EMBASSY PROPERTY DEVELOPMENTS PRIVATE LIMITED ,BANGALORE vs. ACIT, CENTRAL CIRCLE-1(3), BANGLAORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE – PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No. 2864/Bang/2025 Assessment Year : 2016-17

M/s. Embassy Property Developments Private Limited, The Assistant Commissioner of V. Sudhindranath, Income Tax, No. 51/7/1, Chitrakoot, Ratna Central Circle – 1(3), Vs. Avenue, Richmond Road, Bengaluru. Bengaluru – 560 025. PAN: AAACD6927A APPELLANT RESPONDENT Sri Deepak Padmanabhan, CA Ms. Pooja Maru, CA Assessee by : Ms. Nimashri KA, Advocate : Sri Shivanad Kalakeri – CIT DR Revenue by

Date of Hearing : 28-04-2026 Date of Pronouncement : 25-06-2026

ORDER PER PRASHANT MAHARISHI, VICE – PRESIDENT

ITA No. 2864/Bang/2025 A.Y 2016-17 Bengaluru [ The ld. AO, the ld. Assessing Officer] , under section 143(3) of the Income Tax Act, 1961 [ The Act ] dated 31 December 2018. In the assessment order, the Assessing Officer made disallowances under section 40(a)(i) and section 14A of the Act. In appeal, the addition under section 40(a)(i) was deleted, while the disallowance under section 14A read with Rule 8D of the Income Tax Rules was partly sustained. 2. The assessee has challenged the sustained disallowance on the ground that the Assessing Officer did not record the satisfaction required under section 14A of the Act and, therefore, the disallowance confirmed under that provision is unsustainable in law. 3. The assessee is engaged in the business of real estate development, including the development of integrated office spaces and parks. It filed its return of income on 30 November 2016 declaring total income of ₹37,23,81,900. 4. During the relevant year, the assessee earned dividend income of ₹1,46,02,900 from investments in mutual funds. The Assessing Officer noted the assessee’s share capital of approximately ₹975 crore, total assets of approximately ₹5,928 crore, finance costs of approximately ₹160 crore, and interest income of approximately ₹141 crore, and required the assessee to explain the basis of the disallowance made in relation to exempt income. The assessee stated that it had voluntarily disallowed ₹7,30,100, being 5% of the exempt income, on an estimated basis. 5. The assessee submitted that

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ITA No. 2864/Bang/2025 A.Y 2016-17 a. No specific administrative expenditure was incurred to earn the dividend income and that it, on an estimated basis, voluntarily disallowed 5% of the exempt income. b. It further contended that no interest expenditure was attributable to the investments in mutual funds and, therefore, no disallowance of interest was warranted. c. The assessing officer cannot invoke the provisions of section 14 A without giving reasons for claims made by the SSE in this regard various judicial precedents were cited. 6. The Assessing Officer rejected the assessee’s estimate, recorded his dissatisfaction with the claim, invoked section 14A read with Rule 8D, and computed a higher disallowance after reducing the amount already disallowed by the assessee as under :- a. The assessee merely relied on the legal position stated by various appellate authorities and failed to furnish details of fund flow to show that the investments yielding exempt income were not made out of borrowed funds. It also did not provide details regarding the period for which the mutual fund investments were held, whether borrowed funds were used, or whether internal approvals existed for such short-term investments. In the absence of supporting evidence, the claim that no expenditure was incurred for earning exempt income cannot be accepted. b. Further, since the disallowance made by the assessee was based only on an estimate, it cannot be accepted where the Act prescribes a specific method for computing such disallowance.

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ITA No. 2864/Bang/2025 A.Y 2016-17 c. The legislative intent is to allow only expenditure incurred in relation to taxable income. Consequently, expenditure attributable to earning exempt income must be disallowed, irrespective of whether such exempt income was actually received during the relevant financial year. d. This position is reinforced by the use of the term “includible” in the heading of section 14A of the Act and in the heading of Rule 8D of the Income Tax Rules, 1962. The wording indicates that exempt income need not actually be included in the income of a particular year for disallowance to be attracted. Therefore, for invoking section 14A, it is not material whether the assessee earned exempt income during the relevant financial year. e. The assessee’s claim that no expenditure was incurred is liable to be rejected for want of evidence. This is, therefore, a fit case for determining the expenditure incurred in relation to exempt income in accordance with Rule 8D. Rule 8D is prescribed for computing expenditure attributable to exempt income where such expenditure cannot be directly ascertained. Reliance is also placed on the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT, 91 taxmann.com 154, which held that investments in shares of operating companies, even if made to acquire or retain controlling interest, are covered by section 14A where dividend income from such shares does not form part of total income. f. CBDT Circular No. 5/2014, issued under section 119 of the Income Tax Act, clarifies that Rule 8D read with section 14A provides for disallowance of expenditure even where the assessee has not earned any exempt income.

