M/S.GODREJ INVESTMENT PVT LTD ,MUMBAI vs. DY CIT, CIRCLE 14(1), MUMBAI

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against order dated 15/12/2025 passed by the Ld. Commissioner of Income-tax (Appeals)- National Faceless Appeal Centre, Delhi [in short the Ld. CIT(A)] for Assessment Year 2015-16, in relation to penalty levied

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by the Assessing Officer under Section 271(1)(c) of the Income- tax, 1961( in short ‘the Act’) , raising following grounds; -

i. The learned Commissioner of Income Tax (Appeals) erred in confirming the penalty levied by the Assessing Officer on the notional disallowance under section 14A r.w. Rule 8D(2)(iii) amounting to Rs.27,69,212/- for the following reasons;-

a. The Assessing Officer erred in levying a penalty u/s.271(1)(c) of the Act without recording satisfaction in the Assessment Order. b. The Assessing Officer erred in levying a penalty u/s.271(1)(c) of the Act on the grounds that the Appellant had furnished inaccurate particulars of his income. c. The Assessing Officer erred in levying a penalty u/s.271(1)(c) of the Act without assessing the Total Income on which the penalty has been levied and without serving the Order Giving Effect to the order of the Income. Tax Appellate Tribunal, which formed the basis for the penalty order.

ii. The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in levying a penalty on the alleged disallowance of notional administrative expenditure amounting to Rs.85,35,097/- when no such expenditure has been incurred or claimed by the Appellant as the actual administrative expenditure debited to the Profit & Loss account and claimed by the Appellant was only Rs.11,94,645/ of which Rs.4,80,000/- was suo-moto disallowed by the Appellant at the time of filing the Return of Income.

iii. The learned Commissioner of Income Tax (Appeals) erred in stating that Appellant has suo-moto not disallowed any administrative expenditure under section 14A of the Act when in actual fact the Appellant had disallowed an amount of Rs.4,80,000/- under section 14A r.w. Rule 8D(2)(i).

iv. The learned Commissioner of Income Tax (Appeals) erred making a factually erroneous statement that the penalty order was passed before the order of Hon'ble Tribunal and that Assessing

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Officer has rightly computed disallowance under Rule 8D(2)(iii), when in fact the Tribunal order was dated November 26, 2021 and the Penalty order was dated July 20, 2022. v. The learned Commissioner of Income Tax (Appeals) erred in not serving the remand report to the Appellant and thereby not granting an opportunity to the Appellant to rebut the same. vi. The learned Commissioner of Income Tax (Appeals) and the Assessing Officer erred in levying a penalty u/s.271(1)(c) of the Act even though there was no concealment by the Appellant. vii. The learned Commissioner of Income Tax (Appeals) and the Assessing Officer erred in levying a penalty u/s.27(1)(c) of the Act in a matter where two different views are possible. viii. Without prejudice and in any event, the penalty levied is highly excessive and arbitrary, and the same requires to be reduced substantially.

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11,94,645/-. In this manner, he considered total disallowance of Rs. 6,16,81,185 under section 14A read with Rule 8D and after reducing the suo-motu disallowance made by the assessee, made net addition for the balance amount of Rs. 6,12,01,185/-.

2.1 On further appeal, Ld. CIT(A) upheld the disallowance under Rule 8D(2)(ii), but restricted the disallowance under Rule 8D(2)(iii) to the extent of Rs. 9,81,998/- on proportionate allocation of expenses debited in profit and loss account in ratio of taxable and exempted income earned by the assessee during the year under consideration.

“12. Considered the rival submissions and material placed on record, we observe from the record that no doubt assessee has earning exempt income to the tune of ₹.55.21 crores and assessee has suo moto declared direct expenses relating to interest to the extent of ₹.4219/- and administrative expenses to the extent of ₹.4.8 lakhs. We observed from the Assessment Order that Assessing Officer while perusing the Profit and Loss Account clearly brought on record that assessee has earned interest income of ₹.11.96 crores which is taxable and claimed interest expenditure to the extent of ₹.7.68 crores. In the net result assessee is actually earned net taxable interest during this year, it clearly indicates that assessee has used own funds for the purpose of making investments in shares only from which assessee has earned exempt income, as held in the cases of CIT v. Jubiliant Enterprise (P.) Ltd, (supra) and Pr.CIT v. Nirma Credit & Capital (P.) Ltd.,

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(supra), the tax authorities can disallow interest expenditure after reducing the interest income earned by the assessee for the purpose of disallowance u/s. 14A of the Act. In the given case since assessee has earned net interest income the disallowance of interest under Rule 8D(2)(ii) of I.T. Rules can be made only if there is any positive expenditure. Considering the fact that assessee has net interest income, there is no interest expenditure claimed by the assessee which can be applied to disallow u/s. 14A r.w. Rule 8D(2) (ii) of I.T.Rules. Accordingly, ground raised by the assessee is allowed.”

