1. These two appeals by the assessee relate to the assessment years 1984-85 and 1985-86.
2. We shall first deal with the assessment year 1984-85. The assessee had purchased a barge 'Vishal Laxmi' on 11-10-1983. The assessee gave it on lease on 19-10-1983 to M/s Salg'aocar Mining Industries Pvt. Ltd. The document of lease was executed between the parties. The assessee claimed investment allowance in respect of the said barge. The ITO rejected the said claim. According to the Income-tax Officer, the assessee was not engaged in the business of operation of ships prior to the acquisition of the said barge. After acquiring the said barge, the assessee had given the same on lease for five years. The said act of giving the barge on lease, according to the ITO, did not amount to exploitation of commercial asset. Consequently, the income from the transaction of giving the barge on lease was not assessable as business income but was assessable as Income from other sources. Since, the said income was not business income, investment allowance, according to the ITO, was not allowable. The ITO accordingly disallowed the claim for investment allowance. Attention of the ITO had been drawn to certain passages in the book on "Charter parties and Bills of Lading" by Scrutton (18th Edition). One of the passages towards which attention of the ITO had been drawn is as follows : Charter parties may be categorised according to whether or not they amount to a demise or lease of the ship. A charter by demise operates as a lease of the ship itself, to which services of the master and crew may or may not be superadded. A charter by demise of a ship without master or crew is sometimes called a "bareboat" or "net" charter. In contract ordinary "time charter" is sometimes called a "gross" charter. Under Charter by demise, the Charterer becomes for the time being the owner of the vessel, the master and crew become to all intends his servants, and through him the possession of the ship is with him.
Under charter not by demise (time charter) on the other hand, the ship owner agrees with the charterer to render "services" by the master and crew, to carry the goods which are put on board his ship by or on behalf of the charterer In this case, notwithstanding the right of the charterer to have his goods loaded and conveyed in the vessel, the ownership and also possession of the ship remains in the original owner, through the master and crew, who continue to be his servants. Although the master, by agreement between the owner and charterer may acquire authority to sign bills of lading on behalf of the latter, he nevertheless remains in all other respects the servant of the owner. The similar is the opinion, of Carver in "Carriage by Sea" Volume I.The ITO observed that the lease of the barge in question was only "bareboat" charter wherein ownership, at least temporarily, passes on to charter and what is received by the owner is only lease rent and as such, the said lease rent could not be regarded as income from business and the same had to be considered as income from other sources, in consequence whereof investment allowance claimed by the assessee could not be allowed.
3. The assesscc went, in appeal before the CIT(A). The CIT(A) noted that the crucial point to be considered was whether the assessee was engaged in the business of operation of ships. He noted that the barge in question had been purchased in the concerned accounting year and that apart from income from said barge, there was no other income from the business operation of ships. The intention of the assessee was to lease the barge right from the inception. He relied on certain decisions. He examined the clauses of the lease deed and found that there was no responsibility on the assessee either for maintaining machinery or for repairs of the vessel or employment of the crew. All these responsibilities were that of the lessee. According to him, the terms of the lease deed indicated that the intention on the part 1 of the assessee was to part with the commercial asset as such and confine himself solely to derive income in lieu of ownership thereof by leasing and as such the income would, be assessable not as business income but as income from other sources u/s 56 of the Income-tax Act. According to him, the lease of this nature could not be regarded as business of operation of ships. Consequently, according to him, the assessee was not entitled to investment allowance He accordingly confirmed the disallowance. The assessee is now in further appeal before us and the first point raised is that both the authorities below had erred in coming to the conclusion that the act of the assessee did not amount to engaging in the business of operation of ships.
4. Shri Dilip Choksi, who appeared on behalf of the assessee, drew our attention to certain passages in the following books : (iv) C.J.S. Hills on an Introduction to the Law of Carriage of Goods by Sea He submitted that one of the methods by which a person may be engaged in the business of operation of ships was by means of which is technically known as a "Charter by demise" without master or crew, which is called as "bareboat" or "net" charter. In the present case, the assessee had entered into such charter and that the said act of entering into the charter amounting to engagement in the business of operation of ships and as such the income was assessable as business income and investment allowance was allowable. Shri Khaladkar, the learned, departmental representative, who appeared for the revenue, on the other hand, relied on the decisions given in the orders of the ITO and the CIT(A). He submitted that this was a case of mere grant of lease of the barge acquired by the assessee and that this act did not amount to the act of being engaged in the business of operation of ships, and as such the income in question was not assessable as business income and investment allowance was not allowable.
