OERLIKON TEXTILE INDIA PVT LTD,MUMBAI vs. DCIT, CIRCLE 3(2)(1), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by the assessee is directed against the order of ld. CIT(A)/NFAC dated 19.01.2026 for Assessment Year (AY) 2018-19. The assessee has raised following grounds of appeal: “1. The CIT (Appeals) erred in upholding the additional disallowance of Rs. 57,28,869/- made by the Assessing Officer under section 14A r.w rule 8D in respect of the exempt income. 2. The CIT (Appeals) failed to appreciate that the Assessing Officer had invoked provisions of section 14A(2) without examining the claim of the appellant and having regard to the account of the appellant. 3. The CIT (Appeals) erred in not appreciating that the learned AO had failed to give valid and cogent reasons for his dissatisfaction and applying Rule 8D. 4. Without prejudice to the above, the CIT (Appeals) erred in confirming the recalculation of disallowance under section 14A done by the learned Assessing Officer. 5. The CIT(Appeals) failed to appreciate that the investments in debt mutual funds with growth option can yield only taxable income in form of

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited capital gains and they do not generate any exempt income and ought to have been excluded while computing the disclosure under Rule 8D. Relief Sought: 1. The additional disallowance of Rs. 57,28,869/- under section 14A r.w rule 8D be deleted. 2. Alternatively, if rule 8D is applied, investments in debt mutual funds having growth option be excluded while calculating the disallowance under section 14A.” 2. Brief facts of the case are that assessee is a company, engaged in the business of commissioning, installation and marketing of Textile Machinery Plants. While filing return of income for A.Y. 2018-19, the assessee declared income of Rs. 24.48 crore. Case was selected for scrutiny. During assessment, the Assessing Officer (AO) noted that assessee has earned exempt income of Rs. 2.04 crore. The assessee has made disallowance of Rs. 9,16,964/- under section 14A. The AO was of the view that disallowance offered by assessee of its own is not in conformity with Rule 8D. The AO issued show cause notice as to why disallowance under section 14A is not made in accordance with Rule 8D. The assessee filed its reply. The contents of reply are recorded by AO on page 2 of assessment order. The assessee in its reply submitted that they have offered an amount of Rs. 9,16,964/- covering the expenditure which may have been incurred for earning income that does not form part of total income. The expenditure includes possible overhead expenses. The disallowance computed is correct and does not require any further adjustment. The reply of assessee was not accepted by AO. The AO invoked the provision of Rule 8D and computed disallowance

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited under Rule 8D(2)(i) as Nil and under Rule 8D(2)(ii) @ 1.00% of annual average of monthly average of investment made for the purpose of earning exempt income. The AO worked out total disallowance under section 14A of Rs. 66,45,833/-. The AO allowed set off of suo moto of Rs. 9,16,964/- and thereby worked out a net disallowance under section 14A of Rs. 57,28,869/- in the assessment order dated 16.03.2021. 3. Aggrieved by the additions in the assessment order, the assessee filed before ld. CIT(A). Before ld. CIT(A), the assessee in statement of fact submitted that they held investment in mutual fund. Substantial amount of investment was in growth scheme and rest was in dividend scheme. The details of mutual fund and amount invested by the assessee were furnished as has been recorded at page 7 of impugned order. The assessee disallowed Rs. 9,16,964/- covering all expenditure which had been incurred for earning exempt income which dividend for part of total income. The assessee furnished the working of such disallowance. In the working of disallowance, the assessee disallowed 25% of remuneration paid to Ms. Nandini and 50% of overheads indirect cost related to mutual fund investment and justified their suo moto disallowance. The assessee in its submission further submitted that before AO; vide their submission dated 25.11.2000 furnished complete working how disallowance under section 14A was computed. No defect was pointed out in such working, the AO proceeded to apply Rule 8D on the ground that disallowance computed by assessee was not in conformity with Rule 8D. The assessee also submitted that investment

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited in debt fund with growth option do not yield any dividend income, only Net Asset Value (NAV) of their units varies. As and when the units are redeemed there is capital gain and the same is chargeable tax being included in the total income. Thus, scheme does not yield any tax free income at any point of time. Hence, investment in this scheme cannot be considered for disallowance under section 14A. So far as other investment in debt fund with dividend option, dividend declared by the scheme does not form part total income. When the units of these schemes are redeemed, the resultant gain is chargeable to tax. Thus, the investments in these schemes yield both taxable income as well as income which do not form part total income. This fact was brought in the notice of AO that there were only three transactions in mutual fund and two transactions of fresh investment were in respect of investment in debt fund with growth option. There was one transaction of redemption of mutual fund that is Reliance Liquidity Fund with dividend option with a small capital loss of Rs. 2,81,975/-. On the basis of such submission, the assessee justified their suo moto disallowance. The assessee also relied on certain case law. 4. The ld. CIT(A) upheld the action of AO. The ld. CIT(A) while upholding the action of AO in para 5.10 of his order recorded that mandatory pre- condition of section 14A(2) is to record satisfaction after examining the assessee’s account. The AO has specifically recorded his satisfaction incorrectness of suo moto disallowance before proceeding to make disallowance under section 14A. The AO has passed speaking order

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited while invoking provision of section 14A. Hence, disallowance made by AO deserves to be confirmed. Further, aggrieved the assessee has filed present appeal before Tribunal. 5. We have heard the submissions of learned Authorised Representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. Sr. DR) for the Revenue. The ld. AR of the assessee submits that AO has not recorded satisfaction about the correctness of suo moto disallowance made by assessee. The assessee has made disallowance under section 14A in his scientific manner. The ld. AR invited our attention on the investment schedule of the assessee which is filed as Annexure 2 of audit report in Form 3CA. While referring the various entries in Annexure 2 at page 77 of paper book, the ld. AR of the assessee submits that such details contained monthly opening and closing balance during the year with respect to investment made by assessee. The ld. AR of the assessee submits that these investments may be categorised in five categories. First, relates to HDFC Cash Management Fund (Growth), second relates to ICICI Prudential Liquid Plan (Weekly Dividend Payout), third relates to Reliance Liquidity Fund (Weekly Dividend Payout), fourth relates to ICICI Prudential Liquid Fund (Growth Plan) and fifth with regards to HDFC Money Market Fund (Regular Growth Plan). From 4 & 5 items, no dividend income is received. Thus, those investments cannot be considered for monthly average of annual average of investment. Otherwise, the assessee has already disallowed 25% of salary of one employee who is looking after

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited such investment. The ld. AR of the assessee submits that disallowance made by suo moto disallowance made by assessee may be accepted and the addition made by AO may be deleted. Thought, the ld. AR has filed a number of case laws relied upon the following decision:\  South Indian Bank Ltd. vs CIT (2021) 438 ITR 1 (SC)  PCIT vs Godrej & Boyce Mfg. Co. Ltd. (2023) 149 taxmann.com 222 (Bombay HC)  Tata Steel Ltd. vs DCIT ITA No. 800/Mum/2018 (Mumbai-Trib.) 6. On the other hand, the ld. Sr. DR for the Revenue submits that AO has recorded his satisfaction about the suo moto disallowance. There is no straight jacket formula for recording satisfaction. Once, the AO expressly recorded the fact that suo moto disallowance by assessee is not acceptable such satisfaction is sufficient about correctness of claim of assessee. The ld. CIT(A) while confirming the action of AO has clearly held that AO has recorded his satisfaction about correctness of claim of assessee. The AO made disallowance as per Rule 8D. The AO after allowing set off of suo moto disallowance worked out the net disallowance under section 14A of Rs. 57,28,869/-. 7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on the case laws relied by ld. AR of the assessee. We find that there is no dispute about the exempt income shown by the assessee. Further, the assessee has offered suo moto disallowance under section 14A. The detail of suo moto disallowance and exempt income has been recorded by us in preceding paras of this order. We

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited have already recorded the manner of disallowance under Rule 8D by AO. Before us, the ld. AR of the assessee made vehemently argued that no satisfaction is recorded by AO about the correctness of suo moto disallowance. We find that AO in para 4 of his order has recorded that suo moto disallowance by assessee is not in accordance with Rule 8D. We find that no specific reference is made about the accounts of the assessee before rejecting the contention of assessee. We find that sub- section (2) of section 14A mandates that AO shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with the method as may be prescribed, having regard to the accounts of assessee about the correctness of the claim in respect of such expenditure in relation to income which does not form part of total income of assessee under the Act. We find that AO simply disregarded the suo moto disallowance. No satisfaction about the correctness of suo moto disallowance as to why such disallowance is not correct is recorded by AO. The AO is required to fulfil the condition of mandate of sub-section (2) of section 14A. We find that Hon’ble Jurisdictional High Court in PCIT vs Godrej Boyce Mfg. Co. Ltd. (2023) 149 taxmann.com 222 (Bombay) and in PCIT vs Tata Capital Ltd. (2024) 161 taxmann.com 557 / 475 ITR 559 (Bombay) held that where AO had not recorded his satisfaction as to why he was not satisfied with claim of assessee in respect of expenditure in relation to exempt income, the disallowance made under section 14A by applying Rule 8D was to be deleted. Thus,

ITA No.1789/Mum/2026(AY 2018-19) Oerlikon Textile India Private Limited in view of the aforesaid factual and legal position we accept the primary submission of ld. AR of the assessee that no proper satisfaction is recorded by AO before invoking provision of Rule 8D for making disallowance under section 14A. Considering the fact that we have accepted the primary submission of ld. AR of the assessee, therefore, adjudication on other contention has become academic. 8. In result, the appeal of assessee is allowed.

Order pronounced in open Court on 05.08.2026 S- S Sd/- /- SSSd/-/-SSSS GIRISH AGRAWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 05/08/2026 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT and (5) Guard file. By Order

Assistant Registrar ITAT, Mumbai