Ocean Sparkle Ltd., Hyd, Hyderabad V. DCIT, Circle-16(3), Hyderabad, Hyderabad

ITA 440/HYD/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6070 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-05-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 29-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U MINICHANDRAN
• Assessee Lawyers: T S AJAI
• Keywords: Capital asset; Depreciation; Earning of tax free income; Cost of acquisition
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 438, 439 & 440/HYD/2016 ASSESSMENT YEAR: 2008-09, 2011-12 & 2012-13 OCEAN SPARKLE LTD., HYDERABAD PAN AAACO 2519H VS. DY. COMMISSIONER OF INCOME-TAX, CIRCLE 16(3), HYDERABAD. APPELLANT RESPONDENT ASSESSEE BY: SHRI T.S. AJAI REVENUE BY: SMT. U. MINICHANDRAN DATE OF HEARING: 17/05/2018 DATE OF PRONOUNCEMENT: 08/06/2018 O R D E R PER S. RIFAUR RAHMAN, AM: THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST SEPARATE ORDERS OF CIT(A) - 4, HYDERABAD, ALL DATE D 04/01/2016. SINCE IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLUBBED AND HEARD TOGETHER AND, THEREFORE, A COMMON ORDER IS PASSED FOR THE SAKE OF CONVENIENC E. ITA NO. 438/HYD/2016 FOR AY 2008-09 2. BRIEFLY THE FACTS OF THE CASE ARE, ASSESSEE CO MPANY, ENGAGED IN THE BUSINESS OF CARGO LIGHTERAGE AND POR T O&M OPERATIONS, FILED ITS ORIGINAL RETURN OF INCOME FOR THE AY 2008- 09 ON 30.09.2008 DECLARING A TOTAL INCOME OF RS.6,1 2,82,476/- UNDER NORMAL PROVISIONS. BOOK PROFIT U/S.115JB WAS ADMITTED AT RS.14,89,67,159/-. THE ASSESSEE FILED REVISED RE TURN OF INCOME ADMITTING TOTAL INCOME OF RS.8,96,07,642 UND ER NORMAL PROVISIONS AND RS.14,65,02,499 UNDER PROVISIONS OF SECTION I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 2 115JB. THE ORDER U/S.143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) WAS PASSED ON 14.12.2010 AND ASSES SED THE TOTAL INCOME AT RS.12,73,91,732/- AND RAISED A DEMA ND OF RS.52,34,417/-. 2.1 LATER, CERTAIN DISCREPANCIES WERE OBSERVED FROM THE DETAILS SUBMITTED BY THE ASSESSEE AND, THEREFORE, A NOTICE U/S.148 WAS ISSUED AND SERVED ON 26.03.2013 AFTER G ETTING APPROVAL FROM CIT- IV FOR REOPENING OF THE ASSESSME NT U/S 147 OF THE ACT. IN RESPONSE TO THE NOTICE, THE ASSESSE E COMPANY FILED A LETTER ON 02.04.2013 STATING THAT THE REVIS ED RETURN FILED MAY BE TREATED AS THE RETURN FILED WITH REFERENCE T O NOTICE U/S.148 OF THE INCOME-TAX. CONSEQUENTLY, A NOTICE U /S 143(2) WAS ISSUED ON 23.07.2013, POSTING THE CASE ON 02.08 .2013. IN RESPONSE TO THE NOTICE, AUTHORIZED REPRESENTATIVE O F THE ASSESSEE COMPANY FILED THE INFORMATION ON 05.11.201 3 IN SUPPORT OF ITS RETURN OF INCOME. AFTER EXAMINING TH E INFORMATION, THE ASSESSMENT U/S.143(3) R.W.S.147 OF THE I.T. ACT, WAS COMPLETED AS UNDER: 2.2 DURING THE COURSE OF ASSESSMENT, ON VERIFICATIO N OF BOOKS IT WAS FOUND THAT THE ASSESSEE HAS DECLARED OTHER INCOME OF RS.5,43,03,629 IN TONNAGE INCOME (WHICH I S NOT TAXABLE). FURTHER, DETAILS SHOWED THAT THIS IS THE OTHER INCOME UNDER TONNAGE WHICH IS PRIMARILY PROFIT ON THE SALE OF FIXED ASSETS AND OTHER INCOME. THE AO OBSERVED THAT SUBS ECTION (I) AND (II) OF SECTION 115V-I HAVE EXHAUSTIVE MEANING OF RELEVANT SHIPPING INCOME OF TONNAGE TAX FROM CORE