5. We have considered rival submissions. Section 32A(1) lays down that in respect of a ship specified in Sub-section (2), which is owned by the assessee and is wholly used for the purposes of business carried on by him, there shall, in accordance with and subject to the provisions of Section 32A, be allowed a deduction in respect of the previous year in which the ship was acquired.
6. It is not disputed that the ship in question was acquired by the assessee in this year. It is also not in dispute that the assessee was the owner of the ship in question. Consequently, we have to consider whether the ship in question was the one which come in the category of the ship specified in Sub-section (2) of Section 32A. We may mention here that it is not disputed before us that in view of the circular of Central Board of Direct Taxes, the term "ship" would include a barge and as such the barge purchased by the assessee on which investment allowance has been claimed, has been referred to as a ship in this order.
The ship or aircraft or machinery or plant referred to in Sub-section (1) shall be the following, namely : (a) a new ship or new aircraft acquired after the 31st day of March, 1976 by an assessee engaged in the business of operation of ships or aircraft; (b) any new machinery or plant installed after the 31st day of March, 1976 (i) for the purposes of business of generation or distribution of electricity or any other form of power ; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or (iii) in any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.
8. We are concerned with Section 32A(2)(a) of the Act. What we have to consider is whether the assessee was engaged in the business of operation of ships.
9. The business of operation of ships was a specialised business.
Consequently, the expression "business of operation of ships" as it occurs in Sub-section (2) of Section 32A shall have to be considered from the point of view of the businessman who is engaged in such business and not from the point of view of a person who has no detailed knowledge about the manner in which the business of operation of ships is carried on. It is for that reason that the observations in the standard books on this subject become relevant.
10. Copies of relevant passages from the above mentioned books have been filed before us. It is not necessary to quote all those passages in detail. On reading those authorities, the position that emerges may be stated as follows : 11. When a shop-owner or a person agrees to carry goods by water or to furnish a ship for the purposes of so carrying goods, in return for a sum of money to be paid to him, such a contract is called a contract of affreightment and the sum to be paid is called freight. The business of operation of ships would normally be carried out by entering into such agreements. Depending on the manner in which the ship is employed, the contract of affreightment may be contained in a what is technically known as "charterparty" or evidence by a bill of lading. However, the classical division into charterparties and bills of lading is not exhaustive.
12. As regards the manner in which a person engaged in the business of operation of ships may employ the ship, it has been stated in the standard books on the subject that such engagement would be by means of variety of agreements which are known as charter-parties in the shipping world. Charterparties may be categorised according to whether or not they amount to a demise or lease of the ship. Charter by demise of a ship without a master or crew is sometimes called "Bareboat" or "net" charter. In contrast an ordinary "time charter" is sometimes called a "gross" charter. At one time demise charter had largely fallen out of use but they are now becoming more common. It is well understood in the shipping circles that a charter by demise operates as a lease of the ship itself, to which the services of the master and crew may or may not be superadded. Under a charter not by demise, on the other hand, the ship-owner agrees with the charterer to render services by his master and crew to carry the goods which are put on board or a ship by or on behalf of the charter. Whether or not the charter amounts to a demise must turn on the particular terms of the charter. In Patrick M.Alderton on "Sea Transport" different ways of chartering of ships these have been described as follows : (1) The ship can be chartered just as a hull. The charterer then supplies the crew and operates the ship in fact as if he were, the ship-owner.
(2) The ship can be chartered as a functioning operating unit for a period of time. The charterer pays the hire money and the bunkers and the ship trades where the charterer wishes. This is a time charter.
(3) The ship can be chartered to carry so much cargo between A and B. This is known as voyage charter.
