DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 6(4), MUMBAI, MUMBAI vs. RAB ENTERPRISES (INDIA) PRIVATE LIMITED, MUMBAI
What did the Tribunal hold?
The Tribunal dismissed the assessee's grounds challenging the assessment validity and addition on interest income. The Tribunal remanded the issue of disallowance under Section 36(1)(iii) to the CIT(A) for de novo adjudication.
What were the facts?
The assessee appealed against the CIT(A)'s order upholding the assessment proceedings and certain additions. The Revenue also appealed against the deletion of a disallowance. The assessee did not appear for the hearing.
What were the issues?
The key issues were the validity of assessment proceedings due to lack of jurisdiction, taxability of accrued interest income, disallowance of interest expenditure, and classification of gains from share sale.
Which sections of the Income-tax Act were involved?
Section 127,Section 28,Section 14A,Section 40(a)(ia),Section 36(1)(iii),Section 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCHES, MUMBAI
Before: HON’BLE SANDEEP GOSAIN & HON’BLE BIJAYANANDA PRUSETH
Heard together (2 matters)
Read from the judgment's own cause title. This page is filed under one of them.
आदेश / ORDER
PER SANDEEP GOSAIN, JUDICIAL MEMBER: These appeals have been filed by the assessee and the Revenue against the order of the Ld. CIT(A)-54, Mumbai, dated 24 March 2025, for Assessment Year 2020–21.
Firstly, we shall take the appeal filed by the assessee i.e. ITA No. 3548/M/2025 (AY:2020-21)
The assessee has raised following grounds:
In law and in the facts and circumstances of the Appellant's case, the CIT(A) erred in upholding the validity of the assessment proceeding passed by the Id. AO when it has been vitiated due to lack of jurisdiction as the case was centralized without service of the transfer jurisdiction under Section 127 of the Income Tax Act, 1961 (for short "the Act")
In law and in the facts and circumstances of the Appellant's case, the CIT(A) erred in upholding the validity of the assessment proceeding passed by the Id. AO when the assessment proceeding is void and bad in law.
In law, facts, and circumstances of the Appellant's case, the Ld. CIT(A) erred in upholding the action of the Ld. AO, for an addition of Rs. 10,19,19,961/- to the total income on account of interest income accrued on inter-corporate deposits under section 28 of the Act. Interest income can be said to have accrued or arisen only when the taxpayer has a vested right to receive the amount in question and in the Appellant's case, the right to receive interest from borrower companies was specifically waived prior to its being accrued; became a condition and on account of total uncertainty and weak financial position, there was no accrual. Thus, the addition made is based on hypothetical reason. Therefore, the addition made by Id. AO deserves to be deleted.
4. In law and on the facts and circumstances of the Appellant's case, the Id. AO grossly erred in and the Id. CIT(A) erred in confirming the disallowance on account of Section 14A r. w. rule 8D on the investment made in a Limited Liability Partnership of Rs. 979/- which deserves to be quashed.
In law and on the facts and circumstances of the Appellant's case, the Id. CIT(A) has erred in confirming the action of the Id. AO who computed the net gain of Rs. 17,30,04,730/- arising from the sale of share of the subsidiary company under the head 'Capital Gains' instead of 'Profits and Gains from Business or Profession', as correctly credited by the Appellant in its audited financial statements. The Appellant submits that the said transaction falls within the purview of business purpose. Thus, the action of the Id. AO is unjustified and liable to be set aside.
The Id. CIT(A) erred in upholding action of Id: AO for the initiation of the penalty proceeding under Sec. 270A of the Act.
None appeared on behalf of the assessee despite repeated calls. On going through the case records, we noticed that this is the 10th opportunity. Since nobody has appeared and no application seeking adjournment has been filed, in the absence of the assessee or his representative, we proceed to hear the appeal ex parte.
On the other hand, the Ld. DR present in the Court is ready with his arguments, therefore, we have decided to proceed with the hearing of the appeal ex parte.
Ground Nos. 1 and 2 raised by the assessee are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) in upholding the validity of the assessment proceedings passed by the AO. Therefore, we have decided to adjudicate these grounds through the present consolidated order.
5. We have heard the Ld. DR and perused the material placed on record. From the records, we noticed that these grounds were not raised by the assessee before the first appellate authority and the same are additional grounds. However, no application for admission of the additional grounds has been placed on record, and no submissions have been made before us. We further noticed that no objection was raised before the AO during the assessment proceedings. Therefore, these grounds raised by the assessee are dismissed.
Ground No. 3 raised by the assessee relates to challenging the order of the Ld. CIT(A) in upholding the action of the AO in making an addition under Section 28 of the Act.
We have heard the Ld. DR and perused the material available on record. The Ld. CIT(A) has dealt with this issue in detail in his order, and the operative findings are contained in paragraphs 5.3.1 to 5.3.3 and the same is reproduced herein below:
5.3 The facts recording and finding of the AO in the assessment order and submission made by the appellant has been considered.
5.3.1 The facts of the case of the appellant are that as on 31.03.2020 the long term borrowing stood to Rs.929.60 Crore and short term loans and advances given to subsidiary/group companies was Rs.212.49 Crore. During the year, interest of Rs. 10,19,19,961/- Croreaccrued on loans and advances given to subsidiary/group companies. During the year, interest expenses of Rs.96,52,98,567/- accrued, out of which the appellant claimed interest expenses of Rs. 11,71,53,717/- as expenditure in the financial statements and interest on ICD accrued amounting to Rs.84,81,44,850/- was not recognized in the financial statements. In the financial statements the auditor made a remark that the interest income of Rs. 10,19,19,961/- Crore for year ended 31.03.2020 on Inter Corporate Deposit was not recognized due to non-recoverability. Further, the Auditor remarked that the interest expenses of Rs.84.81 crore on Inter Corporate Deposits taken from group companies and subsidiaries was also not recognized. The considering the mercantile system of accounting generally followed by the appellant included the accrued interest income as income and also included accrued interest expenses as expenditure. The AO made addition in respect of accrued interest income. The AO also included accrued interest expenditure as expenses, however, disallowed the accrued interest being incurred for non-business purpose as borrowed funds were utilized for giving loan to group companies without no nexus between business and loan given. The AO disallowed interest of Rs.84,81,44,850/-u/s.36(1)(iii) of the Act. As the appellant had suo-moto disallowed u/s 40(a)(ia) interest of Rs.22,44,43,455/- (30% of interest expenses of Rs.84,81,44,850/-), the AO made net disallowance of Rs.59,37,01,395/-u/s.36(1)(iii) of the Act.
