SOLITAIRE APPLIANCES PRIVATE LIMITED,MUMBAI vs. DY CIT CIRCLE 3(3)(1), MUMBAI

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ITA 914/MUM/2026Status: DisposedITAT Mumbai01 September 2026AY 2017-187 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that Section 14A disallowance is not applicable if no exempt income is earned and the Explanation to Section 14A inserted by the Finance Act, 2022 is prospective. For Section 36(1)(iii), the matter was remanded to the AO for fresh adjudication.

What were the facts?

The Assessing Officer (AO) made disallowances under Section 14A r.w. Rule 8D and Section 36(1)(iii) of the Income Tax Act. The Commissioner (Appeals) upheld these disallowances. The assessee contended that no exempt income was earned, thus Section 14A disallowance was unwarranted, and sought an opportunity to furnish documents for the Section 36(1)(iii) disallowance.

What were the issues?

Whether disallowance under Section 14A is permissible when no exempt income is earned, and whether the amendment to Section 14A is retrospective. The second issue pertains to the validity of disallowance under Section 36(1)(iii) due to lack of evidence.

Which sections of the Income-tax Act were involved?

Section 14A,Section 36(1)(iii),Section 115JB

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCHES, MUMBAI

Before: HON’BLE NARENDER KUMAR CHOUDHRY & HON’BLE PRABHASH SHANKAR

Pronounced: 01.09.2026

आदेश / ORDER

PER: NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER:

This appeal has been preferred by the Assessee against the order dated 27.11.2025, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) (in short, “Ld. Commissioner”) u/s 250 of the Income Tax Act, 1961 (in short, “the Act”), for the A.Y. 2017- 18.

2.

Brief facts relevant for adjudication of the instant appeal are that the AO, vide assessment order dated 09.12.2019 passed u/s 143(3) of the Act, made the following disallowances:

(i) Rs.2,38,75,419/- u/s 14A r.w. Rule 8D, after reducing the suo motu disallowance of Rs.1,01,730/- from the total disallowance computed at Rs.2,39,77,149/-; and (ii) Rs.23,24,84,724/- u/s 36(1)(iii) of the Act. 3. The Ld. Commissioner affirmed both the disallowances. In respect of section 14A, reliance was placed upon the Explanation inserted by the Finance Act, 2022; whereas the disallowance u/s 36(1)(iii) was sustained principally for want of sufficient supporting evidence.

4.

Before us, the Ld. Counsel submitted that the Assessee had not earned any exempt income during the year under consideration and, therefore, no disallowance u/s 14A r.w. Rule 8D was warranted. It was further submitted that the suo motu disallowance of Rs.1,01,730/- had been made inadvertently. Reliance was placed upon Cheminvest Ltd. v. CIT [(2015) 378 ITR 33 (Delhi)] and Bal Mukund Acharya v. DCIT [2009] 176 Taxman 316 (Bom.).

5.

The Ld. Counsel further relied upon the Special Bench decision in ACIT v. Vireet Investment (P.) Ltd. [(2017) 165 ITD 27 (Delhi- Trib.) (SB)] for the proposition that disallowance computed u/s 14A r.w. Rule 8D cannot be mechanically added while computing book profit u/s 115JB of the Act.

6.

With regard to the disallowance u/s 36(1)(iii), the Ld. Counsel submitted that an identical issue had earlier been remanded to the AO in the Assessee’s own case and that the Assessee is now in a position to furnish the requisite documents. Accordingly, one opportunity was sought.

7.

The Ld. DR, on the contrary, supported the orders passed by the authorities below. However, no contrary binding authority was brought to our notice against the judicial precedents relied upon by the Assessee.

8.

We have heard the parties, perused the material available on record and given thoughtful consideration to their rival claims. The law applicable to A.Y. 2017-18 is well settled that where no exempt income has been earned, no disallowance u/s 14A r.w. Rule 8D can ordinarily be made. Further, the Explanation inserted in section 14A by the Finance Act, 2022 w.e.f. 01.04.2022 is prospective and does not govern the year under consideration.

