Case Law Details
Dahej Harbour and Infrastructure Private Limited Vs ACIT (ITAT Mumbai)
Conclusion: Expenditure of ₹4.49 crore incurred on maintenance dredging for removal of natural siltation and restoration of the existing operational depth of the jetty constituted revenue expenditure allowable under section 37(1). Accordingly, the disallowance made by AO and sustained by CIT(A) was deleted.
Held: Assessee was engaged in the business of operating and maintaining a jetty, incurred expenditure of ₹4.49 crore towards maintenance dredging. Due to continuous silt deposition caused by strong tidal currents in the Gulf of Khambhat, periodic dredging was necessary to maintain the minimum navigational depth of 13.5 metres required for safe berthing and movement of vessels. The work was carried out under an agreement with M/s Van Oord India Pvt. Ltd. titled “Agreement for Maintenance Dredging Services.” The expenditure was debited under repairs and maintenance and tax was deducted at source. AO treated the expenditure as capital in nature on the ground that dredging was undertaken only once in about two years and conferred enduring benefit. CIT(A) affirmed the disallowance. Assessee contended that the dredging activity was undertaken solely to remove naturally accumulated silt and preserve the operational efficiency of the existing jetty. No new berth, channel or infrastructure was created and the expenditure merely restored the original navigational depth. Hence, the amount constituted revenue expenditure allowable under section 37(1). Revenue argued that the infrequent nature and substantial amount of expenditure indicated acquisition of a long-term advantage. According to the Revenue, the dredging activity enhanced the operational efficiency and navigational capacity of the jetty and, therefore, was capital expenditure. It was held that the agreement itself described the work as “maintenance dredging” and the documentary evidence established that the activity was undertaken only to remove silt accumulation and maintain the existing water depth. The contractor was deployed for merely five days and no material was brought on record to show that the dredging resulted in creation of any new asset, expansion of capacity or addition to the existing infrastructure. Tribunal held that an expenditure assumed capital character only when it created a new asset or results in an advantage in the capital field. Merely because an expenditure yields benefit extending beyond one accounting period did not render it capital in nature. The dredging activity merely preserved and maintained the existing profit-making apparatus and enabled the assessee to carry on its business efficiently. The periodic nature of such maintenance, even if undertaken once in two years, could not alter its revenue character.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”], under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] dated 28.11.2025 arising out of the assessment order passed by the Assessing Officer under section 143(3) of the Act dated 21.12.2019 for Assessment Year 2017-18.
2. Briefly stated, the facts of the case are that the assessee is a company engaged in the business of development, maintenance, administration and operation of a jetty. The assessee filed its return of income electronically on 31.10.2017 declaring total income 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 required to explain why disallowance at 1% of annual average value of investments should not be made in terms of amended Rule 8D. In response, the assessee submitted that the disallowance worked out to Rs.22,57,232/- and further contended that since a disallowance had already been made in the computation of income, no further addition was warranted. The Assessing Officer, however, was not satisfied with the explanation and computed the disallowance under Rule 8D at Rs.24,36,472/-. After reducing the amount already disallowed by the assessee, a further sum of Rs.22,57,232/- was added to the total income. The Assessing Officer also considered the said amount while computing book profit under section 115JB.
4. The Assessing Officer further observed from Form No.26AS that receipts reflected under sections 194C and 194J amounted to Rs.74,96,92,918/- whereas receipts credited in the books of account amounted to Rs.74,02,83,501/-, resulting in a difference of Rs.54,97,657/-. The assessee was called upon to reconcile the difference. In response, the assessee furnished reconciliation details and party-wise breakup. According to the Assessing Officer, the assessee failed to furnish supporting ledger accounts and documentary evidence to establish that the differential amount did not represent income chargeable to tax. Holding that the assessee had failed to discharge the burden cast upon it, the Assessing Officer treated the differential amount of Rs.54,97,657/- as income not offered to tax and added the same to the total income.
