NATCO PHARMA LIMITED,HYDERABAD vs. ACIT, CIRCLE -5(1), HYDERABAD

आयकर अपील�य अ�धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A‘ Bench, Hyderabad �ी रिवश सूद,�ाियक सद� एवं �ी मधुसूदन साविड़या लेखा सद� सम� | Before Shri Ravish Sood, Judicial Member A N D Shri Madhusudan Sawdia, Accountant Member आ.अपी.सं /ITA No. 640/Hyd/2026 (िनधा�रण वष�/Assessment Year: 2022-23) NATCO PHARMA Ltd Vs. Assistant Commissioner Hyderabad of Income Tax PAN: AAACN6927A Circle 5 (1) Hyderabad (Appellant) (Respondent) िनधा�रती �ारा/Assessee by: Advocates Nishant Thakkar & Jasmin राज� व �ारा/Revenue by: Shri Madhukar AVES, Sr. DR सुनवाई की तारीख/Date of hearing: 06/08/2026 घोषणा की तारीख/Pronouncement: 21/08/2026 आदेश/ORDER Per Madhusudan Sawdia, A.M.:

This appeal is filed by NATCO PHARMA Ltd (“the assessee”), feeling aggrieved by the final assessment order passed by the Assessing Officer dated 24.12.2025 passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) for the A.Y. 2022-23. 2. The assessee has raised the following grounds of appeal:

section 143(3) read with sections 144C(13) and 144B of the Act dated 24.12.2025, making additions/disallowances of Rs. 6,09,28,523/- on account of transfer pricing adjustment, Rs. 5,86,00,000/- on account of disallowance of deduction under section 80G of the Act, Rs. 62,55,526/-under section 14A of the Act and Rs. 32,500 on account of excess depreciation claimed, thereby determining the total income of the assessee at Rs. 12,58,16,549/-. 5. Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that, out of the grounds raised by the assessee, only two issues survive for adjudication, namely, disallowance of deduction of Rs. 5,86,00,000/- under section 80G of the Act in respect of donations forming part of CSR expenditure and disallowance of Rs. 62,55,526/- under section 14A of the Act. 6. Ground Nos. 2 to 4 raised by the assessee relate to the disallowance of deduction of Rs. 5,86,00,000/- claimed under section 80G of the Act. In this regard, the Ld. AR invited our attention to para no. 2 at page no. 77 of the draft assessment order and submitted that the Assessing Officer had disallowed the deduction on the ground that the donations made by the assessee formed part of the CSR expenditure incurred pursuant to the mandatory requirement under section 135 of the Companies Act, 2013 and, therefore, according to the Assessing Officer, such expenditure was not incurred voluntarily and was not eligible for deduction under section 80G of the Act. The Ld. AR further submitted that the identical issue has already been decided by the Hyderabad

Bench of the Tribunal in the cases of Deloitte Tax Services India Private Limited Vs. DCIT in ITA Nos. 341 & 342/Hyd/2023, order dated 19.06.2024 and ACIT Vs. Penna Cement Industries Limited in ITA Nos. 1083 & 1084/Hyd/2024, order dated 21.01.2026. The Ld. AR submitted that the Tribunal has held that section 80G(2)(a)(iiihk) and section 80G(2)(a)(iiihl) of the Act specifically exclude from deduction the sums contributed towards Swachh Bharat Kosh and Clean Ganga Fund respectively where such sums are spent by the assessee in pursuance of CSR under section 135(5) of the Companies Act, 2013. It was submitted that when the Legislature has specifically provided such restriction in respect of the aforesaid two funds, but has not provided any similar restriction in respect of other donations otherwise eligible under section 80G of the Act, such restriction cannot be extended to other eligible donations merely because they form part of CSR expenditure. Accordingly, the Ld. AR prayed that the disallowance of Rs. 5,86,00,000/- made by the Assessing Officer be deleted. 7. Per contra, the Learned Departmental Representative (“Ld. DR”) relied upon the orders of the Assessing Officer and the directions issued by the Ld. DRP and submitted that the expenditure incurred by the assessee towards CSR was pursuant to the statutory obligation imposed under section 135 of the Companies Act, 2013 and, therefore, the Assessing Officer was justified in denying the deduction claimed by the assessee under section 80G of the Act. 8. We have heard the rival submissions and perused the material available on record including the case laws relied upon. The issue before us is whether a donation otherwise

