with the provisions of this Chapter and such income shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
There is no dispute with regard to the fact that the assessee company is operating “Qualifying ships” and hence it is entitled to offer its income under Chapter XII G of the Act. In the three years under consideration, the assessee company offered its income as per “Tonnage tax scheme” prescribed under Chapter XII-G of the Act.
3.1 The assessment for the assessment year 2006-07 was initially completed on 29.1.2008 under section 143(3) of the Act by accepting the income disclosed by the assessee. Subsequently the Assessing Officer noticed that the assessee had generated interest income of Rs.35.16 lakhs from house building and other advances given by it and also miscellaneous income of Rs.586.06 lakhs during the year relevant to the assessment year 2006-07. The Assessing Officer took the view that these types of income cannot be considered as income generated from the core activity of operating qualifying ships and hence the assessee could not claim exemption of the same under the garb of tonnage tax scheme, i.e. these two types of income have to be assessed under normal provisions of the Act. Accordingly he reopened the assessment by issuing a notice under section 148 of the Act on 30.1.2009. After hearing the assessee, the Assessing Officer added both types of income cited above to the total income of the assessee.
3.2 The assessment for the years 2007-08 & 2008-09 were completed under section 143(3) of the Act, wherein the Assessing Officer, inter alia, added similar types of income to the total income of the assessee on the very same reasoning. As stated earlier, the appeals filed by the assessee before the learned CIT (A) were partly allowed. Hence both the parties are in appeal before us.
4. The common ground on which both the parties are in appeal relates to the determination of nature of interest income and miscellaneous income, i.e. whether they form part of income from the business of operating qualifying ships or not?. Besides the common ground cited above, both the parties have raised certain other grounds also. We shall first deal with the “other grounds” raised by them.
5. In the assessment year 2006-07, the assessee has raised following other grounds:-
(a) Validity of reopening of assessment under section 147 of the Act.
(b) Allowability of interest under section 244A of the Act on the self assessment tax paid by the assessee.
The revenue has also raised following other grounds in that year:-
(a) Allowability of interest under section 244A on the self assessment tax paid by the assessee.
(b) Deletion of interest charged under section 234D of the Act.
5.1 The first issue in the “other ground” raised by the assessee for the assessment year 2006-07 relates to the validity of reopening of assessment. The assessee challenged the reopening of the assessment under section 148 of the act before learned CIT (A) also and the first appellate authority dismissed the said ground with the following observations:
“5.1 After hearing the learned Authorised Representative and on carefully considering the facts relating to admission of additional grounds of appeal for treating the reassessment proceedings as invalid, it may, at the threshold, be stated that the said additional ground of appeal, ipso facto, does not qualify to be admitted for the reason that never ever during the reassessment proceedings had the validity of issue of notice under section 148 been challenged on behalf of the appellant company and, as such, such additional ground cannot be said to arise from the assessment order under section 147/143(3), dt. 02-12-09. The appellant, having acquiesced to the reassessment proceedings by the Assessing Officer without any iota or objection or reservation, the additional ground relating to such issue does not merit to be admitted. Even otherwise, the claim of the appellant that it had duly disclosed full and true facts relating to miscellaneous income is baseless and incorrect one. A perusal of the breakup of miscellaneous income indicates three items, the first one being sale of scrap, empties, condemned stores etc (Rs.23.51 lakhs), the second one being rent recoveries (Rs.4.70 lakhs) and the third one being a non-specified item “others” (Rs.555.85 lakhs). In the absence of any detailed breakup of the miscellaneous income falling under the sub category “others”, it cannot be said that the appellant company had made full and true disclosure of its miscellaneous income which could have been considered by the Assessing Officer who framed the original assessment order. It does not appeal from the records that the erstwhile Assessing Officer who had passed the original assessment order dt. 29.01.08 had ever applied his mind to the nature and details of “other” income included in the miscellaneous income. Hence, the question of any change of opinion by the successor Assessing Officer who initiated the reassessment proceedings does not arise at all. Both technically as well as on merits, the additional ground challenging the validity of the proceedings under section 147 of the Act for the assessment year 2006-07 being bereft of substance and devoid of merit, is liable to be thrown out at the threshold stage. Hence the same is, hereby, declined to be admitted”.