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ITA No. 2864/Bang/2025 A.Y 2016-17 7. The Assessing Officer computed the disallowance under section 14A at ₹9,18,80,082. After reducing the assessee’s voluntary disallowance of ₹7,30,100, the net disallowance was determined at ₹9,11,49,982. 8. Before the Commissioner of Income Tax (Appeals), the assessee reiterated that no expenditure had been incurred for earning the exempt income and that the voluntary disallowance was reasonable.It also stated that no interest expenditure was attributable to the exempt income, and that this claim had not been rebutted by the Assessing Officer with any evidence. The assessee contended that it was not an investment company maintaining a large investment or treasury department to manage investments. It further submitted that, as reflected in the balance sheet schedules, the investments were in subsidiary and related companies engaged in real estate or allied activities. The assessee argued that no presumption could be drawn that expenses such as rent, travel, maintenance, or other infrastructure costs were incurred for earning dividend income. It relied on several judicial precedents and also submitted that the Assessing Officer had not recorded any satisfaction, with reference to the books of account, that the assessee’s claim was incorrect. 9. The Commissioner of Income Tax (Appeals) held that the assessee’s disallowance of 5% of exempt income was arbitrary, estimated, and unsupported by the provisions of law, whereas the computation made by the Assessing Officer was in accordance with the Act and the Rules. He further held that the Assessing Officer was justified in invoking Rule 8D, as the assessee had earned exempt income but had not demonstrated that no borrowed funds were used for earning such income. The Commissioner of Income Tax (Appeals) also observed that,

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ITA No. 2864/Bang/2025 A.Y 2016-17 once the assessee’s disallowance was not in accordance with section 14A and Rule 8D, the Assessing Officer was empowered to compute the disallowance under the prescribed method. Since the assessee’s disallowance lacked any proper basis, its rejection could not be treated as absence of satisfaction by the Assessing Officer. However, the Commissioner of Income Tax (Appeals) accepted the assessee’s contention that only investments yielding exempt income should be considered for computing disallowance under section 14A read with Rule 8D. Accordingly, the assessee’s ground was partly allowed. 10. Aggrieved, the learned Authorized Representative Shri Deepak Padmanabhan, CA submitted that the addition made by the Assessing Officer was unsustainable. It contended that, under section 14A (2) of the Act, the Assessing Officer must first examine the assessee’s claim with reference to its accounts and record satisfaction as to the correctness of that claim before applying the prescribed method under the Income Tax Rules. The assessee argued that such satisfaction must be based on an objective analysis of the accounts. In the present case, the Assessing Officer was required to examine the voluntary disallowance made by the assessee to 5% of the exempt income and establish a nexus between the exempt income and the expenditure incurred. The assessee relied on the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT, 402 ITR 640. It further submitted that the Assessing Officer had not carried out this exercise in accordance with law but had proceeded on assumptions and presumptions while computing the disallowance under Rule 8D. Therefore, the assessee contended that the Assessing Officer failed to record the valid satisfaction mandatorily required under section 14A (2) before invoking Rule 8D.