5. The Assessing Officer also noticed that out of expenditure of Rs.5,12,92,000/- debited under the head “Repairs to Machinery”, a sum of Rs.4,49,73,750/- represented payment made to M/s. Van Oord India Pvt. Ltd. towards dredging work in the jetty area. The assessee explained that dredging services were undertaken periodically for maintenance of the jetty and that no new asset had come into existence. The assessee further pointed out that tax had been deducted at source on such payments. The Assessing Officer, however, held that dredging activity conferred enduring benefit upon the assessee, was undertaken only once in two years and therefore constituted capital expenditure. Consequently, the Assessing Officer disallowed the entire expenditure of Rs.4,49,73,750/- and added the same to the income of the assessee.
6. Aggrieved by 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 section 115JB and contended that Rule 8D could not be imported into Explanation l(f) to section 115JB.
8. The learned CIT(A), after considering the submissions, held that the Assessing Officer had examined the working furnished by the assessee and had recorded dissatisfaction with the correctness thereof before invoking Rule 8D. According to the learned CIT(A), once satisfaction under section 14A(2) was recorded, application of Rule 8D became mandatory. The learned CIT(A) further held that no computational error was demonstrated by the assessee and that expenditure relatable to exempt income was liable to be added back while computing book profit under section 115JB. Accordingly, the disallowance of Rs.22,57,232/- was confirmed.
9. With regard to the addition of Rs.54,97,657/- on account of mismatch between Form No.26AS and the books of account, the assessee submitted before the learned CIT(A) that out of the total difference of Rs.94,09,417/-, an amount of Rs.39,11,760/-represented service tax and the balance amount of Rs.54,97,657/- represented excess income wrongly reported by deductors while filing TDS returns. It was contended that such income neither accrued to nor belonged to the assessee and declarations from the concerned parties had been furnished before the Assessing Officer. Alternatively, it was submitted that only the excess TDS amount of Rs.4,79,496/- could be brought to tax under section 198 of the Act.
10. The learned CIT(A) observed that except for a party-wise breakup and unilateral declarations, the assessee had not produced any contemporaneous documentary evidence such as ledger accounts, invoices or supporting accounting records to establish non-accrual of income. The learned CIT(A) held that the burden of proving the claim rested upon the assessee and, in the absence of satisfactory evidence, upheld the addition of Rs.54,97,657/- made by the Assessing Officer.
11. In respect of dredging expenditure amounting to Rs.4,49,73,750/-, the assessee submitted before the learned CIT(A) that dredging activity was undertaken for maintaining the required water depth by removing silt and deposits so as to facilitate movement of vessels and that the expenditure merely preserved and maintained the existing jetty infrastructure. It was argued that no new asset came into existence and therefore the expenditure was revenue in nature. 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”) in respect of disallowance of an additional amount of Rs. 22,57,232/ – u/ s. 14A of the Act r. w. rule 8D(2)(iii) of the Income Tax Rules, 1962.
1a. Without prejudice to the above, the Ld. A.O. has Grossly erred in making the disallowance of section 14A r. w. rule 8D(2)(iii), amounting to Rs. 22,57,232/- while computing the book profits u/ s. 115JB of the Act and reduce the book profits u/ s. 115JB of the Act.
GROUND H: Addition of a sum Rs. 54,97,657/- on account of mismatch between receipts as per 26AS and as per books of account
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of Assessing Officer (“AO”) in adding the difference amount of Rs. 54,97,657/ – between receipts as per 26AS and as per books of account.
2a. Without prejudice to above, the learned AO has grossly erred in making an addition of the entire amount of Rs. 54,97,657/ – instead of Rs. 4,79,496/ – being the amount of TDS, as per provision section 198 of the Act.
Ground HI: Disallowance of Dredging expenditure amounting Rs. 4 49 73 750/-
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the action Assessing Officer (“AO”) in disallowing dredging expenditure amounting Rs.4,49,73,750/ – by treating the same as capital expenditure.
GROUND IV: GENERAL
4. The Appellant craves leave to add to, alter and / or amend all or any of the foregoing grounds of appeal.
14. We shall now proceed to deal with and adjudicate each of the grounds of appeal separately in the succeeding paragraphs.
