KRISHNAN KRISHNAN,MUMBAI vs. DCIT, VASHI, MUMBAI

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ITA 6802/MUM/2025Status: DisposedITAT Mumbai03 September 20269 pages

In favour of the Revenue: the assessee's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the disallowance under Section 14A read with Rule 8D(2)(ii) was correctly made. The Tribunal found that the Assessing Officer had recorded satisfaction and that the computation under Rule 8D(2)(ii) is a standardized measure of indirect expenditure, irrespective of the source of funds.

What were the facts?

The assessee, a stock market trader, earned exempt dividend income. The Assessing Officer disallowed expenses under Section 14A read with Rule 8D, which was upheld by the CIT(A). The assessee argued that investments were made from own funds and no direct expenditure was incurred for earning dividend income.

What were the issues?

Whether the disallowance of expenses under Section 14A read with Rule 8D for earning exempt dividend income is sustainable when investments are made from own funds and no direct expenditure is incurred. Whether interest and penalty proceedings are valid.

Which sections of the Income-tax Act were involved?

Section 14A,Section 234B,Section 234C,Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL

For Respondent: Smt. Sujatha Iyyanger, Sr. DR
Pronounced: 03.09.2026

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: E BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA 6802/MUM/2025 िनधा�रण वष�/Assessment Year: 2018 - 19) Krishnan Krishnan DCIT 1301 Maruti Mount View, Plot No. 4th Floor, Vashi Railway Station 24, Sector 8b, CBD Belapur, Building, International Infotech Vs. Navi Mumbai – 400614 Park, Navi Mumbai-400703, Maharashtra Maharashtra अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of Assessee: ARXPK4343C

अपीलाथ� �ारा/Appellant represented by: Shri Surendra Tiwari, Advocate ��थ� �ारा/Respondent represented by: Smt. Sujatha Iyyanger, Sr. DR

सुनवाई की तारीख / Date of conclusion of hearing: 23.06.2026 घोषणा की तारीख / Date of pronouncement: 03.09.2026 आदेश / ORDER O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by assessee is against the order of the Ld. CIT (A), National Faceless Appeal Centre (NFAC), Delhi, Order No. ITBA/NFAC/S/250/2025-26/1078974606(1) dated 28.07.2025 passed against the assessment order by National e-Assessment Centre, Delhi, u/s. 143(3) r.w.s 143(3A) and 143(3B) of the Income-tax Act, 1961 (‘the Act’) dated 11.03.2021 for Assessment Year 2018-19.

2.

Assessee has raised the following grounds: 1. Ground No. 1 – General Ground On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals) erred in upholding the assessment order passed by the Assessing Officer under section 143(3) assessing the total income at ₹ 56,16,660 as against the returned income of ₹ 48,04,740. The appellant denies his liability to the extent of additions and disallowances confirmed by the CIT(A). 2. Ground No. 2 – Disallowance under Section 14A read with Rule 8D The Learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of ₹ 8,11,917 made by the Assessing Officer under section 14A read with Rule 8D(2)(iii) without appreciating that: (i) the Assessing Officer had not recorded the mandatory satisfaction as required under section 14A(2) before invoking Rule 8D; (ii) the Assessing Officer applied Rule 8D mechanically and without examining the accounts of assessee or the explanation furnished; and (iii) the disallowance so computed is excessive and arbitrary, being 92% of the exempt dividend income of ₹ 8,82,847. 3. Ground No. 3 – Investments made from own funds The Learned CIT(A) failed to appreciate that the investments yielding exempt income were made entirely out of the appellant’s own capital and accumulated surplus funds amounting to ₹ 10.63 crore, and no borrowed funds or interest expenditure were involved, hence no disallowance could be made under section 14A. 4. Ground No. 4 – Absence of proximate nexus between expenditure and exempt income The Learned CIT(A) erred in not appreciating that there was no proximate or identifiable expenditure incurred for earning the exempt dividend income, and that the investments were long-term passive holdings not requiring day-to-day management or administrative effort. 5. Ground No. 5 – Mechanical reliance on Rule 8D computation The Learned CIT(A) erred in upholding the Assessing Officer’s computation of disallowance under Rule 8D(2)(iii) purely on a notional formula basis, without verifying the correctness of assessee’s claim or considering that only investments yielding dividend income can be considered for such computation. 6.Ground No. 6 – Interest under Sections 234B and 234C The Learned CIT(A) erred in confirming the levy of interest under sections 234B and 234C, which is purely consequential in nature. 7. Ground No. 7 – Penalty Proceedings under Section 270A The Learned CIT(A) erred in upholding initiation of penalty proceedings under section 270A, though the issue is purely a matter of interpretation and there is no concealment or misreporting of income by the appellant.

3.

At the outset, it is noted that the present appeal has not been filed within the limitation period prescribed under section 253(3) of the Act. The order of ld. CIT(A) was received by assessee on 28.07.2025 and the appeal ought to have been filed on or before 26.09.2025. The appeal has, in fact, been filed on 27.10.2025, resulting in a delay of 31 days. It is accompanied by an application seeking condonation of delay. Having perused the averments contained in the condonation application and being satisfied that a sufficient cause exists, we find it appropriate to condone the said delay and take up the matter for adjudication.

4.

Brief facts of the case are that assessee is a trader in the stock market who filed his return of income on 08.06.2018, reporting total income at Rs. 48,04,740/-. During the year, assessee earned business profits of Rs. 27,89,597/- from intra-day trading and capital gains (short-term and long-term), of Rs. 27,98,374/- from investment activity, against which composite expenses of Rs. 19,79,677/- were claimed in the profit and loss account. The case was selected for Complete Scrutiny under CASS on the issues of Short Term Capital Gains under section 111A, Securities Transactions and Business Expenses.

4.1. On perusal of the balance sheet, ld. Assessing Officer noticed that assessee held investments in shares and mutual funds of Rs. 8,75,45,059/- as on 31.03.2018 and had earned exempt dividend income of Rs. 8,82,847/- during the year, against which no expenditure had been offered for disallowance. On being called upon to justify the claim that no expenditure was incurred to earn the exempt income, assessee furnished month-wise opening and closing balances of investments and contended that – (i) entire investment was made out of own funds without resort to any borrowing;

(ii) direct expenses relatable to trading activity such as STT, brokerage, transaction charges etc. aggregating Rs. 11,14,955/- were already embedded in and claimed against taxable trading profits; and

(iii) the balance expenses of Rs. 8,60,167/- were routine office expenses having no nexus with the earning of dividend income, and that Rule 8D was accordingly not attracted. 4.2. Ld. Assessing Officer after considering assessee's submissions, recorded his dissatisfaction on the correctness of assessee's claim that no expenditure was incurred to earn the exempt income, holding that dividend income cannot be earned without incurring at least some indirect or administrative expenditure relatable to investment decisions. In para 4.1 of the impugned order, he records that on perusal of the profit and loss account, the total expenses of Rs. 19,79,677/- have been debited. He also took note of the nature of these expenses so debited, which included: a) STT paid b) stamp duty c) salary expenses d) office and business expenses e) professional fees f) electricity expenses g) depreciation, etc.

4.3. He thus, noted that expenses debited to the profit and loss account have certainly embedded within them the expenses which were incurred to earn the exempt dividend income. Further, he recorded that he is not satisfied with the claim of the assessee that no expense has been incurred in relation to income which does not form part of the total income and took the view that it will be appropriate to determine the amount of expenditure in relation to such income in accordance with the method laid down in Rule 8D of the Income-tax Rules, 1962 (the Rules). Assessee was asked to furnish the details of expenditure incurred to earn exempt income and justify his claim in view of the provisions of Section 14A read with Rule 8D of the Rules.

4.4. Section 14A read with Rule 8D(2) was invoked. Restricting the base to assessee's shareholding in IIFL and JMFL (the securities forming assessee's share investment portfolio, as against the residual non- security investments in property, CAMS and Franklin Templeton comprised in the total figure of Rs. 8,75,45,059/-), ld. Assessing Officer computed the annual average of the monthly average of opening and closing balances of such investments at Rs. 8,11,91,689/- and applying the rate of 1% thereof in terms of Rule 8D(2)(ii), computed a disallowance of Rs. 8,11,917/-, which was added to the returned income, resulting in assessed income of Rs. 56,16,660/-. Aggrieved, assessee went in appeal before ld. CIT(A) who upheld the action of ld. Assessing Officer. Aggrieved, assessee is in appeal before the Tribunal.

5.

Ground no. 1 is general in nature and does not require independent adjudication. Grounds nos. 2 to 5, along with the sub- grounds thereto, all arise from and revolve around the singular controversy as to the sustainability of the disallowance of Rs. 8,11,917/- made under section 14A read with Rule 8D and are accordingly taken up together. Grounds nos. 6 and 7, concerning consequential levy of interest under sections 234B/234C and initiation of penalty under section 270A respectively, are dealt with towards the close of this order.

6.

