SAHNEY KIRKWOOD PRIVATE LIMITED,MUMBAI vs. ACIT/ JCIT, AGRA, AGRA

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ITA 6473/MUM/2026Status: DisposedITAT Mumbai21 August 2026AY 2009-107 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the proportionate interest disallowance under Section 14A is deleted as the assessee demonstrated sufficient interest-free funds for investments. However, the disallowance for indirect expenditure is confirmed. The addition of Section 14A disallowance to book profits under Section 115JB was not sustained.

What were the facts?

The assessee claimed a disallowance under Section 14A, which was upheld by the lower authorities. The assessee argued that investments were made from interest-free funds, including proceeds from land sale, and that borrowed funds were used for working capital. The disallowance was also added to book profits under Section 115JB.

What were the issues?

Whether disallowance under Section 14A is justified when sufficient interest-free funds are available, and whether such disallowance can be added to book profits under Section 115JB.

Which sections of the Income-tax Act were involved?

Section 14A,Section 115JB

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI

Before: SHRI OM PRAKASH KANT & SHRI ANIKESH BANERJEE

PER SHRI ANIKESH BANERJEE, JUDICIAL MEMBER: The instant appeal of the assessee is filed against the order of the Ld. Commissioner of Income Tax, Appeal ADDL/JCIT (A), Agra [for brevity, the ‘Ld. CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (“the Act”) for Assessment Year 2009-10 date of order 30.03.2026. The impugned appellate order emanated from the order of the Ld. Income Tax Officer-Ward 14(3)(3), Mumbai (for brevity ‘Ld. AO’), order passed under section 143(3) r.w.s. 254 of the Act, date of order 08.03.2016.

2.

The assessee is taken the following grounds:

“GROUND NO. I: DISALLOWANCE AMOUNTING TO RS. 12,24,622/- U/S. 14A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (“THE RULES”): 1. On the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the addition of Rs. 12,24,622/- u/s 14A of the Act r.w.r. 8D of the Rules. 2. The Appellant prays that the disallowance u/s 14A of the Act r.w.r 8D of the Rules amounting to Rs. 12,24,622/- , including the suo moto disallowance made by the Appellant, be deleted or be appropriately reduced. WITHOUT PREJUDICE TO GROUND NO. II. GROUND NO. II: ADDITION OF DISALLOWANCE OF RS. 12,24,622/- UNDER SECTION 14A OF THE ACT R.W.R 8D OF THE RULES FOR THE PURPOSES COMPUTING BOOK PROFITS U/S 115JB OF THE ACT: 1. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the addition of the disallowances of Rs. 12,24,622/- made under section 14A of the Act r.w.r 8D of the Rules to the book profits computed u/s 115JB of the Act. 2. The Appellant prays that the AO be directed to delete the addition of disallowances u/s. 14A of the Act r.w.r 8D of the Rules while computation of book profits u/s 115JB of the Act. GROUND NO. III: GENERAL: The Appellant craves leave to add, alter, amend or vary all or any of the above grounds of appeal either before or at the time of hearing.” 3. The brief facts of the case are that the assessee-company is engaged in the business of manufacturing and marketing of commutators and electrical insulation materials. The assessee filed its return of income declaring total income of Rs.21,96,780/-. The assessee had investments in tax-free securities and had earned dividend income exempt from tax. The matter had earlier travelled before the Coordinate Bench of the Tribunal in ITA 2 Nos.7057/Mum/2013 and 7105/Mum/2013, and the issue relating to disallowance under section 14A was restored to the file of the Ld. AO for examination of the availability of sufficient interest-free funds. Pursuant to the directions of the Tribunal, the Ld. AO recomputed the disallowance under section 14A read with Rule 8D at Rs.12,64,622/-, comprising proportionate interest expenditure of Rs.9,74,370/- and 0.5% of average investments towards indirect expenditure of Rs.2,90,252/-. The Ld. AO also added the entire disallowance of Rs.12,64,622/- while computing book profit under section 115JB, thereby increasing the book profit from Rs.3,29,87,649/- to Rs.3,42,52,271/-. Being aggrieved, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) sustained the action of the Ld. AO, inter alia, observing that sufficient documentary evidence and fund-flow analysis had not been furnished to establish that the investments were made exclusively out of the assessee's own interest-free funds. The assessee is now in appeal before us.

4.

The Ld. AR filed a paper book comprising pages 1 to 108, which has been placed on record. The Ld. AR submitted that the investments in shares and mutual funds had not been made out of borrowed funds. It was contended that the investment in mutual funds originated from the consideration received on sale of immovable property amounting to Rs.8.60 crore. The assessee furnished the fund-utilisation statement showing net investment in mutual funds of Rs.1,35,61,776/- and Rs.4,96,37,323/-, leaving a balance of Rs.2,28,00,901/- out of the sale consideration. It was further submitted that the borrowings on which interest had been paid were utilised for working-capital requirements and not for making the investments yielding exempt income. The Ld. AR submitted a detail in tabular format related to earning and utilization of fund for purchasing the mutual fund. The said chart is reproduced as below:

Particular Amount (Rs) Consideration of Sale of Land 8,60,00,000 Less: - Net Investment in mutual Fund During A.Y. 2007-08 1,35,61,776 Balance consideration remaining from Sale of land 7,24,38,224 Less: - Net investment (incremental) in mutual fund during 4,96,37,323 A.Y. 2008-09 Balance consideration remaining from sale of land 2,28,00,901

5.

