NETMAGIC SOLUTIONS PRIVATE LIMITED ,MUMBAI vs. DCIT, CIRCLE 2(3)(1), MUMBAI

आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal emanating from the appellate order dated 11.11.2025 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to the assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 16.04.2021 for the Assessment Year [A.Y.] 2018-19.

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. 2. The grounds of appeal are as under: “1. No adequate opportunity provided to the Appellant: 1.1 The CIT(A) erred in law and on facts in not adjudicating the Appellant's ground challenging the validity of the assessment framed in violation of the mandatory procedure prescribed under the E-Assessment Scheme, 2019, including non-issuance of a show cause notice along with the draft assessment order. The CIT(A) further erred in passing the impugned order under section 250 of the Act without granting an opportunity of being heard through video conferencing, despite a specific request, thereby violating the principles of natural justice. Consequently, the impugned appellate order and the assessment order are bad in law and liable to be quashed. 2. Disallowance under section 14A of the Act of Rs. 14,94,50,000/-: 2.1 The CIT(A) has grossly erred law and on facts in upholding the disallowance of expenditure amounting to INR 14,94,50,000/- under section 14A of the Act read with Rule BD without appreciating that the Appellant has not earned/received any exempt income during the year under consideration and hence no disallowance is warranted under section 14A of the Act in view of Chettinad Logistics Private Limited [2018] 95 taxmann.com 250 (SC). 2.2 The CIT(A) has grossly erred in law and on facts in upholding the disallowance of expenditure amounting to INR 14,94,50,000/- under section 14A of the Act read with Rule 8D without appreciating that the disallowance under section 14A of the Act read with Rule 8D should be restricted to exempt income earned/received by the Appellant, which is Nil in the present case. 2.3 The CIT(A) grossly erred in upholding the disallowance of expenditure of INR 14,94,50,000/- by invoking the provisions of section 14A of the Act read with rule 8D without appreciating that the Appellant had own funds which were sufficient for the purpose of making the investments. The Learned CIT(A) ought to have appreciated that there is a direct nexus between increase in share capital (own funds) and investment and also no administrative expenses were incurred by the Appellant in relation to same. 2.4 The CIT(A) grossly erred in upholding disallowance under section 14A read with Rule 8D of the Act without appreciating that the Assessing Officer has not recorded satisfaction to substantiate that the amount disallowed by the Appellant was not adequate. 2.5 Without prejudice to the above, the CIT(A) has grossly erred in computing the disallowance under Rule 8D by including the value of investments in subsidiary company which has no potential of generating taxable income. The CIT(A) failed to appreciate that gain from transfer of such investments is taxable income and also dividend from such investment is now taxable.

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. 2.6 Without prejudice to the above, the disallowance under section 14A of the Act shall be substantially reduced.”

4.1 The AO noted investment of Rs 1494 cr.as per the Balance sheet and by invoking the provisions of section 14A r.w Rule 8D worked out 1% thereof, making addition of Rs 14.94 cr. on the ground that such investment were capable of earning exempt income. In the subsequent appeal, the addition was upheld by the ld.CIT(A) who held that disallowance was mandatory on the facts of the case.

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. categorically by the authorities below. In this regard, he placed reliance on decisions by the hon’ble Bombay High Court in the cases of Kohinoor Projects P.Ltd 2020) 425 ITR 700(Bom), Rivian International P.Ltd ITA No.693 of 2025(Bom)-Nirved Traders P.Ltd 421 ITR 142(Bom) where such a propositions has been laid down.

5.1 Per contra, the ld.DR relied on the orders of the authorities below.He contended that the lower authorities correctly applied the amended provisions of law and the CBDT Circular no. 5/2014, dated 11.02.2014, wherein it was laid down that even without earning exempt income, the disallowance u/s.14A could be made. The ld. DR further contended that a new Explanation has been inserted in Section 14A of the Act by the Finance Act, 2022, which according to him, was applicable retrospectively, and therefore, urged that the order of the lower authorities be upheld.

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. April 2022 and not before. In our considered view, therefore, the new Explanation inserted in Section 14A of the Act with effect from 01.0.2022 cannot be applied in the assessment years under consideration for the present case. We find that the applicability of the Explanation has already been adjudicated by various courts of law holding that it is not applicable on retrospective basis. The Hon'ble Supreme Court in the case of MM Aqua Technologies Ltd Vs CIT (436 ITR 582) and CIT Vs Vatika Township Pvt Ltd (367 ITR 466), held that any legislation which imposes new obligation or new duties or a new levy shall have to be necessarily treated as prospective in nature.