We also notice that the assessment has been reopened within 4 years from the end of the relevant assessment year and hence the first proviso to section 147, which prescribes certain restrictions, does not apply to the instant case. The assessee also has not brought on record any case law to show that the reopening made within four years from the end of the relevant assessment year is bad in law in the facts and circumstances of the instant case. Hence, we uphold the decision of the learned CIT (A) on this issue.
5.2 The next issue in “other grounds” raised by the assessee relates to the allowability of interest under section 244A of the Act on the self assessment tax paid by it, which was allowed partly by Learned CIT(A). The facts relating to this issue are stated in brief. The assessee had paid self assessment tax of Rs.5.00 crores and the entire amount of Rs.5.00 crores along with some portion of other prepaid taxes became refundable. The entire refund amount was adjusted against the existing tax demand pertaining to other years while processing the return u/s 143(1) of the Act. The Assessing Officer did not grant interest under section 244A of the Act on the said refund arising out of the self assessment tax. The Learned CIT(A), in the impugned common order, directed the Assessing Officer to grant interest on an amount of Rs.2.66 crores instead of Rs.5.00 crores. As stated earlier, both the parties are aggrieved by this decision. The assessee’s grievance is that the interest under section 244A should have been granted on the entire amount of Rs.5.00 crores. However, the department’s grievance is that the Learned CIT(A) should not have granted interest at all on any portion of self assessment tax payment.
5.2.1 However from the paper book filed by the assessee, we notice that the assessee has moved a petition under section 154 of the Act before the Assessing Officer seeking interest under section 244A of the Act on the refund arising out of self assessment tax paid by it and the same was rejected by the Assessing Officer. Hence the assessee filed an appeal before Learned CIT(A) challenging the order passed under section 154 of the Act and the said appeal was disposed of by Learned CIT(A), Visakhapatnam, i.e. the immediate predecessor of the CIT(A) who passed the impugned common order. The said order was passed on 26.4.2010 in ITA No. 35/ACIT/C-3( 1)/VSP/08-09, wherein the predecessor Learned CIT(A) held that the assessee is entitled to interest under section 244A on the refund arising out of self assessment tax paid. It appears that the assessee has also taken an identical ground in the appeal filed against the assessment order passed under section 143(3) of the Act. Hence the successor Learned CIT(A), i.e. the present Learned CIT(A) in the instant case, has decided the very same issue by partly allowing the ground in his common order dated 11.11.2010. It is not shown to us that the department has filed any appeal challenging the order dated 26.4.2010 passed by the predecessor Learned CIT(A). In that case, the impugned issue has reached finality and the instant ground taken before Learned CIT(A) in the appeal filed against the assessment order has become infructuous. Accordingly, we set aside the order of the learned CIT(A) on this issue.
5.3 The second issue in “Other grounds” raised by the revenue in assessment year 2006-07 relates to the chargeability of interest under section 234D of the Act. As stated earlier, the assessee was given a refund of Rs.11.02 crores while processing the return under section 143(1) of the Act. In the assessment order passed under section 143(3) of the Act, the refund amount was determined at Rs.11.08 crores to the assessee. However, in the reassessment proceedings carried under section 147 of the Act, the amount refundable to the assessee got reduced to Rs.8.75 crores. Hence a sum of Rs.2.33 crores became collectible from the assessee. The Assessing Officer levied interest of Rs.29,14,11O/- under section 234D of the Act on the amount so became collectible. The assessee challenged the said interest charged under section 234D of the Act before Learned CIT(A), who held that the interest under section 234D is not chargeable in the hands of the company in reassessment proceeding. The revenue has challenged the said decision of Learned CIT(A) before us.
5.3.1 The learned Departmental Representative submitted that the interest under section 234D can be charged if the amount of refund already granted became collectible in a regular assessment. For the said purpose, the assessment made for the first time under section 147 of the Act is treated as “regular assessment”. The impugned assessment is the assessment made for the first time under section 147 of the Act, i.e. there is no other 147 assessment earlier. The only assessment order available is the assessment order made under section 143(3) of the Act. Accordingly he submitted that the assessment made for the first time under section 147 of the Act is to be treated as “regular assessment” for the purpose of sec. 234D of the Act and hence interest is leviable in the hands of the assessee. On the contrary the learned Authorised Representative submitted that the impugned section is applicable only in cases where the refund granted under section 143(1) became collectable in a regular assessment. He submitted that, in the instant case, the impugned assessment is a reassessment made under section 147 of the Act, since the original assessment has already been completed under section 143(3) of the Act. Accordingly he contended that the provisions of section 234D shall not apply in the facts and circumstances of the case.
