PRAGATI AUTOMOTIVE ENGINEERS PRIVATE LIMITED,DELHI vs. INCOME TAX OFFICER, WARD 20(1), DELHI, NEW DELHI

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ITA 281/PUN/2026Status: DisposedITAT Delhi14 May 2026AY 2017-187 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the disallowance under Section 14A cannot exceed the exempt income earned by the assessee. Therefore, the disallowance was restricted to the amount of exempt income.

What were the facts?

The assessee earned exempt income and claimed expenses, but did not offer any disallowance under Section 14A. The AO invoked Section 14A read with Rule 8D, disallowing Rs. 7,54,396. The CIT(A) upheld this disallowance.

What were the issues?

Whether the disallowance under Section 14A read with Rule 8D should be restricted to the amount of exempt income earned by the assessee.

Which sections of the Income-tax Act were involved?

Section 14A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH ‘SMC’: NEW DELHI

For Appellant: Shri Paritosh Jain, Adv
For Respondent: Shri Manoj Kumar, Sr. DR
Hearing: 04.05.2026Pronounced: 14.05.2026

PER RAMIT KOCHAR, AM: This appeal in ITA No. 281/Pun/2026 for Assessment Year: 2017-18 has arisen form the learned CIT(A)’s appellate order u/s 250 dated 31/12/2025 in DIN & Order No: ITBA/APL/S/250/2025-26/1084275093(1), which in turn has arisen from the assessment order dated 28.10.2019 passed by the AO u/s 143(3)of the Income Tax Act, 1961.

2.

The assessee has raised the following grounds of appeal: “1. That on the facts and circumstances of the case, the appellate order passed by the learned Commissioner of Income Tax (Appeals) (hereinafter referred as "Ld. CIT(A)"), by arbitrarily confirming addition of Rs. 7,54,396/- is bad both in the eyes of law and on facts. 2. That on the facts and in the circumstances of the appellant's case, the Ld. CIT(A) erred both in law and facts in confirming the disallowance of expenses of Rs. 7,54,396/- under section 14A of the Act only on the assumption that application of provisions of section 14A read with Rule 8D is automatic and mandatory without appreciating the fact that no expenses were incurred in relation to earning exempt income.

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3.

That on the facts and in the circumstances of the appellant case, the Ld. CIT(A) erred both in law and facts in confirming the disallowance of expenses of Rs. 7,54,396/- under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 without recording his satisfaction that as to why the claim of the appellant that no expenses has been incurred / claimed for earning exempt income is not correct 4. Without prejudice to the Ground of Appeal No. 1 to 3, the Ld. CIT(A) erred both in law and facts in confirming the disallowance of expenses of Rs 7,54,396/- under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 without appreciating that the amount of disallowance under section 14A of the Act should be restricted to the extent of exempt income earned of Rs.2,63,115/- 5 That the grounds of appeal are independent and without prejudice to each other. 6. The appellant craves leave to add, amend or alter any of the grounds of appeal.”

3.

Brief facts of the case are that the assessee filed its return of income declaring total income of Rs.200/- on 31.11.2017. The assessee’s case for A.Y.2017-18 was selected by Revenue for limited scrutiny under CASS . The reason being for said selection being “Expenses incurred for earning exempt income”. Statutory notices were issued by the AO u/s 143(2) and 142(1) of the 1961 Act, from time to time during the course of assessment proceedings. The assessee participated in the assessment proceedings, and submitted its replies/responses before the AO. The assessee company is stated to be engaged in the business of automotive engineers, dealers in all kind of automobiles etc. . During the year under consideration, the assessee has earned income from interest and profit on sale of shares. The AO observed that the assessee has earned exempt income to the tune of Rs. 2,07,642/- , while the assessee has not made any disallowance of the corresponding expenses u/s 14A of the 1961 Act. The assessee was asked by the AO to explain the same. The assessee submitted that it earned exempt income of Rs. 2,63,115/- , being Rs 2,07,642/- as dividend income and Rs.55,473/- as long term capital gains exempt u/s 10(38). It was submitted that the assessee paid taxes u/s 115JB of the 1961 Act. It was submitted that the assessee incurred total expenses (after considering add back of expenses) to the tune of Rs. 7,54,396/- which were all incurred for earning taxable income. These expenses are routine and operational expenses such as audit fee , ROC

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expenses, bank charges , employees benefit expenses for day to day business operations and were not incurred for earning exempt income. Thus, the same cannot be considered for disallowance u/s 14A. The AO invoked the provisions of section 14A of the 1961 Act r.w.Rule 8D and made disallowance to the tune of Rs.7,54,596/- , detailed as hereunder:

DIVIDEND RECEIVED DURING THE FY17-18 2,07,642.00 AMOUNT OF EXPENDITURE DIRECTLY REALTING TO INCOME WHICH NIL DOES NOT FORM PART OF TOTAL INCOME AMOUNT OF INTEREST NIL (A) AVERAGE VALUE OF INVESTMENT OPENING VALUE OF INVESTMENT 24,69,68,987.00 CLOSING VALUE OF INVESTMENT 21,20,41,956.00 AVERAGE VALUEOF ABOVE INVESTMENT (B) 22,95,05,471.50 AN AMOUNT EQUAL TO 1% OF THE AVERAGE OF THE VALUE OF 22,95,054.72 INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALACE SHEET OF THE ASSESSEE ON THE FIRST DAY AND LAST DAY OF THE RELEVANT ACCOUNTING YEAR DISALLOANCE U/S 14A 22,95,054.72 DETAILS OF NON CURRENT INVESTMENTS PARTICULARS AS ON 31-03-17 AS ON 31-03-16 QUOTED 4,39,01,956 4,43,68,987 SHARES UNQUOTED 14,30,40,000 19,60,00,000 SHARES PROPERTY 66,00,000 66,00,000 FDR 1,85,00,000 ---- TOTAL 21,20,41,956 24,69,68,987

DETAILS OF TOTAL ASSETS AS APPEARING THE BALANCE SHEET PARTICULARS AS ON 31-03-17 AS ON 31-3-16 ALL ASSETS 22,71,48,612.00 26,57,30,500.00 EXCEPT DEFFERED TAX ASSETS AVERAGE OF 24,64,39,556.00 TOTAL ASSETS

Notwithstanding of above, after considering Assessee Company replies and Provisions of Section 14 A of Income Tax Act 1961, read with Rule 8 D, disallowance of expenditures (in relation to Exempted Income claimed by Assessee company) of Rs.22,95,054/- is restricted to Expenditures claimed at Rs.7,54,396/- after disallowances of expenditures amounting to

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Rs.2,40,305/- in computation of Income. Resultantly, expenses disallowable u/s 14A of the Income-tax Act with Rule 8D is computed at Rs. 7,54,396/- and therefore disallowance of Rs. 7,54,396/- is made to the income of the assessee company. 4. After considering the submissions and facts of the case, the income of the assessee company is computed as under: 200/- Returned income declared by the Rs. assessee company. Disallowance u/s 14A as discussed above Rs. 7,54,396/- Para 3 Total Income Rs. 7,54,596/- 3.2. Thus as could be seen that the AO invoked the provisions of section 14A r. w. Rule 8D. The assessee has received exempt dividend income at Rs.2,07,642/- , while average value of investment made by the assessee was at Rs.22,95,05,471.50. The AO disallowed 1% of the average of the value of investment invoking Rule 8D of the Income-tax Rules,1961 which amounted to Rs. 22,95,054.72, but restricted the disallowance to the actual expenditure incurred and claimed by the assessee which was to the tune of Rs.7,54,596/- u/s 14A read with Rule 8D. 4. Aggrieved, the assessee filed first appeal with ld. CIT(A). The assessee contended before ld. CIT(A) that no expenditure has been incurred by the assessee company to earn exempt income of Rs. 2,63,115/- as the expenses claimed in the Profit and Loss Account are primarily salaries and routine administrative expenses which were wholly for taxable business operations. The assessee contended that the AO mechanically applied Rule 8D without recording mandatory satisfaction or establishing nexus between the expenses and exempt income . The assessee contended that even FDR on which no exempt income are earned are included while computing daisallowance u/s 14A read with Rule 8D. The Ld. CIT(A) dismissed the appeal of the assessee by confirming the addition made by the AO. The Ld. CIT(A) observed as that assessee has earned dividend income of Rs. 2,07,642/- and long term capital gain Rs.55,473/- which were claimed as an exempt income. The ld. CIT(A) observed that the assessee has investment of Rs. 21.20 crores as on 31.03.2017 and Rs. 24.69 crores as on 31.03.2017. The assessee has claimed expenses of Rs. 7,54,396/- . The ld. CIT(A) observed that the routine business expenses such as salaries, audit fees, ROC fees and office expenses are common in nature and cannot be segregated from the activities relating to investment. The ld. CIT(A) referred to decision in the case

