MANUGRAPH INDIA LIMITED ,MUMBAI vs. ACIT CIRCLE 3(2)(1), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER:

ld. CIT(A) both dated 10.09.2025 for Assessment Year (AY) 2016-17 &

2017-18 respectively. Certain facts in both the years are common. The

assessee has raised certain common grounds of appeal in both the years,

therefore, with the consent of parties both the appeals are heard, clubbed

together and are decided by common order to avoid the conflicting

decision. For appreciation of fact, facts in A.Y. 2016-17 in ITA No.

7160/M/2025 is treated as lead case. The assessee has raised following

grounds of appeal:

“1. Disallowance of expenses u/s. 14A of the Act-Rs.27,75,315/- 1.1. The Assistant Commissioner of Income-tax, Circle 3(2)(1), Mumbai (AO) erred in disallowing expenses of Rs.27,75,315/- u/s. 14A as against Rs. 1,20,899/- disallowed by the appellant company in the Return of Income.

1.2. The Commissioner of Income-tax, (Appeals)-48, Mumbai [CIT (A)] erred in setting aside the matter to the file of the AO for computing the disallowance of expenses after taking income from growth funds. The appellant submits that investments made by the appellant in growth mutual funds are not capable of earning exempt income as dividend is not paid by the fund to the unit holders.

1.3. The AO erred in considering interest expenses of Rs. 1,65,37,000/- for the purpose of disallowance u/s14A of the Act r.w.r BD(ii) and 8D(iii) of the Rules. The appellant submits that the said expenses are incurred on facilities availed from banks for working capital requirements and not for the purpose of investments. The appellant submits that the investments have been made by the appellant out of its own funds and not out of borrowed funds. The CIT(A) erred in holding that the appellant has not submitted any supporting document for its contrary claim.

2.2. The AO erred in disallowing the expenses without bringing anything on record to show that the rent paid by the appellant is excessive and unreasonable.

2.3. The appellant submits that these expenses have been incurred by the appellant exclusively for the purpose of business and therefore are allowable under law.

3.2. The appellant submits that the appellant claimed deduction in respect of revenue expenses of Rs.1,90,81,154/- u/s. 35(2AB) of the Act. However, the DSIR has approved expenses of Rs. 1,68,80,506/- for weighted deduction. The expenses of Rs.22.00,648/-not considered by the DSIR u/s. 35(2AB) of the Act ought to have been allowed by the AO u/s. 35(1)(i)/37(1) of the Act as the expenses relate to the business of the appellant company.

business of manufacturing and exporting of precision and sophisticated

printing machines. The assessee filed its return of income for A.Y. 2016-17

on 29.11.2016 declaring loss of Rs. 2.22 crore under normal provisions of

the Act and a book profit of Rs. 3.32 crore under section 115JB. Case was

selected for scrutiny. The assessment was completed on 22.12.2018. The

Assessing Officer (AO) while passing the assessment order made

disallowance under section 14A read with Rule 8D of Rs. 27,75,315/-,

disallowance of claim for deduction under section 35(2AB) of Rs.

44,01,296/- and disallowance of rent expenses of Rs. 13,20,000/-. On

appeal before ld. CIT(A), the disallowance of rent expenses and scientific

research expenditure was upheld. On disallowance of section 14A, the

assessee was allowed part relief. Further, aggrieved the assessee has filed

present appeal before Tribunal.

assisted by Sh Rahul Hakkani Advocate, hereinafter referred as learned

Authorised Representative (ld. AR) of the assessee and the learned Senior

Departmental Representative (ld. Sr. DR) for the Revenue. Ground No. 1

relates to disallowance under section 14A. The ld. AR of the assessee

submits that during relevant financial years, the assessee earned exempt

dividend income of Rs. 23,04,695/-. The assessee computed suo moto

disallowance under section 14A r.w. Rule 8D of Rs. 1,20,899/-. The details

of dividend income, computation of total income and working of suo moto

disallowance was furnished before Assessing Officer (AO) and copy thereof is filed before Tribunal. The AO disregarded suo moto

disallowances and computed disallowance by invoking Rule 8D and

worked out disallowance of Rs. 28,96,214/-. The AO while computing

disallowance considered all investments instead of restricting to those

investments which yielded exempt income. Before ld. CIT(A), the assessee

demonstrated that so far as interest expenses is concerned, such interest

expenses were incurred for the purpose of business and not for the

purpose of any investment. Even otherwise, the assessee explained that

they have interest free funds more than the interest-bearing funds. The ld.