ACTIVITIES AND INCIDENTAL ACTIVITIES, AND HENCE OTHER INCOME SHALL NOT CONSTITUTE EXEMPTED TONNAGE INCOME. AS PER SECTION 115VN 'ANY PROFIT ARISING FROM TRANSFER OF CAPITAL ASSET SHALL BE COMPUTED IN ACCORDANCE WITH PROVISION OF SECTION 45 TO 51 WITH A SPECIFIC PROVISION THAT WDV OF BLOCK OF ASSETS WO ULD BE I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 3 SUBSTITUTED BY WDV OF BLOCK OF QUALIFYING ASSETS'. FURTHER, AO NOTED THAT THE REVISED DEPRECIATION CHART SUBMITTED BY THE ASSESSEE CLEARLY SHOWS THE SALE OF TONNAGE SHIPS A T RS.14,59,08,000/-. A LETTER WAS ADDRESSED TO THE AS SESSEE CALLING FOR CLARIFICATION IN THIS REGARD. THE ASSES SEE SUBMITTED A REPLY ON 05/11/2013, AND STATED AS UNDER: (A) WE ARE INTO THE BUSINESS OF SHIPPING AND PORT OPERATIONS: WE HAVE OPTED THE TONNAGE TAX SCHEME AND HAS GOT BOTH TONNAGE VESSELS AND NON- TONNAGE VESSELS. THE DETAILS OF BLOCK OF ASSETS RELATING TO TONNAGE VESS ELS AND NON- TONNAGE VESSELS ARE MAINTAINED SEPARATELY AS REQUIRED U/S.115VK. (B) SECTION 115VN PROVIDES THAT THE CAPITAL GAINS A RISING ON SALE OF TONNAGE ASSETS SHALL BE COMPUTED IN ACCORDANCE WITH THE SEC 45 R.W.SEC. 50. THE PROVISO TO SECTION 115 VN CLARIFIES THAT THE PROVISIONS OF SEC TION 50 SHELL APPLY FOR THE 'WRITTEN DOWN VALUE OF THE BLOC K OF QUALIFYING ASSETS' . (C) THEREFORE, THE CAPITAL GAINS IF ANY U/S.50, IN RESPECT OF THE BLOCK OF ASSETS RELATING TO TONNAGE ASSETS W ILL HAVE TO BE COMPUTED SEPARATELY FROM THE BLOCK OF AS SETS RELATING TO NON-TONNAGE ASSETS. D) IN RESPECT OF SALE OF ANY VESSEL OF THE TONNAGE DIVISION, THE LIABILITY TO CAPITAL GAINS ARISES ONL Y IF ANYONE OF THE FOLLOWING SITUATIONS ARE ATTRACTED; A) IF THE SALE VALUE OF ANY TONNAGE VESSEL, RESULTS IN AN EXCESS OVER THE AGGREGATE OF THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS OF THE TONNAGE DIVISION, THEN S UCH EXCESS IS CHARGEABLE TO CAPITAL GAINS U/S.50( 1). OR B) IF THE BLOCK OF ASSETS RELATING TO TONNAGE DIVIS ION CEASES TO EXIST THEN THE LIABILITY TO THE CAPITAL G AINS ARISES U/S 50(2) (E) IN THE PRESENT CASE IT CAN BE SEEN FROM THE COMPUTATION OF WRITTEN DOWN VALUE OF THE TONNAGE DIVISION, FILED ALONG WITH THE RETURN OF INCOME, TH AT NONE OF THE SITUATIONS PRESCRIBED IN SECTION 50(1) OR 50 (2) ARE I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 4 ATTRACTED. THE SAFE OF THE TONNAGE VESSEL NAMELY OC EAN MELODY HAS NOT RESULTED IN ANY CREDIT BALANCE OF TH E BLOCK OF ASSETS OF TONNAGE SHIPS AND HENCE SECTION 50(1) IS NOT ATTRACTED. FURTHER, THE SALE OF THE SH IP OCEAN MELODY HAS NOT RESULTED IN THE BLOCK OF SHIPS OF TONNAGE DIVISION CEASING TO EXIST, AND HENCE SECTIO N 50(2) IS NOT ATTRACTED. (F) THE CREDIT OF RS.5,43,03,629 IN THE BOOKS OF ACCOUNTS, AND THE STATEMENT OF ALLOCATING PROFITS D IVISION WISE, IS ONLY AN ACCOUNTING EXERCISE. THE AMOUNT SO CREDITED TO THE PROFIT & LOSS ACCOUNT OF THE TONNAG E DIVISION IS ONLY 'PROFIT ON SALE OF ASSET', AND DOE S NOT REPRESENT THE AMOUNT CHARGEABLE TO TAX AS CAPITAL GAINS. IT IS SETTLED LAW AND PRACTICE THAT CAPITAL GAINS IS TO BE COMPUTED AS PROVIDED IN SECTION 45 TO 51, AND THAT THERE IS NO RELATIONSHIP TO THE AMOUNT CREDITED IN THE PROFIT & LOSS ACCOUNT/BOOKS OF ACCOUNTS