5.3.2 During the appellate proceedings, the appellant submitted that as per para- 5 explanation to AS-9 uncertainties regarding determination of amount or its associated cost may influence the timing of the revenue. Further, as par para 9 of AS-9revenue recognition may be appropriate when it is reasonably certain that ultimate collection will be made. The appellant submitted that as per RBI's moratorium scheme the borrower had requested waiver of interest to be paid by them. Therefore, there was uncertainty in recognition of interest income and it could not be taxed u/s 5 of the IT Act. To support the argument the appellant relied upon the decisions in the case of Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92 (Delhi). The appellant also submitted that as per Para no. 4 and 5 of the ICDS04, revenue should be recognized when there is certainty of its ultimate collection and the ability to assess the ultimate collection with reasonable certainty is lacking in such case revenue recognition in respect of such should be postponed to the extent of uncertainty involved. As decided decisions in the case of Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92 (Delhi), ICDS could not override the provisions of section 145 of the Act. The appellant further submitted that on real income and not hypothetical income should be taxed under the IT Act. To support the appellant relied upon the decision in the case of CIT v. Excel Industries Ltd. CIVIL APPEAL NO. 125 OF 2013, Commissioner of Income Tax v. Shoorji Vallabhdas and Co., [1962] 46 ITR 144 (SC). Godhra Electricity Co. Ltd. v. Commissioner of Income Tax, [1997] 225 ITR 746 (SC). Simoco Systems And Infrastructure Solutions Limited v. ITO Ward-2(1) 2025 (1) TMI 274-ITAT KOLKATA, Deputy Commissioner of Income- tax, Central Circle-1(4) vs. Safari Biotech (P.) Ltd. [2023] 156 taxmann.com 571 (Ahmedabad - ITAT), Director of Income-tax vs. Brahamputra Capital Financial Services Ltd. [2011] 12 taxmann.com 387 (Delhi), Pranav Vikas (India) Ltd. vs. Assistant Commissioner of Income-tax, Circle-14(1), New Delhi [2009] 116 ITD 141 (Delhi), H.M. Kashiparekh & co. ltd. v. CIT (1960) 39 ITR 706 and State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC).
5.3.3 During the year, interest of Rs. 1,27,19,315/- and Rs. 8,92,00,646/- accrued on loan and advances given to M/s Bliss Abode Pvt. Ltd. and M/s DoIT Creation (India) Pvt. Ltd. Thus, total interest of Rs. 10,19,19,961/- accrued to the appellant company. It is a fact that the appellant is a company and it is following mercantile system of accounting. It is also a fact that interest has accrued to the appellant company on loans and advances given by the appellant company. The interest accrued is an income as per the provisions of section 4 and 5 of the I.T.Act. Even though the appellant has stated that there were uncertainties in realization of interest, however, the appellant has not demonstrated as to how there were uncertainties in realization of interest. As the appellant has followed mercantile system of accounting and the interest on loan and advances accrued during the year, therefore, the interest income on loans and advances is required to be offered for taxation in the year of accrual. Accordingly, the addition of Rs. 10,19,19,961/-made by the AO in respect of interest accrued on loans and advances given by the appellant is upheld.
5.3.4 During the appellate proceedings, the appellant submitted that in respect of interest income and interest expenditure it followed cash system of accounting. The appellant submitted that hybrid system of accounting has been upheld in the case of Commissioner of Income-tax, W.B.-III, Calcutta v. United Bank of India: [2015] 54 taxmann.com 213 (Calcutta), Principal Commissioner of Income-tax v. Davangere Urban Co-operative Bank Ltd, [2018] 93 taxmann.com 221 (Karnataka), L.K.P. Merchant Financing Ltd. v. Deputy Commissioner of Income- tax, [2022] 140 taxmann.com 548 (Bombay), Principal Commissioner of Income- tax v. North Eastern Electric Power Corporation Ltd. [2024] 164 taxmann.com 307 (Meghalaya), Cyber Media (India) Ltd. v. Commissioner of Income-tax; [2011] 198 Taxman 185 (Delhi), Principal Commissioner of Income-tax v. South Canara District, Central Co-operative Bank Ltd.; [2022] 139 taxmann.com 303 (Karnataka) and Bajaj Finance Ltd. v. Principal Commissioner of Income-tax, [2023] 152 taxmann.com 216 (Pune - Trib.).
The appellant also submitted that in the computation of income, under the head 'Decrease in profit on ICDs' the income was offered for taxation after offsetting interest expenditure of Rs. 59,37,01,395/-. Therefroe, it would lead to double taxation.
The appellant submitted that loan given to subsidiary/group companies was not a sham transaction, but such loans were advanced for commercial expediency. In this regard the appellant has relied upon decision in the case of Principal Commissioner of Income-tax, Panaji vs. V.S. Dempo Holding (P.) Ltd. [2021] 130 taxmann.com 456 (Bombay).
The appellant submitted that the meaning of 'for the purpose of business' is the same for section 36(1)(iii) also. The decisions rendered by various courts in respect of the meaning 'for the purpose of business' u/s. 37 would also be applicable for section 36(1)(iii) of the Act. With regard to the meaning of for the purpose of business', the appellant has relied upon the decision in the case of CIT v. Malayalam Plantations Ltd [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning & Weaving Mills Ltd [1971] 82 ITR 166 (SC), S.A. Builders Ltd v. CIT (Appeals), Chandigarh [2007] 288 ITR 1 (SC), Dalmia Cement 254 ITR 377, Hero Cycles (P.) Ltd. in Civil Appeal No. 514 OF 2008 dated 05.11.2015 [2015] 63 taxmann.com 308, Principal Commissioner of Income-tax. vs. Essel Infra Projects Ltd [2024] 161 taxmann.com 214 (Bombay) [31-01-2024], ACIT v. Rideema Toll (P.) Ltd 137 taxmann.com 252. Commissioner of Income-tax, Bangalore vs. Himatsingka Seide Ltd. [2016] 69 taxmann.com 259 (Karnataka)/[2016] 240 Taxman 753 (Karnataka), Rupee Finance & Management Pvt.Ltd v. DCIT reported in (2017) 57 ITR (Trib) 205 (Mum.), Commissioner of Income Tax vs Reliance Communications Infrastructure Limited, High Court of Gujarat in case of B. Nanji & Co. vs DCITandPCIT vs Gaursons Realty (P.) Limited [2020] 120 taxmann.com 259.
The appellant also submitted that the investment into subsidiary companies was for the strategic purposeand, therefore, it was for business purpose. For this, the appellant relied upon the decision in the case of DCIT v. Indian Hotels Co. Ltd [2005] 92 ITD 97 (MUM.)(TM).
The appellant also submitted that the loan advanced to subsidiaries was out of commercial expediency, therefore, the interest paid is allowable u/s.36(1)(ii) of the Act. For this, the appellant relied upon the decision in the case of Vaman Prestressing Co. (P.) Ltd. vs. Additional Commissioner of Income-tax [2023] 154 taxmann.com 325 (Bombay) (15-09- 2023] and Principal Commissioner of Income Tax-9 vs. E City Investments And Holdings Company (P.) Ltd. [2020] 117 taxmann.com 124 (SC)[27-01-2020].
5.3.4.1 As far as recognition of expenditure in respect of interest accrued is concerned, the appellant is following mercantile system of accounting, therefore, the AO has rightly considered the interest expenditure as expenditure incurred during the year. The AO has disallowed the interest expenditure u/s 36(1)(iii) being incurred for non-business purpose.
