DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(4), MUMBAI, MUMBAI vs. ESSAR PORTS LIMITED, MUMBAI

PER SANDEEP GOSAIN, JUDICIAL MEMBER:

This appeal is filed by the Department against the order of Ld. CIT(A)- 51, Mumbai vide DIN: ITBA/APL/S/250/2025-26/1082240891(1) dated 03- Nov-2025 for the Assessment Year 2016-17. The Department has raised the following grounds of appeal:

6.1 The submissions of the appellant have been perused. The issue in the instant appeal relates to disallowance U/s 14A, both under the normal provisions of the Act and also U/s 115JB in the computation of book profit. The peculiar facts in the present case is that the appellant has not received any exempt income in the instant year but has suo motto made a disallowance of Rs.1,46,22,94,070/- which was in excess of the exempt income and also 2 the disallowance computed by the AO under Rule 8D and therefore the AO has not made any further disallowance. The appellant however made a claim before the AO that since it is a settled law that no disallowance can be done in the absence of exempt income, the suo motto disallowance done by it may be allowed to be deleted. The AO has not accepted this argument of the appellant and has instead relied upon various decisions and CBDT circular to hold that disallowance U/s 14A is warranted even in cases wherein no exempt income has been earned by the appellant.

6.2 The appellant on the other hand has contended that the issue is a covered matter by way of decision of ITAT in its own case for AY2010-11 in which the ITAT has not only considered the applicability of disallowance U/s 14A in excess of the exempt income but has also decided that the claim of the appellant is to be allowed-even if the same results in lowering of returned income, as is the situation in the instant year. With respect to disallowance U/s 14A in the computation of book profit, the appellant has submitted that this is also a covered issue by way of order of ITAT in its own case.

6.3 The submissions of the appellant have been considered. It is observed that on the issue of extent of disallowance u/s 14A which can be made if the dividend income earned during the relevant year is either nil or less than the amount of disallowance computed under section 14A, earlier there used to be substantial debate. However, this was settled by the 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 sec 14A itself are not applicable, then there is no question of invoking Rule 8D and computing the disallowance. It was noted by the Hon'ble High Court that the language used in the provisions of sec. 14A makes it abundantly clear that the same is triggered only when there is an income which does not form part of the total income under the Act. It was held by the Hon'ble High Court that the provisions of sec. 14A cannot be invoked if no exempt income has been eamed for the relevant year. The Hon'ble High Court granted relief to the said assessee on the disallowance made by the AO u/s. 14A on the ground that no exempt/dividend income was earned during the relevant year. The relevant portion of the decision of the Hon'ble Madras High Court in the case of Chettinad Logistics P. Ltd. is reproduced as under:-

9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.

10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section.

10.2 Mr. Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D.

10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee.

10.4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.

11.1 A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.

11.2 As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.

11.3 Pertinently, the Division Bench in Redington (India) Ltd. (supra) case has repelled this precise argument.

12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked.

12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.

6.4 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. The High Court observed that:

During the same period relevant to the Assessment Year in question, the Assessee had earned dividend income of Rs. 1,13,72,545/- which was exempt from tax. The Assessing Officer disallowed the interest expenditure of Rs.3,79,83,539/, He further disallowed administrative expenditure and made a total disallowance of Rs. 4,22,72,425/- under Section 14A of the Income Tax Act, 1961 (the Act', for short) read with Rule 8D of the Rules. The Tribunal, by the impugned Judgment, confirmed such disallowance upon which, the Assessee has filed this Appeal.

"14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence.

Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs.2,48,85,000/- as expenses to eam exempted Dividend income of Rs. 1,80,30,965/- is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of Rs.1,80,30,965/-, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted Dividend income. The disallowance under Section 14A cannot be wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not deemed disallowance under Section 14A of the act but an enabling provision for assessing authority to compute the same on the given facts and figures in the regularly maintained Books of Accounts. The assessing authority also could not have called upon the Assessee himself to undertake the exercise of computing the disallowance under Section 8D of the Rules. Such abdication of duty is not permissible in law. Since no such exercise has been undertaken by the assessing authority, the case calls for a remand."

"4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT (Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section (1) of section 14A provides that for the purpose of computing total income under chapter IV of 3 [2015] 372 ITR 97 URS 4 of 7 5 3-ITXA 149- 17.odt the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under:

"7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus. with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application."