5.3.2 We have heard the parties on this issue. For the sake of convenience, we extract below the sub section 1 of section 234D:
“234D(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143 and -
(a) no refund is due on regular assessment; or
(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of one – half per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment”.
On a plain reading of the above said section, we notice that the interest under section 234D is leviable only if the refund granted to the assessee under section 143(1) of the Act become collectable in the order passed under “regular assessment”. The term “regular assessment” has been defined under section 2(40) of the Act as under:
“(40) “regular assessment” means the assessment made under sub section (3) of Section 143 or section 144;”.
Under the explanation given under section 234D the meaning of “regular assessment” is extended further as under:
“Explanation:- Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section”.
Now the question that arises is whether the reassessment made in the instant case under section 147 of the Act can be termed as a “regular assessment” for the purpose of section 234D of the Act. According to the learned Departmental Representative the impugned assessment is the assessment made for the first time under section 147 of the Act and hence it can be called as regular assessment for the purpose of charging interest under section 234D, i.e. according to learned Departmental Representative the second and subsequent reassessments made under section 147 of the Act after the completion of first reassessment under section 147 of the Act are only excluded from the purview of section 234D of the Act. However, we are not able to agree with the said contentions of the learned CIT (DR). According to us the interpretation made by the learned CIT (A) appears to be acceptable. For the sake of convenience, we extract below the relevant observations of the learned CIT (A):
“9.1 After hearing the learned Authorised Representative and on a careful consideration of the facts relating to the issue, it may be stated that regular assessment has been defined to mean assessment order passed under section 143(3) or under section 144 or where the assessment has been made for the first time under section 147 or under section 153A. Thus, reassessment proceedings under section 147 after completion of the assessment under section 143(3) is excluded from the purview of “regular” assessment. Such exhaustive definition of “regular” assessment when considered in the light of the fact that in the appellant company’s case the assessment under section 147 has been made not for the first time, but after the completion of an assessment under section 143(3), the same cannot be termed as “regular” assessment and, consequently, the provisions of sec.234D cannot apply in the appellant company’s case, although as a logical corollary, the appellant company is liable to pay interest on the excess refund granted to it earlier in the manner where interest under section 144A is granted to the appellant company on the excess taxes paid by it. IN this view of the matter, no interest under section 234D is chargeable in the appellant company’s case”.
Accordingly we uphold the order of the learned CIT (A) on this issue.
6. We shall now take up the common issue urged in all the three appeals filed by both the parties. The assessee claimed that the interest income and miscellaneous incomes form part of income generated from the business of operating qualifying ships. The Assessing Officer did not agree with the said claim and accordingly added the same to the total income of the assessee. The Learned CIT(A) gave partial relief and hence both the parties are in appeal before us. For the sake of convenience, we extract below the breakup details of said interest & miscellaneous income as given in the assessment order relating to the assessment year 2007-08:
(i) Sale of scrap – Rs.73,04,329
(ii) House Rent Recovery – Rs. 3,64,016
(iii) Profit on sale of assets – Rs. 10,4
(iv) Sale of tender documents – Rs. 8,22,678
(v) Receipt of liquidatory damages – Rs.207,94,256
(vi) Late attend receipts – Rs. 60,439
(vii) Others – Rs. 61,10,45
(viii) Insurance – others – Rs.945,57, 148
(ix) Office building, warehouse/store – Rs. 78,978
(x) Interest on house rent – Rs. 27,90,63 1
TOTAL = Rs.13,30,07,835
7. Before addressing the above said issue, we feel it pertinent to make a reference to the relevant provisions of the Act. The term “relevant shipping income” has been defined in section 115VI of the Act, according to which the profits from core activities referred to sub section 2 to section 115VI and the incidental activities referred to in sub section 5 of that section are treated as “relevant shipping income”. For the sake of convenience, we extract below sub section 2 of section 115VI which define the core activities:
“(2) The core activities of a tonnage tax company shall be
(i) its activities from operating qualifying ships; and
(ii) other ship-related activities mentioned as under:-
(A) shipping contracts in respect of -
(i) earning from pooling arrangements;
(ii) contracts of affreightment
Explanation:- For the purpose of this sub-clause:-
(a) “pooling arrangement” means an agreement between two or more persons for providing services through a pool or operating one or more ships and sharing earnings or operating profits on the basis of mutually agreed terms;
(b) “contract of affreightment” means a service contract under which a tonnage tax company agrees to transport a specified quantity of specified products at a specified rate, between designated loading and discharging ports over a specified period;
(B) specific shipping trades, being
(i) on-board on-shore activities of passenger ships comprising of fares and food and beverages consumed on board;
(ii) slot charters, space charters, joint charters, feeder services, container box leasing of container shipping”.