eligible for deduction under section 80G of the Act can be denied such deduction merely for the reason that the donation also forms part of the CSR expenditure incurred by the assessee pursuant to section 135 of the Companies Act, 2013. We find that the identical issue has already been considered by the Coordinate Bench of this Tribunal in the case of ACIT Vs. Penna Cement Industries Limited (Supra), wherein, in para nos. 14 to 18 of the order, this Tribunal has held as under:

and Clean Ganga Fund respectively are eligible for deduction subject to the specific exclusion of sums spent by an assessee in pursuance of CSR under section 135(5) of the Companies Act, 2013. Thus, wherever the Legislature intended to exclude a donation made pursuant to CSR obligations from the benefit of deduction under section 80G of the Act, it has specifically provided for such exclusion. The Legislature, in its wisdom, while expressly excluding the aforesaid CSR-related contributions from the ambit of deduction under section 80G of the Act, has not extended any similar exclusion to other donations otherwise eligible for deduction under section 80G of the Act. Therefore, in the absence of any such statutory restriction, an additional condition cannot be read into section 80G of the Act so as to deny deduction merely on the ground that the eligible donation was made by the assessee in discharge of its CSR obligation. The specific exclusion made by the Legislature in respect of the aforesaid two funds, while leaving other eligible donations unaffected, also supports the conclusion that there is no general prohibition under section 80G of the Act against deduction of donations forming part of CSR expenditure. We also find that the Coordinate Bench in the case of Deloitte Tax Services India Private Limited Vs. DCIT (Supra) has taken a similar view. Thus, the issue is squarely covered in favour of the assessee by the decisions of the Coordinate Benches. 10. In the present case, the Revenue has not brought before us any material to demonstrate that the donations in question do not otherwise satisfy the conditions prescribed under section 80G of the Act or that any of the donations fall within the specific exclusions provided in section

80G(2)(a)(iiihk) or section 80G(2)(a)(iiihl) of the Act. The deduction has been denied essentially on the ground that the donations were made as part of the assessee’s CSR expenditure. In view of the aforesaid decisions of the Coordinate Benches, such a ground by itself cannot justify denial of deduction under section 80G of the Act. Accordingly, respectfully following the decisions of the Coordinate Benches in the cases of Deloitte Tax Services India Private Limited Vs. DCIT (supra) and ACIT Vs. Penna Cement Industries Limited (supra), we hold that the assessee is entitled to deduction under section 80G of the Act in respect of the eligible donations forming part of its CSR expenditure. We, therefore, direct the Assessing Officer to delete the disallowance of Rs. 5,86,00,000/- made on this account. Accordingly, Ground Nos. 2 to 4 raised by the assessee are allowed. 11. Ground Nos. 5 to 7 raised by the assessee relate to the disallowance of Rs. 62,55,526/- made by the Assessing Officer under section 14A of the Act. In this regard, the Ld. AR invited our attention to the relevant portion of the draft assessment order at page nos. 81 to 83 and submitted that the Assessing Officer had computed the impugned disallowance with reference to the investments made by the assessee in equity shares by relying upon the Explanation inserted in section 14A of the Act with effect from 01.04.2022. The Ld. AR submitted that the reliance placed by the Assessing Officer on the said Explanation is misplaced. Inviting our attention to the provisions of the Explanation to section 14A, the Ld. AR submitted that the said Explanation only clarifies that the provisions of section 14A would apply where expenditure has been incurred in relation to income which does not form part

of the total income under the Act, notwithstanding that such exempt income has not accrued or arisen or has not been received during the relevant previous year. It was, therefore, submitted that the fundamental requirement for invoking section 14A continues to be that the expenditure must have been incurred in relation to income which does not form part of the total income under the Act. The Ld. AR further invited our attention to section 10(34) of the Act and submitted that, pursuant to the amendments made by the Finance Act, 2020, dividend income arising from investment in equity shares ceased to be exempt with effect from 01.04.2020 and is taxable in the hands of the shareholder from Assessment Year 2021- 22 onwards. Therefore, where the investments made by the assessee in equity shares are capable of yielding only taxable dividend income, the provisions of section 14A of the Act cannot be invoked in relation to such investments. It was submitted that the Explanation to section 14A of the Act does not alter this position, since the Explanation cannot bring within the ambit of section 14A of the Act expenditure incurred in relation to income which itself forms part of the total income. In support of his contention, the Ld. AR relied upon the decision of the Delhi Bench of the Tribunal in the case of Ahluwalia Contracts (India) Limited Vs. ACIT in ITA No. 7474/Del/2025 for Assessment Year 2023-24, order dated 30.03.2026, wherein the Tribunal held that, with effect from Assessment Year 2021-22, dividend income is not in the nature of exempt income and, therefore, no disallowance under section 14A of the Act can be made in relation to investments yielding such taxable dividend income. The Ld. AR further invited our attention to the order passed by the Ld. PCIT under