Disallowance of expenditure u/s. 14A amounting Rs. 22,57,232/-
15. Insofar as Ground No.1 relating to disallowance under section 14A is concerned, the learned Authorised Representative (AR) reiterated the submissions advanced before the lower authorities and drew our attention to the detailed working furnished during the appellate proceedings. It was submitted that the assessee had earned exempt dividend income of Rs.1,32,97,749/- during the year from IDFC Arbitrage Plus Fund – Direct Plan – Reinvestment Option and had, on its own, identified and disallowed expenditure amounting to Rs.1,79,240/- under section 14A while filing the return of income. Referring to the computation furnished before the authorities below (Annexure – 2 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 86 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 securities and mutual funds. It was emphasised that the exempt income was earned only from dividend distribution by debt mutual funds and that no direct expenditure whatsoever had been incurred for earning such exempt income. According to the learned AR, the assessee had identified the actual personnel involved in maintaining the investment portfolio and had allocated expenditure on a scientific and reasonable basis. Therefore, the disallowance voluntarily offered represented the actual expenditure incurred in relation to exempt income.
17. The learned AR further submitted that the Assessing Officer had mechanically invoked Rule 8D without recording any objective dissatisfaction regarding the correctness of the assessee’s claim as mandated under section 14A(2) of the Act. It was contended that section 14A(2) requires the Assessing Officer, having regard to the accounts of the assessee, to first record a finding that he is not satisfied with the correctness of the claim made by the assessee before resorting to the computation mechanism prescribed under Rule 8D. However, in the present case, the Assessing Officer neither examined the detailed working furnished by the assessee nor pointed out any defect therein. Instead, the Assessing Officer directly proceeded to compute disallowance by applying 1% of annual average investments under Rule 8D.
18. The leaned AR further submitted that before the CIT(A), in support of the aforesaid contention, reliance was placed upon the judgment of the Hon’ble Supreme Court in Maxopp Investment Ltd. vs. CIT (402 ITR 640), wherein it has been held that the Assessing Officer must first record dissatisfaction with the correctness of the assessee’s claim before invoking Rule 8D. Reliance was also placed upon the decisions of the Hon’ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT (328 ITR 81), PCIT vs. DSP Adiko Holdings Pvt. Ltd. (414 ITR 555), and the decision of the Hon’ble Gujarat High Court in CIT vs. Gujarat State Fertilizers & Chemicals Ltd. (Tax Appeal No. 82 of 2013), for the proposition that Rule 8D cannot be applied automatically and that recording of objective satisfaction is a jurisdictional prerequisite. It was accordingly prayed that the addition of Rs.22,57,232/- sustained by the learned CIT(A) be deleted.
19. The learned AR further contended that, in any event, the disallowance 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 8D is liable to be deleted. Reliance was also placed upon the judgment of the Hon’ble Bombay High Court in DSP Investment Pvt. Ltd. vs. Addl. CIT(Income Tax Appeal 2342 of 2013), wherein the Hon’ble Court emphasised the requirement that the Assessing Officer must first examine and reject the assessee’s claim regarding expenditure relatable to exempt income before resorting to Rule 8D. It was submitted that the Hon’ble Court recognized that the issue of recording dissatisfaction under section 14A(2) goes to the root of the matter and requires due examination by the appellate authorities.
21. The learned AR further submitted that no adjustment on account of disallowance under section 14A could be made while computing book profit under section 115JB of the Act. It was contended that section 115JB is a self-contained code and the computation of book profit can be made only in accordance with the specific adjustments prescribed in Explanation 1 thereto. The learned AR submitted that the disallowance computed under section 14A read with Rule 8D forms part of the computation mechanism under the normal provisions of the Act and cannot be imported into the MAT provisions contained in section 115JB. In support of the aforesaid proposition, reliance was placed upon the decision of the Special Bench in ACIT vs. Vireet Investment (P.) Ltd. 1(2017) 82 com 415 (Delhi)(SB)1, wherein it was held that the computation contemplated under clause (f) of Explanation 1 to section 115JB(2) has to be made independently and without resorting to the computation mechanism prescribed under section 14A read with Rule 8D. The learned AR submitted that the Special Bench categorically held that the amount to be added back while computing book profit cannot be mechanically adopted from the disallowance worked out under section 14A.
