DEPUTY COMMISSIONER OF INCOME TAX, MANGALURU vs. NEW MANGALORE PORT AUTHORITY, MANGALURU

These appeals were heard on different dates since the issue involved in asserssee’s and Revenue’s appeals are similar except ground No.5 raised by the assessee in Assessment Year 2016-17 and figures reported. Therefore, for the sake of convenience and brevity, we are taking Assessment Year 2015-16 regarding addition of interest income raised in assessee’s appeal and decision taken for this Assessment Year shall apply mutatis mutandis for all the other Assessment Years. to 727/Bang/2025 482 to 486/Bang/2025 Page 4 of 14 3. Assessee’s Appeal in ITA No.723/Bang/.2023 and Revenue’s Appeal in (Assessment Year 2015-16) :

Consequently, a show cause notice dated 16.03.2022 was issued to the assessee and Draft Assessment Order was also sent before completion of assessment proceedings. In response to this, the assessee has submitted its reply and reply was considered and examined but the assessee failed to furnish documentary evidence in support of the reserve funds used for specific purpose of development of port and not in connection with regular operations of the assessee. Accordingly, the reply was not accepted. Hence, the amount of Rs.59,74,78,162/- was added to the total income and total income was computed as detailed below under section 143(3) r.w.s. 263 r.w.s. 144B of the Act.

Income as per revised ITR - Rs.1,09,19,61,940/- 2. Addition as per Assessment Order 28.12.2017 - Rs.11,75,96,466/- 3. Addition in para 5 - Rs.59,74,78,162/- Total taxable income - Rs.180,70,36,568/-

Aggrieved from the above Order, assessee filed appeal on 01.10.2022 against the above Order raising 7 grounds on 3 issues i.e., disallowance under section 14A of the Act, claim under section 80IA of the Act of Rs.11,51,71,466/- and addition of interest of Rs.71,26,49,623/-. The learned CIT(A) disallowed the interest received on reserve fund and allowed other 2 issues. Accordingly, he partly allowed the appeals of the assessee.

During the course of assessment proceedings, it was observed that the assessee has claimed exempt income of Rs.2,59,32,531/- but the assessee has not disallowed any expenditure towards earning of this exempt income and he noted that as per provision of section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of income and further noted that the section would apply even in cases where the assessee claims to have incurred no expenditure towards earning of exempt income. In this case, the assessee has claimed exempt income of Rs. 2,59,32,531/-. No income of any nature can be earned without some minimal effort being made to earn such income. Even in respect of investments in bonds etc., the assessee would have deployed man power, effort in terms of time and energy, space for such activity plus other charges. Thus, the claim of the assessee that no expenses were incurred is not acceptable. Accordingly, he applied Rule 8D(II) and calculated disallowance of Rs.24,25,000/-.

Further, on perusal of the income tax return, it was noticed that the assessee has claimed deduction of Rs.11,51,71,466/- on account of section 80IA of the Act. In this regard, the assessee was asked to explain in detail as to why the claim should be allowed. In this regard, the assessee filed reply stating that in terms of circular No.10/2005 dated 16.12.2005, structures at ports for storage, loading and unloading will be included in the definition of port for the purpose of section 10(23)(G) and section 80IA of the Act. However, the assessee was not been able to provide any details in respect of the claim made under section 80IA of the Act and assessee had also not maintained separate account in this regard. Further, the section 10(23)(G) of the Act was omitted by Finance Act, 2006 w.e.f. 01.04.2007. As per the reply submitted by the assessee, it was noted that the assessee has not developed a new port for which deduction under section 80IA of the Act chas b een claimed. It has merely sought deductions for income earned from new berth No.15 set as per the existing port. Therefore, the claim of the assessee for the new infrastructure facility would fall within the definition of infrastructure facility, were not accepted and disallowed the deduction claimed under section 80IA(4)(i) of the Act.

Aggrieved from the above Order, both the parties are in appeal before the Tribunal.

The learned Counsel reiterated the submissions made before the lower authorities and submitted that the interest received on reserve funds are designated fund to be created mandatorily as per direction of Government of India. In this regard, she relied on the letter issued by Ministry of Surface Transport (Port Wing), Delhi, No.PR-15024/7/93-PG dated 16th June, 1994 which is placed at Paper Book Page No.76 and another letter of Ministry of Shipping and Transport (Transport Wing) No.P&F-15/76 dated 20.03.1978

She further submitted with regard to disallowance under section 14A of the Act that the AO has wrongly invoked section 14A of the Act and wrongly calculated disallowance under section 14A of the Act applying Rule 8D, he has considered the entire investments including those investments in which no exempt income has been received. The computation mechanism clearly states that while calculating disallowance as per Rule 8D, only those investments have to be considered in which the exempt income has been yielded by the assessee. She further submitted that disallowance made by the AO is without recording the satisfaction / reaching finding as to nexus of any expenditure incurred during the year with investments made are exempt income. The learned CIT(A) has relied on the judgment in assessee’s own case for the previous Assessment Years but in the impugned Assessment Year, there is no satisfaction recorded by the AO, therefore, the entire addition made by the AO does not survive as per decisions rendered by various Courts and Tribunal.

