Great Eastern Shipping Co. Ltd. Vs ACIT (ITAT Mumbai)
Cancellation of vessel construction contracts constituted a capital receipt and was outside the purview of Section 28(iv)
In a recent case between Great Eastern Shipping Co. Ltd. and the Assessing Officer (ACIT) before the Income Tax Appellate Tribunal (ITAT) Mumbai, the issue of whether the cancellation of vessel construction contracts, resulting in a foreign exchange gain, constituted a capital receipt or a revenue receipt under Section 28(iv) of the Income Tax Act (ITA) was deliberated upon.
The contention revolved around the treatment of foreign exchange gains written back upon the cancellation of vessel construction contracts, which were earlier capitalized to the vessels, for the assessment year 2011-12. The Assessing Officer (AO) asserted that such gains fell within the purview of Section 28(iv) of the ITA and were taxable as revenue receipts. This stance was based on the argument that since the vessel had not been acquired by the assessee, the gain couldn’t be related to a capital asset, thus making it taxable.
However, the appellant argued that such gains were capital receipts, exempt from taxation under Section 28(iv) of the ITA. They provided a comprehensive elucidation of the transactions involved:
- The contracts with the shipyard for vessel construction involved stage payments made from foreign currency loans.
- Exchange differences on revaluation of these loans were initially credited to the Ships under Construction account as part of Capital Work in Progress.
- Upon cancellation of the contracts, associated interest expenditures were written off to the Profit and Loss Account.
- The exchange differences, earlier capitalized, were written back and credited to the Profit and Loss Account.
The AO, in the final assessment, taxed the exchange difference written back on contract cancellation as a revenue receipt, emphasizing the lack of clarification regarding the treatment of ‘capital work in progress.’
In response, the appellant highlighted that Section 28(iv) applied to receipts on revenue account arising from business or profession. Since the gains were on capital account, the section wasn’t applicable. This interpretation aligned with a precedent set by the Hon’ble Supreme Court in Mahindra & Mahindra Ltd, where it was held that receipts in the form of cash or money couldn’t be taxed under Section 28(iv).
The ITAT upheld this argument, ruling in favor of the appellant. It concluded that foreign exchange gains written back on vessel construction contract cancellation, previously capitalized, constituted capital receipts and were outside the scope of Section 28(iv) of the ITA.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid cross appeals have been filed by the assessee as well as by the Revenue by separate impugned orders against final assessment order dated 29/01/2016 passed u/s.143(3) r.w.s. 144C(13) in pursuance of directions given by the DRP dated 28/12/2015 for the A.Y.2011-12; order against 31/01/2018 passed by ld. CIT(A)-10, Mumbai for the A.Y.2013-14 and cross appeals filed by the assessee as well as by the Revenue against order dated 28/01/2019 passed by CIT(A)-10, Mumbai for the A.Y.2015-16.
2. Since issues involved in all the years are common, therefore, the same were heard together and have been disposed of by way of this consolidated order. We will take up take up the appeal for A.Y.2011-12 first.
3. The ground Nos.1 to 9 and additional ground Nos.1& 2 relate to disallowance u/s.14A of the Act made by the ld. AO has been challenged by the assessee.
4. The brief facts qua the issue of disallowance u/s.14A of the Act are that assessee while filing the return of income has computed disallowance of Rs.1,17,99,604/- u/s.14A. The working of the disallowance by the assessee was in the following manner:-