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ITA No. 2864/Bang/2025 A.Y 2016-17 11. About the mandatorysatisfactionrequired under section 14A (2) of the Act,the assessee submitted that the observations in the assessment order were general and mechanical. According to the assessee, the Assessing Officer had not recorded any proper or reasoned dissatisfaction with the voluntary disallowance, nor had he established any nexus between borrowed funds and the investments yielding exempt income. The assessee further contended that its Suo motu disallowance was neither specifically examined nor rebutted. Accordingly, it was submitted that the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) deserved to be deleted. 12. The learned CIT-DR, Shri Shivanand Kalakeri, strongly supported the order of the Assessing Officer. He submitted that, when specifically called upon to justify the disallowance under section 14A of the Act, the assessee merely stated that it had voluntarily disallowed 5% of the exempt dividend income. According to him, this approach was neither supported by law nor by any judicial precedent. He further submitted that the assessee had not substantiated its claim that no direct expenditure was incurred for earning dividend income. If the assessee wished to support its claim, it was required to demonstrate that the investments were not made from interest-bearing borrowed funds. However, the assessee failed to produce the cash-flow statement required by the Assessing Officer to verify this claim. He referred to paragraph 3.8 of the assessment order, where the assessee’s objections were rebutted.He therefore submitted that the Assessing Officer had correctly made the disallowance. About the appellate order, he specifically relied on paragraph 7.1, where the Commissioner of Income Tax (Appeals) held that the satisfaction recorded by the Assessing Officer met the

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ITA No. 2864/Bang/2025 A.Y 2016-17 requirements of section 14A (2) of the Act. Accordingly, he submitted that the assessee’s arguments were without merit and that the orders of the lower authorities deserved to be upheld. 13. We have carefully considered the rival submissions and perused the orders of the lower authorities. The issue in this appeal is limited to the disallowance under section 14A of the Act. The assessee earned exempt dividend income of ₹1,46,02,900 from mutual funds and, therefore, the provisions of section 14A were applicable. The assessee, on its own, disallowed ₹7,30,100, being 5% of the exempt income, on an estimated basis. During assessment proceedings, the Assessing Officer noted the assessee’s substantial share capital and total assets, as well as its finance costs and interest income, and required the assessee to justify its claim that no expenditure was incurred in relation to the exempt income, except the estimated disallowance. The Assessing Officer rejected the assessee’s method, holding that it was not supported by law, and invoked section 14A (2) read with Rule 8D to compute the disallowance. The claim that no expenditure had been incurred was also rejected for want of evidence. Accordingly, the disallowance was computed as stated above. In appeal, the Commissioner of Income Tax (Appeals) accepted only the assessee’s contention that, for computing the disallowance, only investments yielding exempt income should be considered. 14. Section 14A of the Act provides that, notwithstanding anything contained contrary in the Act, expenditure incurred in relation to income not forming part of total income is not allowable as a deduction. Sub-section (2) empowers the Assessing Officer to determine such expenditure in accordance with the prescribed method.

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ITA No. 2864/Bang/2025 A.Y 2016-17 However, this power can be exercised only after the Assessing Officer has examined the assessee’s accounts, records dissatisfaction with the correctness of the assessee’s claim regarding the expenditure incurred, or the claim that no expenditure was incurred, in relation to exempt income. Therefore, before rejecting the assessee’s explanation and making a higher disallowance, the Assessing Officer must examine the accounts, consider the assessee’s claim, and record reasons showing why the claim is incorrect. Only after satisfying this statutory requirement can the prescribed computation mechanism under Rule 8D of the Income Tax Rules, 1962 be invoked. 15. To determine whether the Assessing Officer recorded the required satisfaction, paragraph 3.8 of the assessment order is relevant. The Assessing Officer rejected the assessee’s claim of having incurred no expenditure merely “for want of evidence,” without identifying any specific details that the assessee had failed to furnish. Although the assessee claimed that no interest expenditure was attributable to the exempt income, the Assessing Officer recorded no finding linking any interest cost to the mutual fund investments that yielded such income. Since the assessee’s interest-free funds exceeded those investments, the presumption would operate in its favour. The annual accountsbefore the Assessing Officer showedshare capital and free reserves of about ₹900 crore, a fact noted in the assessment order. However, he examined neitherthe amount invested in mutual funds yielding exempt income nor verified the fund-flow and cash-flow statements forming part of the audited accounts.The Authorized Representative also demonstrated that the cash-flow statement was certified by the auditors, approved by the shareholders, and filed with the Ministry of

