TaxTMI 
TaxTMI 
2026 (6) TMI 676
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....e of Rs. 49,58,78,500/- under the normal provisions of the Act. The return was processed under section 143(1) and subsequently selected for scrutiny under CASS. Notices under sections 143(2) and 142(1) were issued from time to time and served upon the assessee. Thereafter, the Assessing Officer completed the assessment under section 143(3) of the Act vide order dated 21.12.2019 determining the total income at Rs. 54,86,07,130/- after making, inter alia, (i) disallowance under section 14A amounting to Rs. 22,57,232/-, (ii) addition of Rs. 54,97,657/- on account of mismatch between receipts reflected in Form No.26AS and receipts recorded in the books of account, and (iii) disallowance of dredging expenditure amounting to Rs. 4,49,73,750/-. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee had earned exempt dividend income of Rs. 1,32,97,749/- and had suo motu disallowed a sum of Rs. 1,79,240/- under section 14A of the Act. The Assessing Officer was of the view that the disallowance offered by the assessee was not in accordance with section 14A read with Rule 8D. Accordingly, vide notice issued under section 142(1), the assessee was re....
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....y the assessment order, the assessee preferred appeal before the learned CIT(A). During the appellate proceedings, the assessee filed detailed written submissions and supporting documents. 7. In respect of disallowance under section 14A, the assessee submitted before the learned CIT(A) that it had itself identified indirect expenditure attributable to earning exempt income and had accordingly disallowed Rs. 1,79,240/- while filing the return of income. It was contended that no direct expenditure had been incurred for earning exempt income and that indirect expenditure had been allocated on a reasonable basis by identifying personnel costs and administrative expenses relatable to investment activities. The assessee further contended that the Assessing Officer had invoked Rule 8D mechanically without recording objective dissatisfaction as mandated under section 14A(2) of the Act. Reliance was placed upon various judicial precedents. The assessee further submitted that even if Rule 8D were to be applied, only Rs. 20,77,992/- could be disallowed after adjusting the suo motu disallowance already made. The assessee also challenged the adjustment made while computing book profit under ....
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..... Alternatively, the assessee claimed consequential depreciation in the event the expenditure was held to be capital in nature. 12. The learned CIT(A), however, held that dredging activity undertaken once every two years resulted in removal of accumulated silt and provided deeper navigational access to vessels, thereby conferring enduring business benefit upon the assessee. The learned CIT(A) observed that the assessee had failed to demonstrate that the expenditure merely preserved the existing asset without enhancing its utility. Accordingly, the learned CIT(A) upheld the action of the Assessing Officer in treating the dredging expenditure as capital in nature. However, the learned CIT(A) directed the Assessing Officer to grant consequential depreciation in accordance with section 32 of the Act. 13. Being aggrieved by the aforesaid findings of the learned CIT(A), the assessee is in further appeal before us on the grounds reproduced hereunder: Ground I: Disallowance of expenditure u/s. 14A amounting Rs. 22,57,232/-: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the Assessing Officer ("AO") i....
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.... placed on paper book page No. 93), the learned AR submitted that the assessee had undertaken a specific exercise to identify expenses indirectly attributable to investment activities yielding exempt income. It was explained that one employee from the Finance & Accounts Department was engaged in monitoring and maintaining the investment portfolio and, accordingly, a proportionate share of employee cost amounting to Rs. 71,760/- was allocated towards investment-related activities. Further, common administrative expenses such as printing and stationery, telephone expenses, bank charges, general miscellaneous expenses and welfare expenses were apportioned on a rational basis having regard to the number of employees engaged in investment management activities. On such basis, a further amount of Rs. 1,07,479/- was allocated, resulting in aggregate disallowance of Rs. 1,79,240/- under section 14A of the Act. 16. The learned AR submitted that the assessee is primarily engaged in the business of development, maintenance and operation of a jetty including cargo handling and vessel handling activities. The surplus funds generated from business operations were temporarily invested in secur....
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....isallowance computed under section 14A read with Rule 8D could not be added while computing book profit under section 115JB of the Act. It was submitted that section 115JB constitutes a complete code by itself and that the machinery provisions contained in Rule 8D cannot be imported into clause (f) of Explanation 1 to section 115JB. Accordingly, it was prayed that the addition made to book profit under section 115JB also be deleted. 20. In support of the aforesaid proposition, the learned Authorised Representative placed reliance upon the judgment of the Hon'ble Bombay High Court in Principal Commissioner of Income-tax vs. Tata Capital Ltd. [(2024) 161 taxmann.com 557 (Bom.)], wherein the Hon'ble High Court held that the most fundamental requirement of section 14A and Rule 8D is that the Assessing Officer must record his dissatisfaction with the correctness of the assessee's claim and must furnish cogent reasons for arriving at such dissatisfaction. It was further held that a mere observation that the assessee's explanation is not acceptable would not satisfy the statutory mandate and that, in the absence of proper satisfaction, disallowance made by applying Rule....