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of CIT v. United General Trust Limited (200 ITR 488) and DCIT v. Viraj Profiles Limited (156 ITD 72). The ld. CIT(A) observed that the AO has duly recorded satisfaction. Since the assessee has incurred expenses of Rs. 7,54,396/- , and 1% disallowance u/r 8D works out much higher, the ld. CIT(A) observed that the AO has rightly restricted and disallowed Rs. 7,54,396/- u/s 14A r.w.r. 8D. 5. Still Aggrieved , the assesse filed second appeal before the Tribunal. At the outset, Ld. Counsel for the assessee submitted that the assessee has earned exempt income by way of dividend income of Rs.2,07,642/- and Rs. LTCG on sale of shares of Rs. 55,473/- u/s 10(38), which were claimed as an exempt income under the 1961 Act. The Ld. Counsel for the assessee relied upon the judgment and order of Hon’ble Delhi High Court in the case of Joint Investments (P) Ltd. v. CIT (59 Taxmann.com 295) and Judgment and order dated 22.12.2023 of Hon’ble Delhi High Court in the case of CIT-Central-1 v. RRPR Holding Pvt. Ltd. in ITA No. 808/2023 , and submitted that the disallowance u/s 14A read with Rule 8D cannot exceed the exempt income. Thus, prayers were made to restrict disallowance u/s 14A to the exempt income earned by the assessee.

5.2 The Ld. Sr. DR on the other hand, relied upon the decisions of the authorities below.

6.

I have considered rival submissions and perused the materials available on record. I have enumerated facts in brief and contentions of both the parties in the preceding para’s of this order, and the same are not repeated. Short question which has arisen in this appeal is with respect to disallowance u/s 14A of the 1961 Act. The assessee has earned in aggregate exempt income of Rs. 2,63,115/- during the year under consideration. The assessee has incurred total expenditure to the tune of Rs. 7,54596/- which are stated to be incurred towards Salaries, Audit Fees, ROC Fees and other operational business expenses. The Average investment held by the assessee were to the tune of Rs. 22,95,05471.50. The AO applied Rule 8D of the 1962 Rules to quantify the disallowance

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which work out to be 1% of average investment i.e. Rs. 22,95,054.72, but the disallowance was restricted to actual expenditure incurred i.e. Rs. 7,54,596/-. The assessee has relied upon decision of Hon’ble Delhi High Court in the case of Joint Investments Private Limited(supra) and RRPR Holdings Private Limited(supra) to contend that the disallowance be restricted to the exempt income earned by the assessee i.e. to the tune of Rs. 2,63,115/-. The impugned assessment year under consideration is assessment year 2017-18. There is merit in the contention of the assessee , and the aforesaid judgments and orders of Hon’ble Delhi High Court are binding on this Tribunal. Thus, I restrict disallowance to Rs. 2,63,115/- u/s 14A. The amendment brought in Section 14A by insertion of Explanation by Finance Act , 2022 w.e.f. 01.04.2022 is held to be prospective by Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure India Limited in ITA No. 204/2022(448 ITR 674). The appeal of the assessee is partly allowed in the manner as indicated above. I order accordingly. 7. In the result,the appeal filed by the assessee is partly allowed as indicated above.

Order is pronounced in the Open Court on 14.05.2026 Sd/- (RAMIT KOCHAR) ACCOUNTANT MEMBER Dated: 14.05.2026 *PK, Sr. Ps* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI

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1.

Date of dictation of Tribunal order 04 .05.2026 2. Date on which typed draft order is placed before the dictating 05 .05.2026 Member 3 Date on which typed draft order is placed before the other .05.2026 Member (in the case of DB) 4. Date on which the approved draft order comes to P.S/Sr.P.S .05.2026 5. Date on which the fair Order is placed before the dictng .05.2026 Member for sign 6. Date on which the fair Order is placed before the other .05.2026 Member for sign ( in the case of DB) 7. Date on which the Order comes back to P.S./Sr.P.S for .05.2026 uploading on ITAT website 8. Date of uploading, if not, reason for not uploading .05.2026 9. Date on which the file goes to the Bench Clerk .05.2026 10. Date on which order goes for xerox .05.2026 11. Date on which order goes for endorsement .05.2026 12. Date on which the file goes to the Superintendent/O.S. for .05.2026 checking 13. Date on which the file goes to the Assistant Registrar for .05.2026 signature on the order 14. Date on which the file goes to dispatch section for dispatch the .05.2026 Tribunal Order 15. Date of dispatch of order .05.2026 16. Date on which file goes to Record Room after dispatch the .05.2026 order

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