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ITA No. 2864/Bang/2025 A.Y 2016-17 Corporate Affairs, but it was not considered by the Assessing Officer. Further, although the profit and loss account showed expenses other than finance costs in Schedule 26, no specific item was examined to rebut the assessee’s claim. 16. When the issue came before the Commissioner of Income Tax (Appeals), he did not record any findings on whether the Assessing Officer had complied with section 14A (2) of the Act by examining the assessee’s accounts and recording proper satisfaction. Instead, he merely upheld the Assessing Officer’s conclusion on the same facts reiterated before him, without explaining how the recorded satisfaction met the requirements of law. Since the assessee’s accounts and the correctness of its claim were not properly examined before applying Rule 8D, the order of the Commissioner of Income Tax (Appeals) sustaining the disallowance under section 14A is also unsustainable. 17. Thus, the Assessing Officer invoked section 14A (2) without properly examining the assessee’s accounts or identifying the specific evidence that had not been produced. The rejection of the assessee’s claim merely for want of evidence is, therefore, unsupported on any cogent basis. Consequently, the orders of the lower authorities cannot be sustained and are set aside. 18. In Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC) / 254 Taxman 325 (SC) / 402 ITR 640 (SC) / 301 CTR 489 (SC), the Hon’ble Supreme Court held that, having regard to section 14A(2) read with Rule 8D, the Assessing Officer must record satisfaction before applying the principle of apportionment. Where the assessee has made a Suo motu disallowance under section 14A and the Assessing Officer does not accept it, he must record reasons showing why the assessee’s apportionment is incorrect.

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ITA No. 2864/Bang/2025 A.Y 2016-17 While doing so, the Assessing Officer must also examine the nature of the loans, if any, taken for acquiring shares or making investments. 19. In Principal Commissioner of Income-tax vs. Hindustan Aeronautics Ltd. [2022] 143 taxmann.com 357 (Karnataka)[14-06-2022] and Hindustan Aeronautics Ltd. vs. Assistant Commissioner of Income Tax-3(1)(2), Bangalore [2021] 125 taxmann.com 80 (Karnataka)/[2021] 278 Taxman 266 (Karnataka)[09-12-2020] Where Assessing Officer did not record any non-satisfaction about assessee’s claim that it had not incurred any expenditure in relation to exempt dividend income earned by it, impugned disallowance under section 14A made by Assessing Officer was unjustified. 20. Same is also the views of the Honourable Karnataka High court in Essilor India (P.) Ltd. vs. Deputy Commissioner of Income-tax [2022] 137 taxmann.com 60 (Karnataka)/ [2022] 286 Taxman 385 (Karnataka) [28-01-2022] where in it has been held that: - “7. We have considered the submissions made on both sides and have perused the record. Section 14A of the Act deals with expenditure in relation to income not includable in total income. Section 14A(2) provides that assessing officer 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 such method as may be prescribed, if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. It is well settled in law that assessing officer has to record reasons for disagreeing with the claim of the assessee that it had incurred no

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ITA No. 2864/Bang/2025 A.Y 2016-17 expenditure for earning such exempt income. Even rule 8D (1) requires the assessing officer to mandatorily record his satisfaction that the claim made by the assessee that no expenditure has been incurred in earning the exempt income is incorrect. [See. Godrej & Boyce Mfg. Co. Ltd. (supra)]” 21. In view of the facts discussed above, we have found that the Assessing Officer did not record the required satisfaction, after examining the assessee’s accounts, regarding the correctness of the assessee’s claim that expenditure incurred in relation to exempt income did not exceed 5% of such income. The decisions of the Hon’ble Supreme Court and the jurisdictional High Court cited before us support the assessee’s case that, in the absence of such satisfaction, any disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules, over and above the amount voluntarily disallowed by the assessee, is not sustainable. Accordingly, the Assessing Officer is directed to delete the disallowance made under section 14A to the extent it exceeds the assessee’s voluntary disallowance of ₹7,30,100. 22. Accordingly ground number 2 of the appeal of the Assessee which challenges the absence of satisfaction as stated above is allowed. 23. All other grounds of appeal are either supportive in nature or reiterating against the disallowing speed and therefore same are also allowed. 24. In the result appeal of the assessee is allowed. Order pronounced in the open court on 25th June, 2026. Sd/- Sd/- (KESHAV DUBEY) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE-PRESIDENT At Bangalore, On 25th June, 2026.

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ITA No. 2864/Bang/2025 A.Y 2016-17

*TNTS* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore By order

Assistant Registrar, ITAT, Bangalore

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