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....leted. 23. Per contra, the learned Departmental Representative (DR) strongly relied upon the orders of the Assessing Officer and the learned CIT(A). Referring to paragraphs 4.2 to 4.5 of the assessment order, the learned DR submitted that the Assessing Officer had specifically issued a show-cause notice under section 142(1)requiring the assessee to explain as to why disallowance under section 14A read with Rule 8D should not be computed at 1% of the annual average value of investments in accordance with the amended provisions of Rule 8D. In response thereto, the assessee itself furnished a computation contending that it had already made a disallowance in its return of income. 24. The learned DR further submitted that the Assessing Officer had duly considered the submissions furnished by the assessee and thereafter recorded in paragraph 4.3 of the assessment order that, in terms of section 14A(2), where the Assessing Officer is not satisfied with the correctness of the assessee's claim having regard to the accounts, the amount of expenditure relatable to exempt income is required to be determined in accordance with the prescribed method. It was submitted that the assessmen....
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....see was understated or that any further expenditure was actually incurred in relation to the exempt income. Instead, the Assessing Officer has merely reproduced the provisions of section 14A(2) and proceeded to compute the disallowance under Rule 8D. 27. In our considered view, such an approach does not satisfy the statutory mandate contained in section 14A(2). The provision requires the Assessing Officer, having regard to the accounts of the assessee, to first arrive at a conclusion that he is not satisfied with the correctness of the assessee's claim. Only thereafter can the machinery provisions of Rule 8D be invoked. The satisfaction contemplated by the statute has to be an objective satisfaction based upon examination of the accounts and the claim made by the assessee. Mere reproduction of the statutory provision or direct application of Rule 8D does not amount to recording of satisfaction. 28. The aforesaid principle now stands authoritatively settled by the Hon'ble Bombay High Court in the case of Principal Commissioner of Income-tax vs. Tata Capital Ltd.(supra). In that case also, the Assessing Officer had applied Rule 8D after observing that the assessee's....
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.... demonstrated from the accounts that the claim was incorrect. The assessment order merely proceeds on the assumption that once exempt income exists, disallowance must necessarily be recomputed under Rule 8D. Such an approach is contrary to the law laid down by the Hon'ble Bombay High Court. 32. In view of the foregoing discussion, we hold that the Assessing Officer was not justified in invoking Rule 8D in the absence of a valid and objective satisfaction as contemplated under section 14A(2) of the Act. Consequently, the further disallowance of Rs. 22,57,232/- sustained by the learned CIT(A) cannot be upheld and is directed to be deleted. 33. Having held that the Assessing Officer was not justified in invoking Rule 8D in the absence of a valid and objective satisfaction as mandated under section 14A(2) of the Act and having consequently directed deletion of the additional disallowance of Rs. 22,57,232/-, the corresponding adjustment made while computing book profit under section 115JB of the Act also cannot survive. We further find that the issue is independently covered in favour of the assessee by the decision of the Special Bench in ACIT vs. Vireet Investment (P.) Ltd. ....
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....y identified in the reconciliation statement and excluded from the comparison of receipts. After reducing the service tax component of Rs. 39,11,760/-, the balance difference worked out to Rs. 54,97,657/-. 36. The learned AR submitted that the reconciliation statement itself contains a detailed remarks column explaining the nature of each difference. Referring thereto, it was pointed out that a substantial part of the difference arose because certain deductors had erroneously deducted tax at source on amounts which did not represent actual income of the assessee. For instance, in the case of Ben Line Agencies (India) Pvt. Ltd., income of Rs. 1,12,05,937/- was reported in Form No.26AS as against actual income of Rs. 22,18,422/- credited in the books, resulting in a difference of Rs. 95,04,335/-. The remarks column specifically records that the party had deducted excess TDS and reported excess income in its TDS return. In support thereof, a certificate dated 13.09.2019 issued by Ben Line Agencies (India) Pvt. Ltd. was furnished confirming that against actual income of Rs. 2,21,83,422/-, it had mistakenly reported income of Rs. 3,16,87,757/- in its quarterly TDS returns and consequ....