CIT(A) directed that disallowance under section 14A should be restricted

to the exempt income and he also directed the AO to verify if any dividend

was received in growth mutual funds. The ld. CIT(A) not considered the

submission of assessee that for the purpose of Rule 8D only investment

which yielded exempt income should be considered. The assessee while

making suo moto disallowances considered only those investments are

yielded exempt income and computed disallowance of Rs. 1,20,000/-. The

ld. AR of the assessee submits that ld. CIT(A) erred in holding that

dividend is paid by growth mutual fund. In fact, the assessee has paid

capital gain on redemption. Growth fund foes not yield any

dividend/exempt income hence provision of section 14A does not apply. To

support his submission, the ld. AR of the assessee relied upon the decision

of special bench of Delhi Tribunal in ACIT vs Vireet Investments P. Ltd.

(2017) 165 ITD 27 (Delhi-Trib.) (SB), Manugraph India Ltd. in ITA No.

4761/M/2013 dated 25.03.2025 and Manugraph India Ltd. in ITA No.

2631/M/2015 dated 14.01.2016.

DR) of the Revenue supported the order of lower authorities. The ld. Sr.

DR for the Revenue submits that once the assessee earned exempt

income, the assessee was supposed to offer suo moto disallowance, which

the assessee failed. The assessee furnished working of suo moto

disallowance only on show cause notice. Suo moto disallowance of section

14A was disregarded by AO and he worked out disallowance under section

14A as per formula in Rule 8D. The ld Sr DR for the revenue prayed for

rejection of this ground of appeal.

through the orders of lower authorities carefully. We find that during

assessment, the AO noted that assessee has earned dividend income of

Rs. 23,04,695/-. On show cause notice, the assessee submits that in the

computation of income, the assessee has worked out disallowance under

section 14A of Rs. 1,20,899/-. The AO was of the view that disallowance

under section 14A is not in accordance with Rule 8D. The AO by referring

various case laws invoked provision of Rule 8D and worked out

disallowance of Rs. 28,96,214/- which consists of interest disallowance of

Rs. 15,16,732/- and 0.5% of average value of investment. The AO allowed

the benefit of suo moto disallowance and thereby worked out disallowance

of Rs. 27,75,315/-. Before ld. CIT(A), the assessee submitted that growth

mutual fund does not generate dividend. Such contention was not accepted by ld. CIT(A). On interest disallowance, the assessee submitted

that interest free funds are far excess utilization of interest free funds. The

ld. CIT(A) held that assessee has not demonstrated with supporting

evidence about such plea. The assessee also took plea that disallowance

under section 14A cannot exceed the exempt income. Such contention

was also rejected by ld. CIT(A) that there are several contrary decisions.

The ld. CIT(A) further noted that assessee claimed exempt income of Rs.

23,04,695/-, but not submitted details, if dividend income earned through

growth funds were reinvested or not. The ld. CIT(A) directed the AO to

recompute the disallowance on furnishing fresh figure by the assessee

with regard to exempt income related to dividend on growth mutual fund.