3.1 As far as administrative expenses under Rule 8D(2)(iii) is concerned, the Tribunal restored the Matter back to the AO restricting the disallowance to 0.5% of the average investment which earned actual dividend income. The relevant finding of the Coordinate Bench is reproduced as under ;-

“13. With regard to administrative expenses disallowable under Rule 8D(2)(iii) of I.T. Rules, we agree that Rule 8D is applicable in the case of the assessee. Therefore, the administrative expenses have to be disallowed by applying Rule 8D(2)(iii) of I.T. Rules, we observe from the disallowance made by the Assessing Officer by applying average investments. We do not know whether all the investments made by the assessee has ended up earning exempt income. Therefore, in our view,the disallowance should be restricted to 0.50% of the average investments which actually earned dividend income. Accordingly, we direct the Assessing Officer to recompute the disallowance as per above direction.” 4. Subsequently, the Ld. AO levied penalty in respect of the disallowance of the administrative expenses keeping in view the finding of the coordinate bench of the Tribunal in quantum proceedings in ITA No. 3163/MUM/2019, which has been further upheld by the ld CIT(A) .

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claim and had itself made a suo-motu disallowance under section 14A of the Act. The dispute, therefore, was merely with regard to the quantum of disallowance to be computed under Rule 8D.

5.1 The learned counsel further contended that the Coordinate Bench, while deciding the quantum appeal, had deleted the disallowance under Rule 8D(2)(ii) and restored the issue relating to Rule 8D(2)(iii) to the file of the Assessing Officer with a direction to recompute the disallowance by restricting it to 0.5% of the average value of those investments which had actually yielded exempt income. But the AO didn’t give effect to the order of ITAT. Thus, According to the assessee, the quantum addition had not attained finality and necessarily required recomputation by the Assessing Officer by passing an order giving effect to the Tribunal's directions, but, despite being fully aware of the Tribunal's order, the Assessing Officer proceeded to levy penalty without first giving effect to the quantum order and without determining the amount of disallowance that ultimately survived. It was, therefore, submitted that on the date of levy of penalty, the amount of tax sought to be evaded had itself not crystallised and, consequently, the penalty proceedings were premature and legally unsustainable.

5.2 In support of the aforesaid contentions, reliance was placed upon the decisions of the Hon'ble Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. (2010) 322 ITR 158 (SC), the

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Full Bench decision of the Hon'ble Bombay High Court in Mohd. Farhan A. Shaikh v. DCIT (2021) 434 ITR 1 (Bom.) (FB), the judgments of the Hon'ble Bombay High Court in PCIT v. Elcon Pipe & Fittings (P.) Ltd. [(2026) 187 taxmann.com 886 (Bom.)] and PCIT v. Colo Colour (P.) Ltd. [(2025) 178 taxmann.com 458 (Bom.)], besides the decisions of the Coordinate Benches in Apollo Finance Ltd., Mun Gems v. ACIT [(2023) 155 taxmann.com 1 (Mum.-Trib.)] and ITO v. Sunil Bhagwandas Vorani (HUF) [(2024) 169 taxmann.com 23 (Mum.-Trib.)], to contend that where an addition survives merely on estimation or on application of a statutory formula, the provisions of section 271(1)(c) are not attracted.

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6.2 Even otherwise, on merits also, we find considerable force in the submissions advanced on behalf of the assessee. The penalty has been levied in respect of the disallowance computed under section 14A read with Rule 8D. It is an admitted position that the assessee had disclosed all primary facts relating to its investments and expenditure in the return of income and had also made a suo- motu disallowance under section 14A. The Assessing Officer has neither recorded any finding that the expenditure claimed by the assessee was fictitious nor established that any particulars

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furnished in the return were false or inaccurate. The addition has been sustained only because the Assessing Officer adopted a different method of computation under Rule 8D.