AS PROFIT O N SALE OF ASSET. IN THE PRESENT CASE WHILE THE PROFIT ON SALE OF THE VESSEL RELATING TO TONNAGE DIVISION, IS RS.5,43,03,629/- THE CORRESPONDING AMOUNT CHARGEABL E AS CAPITAL GAINS IS RS. NIL, AS PER THE COMPUTATION ENVISAGED U/S.50. (G) THE OBSERVATION THAT THE AMOUNT OF RS, 5,43,03,629/- IS NOT EXEMPT TONNAGE INCOME AND HENC E THE INCOME IS NON TONNAGE INCOME AND TAXES PAYABLE THEREON IS INCORRECT AND WITHOUT ANY BASIS. THERE I S NO PROVISION OF LAW WHICH CONVERTS A TONNAGE DIVISION INCOME INTO NON TONNAGE INCOME. THE REFERENCE TO INCOME FROM CORE ACTIVITIES IS NOT RELEVANT AND EXTRANEOUS TO THE ISSUE ON HAND. THE PRESENT CASE I S THAT PROFIT ON SALE OF A TONNAGE ASSET IS CREDITED TO THE PROFIT & LOSS ACCOUNT, WHILE THE CAPITAL GAINS ON S UCH SALE AS COMPUTED UNDER THE PROVISIONS OF SECTION 50 IS NIL. IN OTHER WORDS IT IS NOT A CASE OF AN EXEMPTIO N, BUT A CASE OF TAXABLE CAPITAL GAINS BEING NIL ON ACCOUNT OF THE SPECIFIC METHOD OF COMPUTATION PRESCRIBED BY SECTIO N 50. 2.3. IN VIEW OF THE ASSESSEE'S REPLY, THE AO OBSERV ED THAT THE PROVISIONS OF SEC.50(1) OR 50(2) OF THE ACT CANNOT BE INVOKED, HOWEVER, HE OPINED THAT THE SALE OF VESSEL DOES NOT CONSTITUTE THE INCOME EXEMPTED UNDER TONNAGE/NON-TONNAGE INCOM E AND HENCE THE SAME IS TO BE SHOWN UNDER INCOME FROM OTH ER SOURCES. THEREFORE IT WAS PROPOSED TO ADD BACK THE AMOUNT OF I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 5 RS.5,43,03,629 UNDER 'INCOME FROM OTHER SOURCES'. A SHOW- CAUSE LETTER WAS ADDRESSED TO THE ASSESSEE ON 24.02 .2014 AND THE ASSESSEE'S A.R ACCEPTED FOR THE SAME. ACCOR DINGLY, HE MADE AN ADDITION OF RS. 5,43,03,629/-. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT C ONTRARY TO THE STATEMENT OF AO IN THE ASSESSMENT ORDER THAT A SHOW CAUSE LETTER WAS ADDRESSED TO THE ASSESSEE ON 24/02 /2014 AND THE ASSESSEES AR ACCEPTED FOR THE SAME, NO SHO W CAUSE LETTER WAS SENT TO THE ASSESSEE INCLUDING ANY LETTE R DATED 24/02/2014 AND THE ASSESSEES AR HAD NOT ACCEPTED F OR ANY PROPOSAL OF ADDITION. FURTHER, THE ASSESSEE STATED THAT ANY RECEIPT CAN FALL ONLY UNDER ONE HEAD OF INCOME. IN THIS CASE, THE PROFITS OF RS. 5,43,03,629/- FALLS UNDER THE HE ADS OF CAPITAL GAINS. IT IS AN EXEMPT CAPITAL GAINS, THIS WAS ACCE PTED BY THE AO IN PARA 5 OF ASSESSMENT ORDER. IT WAS STATED THA T ONCE A PROFIT OR RECEIPT FALLS UNDER A PARTICULAR HEAD OF INCOME, IT CAN BE CLASSIFIED AS INCOME FROM OTHER SOURCES. THEREFO RE, THE ACTION OF THE AO IN TREATING THE PROFIT OF RS. 5,43 ,03,629/- AS INCOME FROM OTHER SOURCES IS NOT CORRECT. 5. THE CIT(A) REJECTING THE SUBMISSIONS OF THE ASSE SSEE, CONFIRMED THE ORDER PASSED BY THE AO BY PASSING CRY PTIC ORDER WITHOUT DISCUSSING ON THE MAIN PLEA OF THE ASSESSEE . 6. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF A PPEAL: 1. THE CIT(APPEALS) HAS ERRED IN LAW AND IN THE FA CTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADD ITION OF AN AMOUNT OF RS. 5,43,03,629/- AS 'INCOME FROM O THER SOURCES', BEING PROFIT ON SALE AND VESSELS IGNORING THE CONTENTION OF THE ASSESSEE THAT THE SAID PROFIT ON SALE OF I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 6 VESSEL PERTAINS TO TONNAGE TAX DIVISION OF THE ASSE SSEE AND HENCE IS NOT LIABLE TO TAX. 2. THE LEARNED CIT(APPEALS) HAS COMPLETELY ERRED IN LAW IN CONFIRMING THE SAID AMOUNT OF PROFIT ON SALE OF ASSETS AS INCOME FROM OTHER SOURCES. THE LEARNED CIT(APPEA LS) OUGHT TO HAVE APPRECIATED THAT THE ASSESSING OFFICE R HAVING HELD THAT THE PROVISIONS OF SECTION 50(1) OR 50(2) OF THE ACT ARE NOT INVOKED HAS NO REASON, BASIS OR AUTHORITY OF LAW TO TREAT THE SAME AS INCOME FROM O THER SOURCES. 