primary submission that disallowance under section 14A should be

restricted to the investment which yielded exempt income. Such

contention is duly supported by the decision of special bench of Delhi

Tribunal in ACIT vs Vireet Investments P Ltd. (supra). Thus, we accept the

submission of ld. AR of the assessee and direct the AO to consider only

those investments which yielded exempt income for disallowance under

section 14A. Thus, the assessee gets partial relief on the disallowance

under Rule 8D(2)(iii). So far as the interest disallowance under Rule 8D(ii)

is concerned, we find that ld. AR of the assessee vehemently argued that

interest free funds are in far excess than the investment made by

assessee. We find that before ld. CIT(A), the assessee in its submission

submitted that assessee is having its own fund in the form of equity capital and reserve of Rs. 21619.8 lacs. The assessee has made

investment (current & non-current) of Rs. 10044.53 lac. Such facts are not

disputed by ld CIT(A). On perusal of financial statement of assessee, we

find that interest free funds are in far excess to the investment. Thus, as

per the decision of Hon’ble Jurisdictional High Court in CIT vs HDFC Bank

366 ITR 505 (Bombay) wherein it was held that there is presumption of

interest free funds are far in excess then the investment made in tax free

securities that investment out of interest free funds available with

assessee. Hence, we direct the AO to delete the entire interest

disallowance under Rule 8D(2)(ii) and recompute disallowance as per

aforesaid directions. In the result, ground No.1 of appeal is partly allowed.

The ld. AR of the assessee submits that assessee company has incurred

rental expenses for stay in Farm house in Alibaug, which was taken on

leave and license basis from Sanjay Shah, Vice Chairman and Managing

Director (MD), Pradeep Shah (MD) and Sudha Shah (MD). Copy of rent

agreement was furnished. The Alibaug is in the vicinity of Mumbai. The

said farm house was taken on leave and license for the purpose of

comfortable stay of foreign clients and it was used for the purpose of

business. TDS was deducted on the payment of rent. Rent was paid @ Rs.

2,20,000/- per month. The AO disallowed such rental expenditure by

holding that it was not incurred for the purpose of business and rent was

paid to related parties. The AO wrongly held that rent agreement was not

furnished. The ld. CIT(A) confirmed the action of assessing officer. The ld.

AR of the assessee submits that assessee is a company and there is no

personal element on the expenses of a company. Rental expenses were

incurred wholly and exclusively for the purpose of business of assessee.

The AO has not brought any evidence on record that firm house was not

used for the purpose of business. The rent is taxed in the hands of

recipient and there is no tax evasion. Similar expenses were allowed in

earlier year. To support his submission, the ld. AR of the assessee relied

upon the decision of Sayaji Iron & Engg. Co. vs CIT (2002) 253 ITR 749

(752) Guj – HC).

lower authorities. The ld. Sr. DR for the submits that no agreement or

other information about the leave and license was provided. The alleged

rental property has no business connection.

foreign guest, their nationality and purpose of visit and period of his stay.

In response to our such query, the assessee furnished the name of foreign

guest namely, Mr. Demitry, Managing Director from Russia who visited for

the purpose of negotiation and finalization of web offset printing machine

and stays only one night. Further, Mr. Ken Inoue, Head Procurement from

Seiken Graphics Inc from Japan also stayed for one night.

gone through the orders of the lower authorities carefully. We find that

during the assessment, the AO recorded that details of rent expenses was

not provided. The assessee could not justify the expenses incurred wholly and exclusively for the purpose of business. The AO also recorded that

rental expenses was paid to Sanjay Shah, Pradeep and Sudha Shah for

occupying bungalow at Alibaug, who are related party. The assessee has

no business connection in Alibaug. All the three persons to whom rent was

paid are covered under section 40A(2)(b). The AO also noted that office of

assessee is situated in Mumbai, manufacturing unit is at Kolhapur and

paying rent at Bungalow situated in Alibaug. Rent was paid to directors

and relatives who are covered under section 40A(2)(b) which shows

divergent of fund. The assessee could not justify such expenses. The ld.

CIT(A) also held that assessee failed to establish that expenses were

incurred wholly and exclusively for the purpose of business. On the

contention of assessee that expenses were allowed in past and scrutiny

assessment. The ld. CIT(A) held that principle of res-judicata is not

applicable in income tax proceeding and onus on assessee to prove that

expenditure is led out wholly and exclusively for the purpose business.