section 263 of the Act in the assessee’s own case for Assessment Year 2021-22 and, more particularly, page no. 9 thereof, placed at page no. 30 of the paper book, and submitted that the Ld. PCIT himself had held that the provisions of section 14A of the Act were not applicable in the case of the assessee. Accordingly, the Ld. AR prayed that the disallowance of Rs. 62,55,526/- made by the Assessing Officer under section 14A of the Act be deleted. 12. Per contra, the Ld. DR relied upon the order of the Assessing Officer and the directions issued by the Ld. DRP and submitted that the Assessing Officer had rightly invoked the provisions of section 14A of the Act and computed the disallowance in accordance with law. 13. We have heard the rival submissions and perused the material available on record including the case laws relied upon. We have gone through relevant portion of the draft order of the Assessing Officer at page nos.81 to 83, which is to the following effect:

“Expenditure incurred in relation to income not includible in total income. 14A. (1) 77[Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, 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 this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed78, if

the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. [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.]” 15. On perusal of the above, we find that the essential requirement for applicability of the said provision is that expenditure should have been incurred in relation to income which does not form part of the total income under the Act. The Explanation inserted in section 14A provides, inter alia, that the provisions of the said 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 expenditure has been incurred during the said previous year in relation to such exempt income. Thus, the Explanation addresses a situation where the relevant income is otherwise of a nature which does not form part of the total income, but no such

income has actually accrued, arisen or been received during the relevant previous year. In our considered view, the said Explanation does not dispense with the basic requirement that the income to which the expenditure relates must be of a nature which does not form part of the total income under the Act. It is not in dispute that the investments considered by the Assessing Officer for the purpose of computing the disallowance are investments in equity shares. Consequent to the amendments made by the Finance Act, 2020, dividend income from domestic companies is taxable in the hands of the shareholder with effect from Assessment Year 2021-22. Therefore, dividend income arising from such equity investments is no longer income which does not form part of the total income under the Act. Once the income capable of arising from the investments under consideration is taxable and forms part of the total income, the foundational requirement for invoking section 14A in relation to such income is absent. We have also gone through para nos. 4 & 5 at page no. 9 of the order passed by the Ld. PCIT under section 263 of the Act in the assessee’s own case for Assessment Year 2021- 22, placed at page no. 30 of the paper book, which is to the following effect:

“5. We have heard both the parties and perused the material available on record. The Ld. CIT(A) confirmed the disallowance made by the AO by observing that however, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. The Ld. CIT(A) further observed that this Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The relevant extracts of the order of the Ld. CIT(A) are reproduced as under: "8.1 The appellant has primarily submitted that there is no exempt income so sec. 14 A is not applicable. The appellant has also placed reliance on several judgements of Hon'ble Courts in which it was decided that no disallowance u/s 14A shall be made in case no exempt income has been earned by the tax payer in that particular year. The ratio of the decision of the jurisdictional Delhi High Court in the case of Cheminvest Limited v. CIT (2015) ΙΤΑ 749/2014 dated 02.09.2015 is applicable in the case of the appellant. In that case, question before Hon'ble Delhi High court was whether disallowance under section 14A. of the Act can be made in a year in which no exempt income has been earned or received by the assessee. Hon'ble Delhi High Court after relying on its own judgment in Holcim India (P) limited held that no exempt income was earned by the assessee in the relevant assessment year therefore there will be no disallowance under section 14A. Hon'ble Delhi High Court in the case of PCIT v/s Era Infrastructure (India)