3. THE LEARNED CIT(APPEALS) OUGHT TO HAVE NOTED THA T A RECEIPT CAN FALL UNDER ONLY ONE HEAD OF INCOME, AND IN THIS CASE THE IT IS 'CAPITAL GAINS WHICH IS EXEMPT' CONSEQUENTLY, THERE IS NO AUTHORITY TO TREAT THE SA ME UNDER ANY OTHER HEAD OF INCOME INCLUDING INCOME FRO M OTHER SOURCES. THE CIT(APPEALS) OUGHT TO HAVE ALSO NOTED THAT UNLESS A RECEIPT IS CHARGEABLE TO TAX IT CANNOT BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES, THAT TOO BY MERELY OBSERVING THAT THE INCOME DOES NOT CONSTITUTE INCOME EXEMPTED UNDER TONNAGELNON- TONNAGE INCOME. 4. THE CIT(APPEALS) HAVING HELD THAT THE AMOUNT OF RS.5,43,03,629/- PERTAINS TO TONNAGE TAX DIVISION, HAS ERRED COMPLETELY IN HOLDING THAT THE INCOME IS TO B E ADDED UNDER INCOME FROM OTHER SOURCES. 7. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS NOTICED THAT ASSESSEE IS INTO BUSINESS OF SHIPPING AND PORT OPERATIONS. THEY HAVE TWO DIVI SIONS IN THE SHIPPING BUSINESS IN CONSONANCE WITH THE EXEMPTION SCHEMES IN THE I.T. ACT AS PER SECTION 115V NAMELY TONNAGE DIVISION AND NON TONNAGE DIVISION. THE BOOKS ARE MAINTAINED SEPARATELY FOR BOTH THE DIVISIONS. DURING THIS YEAR , THE ASSESSEE DISPOSED OF SHIPS WHICH FALLS IN THE TONNA GE DIVISION. ASSESSEE BY FOLLOWING COMPANY LAW PROVISIONS AND DEPRECIATION METHOD AS PER COMPANY LAW ARRIVED AT A PROFIT ON SALE OF FIXED ASSET AT RS. 5,43,03,629/-. THE SAME WAS DECLARED IN THE BOOKS OF ACCOUNT. DURING HEARING, L D. AR ALSO SUBMITTED RESPECTIVE LEDGER COPY OF THE ASSET AND D EPRECIATION SCHEDULE AS PER COMPANYS ACT. (WHICH IS PART OF PA PER BOOK). I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 7 DURING ASSESSMENT PROCEEDINGS, AO TREATED THE ABOVE PROFIT ON SALE OF FIXED ASSET RELATING TO TONNAGE DIVISION AS INCOME FROM OTHER SOURCES, REASON BEING THIS INCOME COULD NOT BE BROUGHT TO TAX IN ANY OTHER HEAD AS THE ASSET IS DE PRECIABLE ASSET FOR WHICH PROVISIONS OF SECTION 50 ARE ATTRAC TED. SINCE, THIS INCOME COULD NOT BE BROUGHT TO TAX IN ANY OTHE R HEAD OF INCOME, IT WAS BROUGHT TO TAX UNDER INCOME FROM OT HER SOURCES. 7.1 WE FIND IT DIFFICULT TO UNDERSTAND THE VIEWS OF THE REVENUE AUTHORITIES. IT IS A NORMAL PRACTICE THAT T HE PROFIT DETERMINED AS PER COMPANIES ACT IS NOT CONSIDERED FOR DETERMINING THE TAXABLE INCOME FOR THE PURPOSE OF I NCOME TAX. IT IS TO BE DETERMINED SEPARATELY AS PER SECTION 14 OF THE IT ACT BY FOLLOWING HEAD OF INCOME. AN INCOME IS BROUG HT TO TAX CONSIDERING THE NATURE OF INCOME WHICH FALLS WITHIN THE DEFINITION WHICH FALLS UNDER ONE OF THE HEADS OF IN COME. IN THE GIVEN CASE, SALE OF SHIPS, WHICH ARE DEPRECIABLE AS SETS WILL FALL UNDER THE HEAD INCOME FROM CAPITAL GAINS. FRO M THE RECORD, WHICH IS SUBMITTED BEFORE US, THE ASSESSEE HAS SOLD TWO SHIPS AND REALIZED SALE CONSIDERATION OF