The fact remains that as per Memorandum of Association of the appellant company, the appellant company was engaged in the business of purchase and acquisition of land, house and other immovable properties. The other object incidental or ancillary to attain the main object was investment in shares, debentures etc. The AO has disallowed interest paid on loan u/s.36(1)(iii) of the Act on the ground that the appellant company invested borrowed funds in the subsidiary/group companies which was not the business of the appellant company.
It is a fact that during the year appellant also advanced loans of Rs. subsidiary/group company. Regarding advance given to the subsidiary/group companies, the appellant has submitted that the same was made out of commercial expediency. The AO has not doubted the commercial expediency of
loan advanced or Inter-corporate deposits with the subsidiary companies. The only objection of the AO is that the investment/loan given to subsidiary companies was not for business purpose.
It is a settled principle of law if the loan is advanced for commercial expediency, no disallowance u/s.36(1)(iii) of the Act could be made. In this regard, the appellant has relied upon the decision in the case of Vaman Prestressing Co. (P.) Ltd. vs. Additional Commissioner of Income-tax [2023] 154 taxmann.com 325 (Bombay) (15-09-2023] and Principal Commissioner of Income Tax-9 vs. E City Investments And Holdings Company (P.) Ltd. [2020] 117 taxmann.com 124 (SC) [27-01-2020]. Thus, respectfully following the decisions referred above, the appellant is allowed the claim of interest expenditure u/s.36(1)(iii) of the Act. Thus, the disallowance of Rs. 59,37,01,395/-u/s.36(1)(iii) is deleted.
After considering the order passed by the Ld. CIT(A) and hearing ld. DR, we find that the assessee was following the mercantile system of accounting. The interest on loans and advances had accrued during the year under consideration. Therefore, the interest income on such loans and advances was required to be offered to tax in the year of accrual. In view of these facts, the addition made by the AO was rightly upheld by the Ld. CIT(A).
Even otherwise, no new facts, circumstances, or documentary evidence have been brought on record by the assessee to controvert or rebut the findings recorded by the Ld. CIT(A). Accordingly, we find no reason to interfere with or deviate from the findings of the Ld. CIT(A). Consequently, the ground raised by the assessee is dismissed, and the order of the Ld. CIT(A) is upheld.
Ground No. 4 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the disallowance under Section 14A of the Act read with Rule 8D in respect of the investment made in a Limited Liability Partnership (LLP).
We have heard the Ld. DR and perused the material available on record. The Ld. CIT(A) has dealt with this issue in detail in his order, and the operative findings are contained in paragraphs 6.3 to 6.3.4 and the same is reproduced herein below:
Ground no.3 is regarding disallowance of Rs.6,40,53,478/- u/s.14A of the Act.
6.1 During the assessment proceedings, the AO observed that during the year the assessee did not earn any dividend income but share of profit in LLP amounting to Rs. 11,84,856/- was shown as exempt. The AO noted that as on 31.03.2020 investment in private company was Rs. 628,35,67,586/- as compared to that as on 31.03.2019 of Rs. 631,48,84,710/-. The investment in mutual funds was Rs. 1,26,36,770/- and Rs. 11,98,26,359/- as on 31.03.2020 and 31.0-3.2019, respectively. The AO observed that the assessee had not made disallowance u/s 14A. The assesse was asked to explain as to why the disallowance u/s.14A r.w.rule 8D of the Income-tax Rules should not be made. In response to that, vide letter dated 20.12.2023 the assessee submitted that during the year, no exempt income has been earned, therefore, no disallowance should be made u/s.14A of the Act. To support this argument, the assessee relied on the decision in the case of PCIT vs. Oil Industry Development Board and Chettinad Logistics Private Limited. The assessee further relied on the decision in the case of Ballarpur Industries Ltd. in ITA No.51 of 2016 (Bombay High Court), Cheminvest Ltd. Vs.CIT 2015 (378 ITR 33) (Delhi High Court), ACIT vs. Vireet Investment (P) Ltd. [2017] 58 ITR(T) 313 (Delhi-Trib) (SB) and other judgments.
The AO was not convinced with the reply of the assessee. The Aonoted that the term 'expenditure' occurring in 14A took into account not only the direct expenditure but also all form of the expenditure whether it was a fixed, variable, direct, indirect, administrative, managerial or financial. The AO also referred to circular No.5/2014 dated 11.02.2014 issued by the CBDT. The AO noted that as per the provisions of Section 14A of the Act, even when there is no exempt income, disallowance could be made. Accordingly, the AO disallowed Rs. 6,40,53,478/- u/s 14A of the Act. The AO also made adjustment of disallowance made u/s. 14A in the computation of Book Profit of the assessee company.
6.2 During the appellate proceedings, the appellant had filed written submission which is reproduced as under.
"3.5 From the above, Your Good Honour would appreciate that the Ld. Assessing Officer appreciated the facts of the case and the provision of law. It is submitted that the Appellant has made investment into various subsidiary/ group companies which has not yield any exempt income. The Ld. Assessing Officer has failed to appreciate the computation of income and ITR Form wherein it was axiomatic that there was no exempt income earned during the year under consideration.
3.6 From the above the Appellant submits that the investment made into various entities are strategic investments and, in their past, there was no dividend being declared therefore the question of disallowance does not arise in the present case. Appellant submits that the Id. Assessing Officer on assumption basis has applied formulae as per Rule BD without recording satisfaction that expenses incurred by the Appellant are of general administrative in nature and not incurred in the ordinary course of business.
3.7 Appellant submits that provision of section 14A cannot be applied unless there is proximate cause (direct or indirect relation) for disallowance and for which Id. Assessing Officer was duty bound to record his satisfaction. The application of the provision of sub-section (2) & (3) of section 14A and Rule 8D is not automatic in each and every case where there is income not forming part of total income.
3.8 Appellant hereby submits the relevant extract of the audited accounts- profit and loss which shows that the expense incurred are specific and in the ordinary course of business
3.9 However, the Id. AO without appreciating the facts and details have made impugned disallowance of Rs. 6,40,53,478/- when there being no exempt income and no expenditure being carried out.
3.10 No Satisfaction of AO before 14A disallowance
3.10.1 It is submitted that AO was required to record his satisfaction before invoking disallowance uls 14A of the Act. It is submitted that Section 14A r.w. Rule 8D of the Income Tax Rules read as under.
"Expenditure incurred in relation to income not includible in total income.
14A. (1) 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 prescribed, 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."
"Method for determining amount of expenditure in relation to income not includible in total income.
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with-
(a) the correctness of the claim of expenditure made by the assessee; or
(b)the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income; and
(ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income:
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.)