As with all these types of charter the conditions and responsibilities can vary to suit the needs of the two interested parties. As there are no set forms for demise chartering as there are for voyage and time charters each contract will be negotiated afresh. Basically the shipowner's only costs are depreciation, the survey to establish the actual condition of the ship before the charter and the fees of the broker (brokerage) who usually gets a percentage of the hire money (which is paid monthly in advance by the Charterer).
The charterer is responsible for all the daily running costs, the bunkers and all the port costs. He also usually has to for the survey before handing the vessel back to the owner.
This charter is usually for a longish period say from about five years or perhaps the whole life of the ship.
In Payne and Ivamy's Carriage of Goods by Sea, it is observed as follows : Let us now examine the nature of Charterparties as contracts of affreightment. Unlike bills of lading which, as we have seen, are only the best available evidence of the contract, itself, and as such contains the signatures of both parties at the foot. The bill of lading, as has already been observed is significant toy only one of the contracting parties. Charterparties cover basically two forms of contract, time charter and voyage charter. The variation of the time charter known as "bareboat" charter is negotiated when it is the intention of the contracting parties that even the control of the vessel as well as the use of the vessel should pass to the charter during the hire period. The vessel is thus 'demised' to the charter.
13. From these passages, it is clear "bareboat" charter is variation of the time charter and that one of the ways of being engaged in the business of operation of ships is to enter into a charterparty demise i.e. lease of the vessel. Thus, in the shipping circles the lease of the vessels under a charterparty by demise is not considered as a mere act of an owner of a vessel to earn income by rent. It is considered as an act in the course of business of operation of shins. In view of this, when the assessee entered into, what has been described in the orders of the lower authorities, as lease deed, it must be held that he had entered into agreement is known in the shipping business circles as a charterparty by demise which is one of the recognised modes of carrying of business of operation of ships. When Section 32A(2) uses the expression 'business of operation of ships' that expression should be understood in the sense in which the persons carrying on shipping business understand the same. It is a technical expression which is well known in the shipping circles and it includes within its ambit what is technically known as 'charterparty demise' and what would be termed as lease of the vessel in ordinary parlance. In view of these circumstances, we hold that when the assessee entered into agreement of granting lease of the vessel, he had entered into a "charterparty by demise" and this act amounted to an act in the business of operation of ships. It may be mentioned here that in the passage quoted above from Patrick M. Alderton on "Sea Transport" it is mentioned that charterparty by demise is usually for a longish period say from about five years to perhaps the whole life of the ship. In the present case, an agreement is for five years and as such it comes well within the concept of well recognised charterparty by demise.
14. The decisions on which the learned CIT(A) has relied on are not the decisions in respect of business of operation of ships. As far as the business of manufacture or production of any article or thing was concerned, it is necessary in order to obtain investment allowance that the business of manufacture or production should be carried on by the assessee and that if the assessee never carries on such business and merely leases the plant and machinery with intention to obtain rent as owner the activity would not amount to activity of manufacture or production of any article or thing and as such the income would not be business income. However, as already stated the position is different when we have to consider the expression 'business of operation of ships' in Clause (a) of Section 32A(2) of the Act. That expression, as already stated, would include within its compass the act of entering into what is known as "charterparty by demise".
15. We may here refer to the decision of the Madras Bench of the Tribunal in the case of First Leasing Co, of India Ltd. v. ITO [.1983] 3 ITD 808. In that case, the main purpose of the assessee-com-pany for which it came into existence was to purchase machinery and equipments and to lease or otherwise deal with them in any manner whatsoever. The assessee purchased machinery of various kinds and pursuant to its main object of leasing it to others, leased the said machinery to various persons. The machinery leased out by the assessee had been employed by the lessees in such industrial undertakings as are referred to in Sub-section (2) of Section 32A. The Tribunal held that the claim was allowable. This decision would be of assistance in the present case. In that decision, the purpose for which the assessee has come into existence was to purchase machinery and to give it on lease. In the present case giving on lease, "charterparty by demise" is one of the modes in which the operation of business of ships can be carried out.
Consequently the ratio of that decision would be applicable to the present case. It may be noted that the words in Section 32A(2)(a) are "business of operation of ships" and not the "business of shipping".
