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Facts
The assessee, a Non-Banking Financial Company, earned dividend income from investments held as stock-in-trade. The Assessing Officer disallowed expenses under Section 14A read with Rule 8D, even though no direct expenses were incurred and the investments were stock-in-trade. The CIT(A) confirmed the disallowance.
Held
The Tribunal held that investments held as stock-in-trade, which yielded dividend income, should be excluded for the purpose of computing disallowance under Section 14A. The matter was restored to the AO for factual verification and recomputation.
Key Issues
Whether investments held as stock-in-trade, yielding dividend income, are to be considered for disallowance under Section 14A read with Rule 8D, and if expenses need to be disallowed when no direct expenses are incurred.
Sections Cited
14A, 8D, 143(3), 45-IA
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Income Tax Appellate Tribunal, “SMC” BENCH MUMBAI
Before: HON’BLE SHRI SANDEEP GOSAIN
Date of Hearing 11.11.2025 Date of Pronouncement 15.12.2025 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
1. The present appeal has been filed by the assessee challenging the impugned order 25.09.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the assessment year 2017-18.
2. The solitary ground raised by the assessee relates to challenging the order of Ld. CIT(A) in confirming the disallowance of Rs. 17,23,096/- u/s 14A r.w.r 8D of the Act. In this regard Ld. AR appearing on behalf of the assessee relied upon her written submissions, the same are reproduced herein below:
1. Hincon Holdings Limited ('Appellant') is registered as a Non- Banking Financial Company ('NBFC') as defined under section 45-IA of the Reserve Bank of India Act, 1934. The Appellant is principally engaged in lending and investing activities (refer page no. 8 of paper book).
For the Assessment Year ('AY') 2017-18, the Appellant filed its return of income on October 23, 2017, declaring total income at Rs. 19,67,980. Thereafter, the case was selected for scrutiny assessment and the Assessing Officer ('AO') vide order dated June 27, 2019, passed under section 143(3) of the Act, computed the assessed income at Rs. 36,91,080, making an addition of Rs. 17,23,096 under section 14A r.w.r 8D of the Act.
3. Being aggrieved by the order of the AO, the Appellant preferred an appeal before the CIT(A). The CIT(A) vide the impugned order dated July 25, 2024, upheld the order of the AO and dismissed the appeal. Being aggrieved by the order of the CIT(A), the Appellant preferred this appeal before Your Honour.
Proposition in brief A. Disallowance under section 14A - Rs. 17,23,096
4. During the year under consideration, the Appellant earned dividend income of Rs. 11,93,263 from investments made in mutual funds, held as stock-in-trade. The details of mutual funds from which such dividend was earned is appended herewith as Annexure 1. For earning the above dividend income, no direct expenses were incurred by the Appellant. Hence, no suo-moto disallowance under section 14A was made by the Appellant.
5. The Id. AO in para 4 of his order, has stated that the provisions of section 14A are applicable even if no direct expenses are incurred to earn the exempt income and computed the disallowance under section 14A r.w.r 8D as follows:
Particulars Amount A) The amount of expenditure directly relating to NIL income which does not form part of total income B) Opening value of investments 27,86,26,701 Close value of investments 27,86,26,701 Average value of investment 27,86,26,701 Disallowance u/s 14A being 1% average value of 27,86,267/- investment Total disallowance u/s 14A(A+B) 27,86,267/-
6. While computing the disallowance under Rule 8D(2)(ii), the Id. AO took the value of investments for computing the average investments as Rs. 27,86,26,701 (as reflecting under the head 'Non-Current Investments', note 7 to the financial statements (refer page no. 10 of the paper book). The non-current Investments under note 7 of the financial statements, are investments made by the Appellant in equity instruments, from which the Appellant has not earned any dividend income. Therefore, the Id. AO has erred in e./T computing disallowance under Rule 8D(2)(ii), by considering the investments that have not yielded any exempt income during the year.
The Id. AO restricted the disallowance to total expenses of Rs. 17,23,096 claimed by the Appellant. The Appellant had provided to the Id. AO the working of the total expenses not attributable towards dividend income.
8. As submitted above, the Appellant has earned the exempt dividend income from investing activities, has recorded the investments in mutual funds under 'stock-in-trade' (refer page no. 13 of the paper book). Since the dividend yielding investments are held as stock in trade, therefore, no disallowance needs to be made under section 14A r.w.r. 8D.
9. Thus, the Id. AO has erred by considering the investments not yielding exempt income for calculation of disallowance under limb (ii) of Rule 8D. It is a well settled jurisprudence that only those investments yielding exempt income are to be considered for computing disallowance under Rule 8D(2)(ii).