22. The learned AR also placed reliance upon the judgment of the Hon’ble Gujarat High Court in Principal Commissioner of Income-tax vs. Gujarat Fluorochemicals Ltd. 1(2023) 155 com 135 (Guj.)], wherein the Hon’ble High Court approved the principle that no addition to book profit under section 115JB can be made on the basis of the disallowance computed under section 14A read with Rule 8D. It was therefore submitted that the adjustment made by the Assessing Officer to the book profit under section 115JB deserves to be deleted.
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 assessment order clearly demonstrates application of mind by the Assessing Officer to the claim made by the assessee. Drawing attention to paragraph 4.4 of the assessment order, it was submitted that the Assessing Officer computed the disallowance strictly in accordance with the amended Rule 8D applicable for the year under consideration and determined the disallowance at Rs.24,36,472/-, being 1% of the annual average of monthly averages of investments yielding exempt income. According to the learned DR, the Assessing Officer had followed the statutory prescription contained in Rule 8D and the learned CIT(A), after examining the issue in detail, had rightly upheld the disallowance. It was therefore submitted that no interference with the order of the learned CIT(A) was called for and the ground raised by the assessee deserved to be dismissed.
25. We have carefully considered the rival submissions and perused the material available on record. The undisputed facts are that the assessee earned exempt dividend income of Rs.1,32,97,749/- during the year. The assessee, while filing its return of income, suo motu disallowed a sum of Rs.1,79,240/ – under section 14A. The working furnished by the assessee demonstrates that it identified one employee involved in maintaining the investment portfolio and allocated proportionate employee cost thereto. Further, common administrative expenses were apportioned on a reasonable basis and the aggregate expenditure relatable to exempt income was worked out at Rs.1,79,240/-. The assessee thus did not claim that no expenditure was incurred in relation to exempt income but, on the contrary, offered a specific disallowance after examining its accounts.
16. The Assessing Officer, after issuing a show-cause notice, observed that disallowance under Rule 8D would work out to Rs.24,36,472/- and, after reducing the amount already disallowed by the assessee, made a further disallowance of Rs.22,57,232/-. However, from a careful reading of paragraphs 4.2 to 4.5 of the assessment order, we find that the Assessing Officer has not examined the correctness of the working furnished by the assessee. The assessment order does not point out any defect in the basis adopted by the assessee for allocation of employee cost or administrative expenses. The Assessing Officer has also not recorded any finding that the expenditure identified by the assessee 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 explanation was not acceptable. The Hon’ble High Court held that such an observation by itself was insufficient and that the Assessing Officer was required to furnish cogent reasons demonstrating why he was dissatisfied with the correctness of the assessee’s claim. The Hon’ble High Court held that:
“The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons.” (para 7)
29. The Hon’ble High Court further approved the view that Rule 8D is not automatic and can be invoked only after the statutory condition prescribed under section 14A(2) is fulfilled. The ratio of the said judgment squarely applies to the facts before us. In the present case, the Assessing Officer has not even recorded that the assessee’s explanation is unacceptable. There is a complete absence of any discussion demonstrating why the working furnished by the assessee was incorrect. Therefore, the requirement laid down by the Hon’ble Bombay High Court remains unfulfilled.
30. Reliance was also placed on the decision of the Hon’ble Bombay High Court in DSP Investment Pvt. Ltd. vs. Addl. CIT., wherein the Hon’ble Court emphasised that the assessee’s contention regarding applicability of Rule 8D and compliance with section 14A(2) requires specific adjudication and cannot be brushed aside without proper consideration. The Hon’ble High Court set aside the Tribunal’s order as a non-speaking order for failure to examine the assessee’s specific contention and restored the matter for fresh adjudication. Thus, the ratio of the aforesaid judgment is not on the merits of section 14A or Rule 8D. Therefore, the primary authority governing the controversy before us remains the later judgment of the Hon’ble Bombay High Court in Tata Capital Ltd. (supra), which directly deals with the requirement of recording satisfaction under section 14A(2).
31. Applying the principle laid down by the Hon’ble Bombay High Court in Tata Capital Ltd. (supra) to the facts of the present case, we find that the assessee had furnished a detailed working identifying the expenditure relatable to exempt income. The Assessing Officer neither rejected the basis adopted by the assessee nor 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. (supra), wherein it was categorically held that the computation contemplated under clause (f) of Explanation 1 to section 115JB(2) is to be made independently and without resorting to the computation mechanism prescribed under section 14A read with Rule 8D. The Special Bench held that the disallowance worked out under section 14A cannot be automatically imported into the computation of book profit under section 115JB.We further note that the aforesaid principle has received approval from the Hon’ble Gujarat High Court in PCIT vs. Gujarat Fluorochemicals Ltd. (supra), wherein the Hon’ble High Court held that no addition to book profit under section 115JB can be made on the basis of the disallowance computed under section 14A read with Rule 8D. Thus, even on merits, the adjustment made by the Assessing Officer to the book profit by adopting the disallowance determined under section 14A is unsustainable in law. Accordingly, the Assessing Officer is directed to delete the corresponding adjustment made while computing book profit under section 115JB of the Act.
34. In view of the foregoing discussion, Ground No.1 raised by the assessee is allowed.
Addition of Rs.54,97,657/- on account of mismatch between receipts as per Form 26AS and books of account.
35. With regard to Ground No.2 relating to the addition of Rs.54,97,657/- on account of alleged mismatch between receipts reflected in Form No.26AS and receipts recorded in the books of account, the learned AR reiterated the submissions advanced before the lower authorities and drew our attention to the reconciliation statement placed in the paper book (page 92, 100104). It was submitted that the addition has been made on a complete misreading of the reconciliation furnished by the assessee (Annexure -1 P.B. Page No.100).The learned AR submitted that the reconciliation statement demonstrates that receipts as per Form No.26AS aggregated to Rs.74,96,92,918/-, whereas receipts credited in the books of account aggregated to Rs.74,02,83,501/-, resulting in an apparent difference of Rs.94,09,417/-. It was submitted that out of the aforesaid difference, an amount of Rs.39,11,760/- represented service tax collected from customers, which had been included by certain deductors while reporting payments in their TDS returns. Since service tax did not constitute income of the assessee, the same was separately 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 consequently deducted excess TDS of Rs.4,79,496/-. The deductor itself admitted the error and certified that the excess amount reflected in Form No.26AS did not represent actual income payable to the assessee.
37. The learned AR further submitted that another item specifically explained in the remarks column pertained to Interocean Shipping India Pvt. Ltd. The reconciliation statement records that TDS amounting to Rs.4,71,240/- pertaining to Financial Year 2015-16 was reflected in Form No.26AS during the year under consideration. However, the corresponding income had already been offered to tax in the earlier year and the related TDS credit had been carried forward and claimed in Assessment Year 2017-18. In support thereof, reference was made to the Schedule TDS forming part of the return of income wherein the carried-forward TDS credit of Rs.4,71,240/- was specifically disclosed.
38. The learned AR further invited our attention to the entries relating to Interocean Shipping India Pvt. Ltd. appearing in the reconciliation statement. It was submitted that the aggregate amount reflected in Form No.26AS was Rs.3,45,71,549/-, whereas the corresponding income credited in the books of account amounted to Rs.3,85,80,276/-, resulting in a negative difference of Rs.40,08,727/-. Referring to the remarks column of the reconciliation statement, the learned AR submitted that the deductor had deducted tax at source in Financial Year 2015-16 and the corresponding income had already been recognized and offered to tax by the assessee in accordance with the mercantile system of accounting. The related TDS credit was subsequently claimed in accordance with the TDS schedule forming part of the return of income for Assessment Year 2017-18. It was therefore submitted that the difference represented a timing mismatch arising from the manner in which the deductor reported transactions in its TDS returns and not any undisclosed income of the assessee. On the contrary, the books reflected a higher amount of income than what appeared in Form No.26AS, which itself demonstrated that no income had escaped assessment on account of the said item. In support thereof, the learned AR invited our attention to the Schedule TDS forming part of the return of income, wherein TDS credit of Rs.4,71,240/- pertaining to Financial Year 2015-16 had been carried forward and claimed during the year 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 DR, despite admitting the alleged mistake, the deductor had not revised its TDS returns to rectify the excess amount reported in Form No.26AS. The learned DR submitted that if the discrepancy had genuinely arisen on account of an inadvertent error in TDS reporting, nothing prevented the deductor from filing a revised TDS statement and correcting the information appearing in the records of the Department. The learned DR contended that the certificate obtained from the deductor was furnished only after the discrepancy was pointed out by the Assessing Officer during the assessment proceedings and, therefore, the same appears to be an afterthought intended to explain away the mismatch between Form No.26AS and the books of account.
40. We have heard the rival submissions and perused the material available on record. We find that the Assessing Officer made the impugned addition by comparing the receipts reflected in Form No.26AS amounting to Rs.74,96,92,918/- with the receipts credited in the books of account amounting to Rs.74,02,83,501/-. The resultant difference of Rs.94,09,417/- was reduced by service tax component of Rs.39,11,760/- and the balance amount of Rs.54,97,657/- was treated as income not offered to tax. The assessee, on the other hand, furnished a detailed reconciliation statement explaining each item of difference and also produced supporting documents including certificates from deductors and the TDS schedule accompanying the return of income.
41. Upon perusal of the reconciliation statement placed in the paper book, we find that the explanation furnished by the assessee cannot be brushed aside summarily. The reconciliation statement contains item-wise details of the receipts reflected in Form No.26AS vis-à-vis the receipts recorded in the books together with a remarks column explaining the reasons for the differences. The assessee has also produced a certificate issued by Ben Line Agencies (India) Pvt. Ltd. stating that excess income had been reported in its TDS returns and excess tax had been deducted at source. Similarly, in respect of Interocean Shipping India Pvt. Ltd., the assessee has relied upon the TDS schedule and other supporting records to contend that the difference arose on account of timing mismatch between recognition of income and availability of TDS credit.
42. At the same time, we find merit in the contention 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, TDS schedules and other supporting records.
44. In our considered opinion, the material placed before us prima facie demonstrates that the issue is not one of undisclosed receipts simpliciter but one involving reconciliation of receipts reflected in Form No.26AS with the books of account and verification of the assessee’s explanation regarding timing differences, service tax component and alleged errors committed by deductors while filing TDS returns. Since the relevant facts have not been comprehensively verified by the Assessing Officer and the evidences now relied upon by the assessee require factual examination, we consider it appropriate, in the interest of justice, to restore this issue to the file of the Assessing Officer.
45. Accordingly, we set aside the order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer for the limited purpose of verifying the reconciliation furnished by the assessee, the certificate issued by Ben Line Agencies (India) Pvt. Ltd., the claim relating to Interocean Shipping India Pvt. Ltd., the TDS schedules and such other supporting evidences as may be produced by the assessee. The Assessing Officer shall examine the evidences, carry out necessary verification and thereafter adjudicate the issue afresh in accordance with law after affording reasonable opportunity of being heard to the assessee. We clarify that we have not expressed any opinion on the merits of the addition and all contentions of both parties are left open.
46. Ground No.2 is allowed for statistical purposes. Disallowance of dredging expenditure of Rs.4,49,73,750/-
47. The learned AR submitted that the assessee is engaged in the business of operating and maintaining a jetty at Dahej and, in the ordinary course of such business, it is required to undertake periodic maintenance dredging to remove silt deposits and maintain the requisite navigational depth for movement of vessels. Referring to the note on dredging activity placed in then paper book, the learned AR submitted that due to strong tidal currents and continuous sedimentation in the Gulf of Khambhat, silt accumulation regularly takes place around the jetty area, thereby reducing the available water depth. It was explained that maintenance dredging becomes necessary to maintain the minimum operational depth of approximately 13.5 metres required for 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 work undertaken was routine maintenance dredging and not any developmental or capital project. Reference was also made to the invoice raised by Van Oord India Pvt. Ltd. dated 31.03.2017, wherein the charges were described as “Dredging Service Fees” and mobilisation/demobilisation charges for deployment of the dredger. The expenditure was accordingly debited under repairs and maintenance and a provision of Rs.4,49,73,750/- was created in the books of account as on 31.03.2017.
50. The learned AR further submitted that tax was deducted at source at the rate of 2% on the dredging charges amounting to Rs.4,47,50,000/- and the same was deposited with the Government. It was contended that the expenditure neither brought into existence any new capital asset nor resulted in any expansion of the existing jetty facilities. The dredging operation merely restored the original operating condition of the jetty by removing accumulated silt and maintaining the existing navigational depth. According to the learned AR, the expenditure was incurred wholly and exclusively for carrying on the existing business operations and, therefore, constituted allowable revenue expenditure.
51. The learned DR, on the other hand, strongly relied upon the orders of the Assessing Officer and the learned CIT(A). Drawing our attention to paragraphs 6.6 and 6.7 of the assessment order, the learned DR submitted that the assessee itself had admitted that maintenance dredging activity is ordinarily undertaken once in about two years. According to the learned DR, the infrequency of the expenditure and the substantial amount involved clearly indicate that the expenditure was not incurred as part of routine day-to-day operations but was intended to confer a long-term advantage upon the assessee in the conduct of its business. It was contended that the dredging activity improved the operational efficiency and navigational capacity of the jetty and, therefore, resulted in an enduring benefit to the assessee.
52. The learned DR further submitted that merely describing the expenditure as maintenance dredging or deducting tax at source on the payment would not automatically render the expenditure revenue in nature. According to the learned DR, the burden squarely lies upon the assessee to establish that the expenditure did not result in the creation of a capital asset or an enduring advantage. Referring 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 place around the berth area and approach channel of the jetty. The note further records that the reduction in water depth caused by such natural siltation adversely affects vessel movement and port operations and, therefore, maintenance dredging is periodically required to maintain the minimum operational depth necessary for safe berthing and navigation of vessels.
55. We further find that the agreement dated 14.03.2017 entered into with M/s. Van Oord India Pvt. Ltd. is expressly titled as an “Agreement for Maintenance Dredging Services”. Clause 12 of the agreement describing the area of operations specifically provides that the work relates to “Maintenance Dredging at Birla Copper Jetty” and maintenance of berth areas and approaches of the existing jetty. The agreement further clarifies that the dredging activity is undertaken for removal of soft sandy material accumulated in the operational area. The note on dredging activity also demonstrates that the expenditure was incurred to maintain the existing water depth of approximately 13.5 metres necessary for operation of ships using the jetty.
56. The invoice raised by M/s. Van Oord India Pvt. Ltd. shows that the contractor was deployed for a period of only five days and was engaged for dredging service fees together with mobilisation and demobilisation charges. Nothing has been brought on record by the Revenue to establish that the dredging activity resulted in creation of any new berth, additional jetty facility, extension of port infrastructure, expansion of capacity or acquisition of any capital asset. On the contrary, the documentary evidence overwhelmingly indicates that the expenditure was incurred solely to restore and preserve the existing operational condition of the jetty which had been affected by natural siltation.
57. The distinction between capital and revenue expenditure is now well settled. An expenditure can be regarded as capital only when it brings into existence a new asset or results in acquisition of an advantage in the capital field. Merely because an expenditure may provide benefit for more than one accounting period does not automatically render it capital in nature. The true test is whether the expenditure creates or enhances the profit-making apparatus itself or whether it is incurred for preserving, maintaining or facilitating the efficient operation of an already existing 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 required once in two years because of the rate of natural siltation does not convert an otherwise revenue expenditure into capital expenditure.
60. In the present case, the very nature of the work, the terms of the agreement, the explanatory note on dredging activity and the absence of any creation of new infrastructure clearly establish that the expenditure was incurred for maintenance of the existing jetty and for preserving its operational efficiency. Such expenditure is integrally connected with the day-to-day conduct of the assessee’s business and falls squarely within the category of revenue expenditure allowable under section 37(1) of the Act.
61. In view of the foregoing discussion, we hold that the authorities below were not justified in treating the dredging expenditure of Rs.4,49,73,750/- as capital expenditure. We accordingly direct the Assessing Officer to allow the same as revenue expenditure. Thus, Ground No.3 raised by the assessee is allowed.
62. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 10.06.2026.
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