According to sub section 5 the incidental activities shall be the activities which are incidental to the core activities and which may be prescribed for the purpose. The incidental activities for the purposes of relevant shipping income are prescribed in rule h+R of the Income Tax Rules and the same is extracted below:
“11R. The incidental activities (details given in Note 5 appearing after the corresponding Form No.66) referred to in sub-section (5) of section 1 i5V-I shall be the following, namely:-
(i) maritime consultancy charges;
(ii) income from loading or unloading of cargo
(iii) ship management fees or remuneration received for managed vessels; and
(iv) maritime education or recruitment fees”.
8. Now coming to the impugned issue, we notice that the learned CIT (A) has addressed the impugned issue by taking into account following principle, as stated by him in his order:
“The activities from operating qualifying ships should not be restricted to only the receipts from the parties in respect of whom shipping operation services have been rendered but it should also include activities which necessarily and directly relate to the overall shipping operations and, accordingly, the income arising from such activities over and above the receipts from the servicee parties have to be taken as income related to the shipping activities. In other words, there should be a direct nexus between the overall shipping activities undertaken and the receipt/income arising from such activity over and above the shipping operation receipts in respect of various parties”.
Accordingly the learned CIT (A) held that the following incomes are generated from the activity of operating qualifying ships.
(a) Sale of scrap
(b) Profit on sale of assets
(c) Insurance receipts
(d) Recovery of rent from staff for hired accommodation
(e) Recovery for vehicle use
(f) Gain on foreign exchange fluctuation
The learned CIT (A) further held that the following types of income are not related to the activity of operating qualifying ships:
(a) Interest on housing loan given to employees
(b) Liquidated damages collected from various parties
(c) Recovery towards late attendance
(d) Sale of tender documents
(e) Training fee
(f) Fee for supply of information under RTI Act.
(g) Other income**
(** since no detail was furnished about the nature of “other income”.)
8.1 During the course of hearing, it was agreed by both the parties that the term “”income from” used in section 115VA of the Act is akin to the term “derived from”, which is used in Sec.8OHH and other sections. The term “derived from” was explained by Hon’ble Supreme Court in the case of Pandian Chemicals Ltd., vs. CIT (2003) (262 ITR 278) as under:
“It is clear, therefore, that the words ‘derived from’ in section 8OHH of the Income Tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself”.
Accordingly, we shall follow the principles laid down by the Hon’ble Apex Court in the above cited case to ascertain the correctness or otherwise of the decision of Learned CIT(A).
9. In the case of Dy.Commissioner of Income Tax Vs. Core Healthcare Ltd (2009) (308 ITR 263) (Guj.), the question whether the income generated from the sale of empty containers can be treated as income derived from industrial undertakings was raised before the High Court. The question was answered in affirmative and for the sake of convenience, we extract below the relevant head note:
“Held that it was an accepted position that the empty containers, which were sold, were containers in which raw material in bulk had been purchased by the assessee. The cost of the containers was part of the purchase price which went to make up the total cost of the manufactured product and was thus directly relatable to the manufacturing activity of the industrial undertaking. The income generated on sale of such empty containers could be set off against the purchase cost, in other words bringing down the purchase price of raw material, or it could be treated as income directly relatable to the activity of industrial undertaking. The net result would be the same-either the cost of raw material gets reduced and thus increases profits of manufactured products on sale or the sale price of containers is directly added to swell the total profits. Therefore, in the light of the decision of this High Court in the case of Dy.CIT v. HarjivandasJuthabhai Zaveri (2002) 258 ITR 785, there was no infirmity in the impugned order of the Tribunal”.