The AO has clearly noted the lack of direct business connection. General

statement is not sufficient and no details of visitors may hold or specific

corroborative evidence is furnished.

taken on rent was used for the purpose of foreign visitors / customers and

was used for the purpose of business and no personal element is involved.

We find that assessee has not disputed that payments on account of

rental expenses were paid to related parties covered under section

40A(2)(b). The assessee has paid rental expenses of Rs. 13,20,000/- for the period April, 2015 to September, 2015 and thereafter discontinued.

Thus, the assessee has claimed continuous expenses for six months. No

doubt that expenditure incurred wholly and exclusively for the purpose of

business is to be allowed. However, the assessee has to prove the

business expediency and the purpose for which such expenditure was

incurred. The ld. AR of the assessee explained before us that expenditure

was incurred for stay of foreign customers. The name and details of

foreign customers have not been furnished. From the details furnished, we

find that only two foreign clients stated in the farm house for one or two

days in entire period of six months. Thus, in order to avoid the possibility

of revenue leakage, the disallowance is restricted to 50% of the rental

expenses. The disallowance is also restricted to that extent keeping in

view that the firm house is in the name of directors of the assessee

company and personal use is not ruled out. In the result, this ground of

appeal is partly allowed.

AR of the assessee submits that during the year, the assessee claimed

deduction under section 35(2AB), bifurcation of which were furnished

before lower authorities. The assessee debited Rs. 1.90 crore in its profit

and loss account on account of revenue expenses and claimed 200%

weighted deduction in computation of income at Rs. 3.81 crore. The

assessee also claimed capital expenditure of Rs. 1.04 lacs and claimed

weighted deduction @ 200% that is Rs. 2.01 lacs. The ld. AR of the

assessee submits that Department of Scientific & Industrial Research (DSIR) vide his approval dated 10.10.2019, approved the expenses of Rs.

1.68 crore. Thus, on the basis of such approval, the weighted deduction of

Rs. 44,00,308/- is not allowed by AO. The ld. CIT(A) confirmed the action

of AO. The ld. AR of the assessee submits that research and development

is Revenue expenses of Rs. 22,04,648/- not approved by DSIR for

weighted deduction it may be allowed under section 37(1) or 35(1)(i). To

support such submission, the ld. AR of the assessee relied upon the

decision of Delhi Tribunal in Auto Ignition Ltd. vs ADIT in ITA No.

3248/Del/2017 dated 11.08.2021 and Bangalore Tribunal in BEML Ltd. vs

DCIT in ITA No. 291/Bang/2023 dated 19.07.2023. The ld. AR of the

assessee submits that details of research and development (R & D)

expenses was never disputed. The expenses were incurred for the

purpose of business.

deduction under section 35(2AB) was allowed to the extent, it was

approved by DSIR. The assessee cannot claim a single expense under two

different heads.

gone through the orders of lower authorities carefully. We find that AO

allowed the weighted deduction to the extent, it was approved / allowed

by DSIR and rest of the weighted deduction of Rs. 44,01,296/- was

disallowed. The ld. CIT(A) also confirmed the action of assessing officer by

taking view that if the expenditure which a part of R & D claim is not

certified by DSIR which is not eligible for the benefit under section 35(2AB). The alternative plea of assessee that uncertified portion may be

allowed under section 37(1) / 35(1)(i) was also rejected by ld. CIT(A) as it

was not approved so deduction automatically cannot be considered as

general expenditure under section 37(1) without demonstrating that it

meets criteria of research and development expenditure.

ordinate bench of Delhi Tribunal in Auto Ignition Ltd. vs ADIT (supra)

while considering the similar ground of appeal held that R&D expenditure

though not eligible weighted deduction under section 35(2AB) but is

allowable under section 37(1) to the extent of amount expenditure

incurred by assessee. By following the decision of Delhi Tribunal, similar

view was taken by Bangalore Tribunal in BEML Ltd. vs DCIT (supra). Thus,

respectfully following the same, we direct the AO to allowed deduction of

Rs. 22,00648/- under section 37(1). In the result, this ground of appeal is

allowed.