(3) [***]"
3.10.2 In support of the above the Appellant draws Your Good Self kind attention on the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) wherein their lordships considering the decision of Hon'ble Calcutta High Court in Kesoram Industries Ltd. v. Pr. CIT and held that- "Two important issues have been pointed out in the aforementioned decision. Firstly, that the provisions of section 14A has to be interpreted, particularly, the words that "in relation to the income" that does not form of total income. Therefore, it was held that the principle of apportionment of expenses comes into play as that is the principle which is incorporated in section 14A of the Act. With regard to as to how the power under section 14A(2) read with rule 8D of the Rules could be invoked it was pointed out that the Assessing Officer needs to record satisfaction that having regard to the kind of the assesseesuo motu disallowance under section 14A was not correct and it will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In any event, the Assessing Officer will have to record its satisfaction to the said effect."
It is submitted that in the Maxopp Investment Ltd at Para no. 32 of the decision their lordship has observed as follows:
"32) In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income"
3.11 The objective behind section 14A as explained by the Hon'ble Supreme Court
in the case of CIT vs. Walfort Share & Stock Brokers (P) Ltd. ((2010) 326 ITR 11. is that the insertion of section 14A with retrospective effect reflects the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income. The Supreme Court also clearly held that in the case of an income like dividend income, which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non taxable) income, even if it is of the nature specified in sections 15 to 59 cannot be allowed against any other income, which is includible in the total income.
3.12 Appellant also submits that Id. Assessing Officer has failed to identify that which investment would be capable of earning of exempt income. All the investments made by the company are unquoted and no exempt income earned during the relevant period. It is submitted that there being no exempt income earned by the Appellant and same has been duly admitted by Ld. AO that it has not earned any exempt income for year under consideration. Thus, no disallowance under section 14A can be made in absence of exempt income.
The Appellant relies on following judicial pronouncements:
a. Decision of Hon'bleGujarat High Court in case of CIT v. Corrtech Energy Pvt. Ltd.
[45 Taxmann.com 116] (2014) wherein it is held as under.
"[Vide Para 3]..... The Id. AR submitted that this finding of Id. CIT(A) is containing to the law settled by various judicial pronouncements. We have given our thoughtful consideration to the facts and the decision relied upon by the Id. AR. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 has held that in the present case, admittedly, the appellant did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the appellant has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon'ble High Court of Punjab & Haryana in the case of Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition. Therefore, ground Nos. 1 to 1.2 raised by the appellant in its cross-objection are allowed."
b. Decision of ITAT Ahmedabad in case of ACIT v/s. Mundra International Container Terminal Pvt Ltd ITA no 1458/Ahd/2015 dated 12/02/201
Learned representatives fairly agree that there is no tax exempt eamed by the assessee during the relevant previous year, and, for this short reason alone, disallowance under section 14A does not come into play as is the settled legal position in the light of Hon'ble jurisdictional High Court's judgment in the case of CITVs. Corrtech Energy Ltd [(2014) 45 taxmann.com 116 (Guj.)). That is precisely what learnedCIT(A) has noted, and, based thereon, granted the impugned relief.
In view of the above position, we approve the conclusions arrived at by the leamedCIT(A) and decline to interfere in the matter.
c. Decision of ITAT Rajkot in case of ACIT v/s M/s. Small Johnson Floor tiles Pvt Ltd ITA no 369 and 370/RJT/2016 dated 08/02/2017
We have carefully considered the rival submissions and perused the orders of the authorities below. The question that arises for determination is whether section 14A is applicable when the assessee has not actually received any exempt income during the year from assets capable of yielding exempt income. In this regard, we note that the CBDT vide Circular No.5 of 2014 dated 11/02/2014 came out with the clarification that the legislative intend is to allow only that expenditure which is relatable to earning of taxable income It had laid emphasis onuses of term "includible" used in the heading in section 14A and Rule 8D and stated that it indicates that exempt income need not necessarily be included in particular year's income for disallowance to be triggered. The CBDT is thus of the view that disallowance under 14A is not dependent on actual presence of tax free income. However, we note that the identical issue came up for consideration before Hon'ble Gujarat High Court in the case of CIT vs. Corretech Energy Pvt.Ltd. (supra) and host of other Judicial forums. The Hon'ble Gujarat High Court has held that when there is no exempt income and no claim of exemption has been made, section 14A and Rule 8D have no application and consequently no disallowance can be made. Although the judgement of the Hon'ble Gujarat High Court in the case of Corretech Energy Pvt.Ltd. (supra) and many of the other High Courts have been rendered prior to introduction of Rule 8D, we observe that Rule 8D is only a machinery/mechanism to
compute the disallowance. It It is trite that the Rules are sub servient to the main enactment. Rules can never override the main provisions of the Act. If the facts of the case warrants no disallowance, the computation all provision does not come into picture at all. Further, the Circulars of the CBDT which are prejudicial do not exert binding force on the assessee. Accordingly, where no exempt income is received or receivable during the relevant financial year, provisions of section 14A would not operate. In this view of the matter, the disallowance made by the AO is not sustainable having regard to absence of any exempt income during the financial year relevant to the assessment year in question. Therefore, we concur with the action of the CIT(A) in deleting the disallowance made by the AO. no interference therewith is called for.
d. Decision of the Hon'ble Delhi High Court in case of Cheminvest Ltd. v. CIT [2015] 61 xmann.com 118/234 Taxman 761
"Section 14A of the Income-tax Act, 1961-Expenditure incurred in relation to income not includible in total income (Applicability) - Assessment year 2004- 05-Whether section 14A envisages that there should be an actual receipt of income which is not includible in total income; hence, section 14A will not apply where no exempt income is received or receivable during relevant previous year - Held, yes [Para 23] [In favour of assessee)"
e. Following the above view, in a recent decision, the Hon'ble Delhi High Court in the case of M/s Holcim India P. Ltd. vs. CIT-IV (ITA No. 486/2014 & ITA No. 299/2014) dated September 5, 2014 it has been specifically held that disallowance under section 14A is not warranted in a case wherein no exempt income has been earned by the appellant.
f. The Hon'ble Supreme Court in case of Principal Commissioner of Income-tax- 2 v. Caraf Builders & Constructions (P.) Ltd. [2019] 112 taxmann.com 322 (SC) dismissed the special leave petition filed by the revenue against the decision of Hon'ble Delhi High Court in case of Principal Commissioner of Income-tax.-2 v. Caraf Builders & Constructions (P.) Ltd. [2019] 101 taxmann.com 167 wherein the High Court held that where for year in question, finding of fact was that appellant had not earned any tax free income, corresponding expenditure could not be worked out for disallowance. The Head Note of the decision of Hon'ble Supreme Court in as under.
"Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962- Expenditure incurred in relation to income not included in total income (Rule 8D) Assessment year 2009-10 - High Court by impugned order held that upper disallowance cannot exceed exempt income of relevant year and; therefore, where for year in question, finding of fact was that assessee had not earned any tax free income, corresponding expenditure could not be worked out for disallowance Whether Special leave petition filed against impugned order was to be dismissed Held, yes [Paras 25 and 26][In favour of assessee]
3.13.1 It is submitted that the Ld. AO in the Assessment Order vide para c) of the 5.4 has stated that "The Board has issued a Circular No.5/2014 dated 11.02.2014 wherein it is clarified that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year. The Board further clarified that Section 14A of the Act read with Rule 8D provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income."