RS. 14,59,08,000/-. IT HAS WORKED OUT THE PROFIT ON SAL E OF SHIPS AS BELOW (WHICH IS TAKEN FROM THE DEPRECIATION SCHEDUL E AS PER COMPANIES ACT, REFER PAGE 12 AND 32 OF PAPER BOOK) SALE CONSIDERATION 14,59,08,000 ACCUMULATED DEPRECIATION RS. 964,39,9 32 (-)RS. 41,61,449 9,22,78,483 PROFIT ON SALE RS. 5,36,29,517 =============== FOR THE PURPOSE OF INCOME-TAX, ASSESSEE HAS FOLLOWE D THE DEPRECIATION SCHEDULE AS PER CONCEPT OF BLOCK ASSET S AS PER SECTION 2(11) OF THE ACT. SINCE THE ABOVE ASSETS AR E DEPRECIABLE AND FALL UNDER BLOCK I OF ASSETS IN THE DEPRECIATION I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 8 SCHEDULE OF INCOME AS FOLLOWED BY ASSESSEE, WHICH I S REPRODUCED BELOW: BLOCK I SHIPS: TONNAGE WRITTEN DOWN VALUE AS ON 01/04/2007 641,981,602 LESS: SALES DURING THE YEAR 145,908,000 496,073,602 ADD: TRANSFER FROM NON TONNAGE SHIPS 54,829, 921 ADD: ADDITIONS DURING THE YEAR [MORE THAN 180 DAYS] 1,052,349, 396 1,603,252,919 LESS: DEPRECIATION @20% 320,650,584 1,282,602,335 ADD: ADDITIONS DURING THE YEAR [LESS THAN 180 DAYS] 199,409898 1,482,012,233 LESS: DEPRECIATION @10% 19,940,990 WRITTEN DOWN VALUE AS ON 31/03/2008 1,462,071,2 44 =========== FROM THE ABOVE CALCULATION, IT IS CLEAR THAT ASSESS EE HAS REDUCED THE SALE CONSIDERATION OF RS. 14,59,08,000/ - FROM THE BLOCK OF ASSETS AND THEN CALCULATED THE RELEVANT DE PRECIATION FOR THE YEAR. THE PROFIT EARNED BY THE ASSESSEE IN THIS TRANSACTION IS REDUCED FROM THE VALUE OF THE BLOCK OF ASSET. AS PER INCOME TAX, ANY GAIN OR LOSS IN THE CASE OF SAL E OR TRANSFER OF AN ASSET IS ADJUSTED IN THE VALUE OF THE BLOCK O F ASSETS. THE NET VALUE OF BLOCK OF ASSET IS CONSIDERED FOR THE C ALCULATION OF DEPRECIATION FOR THAT YEAR. 7.1.1 FOR CALCULATING CAPITAL GAINS, AS THESE ASSET S I.E. SHIPS FALL UNDER DEPRECIABLE ASSETS CATEGORY, THE SPECIAL PROVISIONS OF SECTION 50 IS APPLICABLE, AS PER WHICH, THERE AR E TWO SITUATIONS NARRATED, FOR THE SAKE OF CLARITY, IT IS REPRODUCED BELOW: 50. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS: NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE (42A) OF SECTION 2, WHERE THE CAPITAL ASSET IS AN ASSET FORMING PART OF A BLOCK OF ASSETS IN RESPECT OF WHICH DEPRECIATION HAS BEEN ALLOWED U NDER THIS ACT OR I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 9 UNDER THE INDIAN INCOME- TAX ACT, 1922 (11 OF 1922 ), THE PROVISIONS OF SECTIONS 48 AND 49 SHALL BE SUBJECT TO THE FOLLO WING MODIFICATIONS:- (1) WHERE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE ASSET TOGETHER WITH THE FULL VALUE OF SUCH CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF ANY OTHER CAPITAL ASSET FALLING WITHIN THE BLOCK OF THE ASSETS DURING THE PREVIOUS YEAR, EXCEEDS THE AGGREGATE OF THE FOL LOWING AMOUNTS, NAMELY:- (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CON NECTION WITH SUCH TRANSFER OR TRANSFERS; (II) THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT T HE BEGINNING OF THE PREVIOUS YEAR; AND (III) THE ACTUAL COST OF ANY ASSET FALLING WITHIN THE BL OCK OF ASSETS ACQUIRED DURING THE PREVIOUS YEAR, SUCH EXCESS SHAL L BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF S HORT- TERM CAPITAL ASSETS; (2) WHERE ANY BLOCK OF