6.1 We find that the Hon'ble Delhi High Court in the decision rendered in the case of Pr. CIT Vs IL&FS Energy Development Pvt Ltd in 399 ITR 483, after considering the Board Circular No.5/2014, upheld the assessee's contention that, in absence of any exempt income earned in the year in question, the disallowance u/s 14A of the Act is unwarranted. We may also gainfully refer to the observations of the Hon'ble Madras High Court in the case of Marg Ltd. vs CIT (120 taxmann.com 84) wherein also the High Court rejected the proposition set out in the Board Circular No. 5/2014 and held that the disallowance of expenditure u/s 14A can never exceed the amount of exempt income so earned by the assessee. Another Bench of Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 248 Taxman 55 wherein the Division Bench of the Court followed another Division Bench judgement in the case of

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad) held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11 - 2-2014, which had been relied by the Tribunal in the impugned order could not be upheld and the disallowance under section 14A of the Act could not go beyond the extent of exempted income itself. Paragraph 12.3 of the said judgement is quoted below for ready reference.

“14. It is well settled that the Rule cannot go beyond the main parent provision. Therefore, what has been provided as computation method in Rule 8D cannot go beyond the roof limit of section 14A itself under any circumstances. The Courts have time and again reiterated this correct, reasonable and clear position of law. But, merely to somehow make more disallowance and impose tax on the hypothetical income of the Assessee, in contrast to the concept of "real income " to be taxed as per section 5 of the Income -tax Act, the authorities under the Income-tax Act keep on adopting such absurd procedures. The disallowance to this extent, if it was to have its way, will constitute a hypothetical 'income' taxable in the hands of the Assessee, which could never be the intention of section 14A of the Act, providing for a proportionate disallowance of expenditure incurred to earn the exempted income. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income -tax Rules, 1962." 6.2 It is also noted that the Hon'ble Supreme Court in its judgement dated 08.02.2019 in the case of CIT vs Oil Industry Development Board (SLP (Civil) No. 2755/2019) had dismissed the SLP filed by the Revenue against the judgement of the Hon'ble Delhi High Court dated 16.02.2018 by relying upon its decision in the case of CIT vs Essar Teleholdings Limited (2018) 3 SCC 253. The Hon'ble Delhi High Court had ruled that, in the absence of any exempt income, disallowance u/s 14A of the Act of any 6

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. amount was not permissible. In arriving at this conclusion, the Hon'ble Court had relied upon its earlier decision in the case of Cheminvest Ltd. vs CIT (378 ITR 33).

6.3 Hon’ble jurisdictional Bombay High Court in the case of Pr.CIT Vs Kohinoor Project Pvt Ltd in 121 taxmann.com 177, following the above judgement of Hon'ble Delhi High Court has also held that in absence of exempt income, no disallowance is warranted u/s 14A of the Act. The relevant findings of the Hon'ble High Court are as follows:

"6. Aggrieved by the reduction in the quantum of disallowance revenue preferred appeal before the Tribunal. The Tribunal considered the contention of the assessee that no exempt income was claimed by the assessee under section 14A of the Act and, therefore, no disallowance could have been made by the Assessing Officer by invoking section 14A together with Rule 8D(2)(ii) of the Income-tax Rules, 1962. Tribunal relied upon the decision of the Delhi High Court in the case of Cheminvest Ltd. v. CIT /2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi); the decision of the Punjab and Haryana High Court in CIT v. Lakhani Marketing Inc. (2014] 49 taxmann. com 257/226 Taxman 45 (Mag.); and decision of the Allahabad High Court in the case of CIT v. Shivam Motors (P.) Ltd. /2015] 55 taxmann.com 262/230 Taxman 63 (All.) and observed that there is uniformity in the view that in case there is no exempt income claimed by the assessee in the return of income, no disallowance can be made by the revenue. Consequently, vide order dated 18 -10-2016 Tribunal dismissed the appeal of the revenue." 6.4 In the facts of the present case, admittedly the exempt income earned by the assessee was NIL. As a corollary, therefore, no disallowance could have been made u/s 14A of the Act. The Hon'ble Madras High Court in the case of Chettinad Logistics Pvt Ltd. vs CIT in 257 Taxman 2 observed as under:

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. 9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. 10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (ndia) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) which was, subject matter of T.C.A.No.520 of 2016. 11.1 A Co-ordinate Bench of this Court, vide judgement dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2 As a matter of fact, a perusal of the judgement would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument. 12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a- vis, notional income. 12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 15. However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1 Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue."

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. 6.5 The SLP filed by the Revenue against the above judgment has since been dismissed by the Hon'ble Supreme Court which is reported in 95 taxmann.com 250.

7.1 In view of the above discussion, we set aside the appellate order and direct the AO to delete the addition made, thus allowing the above grounds of appeal.

Sd/- Sd/- SAKTIJIT DEY PRABHASH SHANKAR (उपाध्यक्ष/ VICE PRESIDENT) (लेखाकार सदस्य/ACCOUNTANT MEMBER)

Place: म ुंबई/Mumbai ददनाुंक /Date 08.06.2026 Soumili Das / PS

आदेश की प्रतितलति अग्रेतिि/Copy of the Order forwarded to :

ITA No. 256/Mum/2026; Netmagic Solutions Pvt. Ltd. 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, 4. Mumbai गार्ड फाईल / Guard file. 5.

सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER,

उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीलीय अतधकरण