What we have to consider is as to how the business of operation of ships can be carried out. If one of the modes of the business of operation of ships is to give it on lease for five years or for a period of lifetime, then such operation would be regarded as an operation in the course of business of operation of ships.
16. One of the reasons given by the ITO in support of his conclusion that the assessee had no intention to treat the vessel in question as commercial asset is that the assessee has not taken the responsibility for maintenance/repairs of the vessel. In this connection, we have already stated that the standard books on the business of shipping indicate that in one of the modes of carrying on such business vis.
charterparty by demise the responsibility for maintenance and employing of crew is taken over by the charter. Consequently, the above fact was not in consistent with the fact that the act of the assessee was within the ambit of business of operation of ships. One of the points to which the learned CIT(A) has drawn attention is that the certificate of registration was obtained on 30-11-1983 whereas the lease agreement had been entered into on 19-10-1983. It has been brought on record that application for registration had been made in September 1983 in accordance with the usual practice of obtaining registration in respect of ships which are to be acquired in due course. The fact that registration was issued on 30-11-1983 is of no relevance as far as the point in controversy is concerned. It is an admitted position that the ship in question had been given on lease for five years. The document of lease is on record. The fact that the registration was obtained on 30-11-1983 had only the effect that it could be plied with effect from that date unless prior to that date some temporary, permit had been obtained. However, this is not relevant as far as the point in controversy is concerned.
17. Another aspect to which the CIT(A) has made a reference is that the assessee himself had not carried on the business of shipping. This aspect is not relevant. As already stated, the requirement in Section 32A(2)(a) is not ttiat o*f carrying on business of operating the ships.
We have already pointed out that charterparty by demise is one of the modes of business of operation of ships recognised in standard books on the subject. Consequently the fact to which the learned CIT(A) has drawn the attention is not relevant. The ITO has quoted a passage from the book of Mr. Scrutton to which we have already made a reference. In the passage quoted by the ITO it is mentioned that a charter by demise of a ship without master or crew is sometimes called a "bareboat" or "net" charter that under net charter by demise the charterer becomes for the time being the owner of the vessel to all intents. Prom this passage, the ITO has drawn the inference that this rent cannot be considered as income from business and that the same has to be considered as income from other sources. From the passage quoted by the ITO the above inference cannot be drawn. The passage quoted by the ITO emphasises the fact that one of the modes in which the business of operation of ships can be carried on is by entering into an agreement known as a charter by demise and a bareboat charter. The agreement with which we are concerned comes in this category and a proper inference to be drawn would be the income arising out of business of operation of ships. Consequently, we set aside the order of the authorities below and direct the ITO to grant investment allowance provided other conditions for such grant are satisfied.
18. The next ground for assessment year 1984-85 is regarding deduction of Rs. 1,59,222 from interest payment made by the ITO in order to determine allowable deduction regarding interest paid on loans.
19. The ITO while deciding the point in controversy has observed as follows : Interest subsidy : In the profit and loss a/c assessee debited an amount of Rs. 2,53,921 as interest charges, but the same seems to have not been paid, since the assessee shows the same in the balance-sheet as due to Syndicate bank, Vasco. But at the same time assessee claimed in the balance-sheet, "interest subsidy" for the year receivable at Rs. 1,59,222 and the same was received in the very next year, as apparent from the balance-sheet for the A.Y. 1985-86. As this is the amount of subsidy given towards payment of interest, the same has to be considered as "remission of interest" by the bank under subsidy scheme and has to be treated as income of the assessee as per IT AT Pune Bench decisions in the case of Banko National Ultramarine and other cases. Therefore, the interest payment claimed to have been payable is reduced to the extent of subsidy receivable.
20. The CIT(A) has dealt with, this point in para 6 of his order as follows : The next contention is regarding the deduction of the interest subsidy of Rs. 1,59,222 from the interest payment on barge operation. ITO daducted this amount from the interest payments as the interest subsidy of Rs. 1,59,222 shown as receivable in the , balance-sheet is a remission of interest by the Bank under the .subsidy scheme. The ITO also relied on the decision of the Hon'ble Tribunal Pune Bench, Pune in the case of Banko National Ultra Marine and other cases. It is the appellant's contention that the interest subsidy is in the nature of a grant and not a revenue receipt and therefore it should not be deducted from the interest payment.