We have heard the rival contentions and perused the material available on record including the assessment order, the impugned order of ld. CIT(A) and the case laws relied upon by the parties. Section 14A(2) requires ld. Assessing Officer to record satisfaction, having regard to the accounts of assessee, before rejecting the correctness of assessee's claim regarding expenditure incurred in relation to exempt income and by virtue of section 14A(3), this requirement applies equally to a claim of assessee that no such expenditure has been incurred. We find that ld. Assessing Officer examined the balance sheet and profit and loss account of assessee, called for details on two separate occasions, considered the nature of assessee's business as declared in the return of income and thereafter recorded a specific and reasoned finding that it was not possible to accept that dividend income of the magnitude earned by assessee could be generated without incurring any administrative or indirect expenditure whatsoever. The contention that the satisfaction is absent or mechanically recorded is accordingly rejected.

6.1. We note that Rule 8D(2) as applicable for the year under consideration, comprises only two limbs viz., clause (i) being expenditure directly relatable to exempt income and clause (ii) being an amount equal to 1% of the annual average of the monthly average of the value of investments capable of yielding exempt income. The disallowance in the present case has been computed exclusively under clause (ii) which is a standardised measure of indirect/administrative expenditure and is, by its very structure, agnostic to the source of funds deployed for the investment. The absence of borrowed capital or interest cost, while relevant to a disallowance of interest expenditure, has no bearing on the computation under Rule 8D(2)(ii), which addresses expenditure of the nature of monitoring, market research, administrative and decision-making relatable to acquisition, retention and disposal of investments and costs that are incurred irrespective of whether the funds are owned or borrowed. The contention of the assessee that the investments were long-term, passive holdings not requiring day-to-day management is equally unavailing.

6.2. The submission that the disallowance of Rs. 8,11,917/- is excessive, being 92% of the dividend income of Rs. 8,82,847/- does not by itself render the disallowance unsustainable in law. Rule 8D(2)(ii) prescribes a formula-driven computation linked to the average value of qualifying investments and not to the quantum of exempt income actually earned in the year. It is a settled proposition that the disallowance cannot exceed the exempt income earned by the assessee in a given year. In the present case before us, the disallowance computed by the learned AO is less than the dividend income earned by the assessee as reported in the return.

6.3. It was contended that ld. Assessing Officer ought to have restricted the average value of investment under Rule 8D(2)(ii) to only those specific investments which actually yielded dividend income during the year, rather than the entirety of assessee's shareholding in the IIFL and JMFL accounts. We note, at the outset, that ld. Assessing Officer has already excluded from the base the non-security investments comprised in the total figure of Rs. 8,75,45,059/- appearing in the balance sheet, namely, investments in property, CAMS units and Franklin Templeton mutual fund units, and has confined the computation to assessee's holding of listed shares in the IIFL and JMFL broking/demat accounts, being the very accounts from which the dividend income in question was, on assessee's own showing, sourced. Assessee has, at no stage, furnished any scrip-wise reconciliation demonstrating which particular securities within these very accounts yielded no dividend whatsoever during the year so as to justify their exclusion and the onus of establishing entitlement to exclude any part of that composite pool from the computation squarely lay upon assessee, which has not been discharged. In these circumstances, we find no error in ld. Assessing Officer having adopted the value of assessee's share investment portfolio, as furnished by assessee, for the purposes of Rule 8D(2)(ii). Ld. Assessing Officer, in effect, has followed the propositions laid down by the Hon'ble Special Bench of Delhi ITAT in the case of ACIT v. Vireet Investment Pvt. Ltd. [2017] 165 ITD 27 (Del Trib).

6.4. In view of the foregoing discussion, we are of the considered view that ld. CIT(A) has correctly appreciated the facts and the applicable law in upholding the disallowance of Rs. 8,11,917/- made by ld. Assessing Officer under section 14A read with Rule 8D(2)(ii) of the Rules. We find no infirmity in the impugned order on this issue. Ground nos. 2 to 5 raised by assessee are dismissed.

6.5. Ground no. 6 is in respect of interest under sections 234B and 234C. The levy of interest under sections 234B and 234C is mandatory and consequential in nature and shall be recomputed, if required, while giving effect to this order. This ground is dismissed as consequential.

6.6. Ground no. 7 is with regard to penalty under section 270A. The initiation of penalty proceedings under section 270A is premature at this stage, penalty being a separate and independent proceeding to be decided by ld. Assessing Officer on its own merits and in accordance with law, uninfluenced by any observation herein. This ground is dismissed as premature/consequential.

7.

In the result, appeal filed by the assessee is dismissed.

Order pronounced in the open court on 03rd September, 2026.

Sd/- Sd/- [Amit Shukla] [Girish Agrawal] Judicial Member Accountant Member Dated: 03rd September, 2026 MP, Sr. PS Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,

(Dy./Asstt.Registrar) ITAT, Mumbai

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