10. In this regard, reliance is placed upon the decision of co- ordinate bench in case of Infina Finance Private Limited v. ACIT (ITA Nos. 413, 414, 415, 416/Mum/2025, order dated October 16, 2024) (refer page nos. 18 to 27 of the paper book), wherein the Hon'ble Mumbai Tribunal held as follows:
"10. In light of the aforementioned decisions of the Hon'ble Supreme Court, Hon'ble High Courts and Co-ordinate bench, we direct the AO to exclude the shares held as stock-in-trade for the purpose of computation of disallowance u/s 14A of the Act and recompute the disallowance.
11. Further we find that the Special Bench in the case of Vireet Investments (supra) has held that only those investment have to be considered which yield exempt income, therefore, respectfully following the same, we direct the AO to consider only those investments for the purpose of disallowance u/s 14A r.w.r. 8D which yielded exempt income."
11. In the decision of Infina Finance Private Limited (supra), the Hon'ble Tribunal has relied on the below case laws and held that shares held as stock in trade are to be excluded for the purpose of computing disallowance under section 14A: a. Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC) b. South Indian Bank Ltd. vs. CIT [2021] 438 ITR 1 (SC) c. ACIT v. Vireet Investment Ltd. 82 taxmann.com 415 d. PCIT vs. Punjab National Bank [2022] 140 taxmann.com 131 (Delhi) e. Religare Securities Ltd. in ITA No. 7291/Del/2019
The Appellant further relies on the following decisions: a. Geecee Ventures Ltd v. DCIT [2025] 174 taxmann.com 1285 (Mumbai - Trib.) b. Air India Ltd v. ACIT [2025] 173 taxmann.com 90 (Mumbai - Trib.) c. Cargo Motors (P.) Ltd. v. DCIT [2022] 145 taxmann.com 641 (Delhi HC) d. Reliance Power Ltd. v. DCIT [2024] 159 taxmann.com 1626 (Mumbai - Trib.) e. Bennett Property Holdings Company Ltd. v. DCIT [2025] 170 taxmann.com 201 (Mumbai - Trib.)
The Appellant respectfully submits that the disallowance made under section 14A of the Act, in the impugned assessment year is unjustified in view of the rule of consistency, especially when no such disallowance was made or contested by the Assessing Officer in the earlier years, despite similar facts and circumstances.
In the present case, the Appellant has consistently maintained investments generating exempt income, and the same methodology of computation and disclosure has been followed across years. In the preceding years, no disallowance under section 14A was made by the AO under similar factual matrix. Therefore, invoking section 14A afresh in the current year without change in facts or law is contrary to the rule of consistency.
The Appellant prays to delete the 14A disallowance of Rs. 17,23,096 computed by the AO in toto as the Appellant has investments yielding dividend which are held as stock-in- trade; no exempt income is earned from other investments; and no disallowance under Section 14A was made or contested in earlier years.
3. I have heard the counsels for both the parties, perused the material placed on records, judgments cited before us and also the orders passed by the revenue authorities. From the records, I noticed that the assessee is registered as Non-Banking Financial Corporation (NBFC) and engaged in lending and investing activities. For the year under consideration the assessee had declared total income of Rs. 19,67,980/-, thereby the case of the assessee was selected for scrutiny and the income of the assessee assessed and computed thereby making addition of Rs. 17,23,096/- u/s 14A r.w.r 8D of the Act. Although it was submitted by Ld. AR that no disallowance u/s 14A was warranted on account of the fact that during the year under consideration assessee had earned dividend income of Rs. 11,93,263/- from investments made in mutual funds held as “stock-in-trade” and the details of mutual funds from which such dividend earned has already placed on record as annexure – 1 in paper book. It was further submitted that earning the above dividend income no direct expenses were incurred by the assessee, hence no suo-moto disallowance u/s 14A was made by the assessee.
4. Whereas on the contrary, Ld. DR submitted that while computing the disallowance under Rule 8D(ii) the AO took the value of investments for computing the average investment as Rs. 27,86,26,701/- and had made the disallowance by holding that the provisions of Sec. 14A are applicable if no direct expenses are incurred to earn the exempt income and computed the disallowance in the following manner.
Particulars Amount C) The amount of expenditure directly relating to NIL income which does not form part of total income D) Opening value of investments 27,86,26,701 Close value of investments 27,86,26,701 Average value of investment 27,86,26,701 Disallowance u/s 14A being 1% average value of 27,86,267/- investment Total disallowance u/s 14A(A+B) 27,86,267/-
On the contrary Ld. DR relying upon the orders passed by the revenue authorities, and also relied upon his written submissions and the same are reproduced herein below:
1.1 The Assessee company e-filed its Return of Income for AY 2017-18 declaring total income of Rs. 19,67,980/-. The return was processed u/s 143(1). The case was selected for scrutiny. Accordingly, assessment was carried out. AO made disallowance u/s 14A r.w.r 8D of IT Act.
1.2 The assessee filed appeal before CIT(A). Ld CIT(A) after considering the submission of the assessee and the assessment order. Confirmed the disallowance made by AO u/s 14A of IT Act.