Ltd. dated 20.07.2022 has held that the amendment in Section 14A brought by Finance Act 2022 would be applicable w.e.f., 01.04.2022 (i.e. from AY 2022-23). 8.2 However, after the amendment to Section 14A by the Finance Act, 2022, effective from AY 2022-23, disallowance under Section 14A read with Rule 8D is applicable even if no exempt income is earned in the current year. This Explanation clarifies, for the removal of doubts, that the provisions of Section 14A shall apply even in cases where no exempt income has accrued, arisen, or been received during the previous year, but expenditure has been incurred in relation to such income. The intent of this amendment, as outlined in the Memorandum to the Finance Bill, 2022, is to address situations where taxpayers hold investments capable of generating exempt income, but no such income is earned in a particular year. The amendment ensures that expenditure incurred on maintaining such investments is not deductible, preventing the erosion of the tax base. Though the appellant has demonstrated through submissions that no exempt income was generated in the current year, however, it cannot be ruled out entirely. It is also noteworthy that while dividends are generally taxable post-Finance Act, 2020, the presence of deductions like Section 80P effectively renders certain income non-taxable, warranting application of Section 14A. 8.3 All case laws relied upon by the appellant pertain to earlier years, and after the insertion of the Explanation, there is no jurisprudence available supporting the appellant's position for AY 2023-24 onwards. Accordingly, following the AO's order and the amended provisions, the disallowance of Rs.6,28,000/- is confirmed. Ground Nos. 1 to 4 are dismissed." (emphasis supplied by us) 5.1 The above findings of the Ld. CIT(A) have been considered very carefully but not found to be acceptable. The Ld. CIT(A) held that disallowance u/s 14A of the Act r.w. Rule 8D of the IT Rules 1962 has to be made even if no exempt income is earned in the current year but in arriving at the findings, the Ld. CIT(A) did not appreciate the underlying principle that disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules, 1962 will be permissible only if the nature of such income would be exempt and not taxable. The fundamental condition for invoking Section 14A is that the expenditure sought to be disallowed must be incurred in relation to income which does not form part of the total income under the Act. In other words, the applicability of Section 14A is contingent upon the existence of exempt income. Pursuant to the

amendment to Section 10(34) by the Finance Act, 2020, effective from AY 2021-22, dividend income is taxable in the hands of the recipient and hence dividend income is no longer exempt in the hands of the shareholder. Thus, in the present case, the assessee even though did not earn dividend income, yet even if it was earned, it would not have been in the nature of exempt income. Therefore, the very foundation for invoking Section 14A is absent in the present case. In view of the above discussion, the submission of the assessee that no disallowance can be made u/s 14A of the Act is acceptable. Thus, the disallowance of Rs. 6,28,000/- made by the AO and confirmed by the Ld. CIT(A) is not sustainable and the same is deleted.” 17. On perusal of the above, we find that the Tribunal has considered an identical issue and held that, with effect from Assessment Year 2021-22, dividend income is not in the nature of exempt income and, therefore, no disallowance under section 14A of the Act can be made in respect of expenditure relatable to investments yielding such taxable dividend income. We find that the ratio of the aforesaid decision squarely applies to the facts of the present case. In view of the above discussion, we are of the considered opinion that where the investments considered by the Assessing Officer are in equity shares and the dividend income arising therefrom is taxable in the hands of the assessee, the provisions of section 14A of the Act cannot be invoked merely by relying upon the Explanation inserted therein. The said Explanation does not convert taxable income into exempt income nor does it extend the operation of section 14A of the Act to expenditure incurred in relation to income which forms part of the total income under the Act. Accordingly, we hold that the Assessing Officer was not justified in making the disallowance of Rs. 62,55,526/- under section 14A of the Act. We, therefore, direct the Assessing Officer to delete the said disallowance. Accordingly, Ground Nos. 5 to 7 raised by the assessee are allowed.

Order pronounced in the Open Court on 21st August, 2026. Sd/- Sd/- (RAVISH SOOD) (MADHUSUDAN SAWDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 21st August, 2026. Vinodan/sps Copy to: S.No Addresses 1 NATCO Pharma Ltd, Natco House, Road No.2, Banjara Hills, Hyderabad 50034 2 Assistant Commissioner of Income Tax Circle 5(1) IT Towers, AC Guards, Masab Tank, Hyderabad 500004 3 Pr. CIT , Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File By Order Digitally signed by KAMALA KAMALA KUMAR KUMAR ORUGANTI ORUGANTI Date: 2026.08.21 11:24:31 +05'30'