ACIT-6(1)(1),MUMBAI, MUMBAI vs. M/S. DOSHION WATER SOLUTIONS PVT. LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K” MUMBAI

BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI ANIKESH BENERJEE (JUDICIAL MEMBER)

ITA No.8255/MUM/2025 Assessment Year: 2013-14

ACIT – 6(1)(1), Room No.504, 5th Floor, M/S Doshion Water Solutions Aayakar, Bhavan, Church Gate, Mumbai Pvt. Ltd, Office No.3, II Floor, A – 400020, Maharashtra. Vs. Wing Godrej Coliseum, Eastern Express Highway B/H EVERAND Nagar, Sion, Mumbai - 400022, PAN NO. AACCD 8958 M APPELLANT RESPONDENT

: Shri Shubham Shah Assessee by : Shri Sunil Kisan Agawane, (SR. AR) Department by : 24.06.2026 Date of Hearing Date of pronouncement : 29.06.2026 ORDER PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against the order dated 15.09.2025, passed by the Learned Commissioner of Income Tax Appeals – 55, Mumbai [in short ‘the Ld. CIT(A)’] for Assessment Year (in short ‘A.Y’) 2013-14, raising following grounds:-

“1. Whether, the facts and in law, the learned CITIA) erred in deleting the disallowance of Rs.1,90,29,000 made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 read with Rule 8D(2)(ii) of the Income-tax Rules, 1962, without appreciating that the Assessing Officer was justified in invoking Rule BD

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as the assessee had failed to quantify or prove its suo motu disallowance of expenditure relatable to the exempt income earned during the year (Rs. 2,00,89,500). 2. Whether, on the facts and in law, the learned CIT(A) erred in holding that since the assessee had sufficient own funds, no disallowance of interest expenditure under Rule 8D(2) () warranted, without appreciating that in (both interest bearing and interest-free funds), the burden lies on the assessee to establish situation where the assessee has mixed funds a direct and exclusive nexus between the interest-free funds and the investments yielding exempt income. 3. Whether, the learned CIT(A) erred in relying on the Oun Funds doctrine, particularly the ruling in HDFC Bank Limited, without properly appreciating that this principle operates on a presumption which may be rebutted and failing to consider that the AO was not satisfied with the claim that interest-bearing funds were not utilized for making the impugned investments, thus rightly resorting to the computation mechanism prescribed under Rule 8D. 4. Whether, the learned CIT(A) erred in restricting the disallowance under Section 14A from Rs. 2,14,65,000 to merely Rs. 24,36,000, without appreciating the fact that the application of Rule 8D(2)(ii) for the interest component was mandatory and correctly applied by the AO, especially since the assessee had used its investment in a subsidiary, necessitating a rigorous determination of attributed interest cost.”

2.1 The assessee is engaged in the business of manufacturing water treatment plants and trading in water treatment components and spares. During the relevant previous year, the assessee had entered into various international transactions with its Associated

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Enterprises ("AEs"). Accordingly, the Assessing Officer, in exercise of powers conferred under section 92CA(1) of the Act, referred the determination of the Arm's Length Price ("ALP") of such international transactions to the Transfer Pricing Officer ("TPO").

2.2 Upon examination of the international transactions, the learned TPO proposed an aggregate transfer pricing adjustment of Rs.26,39,35,000/- in respect of the Information Technology Enabled Services (ITES) segment, allocation of management fees and payment of royalty. Based upon the order of the TPO, the Assessing Officer passed a draft assessment order dated 29.12.2016 under section 144C(1) of the Act proposing the aforesaid transfer pricing adjustment together with a disallowance of Rs.2,14,65,000/- under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962.

2.3 Since the assessee did not file any objections before the Dispute Resolution Panel ("DRP"), the Assessing Officer proceeded to pass the final assessment order under section 143(3) read with section 144C of the Act on 14.02.2025, incorporating the transfer pricing adjustment as well as the disallowance under section 14A exactly as proposed in the draft assessment order.

2.4 Aggrieved thereby, the assessee preferred an appeal before the learned Commissioner of Income-tax (Appeals). The learned CIT(A)

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affirmed the transfer pricing adjustment but granted partial relief in respect of the disallowance made under section 14A by deleting the interest disallowance computed under Rule 8D(2)(ii), while sustaining the administrative expenditure disallowance. The Revenue is in appeal before us only against the relief granted by the learned CIT(A) in respect of the deletion of the interest disallowance under section 14A read with Rule 8D(2)(ii) of the Rules.