1.3 The Assessee, being aggrieved, filed appeal before the Hon'ble ITAT being ITA No. 2961/M/2025. Before the Hon'ble Tribunal, assessee challenged the confirmation of assessment order by Ld CIT(A).
2. Before the AO and CIT(A) assessee has argued on the pointy that the expenses incurred by assessee has no nexus with earning of such exempt income. In the Grounds of appeal before Hon'ble Tribunal assessee has taken the same stand and challenged the order of CIT(A) for not considering the contention of the assessee. However, during the hearings before Hon'ble Tribunal Assessee has taken two arguments as under:
2.1 Firstly, the assessee has contended that while computing the disallowance u/s 14A r.w.r. 8D the AO has erred in considering those investments which are actually stock in trade.
2.2 Secondly assessee has also contended that the investments on which exempt income is not earned during the year should not be considered for computing the disallowance u/s 14A r.w.r. 8D. Assessee has cited certain decisions to support its contention.
In this regard it is submitted that these arguments were not raised before any of the lower authorities and therefore it was not adjudicated by them. For the first time these arguments are taken before Hon'ble Tribunal.
In view of the above it is humbly submitted that the matter may be remanded back to the file of lower authorities for considering these arguments on facts and on merits. Further it is to humbly state that these submissions are in addition to the order of AO and CIT(A) and oral arguments during the hearings and may kindly be taken on record and favourably considered while deciding the case.
6. After having gone through the facts as well as legal proposition in the present case, I find that according to the assessee since the assessee had earned dividend income of Rs. 11,93,263/- from investments made in mutual funds, held as stock in trade, therefore no disallowance needs to be made u/s 14A r.w.r 8D of the Act. And further submitted that only those investments yielding exempt income are to be considered for computing disallowance under Rule 8D(2)(ii). After having gone through the facts of the present case, I find that the Coordinate Bench of ITAT in the case of Infina Finance Pvt Ltd Vs. ACIT (ITA Nos. 413, 414, 415 416/Mum/2025), wherein it has held as under:
"10. In light of the aforementioned decisions of the Hon'ble Supreme Court, Hon'ble High Courts and Co-ordinate bench, we direct the AO to exclude the shares held as stock-in-trade for the purpose of computation of disallowance u/s 14A of the Act and re-compute the disallowance.
Further we find that the Special Bench in the case of Vireet Investments (supra) has held that only those investment have to be considered which yield exempt income, therefore, respectfully following the same, we direct the AO to consider only those investments for the purpose of disallowance u/s 14A r.w.r. 8D which yielded exempt income."
Apart from this different judicial authorities have already held that the shares held as “stock in trade” are to be excluded for the purpose of computing the disallowance u/s 14A in the following cases: a. Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC) b. South Indian Bank Ltd. vs. CIT [2021] 438 ITR 1 (SC) c. ACIT v. Vireet Investment Ltd. 82 taxmann.com 415 d. PCIT vs. Punjab National Bank [2022] 140 taxmann.com 131 (Delhi) e. Religare Securities Ltd. in 7. After having considered the legal preposition and also the facts of the present case and in the light of aforesaid mentioned decisions of Hon’ble Apex Court, Hon’ble High Courts and Coordinate Benches of ITAT, I am also of the view that the investments in the mutual funds held as “stock-in-trade” for the purpose of computation of disallowance u/s 14A of the Act are to be excluded.
Further I find that the Special Bench in the case of ACIT Vs. Vireet Investments Ltd 82 taxmann 415 as held that “ only those investment have to be considered which yield exempt income”. Since both these arguments were not raised before any of the lower authorities, and for the first time these arguments have been raised, which in my view needs factual verifications of records by AO. Therefore, respectfully following the above decision I restore the matter back to the file of AO for factual verification with regard to documents relied upon by the assessee to ascertain as to whether the assessee had held the shares as ‘stock in trade’. And in case it is found that shares have been held in stock in trade then in that eventuality those have to be excluded or the purpose of computing the disallowance u/s 14A of the Act.
Moreover, I further direct the AO to consider only those investments which yielded the exempt income for the purpose of computing disallowance under Sec. 14A r.w.r 8D of the Act. Accordingly the grounds raised by the assessee stands allowed for statistical purposes.
In the result, the appeal filed by the assessee stands allowed for statistical purposes.
Order pronounced in the open court on 15.12.2025 Sd/- (SANDEEP GOSAIN) JUDICIAL MEMBER Mumbai, Dated 15/12/2025 KRK, PS आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. संबंिधत आयकर आयु� / The CIT(A) 3. आयकर आयु�(अपील) / Concerned CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण,मु�बई/ DR, ITAT, Mumbai 5. गाड� फाईल / Guard file. 6. आदेशानुसार/BY ORDER, स�ािपत �ित //True Copy//
उप/सहायक पंजीकार ( Asst. Registrar) आयकर अपीलीय अिधकरण, मु�बई मु�बई / ITAT, Mumbai मु�बई मु�बई