ASSETS CEASES TO EXIST AS SUCH, FOR THE REASON THAT ALL THE ASSETS IN THAT BLOCK ARE TRANSFERRED D URING THE PREVIOUS YEAR, THE COST OF ACQUISITION OF THE BLOCK OF ASSET S SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BE GINNING OF THE PREVIOUS YEAR, AS INCREASED BY THE ACTUAL COST OF A NY ASSET FALLING WITHIN THAT BLOCK OF ASSETS, ACQUIRED BY THE ASSES SEE DURING THE PREVIOUS YEAR AND THE INCOME RECEIVED OR ACCRUING A S A RESULT OF SUCH TRANSFER OR TRANSFERS SHALL BE DEEMED TO BE TH E CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASS ETS. FROM THE ABOVE, IT IS CLEAR THAT IN ONE OF THE SITU ATION, THE VALUE OF SUCH TRANSFER IS MORE THAN THE VALUE OF BL OCK OF ASSETS, THE EXCESS IS CHARGEABLE TO TAX UNDER THE H EAD CAPITAL GAINS. IN THE GIVEN CASE, THE EXCESS I.E. PROFIT I S REDUCED FROM THE BLOCK OF ASSETS AND BLOCK CONTINUE TO HAVE ASSE TS VALUE AND BOTH SITUATIONS HIGHLIGHTED IN SECTION 50(1) & 50(2) ARE NOT ATTRACTED. THEREFORE, AS PER INCOME TAX ACT, TH IS TRANSACTION HAS NOT GENERATED ANY CAPITAL GAINS. 7.2 THEREFORE, INCOME HAS TO BE DETERMINED STRICTL Y AS PER THE PROVISIONS OF I.T. ACT AND NOT AS PER COMPANIES ACT/BOOK PROFIT. ONLY IN SPECIFIC SITUATION BOOK PROFIT IS C ONSIDERED FOR ONLY DETERMINING THE TAXABLE INCOME U/S 115JB. IN N O OTHER I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 10 SITUATION, THE BOOK PROFIT IS CONSIDERED TO BRING A N INCOME WHICH IS NOT AS PER THE PROVISIONS OF I.T. ACT. JUS T BECAUSE A SEPARATE INCOME IS DISCLOSED BY THE ASSESSEE, IT DO ES NOT MEAN THAT IT SHOULD BE BROUGHT TO TAX OVER LOOKING THE ACTUAL PROVISIONS OF INCOME TAX. THEREFORE, THE PROFIT ON SALE OF VESSELS OF THE DIVISION TONNAGE IS NOT TAXABLE AS T HE PROVISIONS OF SECTION 50(1) & 50(2) ARE NOT ATTRACTED. THEREFO RE, THE ADDITION MADE BY THE AO IS DELETED. 8. IN AY 2011-12 (ITA NO. 439/H/16) AND 2012-13 (IT A NO. 440/H/16), THE ASSESSEE HAS RAISED A COMMON GROUND WHICH IS AS UNDER: THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND IN TH E FACTS AND CIRCUMSTANCES OF THE CASE DIRECTING TO AL LOW DEDUCTION EXCEPT TO KARAIKAL PORT AND WORKOUT DEDUC TION U/S.80IA ACCORDINGLY INSTEAD OF EXCLUDING ONLY KARA IKAL PORT - CHEMPLAST SANMAR LIMITED IN AS MUCH AS THE CIT(APPEALS) WAS FOLLOWING THE ORDER OF ITAT FOR TH E AY 2009-10 & AY 2010-11 WHERE IN THE DEDUCTION U/S80IA WAS ALLOWED FOR KARAIKAL PORT (KARAIKAL PORT COMPAN Y PVT.LTD.) DIVISION AND THE DISALLOWANCE AS RESTRICT ED TO CHEMPALST SANMAR - KARAIKAL DIVISION DUE TO NON- FURNISHING OF CERTIFICATE FROM THE DEVELOPER I.E. CHEMPLAST SANMAR, KARAIKAL PORT. 9. BRIEFLY THE FACTS RELATING TO RAISE THIS GROUND ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80IA OF RS. 2,00 ,63,037/- TO THE EXTENT OF THE INCOME AVAILABLE IN RESPECT OF FOLLOWING PORTS: 1. KARAIKAL PORT COMPANY LTD., KARAIKAL 2. GUJARAT CHEMICAL PORT TERMINAL COMPANY LTD., DA HEJ 3. CHENNAI PETROLEUM CORPORATION LTD., NAGAPATNAM 4. CHEMPLAST SANMAR LTD., KARAIKAL. 