3.1 The Assessing Officer, after examining the accounts of the assessee, recorded dissatisfaction regarding the correctness of the aforesaid claim in terms of section 14A(2) of the Act. Consequently, he invoked Rule 8D and computed a total disallowance of Rs.2,14,65,000/-, comprising:

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a) Rs.1,90,29,000/- under Rule 8D(2)(ii) (Interest expenditure).

b) Rs.24,36,000/- under Rule 8D(2)(ii) (Administrative expenditure at 0.5% of average investments of Rs.4872.03 lakhs).

3.2 In appeal, the learned CIT(A), following the order of the Coordinate Bench in the assessee's own case for the earlier assessment year, deleted the interest disallowance under Rule 8D(2)(ii), while sustaining the administrative disallowance. The relevant findings of the Coordinate Bench, which formed the basis of the relief granted by the learned CIT(A), is reproduced as under:-

7.3.1 The AO has made disallowance under Section 14A of Rs. 2,14,65,000/- was made by the AO under Section 14A read with Rule 8D. The appellant had earned exempt income of Rs. 2,00,89,500/- and the AO noted that the major investment capable of earning exempt income / on which dividend has been earned is in the form of investment made by it in its subsidiary company named Gondwana Engineers Ltd.(GEL) The appellant had claimed that the said investment is a pure strategic investment done for commercial expediency which was not found convincing argument by the AO who thereafter after relying upon various decisions referred to the provisions of Section 14A rw Rule 8D and thereafter determined a total disallowance of Rs. 2,14,65,000/- comprising of Rs. 24.36 lakhs under Rule 8D(2) sub clause (iii) and an amount of Rs. 1,90,29,000 under Rule 8D(2) sub clause (ii). The appellant has disputed this addition vide ground 3 of appeal. The submissions filed by the appellant in this regard have been quoted above . 7.3.2 As regards, the disallowance u/s 14A is concerned it is noted that the appellant has claimed that it has sufficient own funds to cover the investments being made and this claim was also before the AO during the assessment proceedings .It was claimed by the assessee before the AO that it had invested in its subsidiary Gondwana Engineers Limited whereas it had sufficient own funds to cover for such Page 34 of 36 AACCD8958M- DOSHION WATER SOLUTION PRIVATE LIMITED A.Y. 2013-14 ITBA/APL/S/250/2025-26/1080735552(1) investments. In this regard, it is noted that for the Hon’ble ITAT has passed order no.- ITA 78/Mum/2018 dated 28/5/2024 for AY 2012-13 and AY 2009-10 in the

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case of the appellant .wherein finding has been rendered on the issue of section 14A rwr 8D that when the own funds of the appellant are sufficient for investment in earning exempt income then no disallowance under Rule 8D is called for. The relevant portion of this decision is being quoted as under :- “21. With regard to the second point under consideration, we shall now examine as to whether the deletion of addition of Rs. 78,12,014/- on account of section 14A, is tenable under law? A Careful reading of the assessment order shows that learned AO found that the assessee company was in receipt of dividend of Rs. 20089500/- which was claimed exempt u/s. 10(34) of the Act, however assessee did not apportion any expenditure attributable to the exempt income. AO thus computed interest expenditure by resorting to the computation as provided under rule 8D(2)(ii) of the Rules and worked out such interest expenditure as Rs. 78,12,014/-. 22. Learned CIT(A), on examination of assessee’s balance sheet found that as on 31.03.2012, appellant assessee had paid up share capital of Rs. 14.48 Crores and reserve and surplus of Rs. 151.97 Crores. The investment, yielding exempt income, were shown at Rs. 48.70 Crores as on 31.03.2012 as against 1.13 Crores as on 31.03.2011. It was noted that assessee’s own fund aggregating to Rs. 166.45 Crores were much higher than the investments of Rs. 48.70 Crores that yield exempt income. Relying on HDFC Bank Limited (2014) 366 ITR 505 (Bom) learned CIT(A) deleted the aforesaid addition on the principle that if there are funds available, both interest free and interest bearing loans, than a presumption would arise that investments would be out of interest-free funds, generated or available with company provided that said funds are sufficient to meet investments. On the basis of assessee’s balance sheet, the reserves and surplus funds are in multiple times than the share capital of the assessee company. Learned CIT(A), has thus rightly deleted the aforesaid addition. The second point is also determined in negative against the revenue.” “ Similar facts exist in the instant AY also. Since, the appellant has claimed that the average shareholders funds of Rs. 16078.92 lakhs were capable to absorb the impugned investment amount , therefore, none of the interest bearing funds were utilised in making the said investment yielding exempt income . In this regard, this reliance placed by the appellant on the decision of Hon’ble Bombay High Court in the case of HDFC bank ltd and other decisions is also found justified. Therefore, the disallowance made by the AO to the extent of Rs. 1,90,29,000/- which pertains to the interest portion stands deleted. However , the applicability of Rule 8D for determination of disallowance u/s 14A is found proper and therefore ,the addition made by the AO under Rule 8D (2) sub clause (iii) is found correct. Therefore, the disallowance made by the AO is restricted to Rs. 24.36 lakh and the balance amount of disallowance u/s 14A of Rs 1,90,29,000/- stands deleted.