"4. Having heard learned Counsel for the parties and perused documents on record, we notice that in Cheminvest Ltd. (supra) Delhi High Court had referred to and relied upon its earlier decision in the case of CIT Vs. Holcim India (P) Ltd. (I.T.A. No.486 of 2014, decided on 5 th September 2014). we further notice that this Court in Income Tax Appeal No.693 of 2015 by an order dated 21 st November, 2017 while dismissing the Revenue's appeal on similar issue had noted that the decision of Delhi High Court in case of Holcim India )P) Ltd. (supra) had adopted the same principles. In the present case, Counsel for the Revenue however, points out that this is not a case where the assessee had earned no income which was exempt from tax. However, in our opinion, the ratio of the above noted decisions in the cases of Cheminvest Ltd. and Holcim India (P) Ltd. (supra) would include a facet where the assessee's income exempt from tax is not NIL but has earned exempt income which is larger than the expenditure incurred by the assessee in order to earn such income. In such a situation that disallowance cannot exceed the exempt income so earned by the assessee during the year under consideration. We do not find any error in the view of the Tribunal. We record that the assessee had offered voluntary disallowance of expenditure of Rs. 1.30 crores, which is not been disturbed by the Tribunal.

6.5 In view of the above, it is clear that the aforesaid decision of Hon'ble Madras High Court in the case of Chettinad Logistics P Ltd (supra) and the decision of the Hon'ble Bombay High Court in the case of Nirved Traders favor the appellant and the disallowance made by the AO u/s 14A is not tenable and has to be restricted to the extent of the exempt income earned.

6.6 It is also, however, pertinent to point out that vide the Finance Act 2022 the following Explanation was inserted in section 14A w.e.f 01.04.2022:

"Explanation. For the removal of doubts, it is hereby clarified 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 the income, not forming part of the total income under this Act, 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 income not forming part of the total Income."

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.

6.7 However, the Hon'ble 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 held that the amendment by way of insertion of the aforesaid explanation was prospective in nature and that prior to 1.4.2022, no disallowance could be made under section 14A with respect to expenditure incurred by assessee to earn exempt income, when no exempt income was earned during relevant assessment year. The relevant extract of the said decision is reproduced as under:

ITBA/APL 52302025-24/102240591

"7. We find that there is no dispute about the fact that the assessee did not have any tax exempt income during the relevant previous year and that the period before us pertains to the period prior to insertion of explanation to section 14A. In this view of the matter, and in the light of consistent stand by co-ordinate benches, following Hon'ble Delhi High Court's judgment in the case of Cheminvest Ltd v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33, we uphold the plea of the assessee that no disallowance under section 14A was and in the circumstances of the case. The plea of the Assessing Officer is thus rejected".

6.8 The same view that the insertion of the explanation in section 14A is prospective in nature has also been held by the Hon'ble Delhi High Court in the case Era Infrastructure (India) Ltd (2022) 141 taxmann.com 289 (Delhi). The relevant extract is reproduced as under

"8. Consequently, this Court is of the view that the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. of this Court has been challenged and is pending 9. Though the judgment adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed v. State of Kerala [2000] 113 Taxman 470/245 ITR 360 and Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [1992] 3 SCC 1, the present appeal is dismissed being covered by the judgment passed by the learned predecessor Division Bench in IL & FS Energy Development Co. Ltd. (supra) and Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi).

6.9 The legal principle that the amendment to Section 144 cannot be given) retrospective effect has been followed be several other subsequent decisions of Mumbai ITAT. Respectfully following the same it is held that the amendment to Section 14A cannot be applied to the instant assessment year and hence in the absence of any exempt income no disallowance U/s 14A can be made.

6.10 As regards the issue that the appellant had suo motto made a disallowance in the computation of income and this claim of no disallowance was made only later and that the same results in lowering of the returned income, it is seen that the ITAT in its decision dated 06.01.2020 in ITA No:1831/Mum/2015 in the case of the appellant itself for AY 2010- 11 has settled the issue in favor of the appellant by holding that the assessed Income san be lower than the returned income) if what the assessee had effered for tax was found not taxable under the law. The relevant extract of the order of the ITAT has already been reproduced above in the submission of the appellant. In view of the detailed findings and respectfully following the decision of the ITAT in the appellant's own case for AY 2010-11, the AO is directed to delete the suo motto disallowance of Rs.1,46,22,94,070/- done by the appellant in its computation of income.

6.11 As regards the issue of making adjustment to the computation of book profit U/s 115JB on account of disallowance U/s 14A, the same is also covered in favor of the appellant by the above stated order of ITAT in its own case for AY 2010-11. Respectfully following the said decision, it is held that no adjustment can be made to computation of book profit U/s 115JB on account of disallowance U/s 14A of the Act.

6.12 The grounds of appeal of the appellant are allowed.

Order pronounced in the open court on 08.07.2026.

Sd/- Sd/- GIRISH AGRAWAL SANDEEP GOSAIN ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 08.07.2026 RY-Sr PS Copy to: DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(4), MUMBAI, 413TH, 4TH FLOOR, KAUTILYA BHAWAN, 1 BANDRA KURLA COMPLEX, BANDRA(E),, MUMBAI-400051, MAHARASHTRA

ESSAR PORTS LIMITED, ESSAR HOUSE, 11 KESHAVRAO KHADYE 2 MARG, MAHALXMI, MUMBAI, MUMBAI-400034, MAHARASHTRA

3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE