DCIT CC-8(3), MUMBAI, MUMBAI vs. MANPREET ESTATES LLP, MUMBAI

The brief facts of the case are that the assessee is a developer and filed the return in the impugned assessment year. The assessee has taken secured loan from financial institution amounting to Rs. 180 crores out of which Rs. 150 crores was disbursed to them. The said loan was taken at interest rate 12.50% p.a. Subsequently, the assessee has utilized the said funds for acquiring shares of M/s Obedience Infracon P. Limited. The shares were acquired at a consideration of Rs. 23,85,68,750/-. So, considering this the Ld. AO had determined the amount of Rs.2,98,21,094/- [Rs. 23,85,68,750/- x @12.5%] the expenditure directly related to income which is not part of the total income & added back with total income u/s. 14A r.w.r 8D of the Income Tax Rule, 1962 (Rules). The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld.

The Ld. DR argued and relied on the order of the Ld. AO. The Ld. DR contended that the assessee had invested the amount of Rs. 23,85,68,750/-. So, the part of interest related to the loan should be disallowed. The Ld. DR invited our attention in assessment order in para 4.1 to 4.3 which has been reproduced as below: “ 4.1 The assessee has taken secured loan from financial institution amounting to Rs. 180 crores out of which Rs. 150 crores was disbursed to them. The said loan was taken at interest rate 12.50% p.a. Subsequently, the assessee has utilized the said funds for acquiring shares of M/s Obedience Infracon P. Limited. The shares were acquired at a consideration of Rs. 23,85,68,750/-. 4.2 The assessee was show caused vide notice dated 01.03.2021 as to why interest @ 12.50% should not be disallowed u/s 14A r.w.r 8D(2)(i) of the Act, as same is directly attributable to the investment made in interest @ 12.50% should not be disallowed u/s 14A r.w.r 8D(2)(i) of the Act, as same is directly attributable to the investment in the said private limited company. In response to same, the assessee has submitted their submission which is duly placed on records. 4.3 The assessee’s submission is carefully considered but found not acceptable. Since, the assessee has duly accepted that they had utilized the funds received from term loan in acquiring the shares of M/s Obedience Infracon P. Limited. Also the assessee has accepted that the provision of section 14A would be applicable on their investment as they had suo-moto disallowed 1% of the monthly average investment in the return of income.”

The Ld. AR argued and respectfully relied on the order of the Ld. CIT(A). The observation of the Ld. CIT(A) in para no. 8 of the impugned appellate order is reproduced as below: “8. Ground No.3 to 5: It is related to disallowance u/s 14A of the Act 8.1 The contentions of the appellant have been duly considered along with judicial pronouncements. Also, I have considered the Assessment order. According to the appellant, the exempt income during the year was Nil. This is also evident from the submission of the appellant and from the assessment order. The AO has, however, computed the disallowance in accordance with Rule 8D and made the disallowance of Rs. 2,98,21,094/- while computing the total income. The appellant has relied on a slew of judgments to state that no disallowance u/s 14A was called for. 8.2 The appellant has relied on a host of decisions to claim that it has not earned any exempt income and therefore, no disallowance can be made u/s 14A. It is observed that on the issue as to whether disallowance u/s 14A can be made if no dividend income has been earned during the relevant year, there was substantial debate. The appellant contended that in decision of the Bombay High Court in the case of Nirved Traders, decided that, the disallowance made by the AO u/s 14A cannot exceed the tax-exempt income earned during the relevant year. It is noted that the appellant has not earned any tax-exempt income during the year as such. Therefore, no disallowance could have been made under section 14A of the Act. Similar view has been taken by the Hon’ble Delhi High Court in Joint Investment Pvt. Ltd. v. CIT, wherein it was categorically held that section 14A cannot be interpreted so as to result in disallowance exceeding the exempt income. 8.3 In the present case, since admittedly no exempt income has been earned during the year, the disallowance made by the AO is contrary to the settled legal position. The suo-moto disallowance made by the Appellant out of abundant caution cannot be construed as acceptance of applicability of section 14A so as to justify further mechanical disallowance. 8.4 Further, it is noted that the investment in M/s Obedience Infracon Pvt. Ltd. was made for strategic business purposes, namely to obtain control over the company which owned property adjacent to the Appellant’s redevelopment project. The investment was thus in the nature of commercial expediency and business expansion. The Hon’ble Delhi High Court in CIT v. Oriental Structural Engineers Pvt. Ltd. has upheld that where investments are made in subsidiary or group concerns for commercial expediency and not for earning exempt income, disallowance under section 14A is not warranted. Similarly, the Mumbai Tribunal in Garware Wall Ropes Ltd. v. Addl. CIT has held that where investments are made for holding controlling stake and no expenditure is incurred for earning exempt income, section 14A cannot be invoked. 8.5 In the present case, the AO has presumed that interest expenditure at 12.5% is directly attributable to the investment merely because a term loan existed. However, it is observed that no fresh investment was made during the year under consideration and no fresh loan was disbursed during the relevant previous year. The interest expenditure incurred during the year was capitalized to work-in-progress as part of project cost. The AO has not brought any direct corroborative material on record to conclusively establish that the interest expenditure for the year under consideration was incurred specifically for earning exempt income. It is further noted that section 14A contains an embedded principle of apportionment and can be invoked only where expenditure is shown to have been incurred in relation to exempt income. In the present case, no exempt income has been earned and no direct nexus has been established between interest expenditure of the year and earning of exempt income. Therefore, the mandatory condition precedent for invoking section 14A is not satisfied. In absence of such proximate nexus, as required by the Hon’ble Supreme Court in CIT v. Walfort Share & Stock Brokers (P) Ltd., disallowance under section 14A cannot be sustained. In light of the above decisions, it is held that the AO is not correct in making the disallowance of Rs. 2,98,21,094/- u/s 14A when during the year the as the appellant has not earned any exempt income. Accordingly, the disallowance made u/s 14A of the Act is allowed.”

The Ld. AR contended that the assessee has not received any exempt income during the year consideration. The respectful reliance was placed upon decision of Hon’ble Mumbai ITAT in the case of DCIT vs Satyam Realtors Pvt. Ltd. (ITA No.2391/Mum/2018 A.Y.2014-15, date of pronouncement 31/07/2019) wherein it is held that if no exempt income is earned during the relevant previous year, then no disallowance u/s.14A of the Act is warranted. The relevant portion of the order of ITAT is reproduced as under:

We have heard the rival submissions and perused the material available on record. The undisputed fact is that the assessee had not earned any exempt income during the relevant previous year. The Ld. AO made a disallowance of Rs.2,98,21,094/- under section 14A read with Rule 8D by attributing interest expenditure at the rate of 12.50% to the investment made by the assessee in the shares of M/s Obedience Infracon Pvt. Ltd. The Ld. CIT(A), however, deleted the said disallowance principally on the ground that no exempt income had been earned by the assessee during the year under consideration. We find that the issue is squarely covered by the settled judicial position applicable to the assessment year under consideration that, in the absence of any exempt income earned or receivable during the relevant previous year, no disallowance under section 14A of the Act can be sustained. The Coordinate Bench of the ITAT, Mumbai, in Satyam Realtors Pvt. Ltd. (supra) after considering the decisions of the Hon’ble High Courts, including Cheminvest Ltd. (supra), Chettinad Logistics (P.) Ltd. (supra), Shivam Motors (P.) Ltd. (supra) and Ballarpur Industries Ltd. (supra), has taken the same view.

In the present case, the revenue has not controverted the factual finding of the Ld. CIT(A) that the assessee had earned no exempt income during the relevant previous year. Therefore, merely because borrowed funds were utilised for acquiring the shares, the same, by itself, cannot sustain a disallowance under section 14A read with Rule 8D when there is no exempt income during the year. Accordingly, following the aforesaid judicial position, we find no reason to interfere with the order of the Ld. CIT(A) deleting the disallowance of Rs.2,98,21,094/-. The grounds raised by the revenue on this issue are, therefore, dismissed.

The assessee, in its Cross Objection, has raised legal grounds which were not adjudicated by the Ld. CIT(A). Since we have upheld the relief granted by the Ld. CIT(A) on merits and the revenue's appeal stands dismissed, adjudication of the legal grounds raised in the Cross Objection would be academic and does not survive for consideration in the present proceedings. Accordingly, the Cross Objection filed by the assessee is also dismissed as academic.

In the result, the appeal of the revenue bearing ITA No. 5053/Mum/2026 as well as the assessee’s CO No. 213/Mum/2026 both are dismissed. Order pronounced in the open court on 14th day of August 2026.