3.13.2 In connection to the above, the Appellant submits that it is an established fact that in any case Circular cannot overrule the decision of Hon'ble High Court Reliance is placed on the following authoritative pronouncements, which has recorded the finding that CBDT Circular cannot overrule the judgments of High Court
Reliance is placed on the decision of Hon'ble Bangalore ITAT in case of Anriya Project Management Services [99-ITAT-2015 (Bang.)]
"Holds that S.14A disallowance cannot be invoked when there was no exempt income in previous year, Declines to accept Revenue's reliance on CBDT circular No. 5 of 2014 dtd Feb 11,2014, holds that "The Board circular which is contrary to the Hon'ble High Court's decisions cannot therefore be the basis to sustain the disallowance made by the Revenue authorities; Follows co-ordinate bench in Bhuwalka Steel that relied on Punjab & Haryana HC ruling in Winsom Textile Industries Ltd: Bangalore ITAT
(ii) The Hon'ble Supreme Court in State of U.P. v. Babu Ram Upadhyay[1961 AIR 751, 1961 SCR (2) 679] expounded the importance of Rules made under the statute by stating as follows:
'Rules made under a statute must be treated for all purposes of construction or obligation exactly as if they were in the Act and are to be of the same effect as if contained in the Act, and are to be judicially noticed for all purposes of construction or obligation": see Maxwell "On the Interpretation of Statutes", 10th edn., pp. 5051. The statutory rules cannot be described as, or equated with, administrative directions...." (p. 752)
(!!!) Decision of ITAT Rajkot in case of ACIT v/s M/s. Small Johnson Floor tiles Pvt Ltd-ITA no 369 and 370/RJT/2016 dated 08/02/2017
"8. We have carefully considered the rival submissions and perused the orders of the authorities below. The question that arises for determination is whether section 14A is applicable when the assessee has not actually received any exempt income during the year from assets capable of yielding exempt income. In this regard, we note that the CBDT vide Circular No.5 of 2014 dated 11/02/2014 came out with the clarification that the legislative intend is to allow only that expenditure which is relatable to earning of taxable income It had laid emphasis onuses of term "includible" used in the heading in section 14A and Rule8Dand stated that it indicates that exempt income need not necessarily be included in particular year's income for disallowance to be triggered. The CBDT is thus of the view that disallowance under 14A is not dependent on actual presence of tax free income. However, we note that the identical issue came up for consideration before Hon'ble Gujarat High Court in the case of CIT vs. Corretech Energy Pvt.Ltd. (supra) and host of other Judicial forums. The Hon'ble Gujarat High Court has held that when there is no exempt income and no claim of exemption has been made, section 14A and Rule 8D have no application and consequently no disallowance can be made. Although the judgement of the Hon'ble Gujarat High Court in the case of Corretech Energy Pvt.Ltd. (supra) and many of the other High Courts have been rendered prior to introduction of Rule 8D, we observe that Rule 8D is only a machinery/mechanism to compute the disallowance. It is trite that the Rules are sub servient to the main enactment. Rules can never override the main provisions of the Act. If the facts of the case warrants no disallowance, the computational provision does not come into picture at all. Further, the Circulars of the CBDT which are prejudicial do not exert binding force on the assessee. Accordingly, where no exempt income is received or receivable during the relevant financial year, provisions of section 14A would not operate. In this view of the matter, the disallowance made by the AO is not sustainable having regard to absence of any exempt income during the financial year relevant to the assessment year in question. Therefore, we concur with the action of the CIT(A) in deleting the disallowance made by the AO. no interference therewith is called for."
3.14 The Honourable Supreme Court held the Rules enacted under the statute to be equal to the provisions contained in the Act itself and required the same to be judicially noticed for all purposes of constructions and interpretations. Similarly, in Honourable Supreme Court in the case of Y. Narayana Chetty v. ITO [1959 AIR 213, 1959 SCR Supl. (1) 189), it held that rules are statutory rules as if they are part of the Act. Once the rules are framed under the statute, they are incorporated in the statute itself and become part of the statute, and the rules must be governed by the same principles as the statute itself.
3.15 Therefore, the rules prescribed under the statute have legal effect as if they are enacted under the statue. Rule 8D(1) of IT rules was prescribed under Sub- Section (2) of Section 14A of the Act and therefore the said rule takes its legal effect from the said provision of the Income Tax Act and hence it has as much a judicial value as the provisions of the Act itself. The said Rule 8D(1) of IT Rules clearly provides that the expense incurred, for the purpose of disallowance u/s 14A rwr 8D, has to be in relation to income which does not form part of total income for the previous year as per the provisions of the Act. The language used in the Rule 8D(1) is of clarificatory nature and has effect of giving a correct and legislature intended meaning to the provision of Section 14A(2) by adding the words 'of a previous year after the term 'having regard to the accounts of the assessee and the words 'for such previous year after the term 'in relation to income which does not form part of the total income under the Act.
3.16 The Rules taking its effect from the statutory provisions have effect as if they are enacted in the Act itself as has been held by the Hon'ble Supreme Court and therefore, the same cannot be overridden by merely a later dated Circular. If the contention of CBDT, as manifested in the Circular, that for the purpose of making disallowance u/s 14A of the Act there is no need of earning exempt income for the relevant year under consideration is accepted then the same clearly has the effect of making the Sub-Rule (1) of Rule 8D redundant and otiose as the said contention is exactly contrary to the language used in the said sub rule. This makes the said circular contrary to the Rule 8D which takes its statutory and legal effect from Section 14A(2) of the Income Tax Act and therefore, such circular is clearly contravening the provision Income Tax Act itself and hence ultra vires.
3.17 From above discussion, it is profusely clear that the explanation and contention as provided by the CBDT, in its circular no. 15/2014 by picking only those words from the Section 14A; memorandum and heading thereof which would best suit to its intent of bringing within the ambit of the said section such expenses which are not intended to be disallowed, are legally defeated by the provision of Sub-rule (1) of Rule 8D being the rule framed under the Section 14A(2) of the Income Tax Act itself. Therefore, addition cannot be made applying circular relied upon by Id. AO.
3.18 In the decision of Hon'ble Madras Court in the case of Redington (India) Ltd. v. Addl. CIT (2017) 392 ITR 633/77 taxmann.com 257 (Mad.), declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule BD is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far."