According to the grant of subsidy the difference between the rate of interest normally chargeable for such loans from time to time would be subsidised by the Govt. of India. Therefore, as the interest subsidy reduces the interest payable by the appellant and on the basis of the decisions of the Tribunal, the deduction of the interest subsidy from the interest payments is in order and is confirmed 21. The assessee is now in further appeal before us. The submission of the learned representative of the assessee before us is that subsidy regarding interest is in the nature of capital subsidy for promoting investment in barges and as such, although the amount of subsidy goes to reduce the overall interest liability, its nature is that of capital subsidy. He relied on those decisions of the Tribunal in which it has been held that cash subsidy under Central Government scheme should not be deducted from written down value of depreciable assets for computing depreciation. He has also relied on decision of Madhya Pradesh High Court in CIT v. Dusad Industries [1986] 162 ITR 784. The learned departmental representative, on the other hand, has submitted that this was a case of charging subsidised rate of interest and it is the net interest paid which is liable to be deducted.
22. We have considered the rival submissions and materials on record.
We find that point in controversy has been covered against the assessee and in favour of department by the decision of the Tribunal in the case of Banko National Ultramarine v. Second ITO [IT Appeal Nos. 457 and 458 (Pune) of 1983 dated 26-3-1985]. The Tribunal in the said order has relied on an earlier order in IT Appeal Nos. 327 to 329 (Pune) of 1979.
The Tribunal noted that similar point had arisen before the Bombay Benches also in the case of Gaixe Economic? De Goa [IT Appeal Nos. 314 to 321 (Pune) of 1979 dated 31-10-1984] and the said point has been decided against the assessee and in favour of the department. The Benches of the Tribunal have held that when subsidised rate of interest is charged on the loans taken by the assessee, it cannot be said that the assessee had obtained any capital receipt. Since facts are identical, this point is to be decided against the assessee.
23. Shri Choksi, the learned representative of the assessee, however, submitted before us that in view of the decision of Madhya Pradesh High Court referred to above, this point should be decided in favour of the assessee although the Benches of the Tribunal have decided this point against the assessee.
24. We have considered the said decision of the Madhya Pradesh High Court. That decision is not in respect of subsidised rate of interest.
The High Court in that case was considering the provisions of a scheme framed by the Government of Madhya Pradesh under which the Government had granted sales tax subsidy to those industries which were set up in backward areas in the State for a specified period. Under one of the clauses of the Agreement between the Government and the grantee, the grantee was entitled to subsidy of 50 per cent of sales tax paid in the last three years or 8 per cent of the capital actually employed whichever was less. The assessee in said case claimed that the subsidy received under the said scheme was not assessable to tax on the ground that it represented additional assistance given by the government as an incentive to the small scale industries in backward areas for capital investments and not to supplement the profits of the assessee. The High Court accepted the said submission and held that the subsidy did not amount to refund of sales-tax as the same was subject to certain terms and conditions and that subsidy was a receipt of capital nature and not liable to tax. It was emphasised that the subsidy had been given on the basis of a particular scheme in respect of industries situated only in backward area and that the same had been given by way of an incentive for capital investments and not by way of additions to the profits of the assessee. In the present case, the subsidy has been given by way of relief in payment of higher rate of interest on the loans taken by the assessee. There is a direct nexus between the loan and the subsidised rate of interest. In these circumstances, the ratio of the said decision would not be applicable to the facts of the present case. We accordingly reject the submission of the assessee to the effect that we should not follow the earlier decision of the Tribunal in which a view against the assessee has been taken. We follow these decisions and reject the ground raised by the assessee.
25. We now come to the appeal for the assessment year 1985-86. The same two points have arisen for decision in this appeal. For I'easons given above, we hold that the assessee would be entitled to claim deduction in respect of interest at the subsidised rate only and not at higher rate and the ground in which the claim made is that the interest subsidy was of capital nature was liable to be rejected.