On the other hand, the learned DR relied on the Order of lower authorities and he submitted that during the course of assessment proceedings, the assessee did not provide specific notifications issued by Government of India with regard to the exemption of interest income. He further submitted that the payer of interest might have deducted TDS on such interest payment to the assessee and the assessee would have claimed as a tax payment. This fact has not been brought out by the assessee. If it is so, the provision of section 199 of the Act to be applied to the assessee. Therefore, it requires further verification. to 727/Bang/2025 482 to 486/Bang/2025 Page 9 of 14 13. Considering the rival submissions, we noted from the Assessment Order that the AO has passed Order under section 143(3) / 263 / 144B of the Act and the revised return filed by the assessee has been accepted and there is only one addition on only one issue towards interest income received on reserve fund of Rs.59,74,78,162/-. While computing the total income for the Assessment Year 2015-16 under section 143(3) r.w.s. 263 of the Act, the AO has considered the Order passed under section 143(3) of the Act dated 28.12.2017, in which the other issues are involved. On going through the Order of the learned CIT(A), it is noted that the learned CIT(A) has partly allowed the appeal of the assessee.

Further, in respect of disallowance of interest of Rs.59,74,78,162/-, we found substance on the arguments of the learned DR and the assessee was also unable to explain the particular notifications issued by the Government of India and she was also unable to explain utilization of the reserve funds. Regarding argument by the DR on TDS claimed (probably), the learned Counsel was unable to provide any explanation. Considering the facts of the case, we deem it fit to remit back this issue to the JAO for a fresh consideration. We have also gone through the judgment of Hon’ble High Court of Orissa cited supra. The assessee was unable to demonstrate that section 90(1) of the Major Port Trust Act and the directions of Ministry of Shipping and Transport has been fully complied by the assessee. Accordingly, the decision is not applicable to the present facts of the case. Therefore, considering the facts of the case, we are of the view that the issue requires fresh examination by the JAO and assessee is directed to substantiate its claim with necessary documents. AO is directed to give reasonable opportunity of being heard. In case of failure, assessee shall not be given second leniency.

With regard to disallowance under section 14A of the Act, the learned DR relied on the Order of the AO and he further submitted before making addition, a to 727/Bang/2025 482 to 486/Bang/2025 Page 10 of 14 show cause notice was issued to the assessee on this issue, therefore, it cannot be said that AO has not recorded any satisfaction for invoking section 14A of the Act and the proposed disallowance was completely brought to the knowledge of the assessee, therefore, the AO has rightly computed the disallowance.

Further, in respect of disallowance under section 14A of the Act, we noted that during the impugned Assessment Year, the assessee has received exempt income more than the disallowance. We noted from the computation of disallowance made by the AO that AO has considered the entire opening and closing value of investments appearing in the financial statements as per Rule 8D(2)(ii) which is as under:

From the above computation mechanism, it is clear that while calculating disallowance, only those investments have to be considered which does not or shall not form of total income i.e., of those which does not yield any exempt income shall not be considered as part of average investments. However, the AO has considered the entire investments whether it has yielded exempt income or not. Therefore, this issue is remitted back to JAO for fresh consideration and assessee is directed to provide the requisite data. In the result, the issue is allowed for statistical purposes.

Revenue’s appeal for Assessment Years2015-16 2016-17, 2017-18, 2018-19 and 2022-23 to 727/Bang/2025 482 to 486/Bang/2025 Page 11 of 14 In all these years, the Revenue has raised only one issue regarding deletion of addition made by the AO under section 80IA(4)(i) of the Act as claimed by the assessee.

The learned DR relied on the Order of the AO and he further submitted that during the assessment proceedings, the assessee did not submit the details and the assessee has also not complied with the requisite procedures for the eligibility of deduction as per section 80IA.

The learned AR relied on the Order of the CIT(A) and submitted that the learned CIT(A) has followed the decision of the Co-ordinate Bench in assessee’s own case for the previous Assessment Years. Therefore, there are no errors in the Order of the CIT(A).

Considering the rival submissions, the AO has disallowed the deduction claimed under section 80IA observing that the requisite procedures have not been followed by the assessee for claiming deduction under section 80IA. We have gone through the Order of the CIT(A) and we notice that the learned CIT(A) has allowed this ground by following the judgment in assessee’s own case for the Assessment Years 2012-13 to 2014-15 in to 757/Bang/2023 dated 19.12.2023. The observation of the CIT(A) is as under:

From the above Order, we do not find any infirmity. The learned CIT(A) has relied on the judgment in assessee’s own case of the Co-ordinate Bench. The learned DR could not bring any adverse finding on this issue of the higher judicial forum. In the result, the appeal of the Revenue on this for the Assessment Years 2015-16, 2016-17, 2017-18, 2018-19 and 2022-23 are dismissed.

Ground No. 5 for the Assessment Year 2016-17:

Regarding addition of Rs.3,95,432/- towards mismatch in the income reported in the Financial Statement and Form 26AS, this issue is remitted back to the JAO for a fresh consideration and assessee is directed to provide reconciliation statement. In the result, this issue is allowed for statistical purposes.

Since we have decided the issue raised by the assessee for the Assessment Year 2015-16 in above terms, therefore, the decision taken for the Assessment Year 2015-16 shall be applied mutatis mutandis for the Assessment Year 2016- 17, 2017-18, 2018-19 and 2022-23.

To sum up, the appeals of the assessee in to 727/Bang/2025 are partly allowed for statistical purposes and appeals of the Revenue in to 486/Bang/2025 are dismissed. A common Order passed shall be kept in the respective case files.