Also in the case of Hon'ble High Court Of Delhi in case of Principal Commissioner of Income-tax-04 v. IL & FS Energy Development Company Ltd ([2017] 84 taxmann.com 186 (Delhi)held as follows:
Head Note:
Section 14A of the Income-tax Act. 1961, read with rule BD of the income-tax
Rules, 1962-Expenditure incurred in relation to income not includible in total income (CBDT Circular v. rule 8D) Assessment year 2011-12 - Whether CBDT Circular No. 5/2014 dated 11-2-2014 cannot override express provisions of section 14A, read with rule BD-Held, yes - Whether where no exempt income was earned in relevant assessment year, merely because tax auditor had suggested in tax audit report that there ought to be such disallowance, it could not be a ground to make disallowance in terms of section 14A, read with rule 8D-Held, yes [Para 23] [In favour of assessee]
The Hon'ble High Court Of Punjab And Haryana in case of Principal Commissioner of Income-tax-l, Chandigarh v. Vardhman Chemtech (P.) Ltd ([2019] 102 taxmann.com 132 held as follows:
"....12. The Tribunal vide order dated 22.4.2016 regarding the ground of deletion of disallowance amounting to Rs. 40,28,526/- under Section 14A of the Act had recorded as under-
"We do not find any infirmity in the order of the Ld. CIT (A), who deleted the disallowance made following the decision of the jurisdictional High Court in the case of Lakhani Marketing (supra). The argument of the Ld. DR that the CBDT Circular No.5/2014 dt. 11.02.2014 stating that even in the absence of any exempt income disallowance under Section 14A has to be made, is binding on the Revenue authority, we find has no merit."
No illegality or perversity could be demonstrated by learned counsel for the revenue in the aforesaid findings recorded by the Tribunal.....
3.19 Consequent to above Appellant places its reliance on the decision of Jurisdictional Hon'ble Mumbai Tribunal in the case of Deputy Commissioner of Income-tax vs. SP Port Maintenance (P.) Ltd. [2024] 164 taxmann.com 752 (Mumbai -Trib.) [25-06-2024], declined to apply the CBDT Circular by explaining that "Where assessee made investment in unquoted equity shares of subsidiary but no exempt income was earned in relevant assessment year, disallowance made under section 14A was not sustainable" held as follows:
"Section 14A of the Income-tax Act, 1961 and rule 8D of the income-tax Rules, 1962-Expenditure incurred in relation to income not includible in total income (Scope of provision) Assessment years 2017-18 and 2018-19-Assessee-company filed return of income declaring certain loss under normal provisions of Act and book profit under section 115JB at minus figure Assessee during year made investment in unquoted equity shares of subsidiary and unquoted growth mutual funds from its own funds and it had not debited any interest expenses or similar expenses incurred to earn any income from investment made by it - Assessing Officer relying on circular No. 5/2014, dated 10-2-2014 disallowed a certain amount under section 14A read with rule 8D on ground that above circular made it clear that disallowance of expenditure for earning exempt income under section 14D read with rule 8D would be attracted even if corresponding exempt income had not been earned during financial year - Whether since there was no exempt income earned in relevant assessment year, disallowance made under section 14A was not sustainable Held, yes [Para 15] [In favour of assessee)
3.20 From the above detailed discussions and explanations, with regards to the CBDT Circular 5/2014, it is clear that the same has failed to pass the test of being legally valid on the anvil of provisions of Section 14A of the Act in various judicial pronouncements and held to be contrary to the provisions of Section 14A of the Act. A firm reliance is placed on the fact that the said circular is clearly against the Rule 8D, taking its legal effect from provisions of Section 14A(2), which explicitly requires the disallowance of such expenses which are incurred in relation to income which does not form part of the total income for the relevant previous year under the provisions of the Income Tax Act. The same is also clearly against the logical connotation of language used in 14A(2) as discussed herein above.
3.21 Similarly, the Hon'ble Supreme Courtin case of Commissioner of Income Tax, (Central) 1 v. Chettinad Logistics (P.) Ltd. [20] 95 taxmann.com 250 (SC), dismissed the revenue's SLP against the ruling of Hon'ble Madras High Court in the case of CIT V. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 (Madras), wherein the Hon'ble Madras High Court has held that in the absence of any exempt income being earned by the assessee, the provisions of S.14A read with Rule 8D cannot be invoked so as to make disallowance of expenditure u/s 14A of the Act. The head note of the stated decision of the Apex Court was produced in the previous submission and for the sake of ready reference is reproduced here in under.
Section 14A, of the Income-tax Act, 1961, read with rule 8D of the Income-Tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12- High Court by impugned order held that section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A It further held that where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked - Whether SLP against said impugned order was to be dismissed - Held, yes [Para 1] [In favour of assessee)
The ratio of above decisions squarely applies to facts of Appellant case, disallowance made by AO deserves to be deleted. Further, in view of facts of the above referred judgements, Circular No. 5/2014, dated 11th February, 2014 is not applicable to the Appellant's case and consequent disallowance made by Assessing Officer deserves to be deleted.
3.22 Appellant submits that in related Morgan Credit Pvt Ltd wherein similar issue regarding 14A disallowance has been decided in the favor of the Morgan Credit Pvt Ltd by the Hon'ble Mumbai ITAT vide ITA No. 1244/Mum/2023 and 1245/Mum/2023 vide order dated 20-09-2023 wherein it has been observed that disallowance under Section 14A of the Act will be carried out only when there is exempt income and the investment has yield exempt income. The relevant extract of the order is reproduced herein below:
Hence, the in the present case there was no exempt income has been earned in form of dividend by the Assessee hence no disallowance to be made. The Hon'ble ITAT in the case of the related entity being Morgan Credits Private Limited, has taken view on disallowance U/s 14 (A), which shall be apply to the present case of the Assessee and thus disallowance is made for those investments which did not yield any exempt income thus the addition made deserves to be deleted. The copy of the order is enclosed herewith vide Exhibit-C
3.23 Moreover, the Appellant submits that on consideration of the above submission, in the instant case the Id. AO has finalize the assessment order by violating rights of the Appellant with sole intention to make addition to the returned income.
6.3 The facts recorded and the findings of the AO in the assessment order and the written submission filed by the appellant have been considered.
6.3.1 The facts of the case of the appellant are that during the year no dividend income was earned by the appellant. The appellant earned share from LLP, which was claimed as exempt. The appellant had not made any disallowance u/s 14A of the Act. The AO applied Rule 8D and made disallowance u/s. 14A amounting to Rs. 6,40,53,478/-.
6.3.2 During the appellate proceedings, the appellant submitted that the appellant made investment into various subsidiaries, group companies from which no exempt income was earned. The appellant submitted that provisions of section 14A cannot be applied unless there is proximate cause for disallowance. For that, the AO is duty bound to record satisfaction. The application of provisions of Section 14A and Rule 8D is not automatic in each and every case where there is income not forming part of total income. It is a settled principle of law that no expenditure was incurred in relation to earning exempt income and, therefore, no disallowance was required. The appellant further submitted that the AO has not recorded satisfaction regarding invoking provisions u/s.14A r.w.Rule BD. For this, the appellant relied upon the decision in the case of Maxopp Investment Ltd. v. CIT [TS-5170-SC-2018-0). The appellant submitted that the object behind Section14A has been explained by the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC).