Applying the above said ratio, the income received by the assessee on sale of scraps and sale of assets could be treated as income directly relatable to the activity of operating qualifying ships. Accordingly, we affirm the order of Learned CIT(A) on these two types of income.
9.1 The amount received on insurance claim was held to be derived from industrial undertaking by Hon’ble Delhi High Court in the case of CIT Vs. Sportking India Ltd (2010)(324 ITR 283). By following the ratio of the said decision, we uphold the decision of Learned CIT(A) on this issue.
9.2 The Learned CIT(A) has held that recovery of rent for leased quarters and also the recovery made for vehicle use are incomes relating to the activity of operating qualifying ships. The assessee has taken a stand that such kinds of recoveries go to reduce the expenses incurred by the assessee on the respective account. However, in our view, such kinds of receipts form independent sources of income which is not connected with the activity of the operating qualifying ships, i.e. they are income relating to a step moved from the main business. Accordingly we reverse the order of learned CIT (A) and restore that of the order of Assessing Officer on these two types of receipts.
9.3 The gains realized on the foreign exchange fluctuation normally take the colour of the primary transactions. It has been stated that the assessee has entered into certain transactions in foreign currency in connection with its core activity of dredging. Accordingly the exchange difference arising out of such activities should be treated as related to the core activity of dredging. Similar view has been taken by Bangalore bench of ITAT in the case of ITC Hotels Vs. Dy.Commissioner of Income Tax (2007)(107 TT3 (Bang) 955). Accordingly, in our view, the learned CIT (A) is right in holding that the same are related to the activity of operating qualifying ships.
10. We shall now deal with the items of income which have been considered by the learned CIT (A) as not relating to the activity of operating qualifying ships. The learned CIT (A) observed that the receipts emanating from the activities which do not have a direct and necessary nexus with the shipping/dredging activities of the assessee company cannot be exempted under the tonnage tax scheme for the reason that the assessee company could well manage shipping activities without undertaking such extraneous activities. It is now well settled that it is necessary to look into the direct or immediate source of any income in order to decide whether such income is derived from the eligible activity. Accordingly we are of the view that the learned CIT (A) was right in holding that the following types of receipts cannot be related to the activity of operating qualifying ships:
(a) Interest on housing loan and other advances
(b) Recovery towards late attendance
(c) Sale of tender documents
(d) Training fees
(e) Fee for supply of information under the RTI Act.
(f) Liquidated damages collected from various contractee parties as compensatory payment for the failure to execute contract works within the stipulated time.
However, with regard to the income categorized as “other income”, the learned CIT (A) has taken adverse inference in the absence of any details with regard to the nature of items of income included therein. However, during the course of hearing, the Learned Authorised Representative pointed out that the explanations given before Learned CIT(A) in respect of “other income”, i.e for the assessment year 2006-07, it is stated that the other income mainly includes “Exchange variation accounted in connection with a foreign dredging contract t Bahrain” and for other two years it was stated that the “Other income” mainly includes “Commission received from the chartering of dredgers for the SSCP Project…”. It is pertinent to note that the assessee has not furnished the details of actual receipts, i.e. natue of receipt, from whom it was received, the date, the amount etc., except making a general statement. In any case, such details were not furnished before the Assessing Officer in order to enable him to examine them vis-à vis the provisions of the Act. Hence, in our view, all the receipts categorized under the head “Other income” in these three years need to be examined by the Assessing Officer. Accordingly, we set aside the order of learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with a direction to examine the nature of receipts that are included in “Other income” and take appropriate decision in accordance with the law. The assessee is also directed to furnish full details of the same to the Assessing Officer. However, if the assessee fails to furnish the required details, the order of Learned CIT(A) on this issue would stand confirmed. We order accordingly.
10.1. The assessee has also taken a stand that if any item of receipts is not considered as receipts relating to the core activity of dredging, then the deduction towards the expenditure incurred towards earning such receipts should be allowed as a deduction and accordingly only net income should be charged to tax. The tax authorities have pointed out that all the expenses incurred by the assessee shall be deemed to have been allowed while computing the income of the assessee under the special provisions of the Act, cited above and hence there cannot be any further deduction of the same expenditure. We agree with the observations of tax authorities in this regard. If the claim of the assessee is allowed, then it would amount to double deduction of the same expenditure, which is not permitted under the Act. Accordingly we dismiss this ground of the assessee.