The Ld. AR further contended that the assessee possessed sufficient own and interest-free funds and, therefore, no proportionate interest expenditure could be attributed to the investments. Reliance was placed, inter alia, on CIT v. Reliance Utilities & Power Ltd. reported in [2009] 313 ITR 340 (Bom.), CIT v. Reliance Industries Ltd. reported in [2019] 410 ITR 466 (SC) and South Indian Bank Ltd. v. CIT reported in [2021] 438 ITR 1 (SC). The assessee's written submissions also specifically pleaded that its reserves and share capital exceeded the value of investments.

6.

In relation to section 115JB, the Ld. AR submitted that the disallowance computed under section 14A read with Rule 8D cannot mechanically be imported into the computation of book profit under section 115JB. Reliance was placed upon the Special Bench decision in ACIT v. Vireet Investment (P.) Ltd. reported in [2017] 165 ITD 27 (Delhi-Trib.)(SB). Accordingly, the Ld. AR prayed for appropriate relief.

7.

Per contra, the Ld. DR supported the orders of the revenue authorities. The Ld. DR submitted that the assessee had incurred interest expenditure on borrowed funds and had simultaneously earned exempt income. According to the Ld. DR, the Ld. AO had correctly computed the disallowance under section 4 14A read with Rule 8D and the Ld. CIT(A) was justified in sustaining the same. The Ld. DR accordingly prayed for dismissal of the grounds raised by the assessee.

8.

We have heard the rival submissions and perused the material available on record. The limited controversy before us is with respect to the disallowance of Rs.12,64,622/- under section 14A, consisting of proportionate interest expenditure of Rs.9,74,370/- and indirect expenditure of Rs.2,90,252/-, and its consequential effect upon computation of book profit under section 115JB of the Act.

9.

On examination of the material placed before us, we find that the assessee has demonstrated the availability of substantial interest-free funds for making the investments. More importantly, the fund-utilisation statement placed before us shows that the assessee had received consideration of Rs.8.60 crore from sale of land, against which investments in mutual funds were made. Even after considering the investments reflected in the statement, a balance of Rs.2,28,00,901/- remained available out of the said sale consideration. The assessee has also consistently pleaded that its share capital and reserves exceeded the investments and that the interest-bearing borrowings were utilised for working-capital purposes.

10.

The principle emerging from Reliance Utilities & Power Ltd. (supra), Reliance Industries Ltd. (supra) and South Indian Bank Ltd. (supra) is that where sufficient own/interest-free funds are available to meet the investments, the presumption operates that such investments have been made out of those interest-free funds, in the absence of material establishing a contrary nexus. In the present case, considering the factual position emerging from the record, we find no sufficient basis to attribute the interest-bearing funds to the investments yielding exempt income.

Accordingly, the proportionate interest disallowance of Rs.9,74,370/- under section 14A read with Rule 8D is deleted.

11.

However, the Ld. AO has separately computed Rs.2,90,252/-, being 0.5% of the average value of investments, towards indirect expenditure attributable to earning exempt income. The assessee had itself accepted the principle of disallowance of indirect expenditure attributable to the exempt income. The material before us does not warrant interference with this component of the disallowance. Accordingly, the disallowance of Rs.2,90,252/- is confirmed. Thus, the disallowance under section 14A read with Rule 8D is restricted to Rs.2,90,252/-.

12.

We further find that the Ld. AO had added the disallowance computed under section 14A read with Rule 8D while determining book profit under section 115JB and thereby enhanced the book profit from Rs.3,29,87,649/- to Rs.3,42,52,271/-. The computation of disallowance under section 14A read with Rule 8D operates for computation of income under the normal provisions of the Act. Such computation cannot, by itself, be mechanically imported into clause (f) of Explanation 1 to section 115JB.

13.

The Special Bench of the Tribunal in Vireet Investment (P.) Ltd. (supra) has held that the computation contemplated under clause (f) of Explanation 1 to section 115JB is to be made without resorting to the computation prescribed under section 14A read with Rule 8D. The assessee had specifically raised this contention before the authorities below.

14.

Accordingly, the adjustment of Rs.12,64,622/-, being the amount computed under section 14A read with Rule 8D, cannot be sustained merely by importing the Rule 8D computation into the determination of book profit under section 115JB. The Ld. AO is, therefore, directed to recompute the book profit under section 115JB in accordance with the provisions of Explanation 1 thereto, without mechanically adopting the disallowance computed under Rule 8D.

15.

In view of the above, the assessee succeeds in respect of the proportionate interest disallowance of Rs.9,74,370/-, whereas the disallowance of Rs.2,90,252/- under section 14A is sustained. The ground relating to computation of book profit under section 115JB is disposed of in terms indicated above.

16.

In the result, the appeal of the assessee bearing ITA No.6473/Mum/2026 is partly allowed. Order pronounced in the open court on 21st day of August 2026 Sd/- Sd/- (OM PRAKASH KANT) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक �Dated: 21/08/2026 SAUMYA Sr.PS Copy of the Order forwarded to: 1. अपीलाथ� �The Appellant , 2. �ितवादी � The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध ,आय .अपी .अिध ,.मुंबई �DR, ITAT, Mumbai 5. गाड�फाइल �Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI

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