6.3 Further, the Coordinate Bench, while deciding the quantum appeal, did not uphold the disallowance made by the Assessing Officer. On the contrary, it deleted the disallowance made under Rule 8D(2)(ii) and restored the issue relating to addition made under Rule 8D(2)(iii) with a direction to recompute the disallowance in accordance with the directions contained therein. The ld DR before us not controverted the allegation of the assessee that penalty has been levied even without giving effect to the order of ITAT and without quantifying the addition to be sustained under Rule 8D(2)(iii) of Rules. Thus, on the date of levy of penalty, the quantum addition had not attained finality and the Assessing Officer was first required to give effect to the order of the Tribunal and determine the amount of disallowance that actually survived. In the absence of such determination, the amount constituting the basis for computation of the tax sought to be evaded remained indeterminate. The levy of penalty without first giving effect to the Tribunal's order was, therefore, premature.

6.4 Apart from the above, we are of the considered opinion that the disallowance under section 14A read with Rule 8D is itself the outcome of a statutory computational mechanism based on

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estimation of expenditure attributable to exempt income. A variation between the disallowance offered by the assessee and that ultimately determined by the Assessing Officer by applying Rule 8D does not, by itself, establish either concealment of income or furnishing of inaccurate particulars. Further, the Hon'ble Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. (supra) has categorically held that merely because a claim made by the assessee is not accepted or is found to be legally unsustainable, the assessee cannot be said to have furnished inaccurate particulars of income. The same principle has consistently been applied by the Coordinate Benches in cases involving disallowance under section 14A and by the Hon'ble Bombay High Court in cases where the quantum addition ultimately survived only on an estimated basis. The Ld. Counsel for the assessee relied upon the decision of the Coordinate Bench of the Tribunal in the case of Appollo Finance Ltd. in ITA No. 5709/Del/2016 for AY 2009-10. The relevant portion is reproduced as under ;-

“ 6. Thus, according to the Ld. CIT(A), the assessee was required strictly to quantify the disallowance in terms of rule 8D of the Income Tax Rules, 1962 and not following the same, he has deliberately filed inaccurate particulars of income. However, we find that disallowance in the assessment order passed consequent to the order of the Tribunal has been made in view of the decision of the Hon'ble Delhi High Court in the case of Joint Investment Private Limited (supra) and not strictly as per computation of Rule 8D of Income-tax Rules, 1962. Further, under the very scheme under section 14A of the Act, apportionment of

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the expenditure attributable to earning exempt income, was difficult for identifying exactly on the precise, numerical and mathematical basis and to have rationality in the disallowance, the rule 8D has been introduced by the CBDT, but that too is a kind of estimate only. In such scenario, the difference between the suo-motu disallowance by the assessee in the return of income and the amount upheld by the Assessing Officer, can be termed as variation in the estimate of expenditure attributable to earning exempt income by the assessee and by the Assessing Officer and same cannot be tantamount to furnishing of any inaccurate particulars of income. Merely making a claim, which is held as non-sustainable under the law, should not lead to penalty under section 271(1)(c) of the Act, when the assessee has furnished details of particulars in the return of income. The assessee is not found to be involved in camouflaging or filing inaccurate details of expenses. Every disallowance made does not justify and mandate levy of penalty under section 271(1)(c) of the Act. The Hon'ble Supreme Court in the case of CIT versus Reliance Petro Products Private Limited (supra) held that where no information given in the return of income is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars and by no stretch of imagination making an incorrect claim can tantamount to furnishing inaccurate particular of income.

6.5 In view of the foregoing discussion, we hold that the impugned penalty is unsustainable on more than one ground, namely, (i) the notice issued under section 274 read with section 271(1)(c) being defective for failure to specify the exact charge; (ii) the penalty having been levied before giving effect to the order of the Tribunal in

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the quantum proceedings and before the quantum addition had attained finality; and (iii) the addition itself being founded merely on the statutory computation prescribed under Rule 8D, without there being any finding of concealment of income or furnishing of inaccurate particulars.

Order pronounced in the open Court on 23/07/2026.

Sd/- Sd/- (PAWAN SINGH) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 23/07/2026 Z.U., P.S.

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Copy of the Order forwarded to :

//True Copy// (Assistant Registrar) ITAT, Mumbai