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7.3.3 Thus, the disallwance made by the AO u/s 14A is confirmed upto an extent of Rs. 24.36 Lakhs. As a result, Ground 3 of appeal is partly allowed.” 3.3 The learned Departmental Representative assailed the order of the learned CIT(A) on multiple grounds. It was submitted that the learned CIT(A) committed a manifest error in accepting the assessee's plea that the investments were strategic in nature. According to the Revenue, the issue stands concluded by the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT (402 ITR 640), wherein it has been categorically held that the dominant purpose for making an investment is wholly irrelevant for the applicability of section 14A and that even strategic investments are not immune from disallowance. It was further contended that once the Assessing Officer had recorded dissatisfaction in accordance with section 14A(2), invocation of Rule 8D became mandatory, as held by the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (328 ITR 81) and by the Hon'ble Delhi High Court in Indiabulls Financial Services Ltd. v. DCIT (395 ITR 242). It was argued that the learned CIT(A) erred in bypassing the statutory computation mechanism prescribed under Rule 8D. The learned Departmental Representative also submitted that the learned CIT(A) wrongly invoked the presumption regarding utilisation of own funds without any evidence establishing a direct nexus between the interest-free funds and the investments. According to the Revenue, where mixed

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funds exist, the assessee is required to establish a clear one-to-one nexus, failing which proportionate interest disallowance under Rule 8D(2)(ii) becomes inevitable. Reliance was placed upon the decision of the Hon'ble Punjab & Haryana High Court in Avon Cycles Ltd. v. CIT (53 taxmann.com 297).

3.4 Per contra, the learned counsel appearing on behalf of the assessee supported the order of the learned CIT(A). He invited our attention to the audited financial statements to demonstrate that the assessee possessed substantial own funds in the form of share capital and reserves, which were considerably in excess of the investments capable of yielding exempt income. It was submitted that the learned CIT(A) merely followed the binding decision of the Coordinate Bench rendered in the assessee's own case on identical facts and, therefore, no interference was warranted.

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either been reversed, stayed or otherwise departed from by any higher judicial forum.

4.1 It is further evident from the audited financial statements that the assessee possessed substantial own funds in the nature of share capital and free reserves, which were significantly higher than the investments capable of generating exempt income. Once the availability of own interest-free funds sufficient to cover the investments stands established, the settled legal presumption is that such investments have been made out of own funds unless the Revenue is able to establish a direct nexus between the borrowed funds and the investments. No such material has been brought on record by the Revenue.

4.2 The principal thrust of the Revenue's arguments before us was directed towards the proposition that strategic investments are also covered within the ambit of section 14A in view of the judgment of the Hon'ble Supreme Court in Maxopp Investment Ltd. We are unable to accept this contention as being germane to the controversy before us. The learned CIT(A) has not deleted the disallowance by accepting the assessee's plea regarding strategic investments. The relief has been granted solely on the independent finding that the investments stood adequately covered by the assessee's own interest-free funds and, therefore, no proportionate interest disallowance under Rule 8D(2)(ii) was warranted.

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Consequently, the Revenue's elaborate submissions regarding the concept of strategic investment do not advance its case.

4.3 In our considered opinion, the learned CIT(A) has correctly applied the binding precedent of the Coordinate Bench in the assessee's own case and has rightly held that no disallowance of interest expenditure under Rule 8D(2)(ii) could be sustained in the facts of the present case. We find no legal or factual infirmity in the impugned order warranting interference. Accordingly, the grounds raised by the Revenue are devoid of merit and stand dismissed.

Order pronounced in the open Court on 29/06/2026. Sd/- Sd/- (ANIKESH BENERJEE) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 29/06/2026 M. Ranganath Vittal , Sr. P.S.

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Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.

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