The appellant submitted that when no exempt income is earned during the year, no disallowance u/s. 14A should be made. For this, the appellant relied upon the decision in the case of CIT v. Corrtech Energy Pvt. Ltd. [45 Taxmann.com 116) (2014), ACIT vs Mundra International Container Terminal Pvt. Ltd. (ITA no. 1458/Ahd/2015), ACIT v/s M/s. Small Johnson Floor tiles Pvt Ltd - ITA no 369 and 370/RJT/2016 Cheminvest Ltd vs CIT-IV [2015] 61 taxmann.com 118, Principal Commissioner of Income-tax-2 v. Caraf Builders & Constructions (P.) Ltd. [2019] 112 taxmann.com 322 (SC). The appellant submitted that the rule takes effect as if they are enacted in the Act itself and it cannot be overridden by the circular. The appellant relied upon the decision in the case of State of U.P. v. Babu Ram Upadhyay 1961 AIR 751, 1961 SCR (2) 679), Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.) in which the Hon'ble Court declined to apply CBDT circular No.15/2014. The same view has been taken by various courts in the case of Principal Commissioner of Income- tax-04 v. IL & FS Energy Development Company Ltd ([2017] 84 taxmann.com 186 (Delhi), Principal Commissioner of Income-tax-I, Chandigarh v. Vardhman Chemtech (P.) Ltd ([2019] 102 taxmann.com 132, Deputy Commissioner of Income-tax vs. SP Port Maintenance (P.) Ltd. [2024] 164 taxmann.com 752 (Mumbai - Trib.). The appellant also submitted that the Hon'ble Madras High court in the case of Commissioner of Income Tax, (Central) 1 v. Chettinad Logistics (P.) Ltd. [20] 95 taxmann.com 250 (SC) held that in the absence of any exempt income, no disallowance u/s.14A should be made. The SLP filed by the revenue has been dismissed by the Hon'ble Supreme Court which is reported as CIT V. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221 (Madras).
6.3.3 It is now settled position of law that no disallowance u/s 14A is to be made if no exempt income is earned during the year. However, in the case of the appellant the appellant has earned share of profit of LLP and it has been claimed as exempt. Therefore, disallowance u/s 14A is warranted in the case of the appellant.
Further, it is also a settled legal position that the investments which have not yielded exempt income should not be considered for making disallowance u/s. 14A of the Act. In this case, no dividend income has been earned from invest made in private companies. Therefore, investment made by the appellant in private companies is to be excluded while computing disallowance u/s 14A of the Act.
As far as disallowance u/s 14A in respect of share of profit in LLP is concerned, Chennai Tribunal in the case of Spincotech Private Limited (ITANo.470/Chny/2018) has held that while computing value of investment, the initial investment should be considered. For ready reference the relevant paras of the decision of ITAT, Chennai are reproduced as under.
"... 8. As regards disallowance of expenditure @ 0.5% average value of investment under 3rd limb of Rule 8D(2)(iii), we find that the assessee has made an argument in light of investments in the partnership firm in the year 2008 and further stated that initial investment at 1.50 crores only to be taken for computing average value of investments. Similarly as regards investments in mutual funds, it was the contention of the assessee that when gain from transfer of mutual fund is taxable under the head capital gains even though dividend is exempt from tax, those investments should be excluded from the purview of average value of investments. We find that the Assessing Officer has taken value of investments in partnership firm as on 31.03.2012 on the basis of amount disclosed in the financial statements, whereas the assesseeclaimed that original investment was at 1.5 crores only and remaining balance was out of accrued profit of the firm which needs to be excluded while computing average value of investments. This aspect needs verification from the Assessing Officer because the facts are not clear as the Assessing Officer stated that investments in partnership firm is at 7.35 crores, whereas the assessee claimed investment in partnership firm is 1.5 crores. Similarly, as regards investments in mutual funds, the assessee claims that investment in mutual funds which suffers capital gain tax needs to be taken out of average value of investments. We have given our thoughtful consideration to arguments of the assessee in light of provisions of section 14A of the Act, and we are of the considered view that what is to be considered in exempt income in form of dividend received by an assessee, but not capital gain derived on transfer of such investments to decide applicability of disallowances of expenditure. If dividend from mutual fund is exempt from tax, then certainly expenditure relatable to such exempt income needs to be disallowed. In this case, there is no clarity whether any exempt income is received from such investments from mutual funds. Further, receipt of exempt income is a precondition for including investments in average value of investments, because investments which do not generate exempt income for the year cannot be included in average value of investments. In this case, the fact with regard to nature of investments and whether any exempt income was earned from investment is not clear from the orders of the lower authorities. Therefore, to ascertain correct facts with regard to nature of investments, the issue needs to be go back to the file of the Assessing Officer. Therefore, we remit issue relatable to computation of disallowances under 3rd limb of Rule 8D regarding 0.5% of average value of investments to the file of the Assessing Officer to reconsider the issue. The Assessing Officer, is therefore, directed to consider the investments made in partnership firm as well as mutual funds while computing average value of investments in accordance with law..."
The AO is directed not to consider investment made in private companies for working of disallowance u/s 14A of the Act. The AO is also directed to consider only initial investment made by the appellant in LLP to work out disallowance under rule 8D(iii) r.w.s. 14A of the Act.
6.3.4 In the case of the appellant, the disallowance u/s. 14A has been restricted with respect to the initial investment made in LLP, therefore, other legal grounds raised by the appellant do not require further adjudication
Accordingly, Ground No. 3 of the appeal is Partly Allowed.
After considering the order passed by the Ld. CIT(A), we find that the Ld. CIT(A) rightly directed the AO not to consider the investments made in private companies for the purpose of computing disallowance under Section 14A of the Act, with a further direction to consider only the initial investment made by the assessee in the LLP for working out the disallowance under Rule 8D(2)(iii) read with Section 14A of the Act.
No new facts, circumstances, or documentary evidence have been brought on record by the assessee to controvert or rebut the findings recorded by the Ld. CIT(A). Accordingly, we find no reason to interfere with or deviate from the findings of the Ld. CIT(A). Consequently, the ground raised by the assessee is dismissed, and the order of the Ld. CIT(A) is upheld.
Ground No. 5 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the action of the AO in computing the net gain of Rs. 17,30,04,730/- arising from the sale of shares of the subsidiary company under the head 'Capital Gains' instead of 'Profits and Gains of Business or Profession'.
We have heard the Ld. DR and perused the material available on record. The Ld. CIT(A) has dealt with this issue in detail in his order, and the operative findings are contained in paragraphs 7 to 7.3.4 and the same is reproduced herein below:
Ground no.4 is regarding treating profit from sale of shares as income from capital gain instead of business income.
7.1 During the assessment proceedings, the AO observed that the gain of Rs.21,32,20,000/-from sale of share of group company was shown as income from business and profession. The AO noted that in A.Y.2018-19, the assessee had shown gain from sale of share of group company as capital gain. Therefore, the AO issued a show cause notice on 02.05.2022 as to why the profit from sale of share of group company should not be taxed as capital gain instead of business income. In response to that the assessee submitted a reply letter dated 18.05.2022. The assessee submitted that the shares of Morgan Habitat Pvt. Ltd. worth Rs.20,00,00,000/- was sold during the year for consideration of Rs.41,32,20,000/- and thus, it resulted to gain of Rs.21,32,20,000/-. The gain from sale of shares was offered for taxation as business income. The assessee submitted that if the capital gain would had been offered on such transaction after index cost of acquisition the capital gain would had been Rs. 18,88,96,318/-. Thus, by showing the business income from sale of share of group company, there was no loss to revenue. The AO noted that the assessee was not in the business of trading in share, therefore, the gain was not business income but it was a capital gain.