9.

In this regard, the Coordinate Bench of the Tribunal in The Assistant Commissioner of Income Tax, Central Circle-6(4), Mumbai v. Indiabulls Real Estate Limited, ITA No.2179/Mum/2024, order dated 10.03.2025, while dealing with an identical issue, observed and held as under:

“3. The first issue relates to disallowance made under section 14A of the Act. During the assessment proceedings, the AO observed from the financial statement that the non-current investment in equity shares had been raised to Rs.5117,21,42,000/- as on 31.03.2018 from Rs.4533,38,64,000/- as on 31.03.2017 and as per the financial statements for the year the current investment in mutual funds had been raised to Rs.284,38,84,000/- as on 31.03.2018 from Rs.76,90,86,000/-as on 31.03.2017. The assessee had made a voluntary disallowance of only Rs.83,33,333/- u/s 14A of the Act which was rejected by him. Accordingly, he computed the disallowance u/s.14A r.w.r 8D at Rs.27,53,07,768/-. 4. Before the ld.CIT(A), the assessee pleaded that the investments that did not earn any exempt income during the year could not be included for computing average investment u/r 8D. The Id.CIT(A) observed that it is now settled that disallowance u/s 14A can be made only when the assessee has actually incurred an expenditure in relation to earning of exempt income. This is as per the ratio of the decisions laid out by the Hon'ble Courts in the cases of Maxopp Investment (15 Taxmann.com 390) (Delhi HC), Cheminvest Ltd (ITA No 749/2014) (Delhi HC) and Hero Cycles Ltd (323 ITR 518) (P & H HC). Once it is found that the assessee has incurred an expenditure in relation to earning of exempt income, the quantum of disallowance u/s 14A can be computed by the AO by applying rule 8D, if the AO is not satisfied with the correctness of the claim made by the assessee as regard the quantum of disallowance offered by it. He found no infirmity in the action of the AO in invoking the provisions of section 14A r.w.r 8D in the present case. However, he further observed that it is now also a settled legal position that disallowance u/s 14A is to be restricted to the exempt income earned during the year. The AO has mentioned that the exempt income earned during the year is only Rs. 5,06,52,261/-. It is further noted by him that when there is no exempt income or the exempt income is less than the disallowance calculated as per rule 8D, the various Judicial Authorities have held that disallowance u/s 14A cannot exceed the exempt income. It is now settled by the recent decision of the Hon'ble Supreme Court dated 02.07.2018 in the case of Chettinad Logistics P. Ltd. (95 taxmann.com 250) wherein the Revenue SLP against the decision of the Hon'ble Madras High Court (80 taxmann.com 221) has not been admitted. In this case, the Hon'ble Madras High Court held that Rule 8D cannot over- ride the provisions of sec. 14A. The Hon'ble Madras Court held that if provisions of section 14A itself are not applicable, then there is no question of invoking Rule 8D and computing the disallowance. It was held by the Hon'ble High Court that the provisions of sec. 14A cannot be invoked if no exempt income has been earned for the relevant year. The Hon'ble Bombay High Court in the case of M/s. Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017) in their decision dated 23.04.2019 approved the claim that the disallowance under section 14A was to be restricted to the tax-exempt income earned during the year. Accordingly, the ld.CIT(A) held that the disallowance made by the AO u/s 14A has to in any case be restricted to the extent of the exempt income earned. He further held that the Explanation introduced in the section was not applicable during the year. He also directed the AO to follow the decision of the Special Bench of Hon'ble ITAT Delhi in the case of ACIT v. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) as also the decision of the jurisdictional Mumbai ITAT in the case Excel Industries Ltd. in ITA No. 5472/Mum/2017 (Order dated 09.01.2023), which lay down that investments that yielded exempt income during the year only have to be considered for computing average investment for the purpose of rule 8D. However, since the assessee had not given any bifurcation of investment that earned exempt income and that did not, the quantification of average investment that yielded exempt income was not possible. Accordingly, the assessee was directed to give bifurcation of investment that earned exempt income and that did not result into exempt income to the AO who was,in turn directed to compute disallowance u/s 14A taking average investment of those investments that have yielded the exempt income. The disallowance 4 so calculated shall in any case not exceed the exempt income earned by the assessee. 5. We find that the ld.CIT(A) has dealt with the matter at length and has taken into consideration the legal position vis-a-vis the provisions of section 14A r.w. Rule 8D. Therefore, there is absolutely no infirmity in the order. We find that in the grounds of appeal, the Revenue has basically agitated the conclusion of the ld.CIT(A) that the Explanation inserted in the section w.e.f.01.04.2022 vide Finance Act 2022 was prospective and did not apply to the year under consideration. In 2022, the Parliament enacted a significant amendment to s.14A of the Act, incorporating a non-obstante clause and an explanatory provision to state that the section applies even if the exempt income is absent during the relevant year. This amendment became effective on 01.04.2022 and does not apply retrospectively. Regarding the applicability of explanation introduced in section 14A vide the Finance Act, 2022 w.e.f 01.04.2022, the Hon'ble Delhi High Court in the case of Era Infrastructure (India) Ltd. (2022) 141 taxman.com 289 (Delhi) held that explanation introduced in sec. 14A is prospective in nature, therefore, no disallowance could be made u/s 14A if there is no exempt income earned prior to assessment year 2022-23. The legislative intent behind insertion of the aforesaid Explanation to section 14A of the Act was to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. The co-ordinate bench of ITAT Mumbai vide its order dated 29.06.2022 in the case of Bajaj Capital Ventures (P) Ltd. (2022) 141 taxmann.com 1 (Mumbai-Trib) has similarly held that the amendment by way of insertion of the aforesaid explanation was prospective in nature. The Hon’ble High Court of Madhya Pradesh has also held the prospective applicability of the amendment to s.14A of the Act in the case of the Pr.CIT v. Keti Construction Ltd. 162 taxmann.com 278(2024). 6. In view of the above discussion, we hold that there is no merit in the ground of the Revenue which is therefore, dismissed.” 10. Thus, in view of the aforesaid legal position, the case qua the disallowance u/s 14A is remanded to the file of the AO for limited verification of the Assessee’s claim that no exempt income was earned during the relevant previous year. If the claim is found correct, the entire disallowance u/s 14A r.w. Rule 8D, including the suo motu disallowance of Rs.1,01,730/-, shall stand deleted.