9.1 IN THE RETURN OF INCOME FILED, ASSESSEE HAD CLA IMED THAT THE INCOME WAS DERIVED FROM OPERATING AND MAINTENAN CE OF PORT INFRASTRUCTURE AND HENCE ELIGIBLE FOR DEDUCTIO N U/S 80IA. I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 11 DURING THE COURSE OF HEARING, ASSESSEE WAS ASKED TO FURNISH DETAILS ON THE NATURE OF OPERATIONS FROM WHICH INCO ME WAS DERIVED SO AS TO MAKE THE ASSESSEE ELIGIBLE TO CLAI M DEDUCTION U/S 80IA OF THE ACT. IN RESPONSE, ASSESSEES AR FIL ED A LETTER DATED 20/01/2014, THE CONTENTS OF WHICH WERE EXTRAC TED BY THE AO AT PAGES 2 & 3. AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE, THE AO DISCUSSED THE ISSUE ELABORATELY IN HIS ORDER AND HELD THAT AS PER THE AMENDMENT MADE IN THE FINA NCE BILL, 2009, WITH A VIEW TO PREVENTING THE MISUSE OF TAX H OLIDAY U/S 80IA, IT HAS BEEN PROVIDE TO CLARIFY WITH RETROSPEC TIVE EFFECT THAT THE BENEFIT UNDER SECTION 80IA(4) WILL NOT BE AVAILABLE IN THE CASE OF A WORKS CONTRACT AWARDED BY ANY PERSON AND EXECUTED BY AN UNDERTAKING OR ENTERPRISE REFERRED T O IN SECTION 80IA(1). HE, THEREFORE, CONCLUDED THAT AS THE ASSES SEES NATURE OF ACTIVITY IS EXECUTION OF CONTRACT WORKS, ASSESSEE IS NOT ELIGIBLE FOR CLAIMING DEDUCTION U/S 80IA OF THE ACT. 10. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE CIT(A), WHO BY FOLLOWING THE DECI SION OF ITAT IN AY 2009-10 AND 2010-11 IN ASSESSEES OWN CA SE, DIRECTED THE AO TO ALLOW DEDUCTION U/S 80IA WITH RE GARD TO JAMNAGAR, KAKINADA AND DAHEJ PORTS AND DISALLOW 80I A DEDUCTION WITH REGARD TO KARAIKAL PORT, FOR WHICH T HE CIT(A) IN AY 2010-11 REJECTED THE CLAIM OF ASSESSEE DUE TO NO N SUBMISSION OF CERTIFICATE. 11. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH OF ITAT IN ASSESSE ES OWN CASE FOR AYS 2009-10 AND 2010-11 (REVENUES APPEALS ) IN ITA I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 12 NOS. 1615 & 1624/HYD/2014 VIDE ORDER DATED 08/07/20 15 WHEREIN THE COORDINATE BENCH HAS HELD AS UNDER: 8. AS FAR AS AY 2010-11 IS CONCERNED, THE ISSUE IS MORE OR LESS IDENTICAL, EXCEPT, THE FACT THAT ASSE SSEE HAS CLAIMED DEDUCTION U/S 80IA FOR THE FIRST TIME I N RESPECT OF KARAIKAL PORT BEING OPERATED BY KARAIKAL PORT COMPANY PVT. LTD. IN THIS REGARD, ASSESSEE HAS SUBMITTED A CERTIFICATE FROM THE PORT AUTHORITY CER TIFYING THAT THEY HAVE ENTERED INTO AN AGREEMENT WITH ASSES SEE FOR O&M OF THE PORT. THAT BEING THE CASE, THE DECIS ION RENDERED IN RESPECT OF AY 2009-10 EQUALLY APPLIES T O THE FACTS OF THE PRESENT CASE. ACCORDINGLY, WE DO NOT F IND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A ) IN ALLOWING ASSESSEES CLAIM OF DEDUCTION U/S 80IA. THEREFORE, UPHOLDING THE ORDER OF LD. CIT(A), WE DI SMISS THE GROUNDS RAISED BY DEPARTMENT. SINCE THE ASSESSEE HAS SUBMITTED A CERTIFICATE FROM THE PORT AUTHORITY CERTIFYING THAT THEY HAVE ENTERED INTO AN AGREEMENT WITH THE ASSESSEE FOR O&M OF THE PORT IN AY 2009-10 ITSELF, WE SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE AO TO ALLOW DEDUCTION U/S 80IA TO KARAIKAL PORT ALSO. 13. IN AY 2012-13, THE ASSESSEE HAS RAISED ANOTHER GROUND WITH REGARD TO DISALLOWANCE OF RS. 25,95,980/- U/ 1 4A OF THE ACT. 14. THE AO DISALLOWED AN AMOUNT OF RS. 25,95,980/- BY OBSERVING THAT THE PROVISIONS OF SECTION 14A ARE A PPLICABLE WITH RESPECT OF DIVIDEND INCOME EARNED BY ASSESSEE ENGAGED IN THE BUSINESS OF DEALING WITH SHARES AND SECURITI ES, ON THE SHARES HELD AS STOCK-IN-TRADE WHEN EARNING OF SUCH DIVIDEND