ITA 7161/M/2025 (A.Y. 2017-18

1.1. The Assistant Commissioner of Income-tax, Circle 3(2)(1), Mumbai (AO) erred in disallowing expenses of Rs.57,22,349/- u/s. 14A as against Rs. Nil disallowed by the appellant company in the Return of Income.

1.2. The Commissioner of Income-tax, (Appeals) - 48, Mumbai [CIT (A)] erred in setting aside the matter to the file of the AO for computing the disallowance u/s14A of the Act after taking income from growth funds. The AO ought to have considered only those investments which have yielded exempt income during the year for the purpose of determining disallowance.

The appellant submits that investments made by the appellant in growth mutual funds are not capable of earning exempt income as dividend is not paid by the fund to the unit holders.

1.1. The AO erred in considering interest expenses of Rs.67,16,000/-/- for the purpose of disallowance u/s14A of the Act r.w.r 8D(ii) and 8D(iii) of the Rules. The appellant submits that the said expenses are incurred on facilities availed from banks for working capital requirements and not for the purpose of investments. The appellant submits that the investments have been made by the appellant out of its own funds and not out of borrowed funds. The CIT(A) erred in holding that the appellant has not submitted any supporting document for its contrary claim.

1.3. Without prejudice to the above, the AO ought to have restricted the disallowance u/s14A to the amount of exempt income earned during the year by the appellant which is Nil.

2.1. The CIT (A) erred in confirming the disallowance of expenses of Rs.2,15,94,000/-made by the AO u/s. 35(2AB) of the Act by misinterpreting the facts of the case.

2.2. The appellant submits that as against deduction on R & D Expenses of Rs. 1,98,99,438/-, the DSIR has approved expenses of Rs. 1,77,67,000/- as eligible for weighted deduction. The AO ought to have allowed weighted deduction ofRs.3,55,34,000/- (being 200% of Rs.1,77,67,000/-) u/s.35(2AB) of the Act as approved by the DSIR vide its approval dated 10th October 2019.

2.3. The CIT (A) has not adjudicated ground No.5.3 of grounds relating to weighted deduction of capital expenditure of Rs. 1,01,78,108/- being 200% of Rs.50,89,054/-u/s. 35(2AB) of the Act. The appellant submits that the said expenses have been approved by the DSIR vide its approval dated 10th October 2019.

3.1. The CIT (A) erred in not allowing the Scientific Research expenses of Rs.22,00,648/-u/s. 37(1)/35(1)(i) of the Act incurred by the appellant for the purpose of business.

3.2. The appellant submits that the appellant claimed deduction in respect of revenue expenses of Rs.1,98,99,438/- u/s. 35(2AB) of the Act. However, the DSIR has approved expenses of Rs. 1,77,67,000/- for weighted deduction. The expenses of Rs.21.32,438/-not considered by the DSIR u/s. 35(2AB) of the Act ought to have been allowed by the AO u/s. 35(1)(i)/37(1) of the Act as the expenses relate to the business of the appellant company.

Considering the fact that this ground of appeal is similar to the ground no.

1 in appeal for A.Y. 2016-17, which we have partly allowed. Hence, this

ground of appeal is allowed with similar direction. In the result, this

ground of appeal is partly allowed.

development expenses under section 35(2AB) and in alternative under

section 37(1) of the Act. We find that these grounds of appeal are similar

as in appeal for AY 2016-17, which we have allowed in our detailed order,

thus, these grounds of appeals are also allowed with similar directions.

Order was pronounced on 04/06/2026 in open Court.

Sd/- Sd/-

MAKARAND VASANT MAHADEOKAR PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, Dated: 04/06/2026 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file.

By Order

Assistant Registrar/DDO ITAT, Mumbai