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....under consideration in accordance with the provisions of the Act. It was submitted that the corresponding income had already been recognized and offered to tax in the earlier year, whereas the related TDS credit became available for claim in the subsequent year. According to the learned AR, the difference reflected in the reconciliation statement thus arose solely on account of the timing difference between recognition of income and grant of TDS credit. The learned AR accordingly submitted that the said difference did not represent any income accrued, received or otherwise chargeable to tax during the year under consideration and, therefore, could not form the basis of any addition. 39. Per contra, the learned DR strongly relied upon the orders of the Assessing Officer and the learned CIT(A).Referring to the reconciliation furnished by the assessee, the learned DR submitted that the primary explanation of the assessee in respect of the difference of Rs. 54,97,657/- rests upon the certificate issued by Ben Line Agencies (India) Pvt. Ltd. claiming that excess income had been reported in its TDS returns and excess tax had been deducted at source. However, according to the learned D....
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.... of the learned DR that the factual correctness of the explanations furnished by the assessee requires independent verification. In particular, the certificate issued by Ben Line Agencies (India) Pvt. Ltd. forms the foundation of the assessee's explanation in respect of a substantial component of the difference. However, it is an admitted position that the deductor has not revised its TDS returns and the figures reflected in Form No.26AS continue to remain unchanged. Whether the discrepancy has in fact arisen on account of an error in TDS reporting, whether the corresponding income has been accounted for elsewhere, and whether the certificate issued by the deductor correctly reflects the factual position are matters which require verification at the level of the Assessing Officer. 43. Likewise, the assessee's explanation regarding Interocean Shipping India Pvt. Ltd. is based upon the claim that the corresponding income had already been offered to tax in an earlier year and that the TDS credit was carried forward and claimed during the year under consideration. Such a claim would also require verification from the books of account, earlier years' returns of income, TD....
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.... movement and berthing of ships and is undertaken periodically as a measure for preservation and efficient operation of the existing jetty infrastructure. 48. Inviting our attention to the agreement dated 14.03.2017 entered into with M/s. Van Oord India Pvt. Ltd., the learned AR submitted that the very title of the contract describes the work as "Agreement for Maintenance Dredging Services". Reference was made to Clause 12 of the agreement dealing with the area of operations, wherein the scope of work is described as maintenance dredging at Birla Copper Jetty and maintenance of berth areas and approaches of the existing jetty. It was submitted that the agreement specifically records that the dredging activity was intended to remove soft sandy material accumulated due to siltation and that no new berth, channel, dock or other infrastructure was created under the contract. 49. The learned AR further drew our attention to the period of utilisation specified in the agreement, which provided for deployment of the dredging vessel TSHD "Volvox Asia" for a period of only five days during March 2017. It was submitted that the short duration of the contract itself demonstrates that the....
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....ferring to the observations of the Assessing Officer, the learned DR submitted that no satisfactory justification had been furnished by the assessee to demonstrate that the expenditure was purely revenue in character. It was therefore argued that the Assessing Officer was justified in treating the dredging expenditure of Rs. 4,49,73,750/- as capital expenditure and the learned CIT(A) had rightly confirmed the disallowance. Accordingly, it was prayed that the order of the learned CIT(A) be upheld and the ground raised by the assessee be dismissed. 53. We have thoughtfully considered the rival submissions and perused the material available on record. The solitary issue for our consideration is whether the dredging expenditure of Rs. 4,49,73,750/- incurred by the assessee is capital or revenue in nature. 54. On perusal of the material placed before us, we find that the assessee is engaged in the business of development, operation and maintenance of a jetty facility at Dahej. The note on dredging activity furnished before the lower authorities explains that due to strong tidal currents and continuous movement of fine sediments in the Gulf of Khambhat, substantial siltation takes ....
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....g business structure. 58. Applying the aforesaid principles to the facts of the present case, we find that the dredging activity neither created any new asset nor added to the capital structure of the assessee. The jetty, berth and navigational facilities already existed. The dredging operation was undertaken only to remove accumulated silt and restore the original operational depth required for carrying on the existing business activities. The expenditure, therefore, merely enabled the assessee to continue its business efficiently and profitably in the same manner as before. 59. We are unable to accept the contention of the Revenue that the expenditure assumes the character of capital expenditure merely because such maintenance dredging is undertaken once in about two years. The frequency with which an expenditure is incurred cannot be the determinative test for deciding its nature. Many maintenance activities, overhauls and repairs may be undertaken periodically after considerable intervals, yet such expenditure continues to retain its revenue character if it is incurred for preservation and maintenance of an existing asset. The fact that maintenance dredging may be require....