11.

If any exempt income is found to have been earned, the AO shall recompute the disallowance in accordance with law, considering only those investments which yielded exempt income and subject to the permissible statutory limits.

12.

Further, while computing book profit u/s 115JB, no adjustment shall be made by mechanically importing the disallowance computed u/s 14A r.w. Rule 8D, in terms of ACIT v. Vireet Investment (P.) Ltd. (supra).

13.

Coming to the disallowance of Rs.23,24,84,724/- u/s 36(1)(iii), admittedly, the issue could not be adjudicated in its proper perspective for want of supporting material. Since the Assessee has undertaken to furnish the requisite evidence, the case on this limited issue is remanded to the file of the AO for decision afresh, suffice to say, by affording a reasonable opportunity of being heard to the Assessee and considering the material and submissions placed/to be placed on record. The Assessee shall cooperate and furnish the requisite evidence without delay or default.

14.

In the result, the Assessee’s appeal is allowed for statistical purposes in the aforesaid terms.

Order pronounced in the open court on 01.09.2026. Sd/- Sd/- PRABHASH SHANKAR NARENDER KUMAR CHOUDHRY ACCOUNTANT MEMBER JUDICIAL MEMBER (Tarun Kushwaha) Sr. Private Secretary Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The DR Concerned Bench

//True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.

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