11. The assessee has raised one more issue in its appeal filed for the assessment year 2008-09. While finalizing the assessment of that year, the Assessing Officer noticed that the assessee did not account for interest awarded to it under the arbitration conducted by the Joint Secretary (Arbitrator) in the Ministry of Heavy Industries & Public Enterprises (Department of Public Enterprises). The Assessing Officer came to know of this fact from the annual report. The relevant observation of Assessing Officer is extracted below:
“On perusal of the annual report of the company for the year 2007-08 relevant to the assessment year 2008-09 it is noticed that under schedule XIV of the Annual Report at item No. K it has been stated that during the year the arbitration in respect of Balari Bar has been adjudicated in favour of the Company. Kolkata Port Trust (KOPT) paid the principal amount of Rs.502 lakhs. However, KOPT disputed payment of the interest amounting to Rs.1144 lakhs upto 31.03.2008 awarded under the award. Hence, income thereto is recognized in the current year accounts to the extent of principal amount received. Similarly under item No.L it has been stated that during the year the arbitration in respect of Link Road Project, Kochi has been adjudicated in favour of the Company awarding principal amount of Rs.289 lakhs plus interest amounting to Rs.801 lakhs upto 31.03.2008. However, Cochin Port Trust have not paid any amount. In view of the uncertainty in realization of the amount, income thereto has not been considered in the accounts”.
The Assessing Officer took the view that the interest amount of Rs. 19.45 crores awarded under arbitration should have been accounted for during the year relevant to the assessment year 2008-09 as the assessee is following mercantile system of accounting and further the said interest has accrued to the assessee on the date of granting award. However, the assessee submitted following explanations in this regard.
(a) The Kolkatta Port trust has disputed the payment of interest and in the Kochi project also, the concerned party has not paid the interest.
(b) Even if the same is taken as accrued, the said interest payment has to be treated as income from dredging activity and hence no separate addition is called for.
(c) Even if it is considered as other income, the corresponding expenses should be allowed to be deducted.
However, the Assessing Officer was not convinced with the said submissions and accordingly added the above said interest amount of Rs. 19.45 crores to the income of the assessee. The Learned CIT(A) also confirmed the same. Hence the assessee is in appeal before us.
11.1 There is no dispute that the assessee is following mercantile system of accounting and the assessee has received both the arbitration award during the year under consideration. Though the assessee claims that the interest awarded by the arbitrator was disputed by both the parties, no material was placed on record to suggest that both the parties have resorted to any legal process in support of their respective claims. The Learned CIT(A) has observed that the assessee has accounted the impugned interest income on receipt basis in the subsequent assessment year. However, the details of interest income so accounted for in that year are not available on record. However, the very fact that the assessee has received interest income in the subsequent year very much suggests that the right to receive the impugned interest has accrued to the assessee during the year under consideration. Accordingly, we uphold the view of the learned CIT (A) that the impugned interest has to be assessed during the year under consideration as per the mercantile system of accounting followed by the assessee.
11.2 Alternatively the assessee has claimed that the impugned interest income form part of its core activity of dredging operations, i.e. the same form parts of income relating to the activity of operating qualifying ships. However, from the record, we are unable to ascertain the nature of activities carried on by the assessee in the above said two projects. It is also not clear whether the nature of the activities of the above said two projects was verified by the Assessing Officer during the course of assessment proceedings. Hence, in our view, this aspect requires verification. With regard to the nature of interest receipts, it has been claimed that the interest realized from customers on overdue payments should be considered as profits and gains derived from the activities carried on by the assessee. In support of the said contention, the assessee has placed reliance on the decision of Hon’ble High Court of Delhi in the case of CIT vs. Advance Detergents Ltd (2010) (228 CTR (Del) 356). We have already held that the nature of activity carried on by the assessee in the above said two projects require verification and interest awarded to the assessee is also connected to the said issue. Accordingly, we set aside the order of the learned CIT (A) on this issue and restore the matter back to the file of the Assessing Officer with a direction to examine this issue afresh in accordance with the law. The Assessing Officer should also examine the assessee’s claim about the nature of interest receipts and take appropriate decision in accordance with law.
12. In the result, the appeals of the revenue are partly allowed and the appeals of the assessee are treated as partly allowed for statistical purposes.
Pronounced in the open Court on 25th July, 2011.