INCOME IS INCIDENTAL IN THE TRADING OF SHARES. FURT HER, HE OBSERVED THAT THE RELATION WAS SEEN BETWEEN THE EXE MPT INCOME AND THE EXPENDITURE INCURRED IN RELATION TO IT AND NOT VICE VERSA. AO ALSO OBSERVED THAT THE PROVISIONS OF SUB- SECTION (1) OF SECTION 14A PROVIDE FOR NOT ALLOWING DEDUCTION IN I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 13 RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME. THE AR FILED A DETAILED SUBMISSION O F THE LOANS ATTRIBUTABLE TO INVESTMENT. THE AO WORKED OUT THE INTEREST PAYABLE ON THE LOANS AT RS. 25,95,980/-, W HICH WAS DISALLOWED U/S 14A. ON APPEAL, THE CIT(A) UPHELD T HE ADDITION. 15. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE OBSERVE THAT THE LEGISLATURE HAS INTRODUCED RULE 8D FOR CALCULATION OF DISALLOWANCE RELATING TO DIRECT EXPENSES ASSOCIATED WITH THE EXEMPT INCOME, INTEREST RELATING TO THE INVESTMENT AND ADMINISTRATIVE EXPEN SES. 15.1 WHILE CAREFULLY READING THE RULE 8D(2)(II), TH E FORMULA GIVEN ARE: A X B/C WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAU SE (I) INCURRED DURING THE PREVIOUS YEAR: B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME F ROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; IN PARTICULAR, THE NOTES FOR B CLEARLY STATES THA T THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. IT IS CLEAR THAT WE HAVE TO INCLUDE THOSE INVESTMENTS WHICH HAS GENERATED INCOM E AND EXCLUDE THOSE INVESTMENTS, WHICH HAVE NOT GENERATED INCOME. IN THE PRESENT CASE, AO HAD TAKEN THE TOTAL INVESTM ENT INSTEAD OF THOSE INVESTMENTS, WHICH HAVE GENERATED INCOME. ACCORDINGLY, WE DIRECT THE AO TO CALCULATE THE DISA LLOWANCE OF INTEREST AS BELOW ( AS PER RULE 8D): I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 14 INTEREST X INVESTMENT( WHICH GENERATED INCOME) AVERAGE TOTAL ASSETS THE MAIN REASON IS THAT AS PER SECTION 14A, NO DEDU CTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY TH E ASSESSEE IN RELATION TO INCOME, WHICH IS EXEMPT FROM TAX. TH E RELEVANCE IS THE EXPENDITURE IN RELATION TO INCOME. THE QUANT IFICATION HAS TO BE UNDERTAKEN IN RELATION TO THE EXEMPT INCOME. THE INVESTMENT WHICH HAS NOT GENERATED EXEMPT INCOME SH OULD BE EXCLUDED FROM THE CALCULATION OF RATIO TO DETERMINE THE DISALLOWANCE. 15.2 SIMILARLY, FOR THE ADMINISTRATIVE EXPENSES, 0. 5% OF AVERAGE INVESTMENTS FROM WHICH THE EXEMPT INCOME IS RECEIVED SHOULD BE CONSIDERED INSTEAD OF AVERAGE OF THE TOTAL INVESTMENTS. 15.3 CONSIDERING THE ABOVE DISCUSSION, WE DIRECT AO TO RECALCULATE THE DISALLOWANCE AS PER RULE 8D(III) AS PER THE ABOVE GUIDANCE. ACCORDINGLY, GROUND RAISED BY ASSES SEE IS ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, BOTH THE APPEALS FOR AY 2011-12 AND 2012- 13 ARE ALLOWED. 17. TO SUM UP, ALL THE THREE APPEALS UNDER CONSIDER ATION ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON 8 TH JUNE, 2018. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 8 TH JUNE, 2018 I.T.A. NOS. 438 TO 440/HYD/2016 OCEAN SPARKLE LTD., HYD. 15 KV COPY FORWARDED TO: 1. OCEAN SPARKLE LTD., 1 ST FLOOR, 128 SRINAGAR COLONY, HYD. 2. DCIT, CIRCLE 16(3), HYD. 3. CIT(A) - 4, HYDERABAD 4. PR. CIT - 4, HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE