Jetty Operator Wins Rs. 4.49 Crore Dredging Expense Claim; ITAT Deletes Section 14A Disallowance and Remands Form 26AS Mismatch Addition

The Income Tax Appellate Tribunal (ITAT) held that dredging expenditure incurred for maintaining the operational depth of an existing jetty is allowable as revenue expenditure and cannot be treated as capital in nature merely because it contributes to the continued functioning of the facility. The Tribunal also deleted the disallowance made under Section 14A for want of proper satisfaction by the Assessing Officer and remanded the issue relating to Form 26AS reconciliation for fresh verification.

The assessee, Dahej Harbour and Infrastructure Limited, is engaged in the business of development, maintenance, administration and operation of a jetty. For AY 2017-18, it filed its return declaring income of Rs.49.58 crore. During scrutiny assessment, the Assessing Officer made three additions, namely disallowance under Section 14A, addition on account of mismatch between receipts reflected in Form 26AS and books of account, and disallowance of dredging expenditure amounting to Rs.4.49 crore by treating it as capital expenditure.

Before the Tribunal, the assessee submitted that it had already made a suo motu disallowance under Section 14A after identifying employee and administrative expenses attributable to investment activities. It was argued that the Assessing Officer had invoked Rule 8D without recording any dissatisfaction with the correctness of the assessee’s working as mandated under Section 14A(2).

The Tribunal found merit in the contention and noted that the Assessing Officer had neither pointed out any defect in the assessee’s computation nor recorded objective reasons for rejecting the same before applying Rule 8D.

“Rule 8D cannot be invoked mechanically without first recording dissatisfaction regarding the correctness of the assessee’s claim.”

Accordingly, the Tribunal deleted the additional disallowance of Rs.22.57 lakh made under Section 14A and also directed deletion of the corresponding adjustment while computing book profits under Section 115JB.

On the issue of addition arising from differences between Form 26AS and the books of account, the Tribunal noted that the assessee had furnished reconciliation statements, certificates from deductors and explanations regarding timing differences as well as excess reporting by deductors. Since these explanations required factual verification, the Tribunal restored the matter to the Assessing Officer for fresh examination after providing adequate opportunity to the assessee.

The major dispute related to dredging expenditure of Rs.4.49 crore incurred by the assessee for maintaining the navigational depth of the jetty. The Revenue treated the expenditure as capital in nature on the ground that it provided an enduring benefit.

The Tribunal, however, observed that the dredging activity was undertaken solely to remove naturally accumulated silt and restore the existing depth required for smooth operations. It noted that the expenditure neither resulted in creation of any new asset nor led to expansion of infrastructure, berth facilities or business capacity.

“The expenditure merely preserved and maintained the existing operational facility and did not result in any advantage in the capital field.”

Holding that the dredging work was in the nature of maintenance necessary for carrying on the existing business, the Tribunal concluded that the expenditure was revenue in nature and allowable under Section 37(1) of the Act. Accordingly, the disallowance of Rs.4.49 crore was deleted, while the Form 26AS issue was remanded to the Assessing Officer for fresh adjudication.

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