7.2 During the appellate proceedings, the appellant submitted a written submission which is reproduced as under:
4.6 The Appellant respectfully submits that the Learned Assessing Officer (Ld. AO) has considered the facts of the case and the relevant provisions of law while examining the matter. It is further submitted that the Appellant has duly declared income amounting to Rs. 21,32,20,000/- under the head "Income from Business & Profession" and paid taxes at the applicable higher slab rate as prescribed under the Income Tax Act, 1961.
4.7 It is essential to highlight that even if the aforementioned income were to be classified under the head "Capital Gains," the taxable amount would be 18,88,96,318/-, which is significantly lower. Despite this, the Appellant has already discharged their tax liability under the head "Income from Business & Profession" at a higher rate. The computation of income and the corresponding disclosures in the Income Tax Return (ITR) Form unequivocally demonstrate that there is no loss to the revenue, irrespective of whether the income is classified under the head "Business & Profession" or "Capital Gains."
4.8 In light of the above, it is humbly prayed that Your Honour tactfully consider the income under the head "Income from Business & Profession" and accept the Appellant's submission accordingly. The Appellant also requests that no adverse view be taken in this matter, as the revenue's interest remains fully protected.
4.9 WITHOUT PREJUDICE the Appellant respectfully submits that, in the event Your Honour is not inclined to consider the primary submission and intends to classify the gain on the sale of investments under the head "Income from Capital Gains" instead of "Income from Business & Profession," the Appellant seeks Your Honour's kind indulgence to allow the carry-forward of business losses to subsequent years, as permitted under the provisions of the Income Tax Act, 1961.
4.10 It is submitted that the classification of the income head should not prejudice the Appellant's right to carry forward the unabsorbed business losses. The Appellant further emphasizes that such an adjustment is in consonance with the principles of equity and fairness, as the carry-forward of business losses is a legitimate right enshrined under the law and should not be denied merely due to the reclassification of income heads.
4.11 The Appellant also wishes to bring to Your Honour's attention that the intention behind the declaration of income and filing of returns was to ensure transparency, full disclosure, and adherence to the statutory provisions. There was no intention to evade taxes or suppress income, and the Appellant has duly complied with all procedural requirements.
4.12 In light of the above, the Appellant respectfully prays that Your Honour, while reclassifying the income under "Income from Capital Gains," be pleased to allow the carry-forward of the unabsorbed business losses to subsequent years, ensuring that the Appellant's rights under the law are preserved. This will uphold the principles of natural justice and prevent undue hardship to the Appellant.
7.3 The facts recorded and the findings of the AO in the assessment order and the written submission filed by the appellant have been considered.
7.3.1 The facts of the case of the appellant are that during the year the appellant sold shares of Morgan Habitat Pvt. Ltd. for consideration of Rs.41,32,20,000/-. After adjusting the cost of acquisition of shares at Rs.20,00,00,000/-, the gain of Rs.21,32,20,000/- was offered by the appellant as business income for taxation. The AO relied upon the finding of the AO in A.Y.2018-19, in which the gain from sale of share of group company was offered by the appellant as capital gain. Further, the appellant was not into trading in the share. Therefore, the AO considered the gain as capita gain.
7.3.2 During the appellate proceedings, the appellant submitted that there was no loss to if business income is considered which is more than the capital gain. Without prejudice, the appellant also requested to allow set off brought forward capital loss and also to allow carry forward of business loss.
7.3.3 There is no change in the method of accounting adopted by the appellant in respect of accounting profit from sale of share of group companies/subsidiary companies as compared to A.Y.2018-19. In A.Y.2018-19, the appellant company offered the gain from sale of share of group company as capital gain. Therefore, for A.Y.2020-21, the gain from sale of share of group company is held as capital gain. The addition of Rs. 18,88,96,318/-made by the AO in respect of capital gain is upheld.
7.3.4 However, the AO is directed to allow set off brought forward capital loss, if any, against the capital gain, as per provisions of the IT Act. The AO is further directed to allow carry forward of business loss, if any, determined after giving effect to this appellate order, as per the provisions of the IT Act.
Accordingly, the ground no.4 of the appeal is Partly Allowed.
No new facts, circumstances, or documentary evidence have been brought on record by the assessee to controvert or rebut the findings recorded by the Ld. CIT(A). Accordingly, we find no reason to interfere with or deviate from the findings of the Ld. CIT(A). Consequently, the ground raised by the assessee is dismissed, and the order of the Ld. CIT(A) is upheld.
In view of our findings on Ground No. 5, Ground No. 6 is consequential in nature and, therefore, also stands dismissed.
Now we take up the appeal filed by the Revenue i.e. ITA No. 3870/Mum/2025 (AY: 2020-21)
Revenue has raised following grounds of appeal:
"Whether, on the facts and in the resanten of the case and in law, the Ld. CITIA) has erred in deleting the shallowenes/8.361) of the Act of Rs.59,37,01,395, without appreciating the funtetheforts were not used //for the purpose of business of the same and (b) was on the contrary invested in subsidiaries, in the form of share capital
"Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred elening the disallowanct/36(1) of the Act of Rs.59,37,01,395/- without appreciating the facts that the assessee had invested borrowed funds into its soster conceaubsidiary companies which were neither in the course of its business not for conomercial expediency and could not therefore be considered an incurred for the purpose of business as mandated under section 36(1)(iii)?"
iii. "Whether, on the fucts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the not to coneider westment made in private companies for working of divatosaics 144 of the Act bu holding that the disallowance u/s 144 connot exceed the eeenust maome by ignoring the CBDT Circular No. 5/2014 włach clarificatory in nature?
iv. "Whether, on the facts and in the camatances of the case and in law, the Ld. CIT(A) has erred in ignonng the coplanation to the section 14A introduced w.e.f. 01.04.2022 which clearly stores that the provisions of the section 14A shall apply and shall be deamed to have always applied in a case where the income, not forming part of the total income under this not, hits 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 of the totalq income.
Ground Nos. 1 and 2 raised by the Revenue are interconnected and interrelated and relates to challenging the order of the Ld. CIT(A) deleting the disallowance under Section 36(1)(iii) of the Act amounting to Rs. 59,37,01,395/-. Therefore, we have decided to adjudicate these grounds through the present consolidated order.
We have heard the Ld. DR and perused the material available on record. From the records, we notice that the Ld. CIT(A) has dealt with this issue in paras 5.3 to 5.3.4.1 and the same is reproduced herein below:
5.3 The facts recording and finding of the AO in the assessment order and submission made by the appellant has been considered.
5.3.1 The facts of the case of the appellant are that as on 31.03.2020 the long term borrowing stood to Rs.929.60 Crore and short term loans and advances given to subsidiary/group companies was Rs.212.49 Crore. During the year, interest of Rs. 10,19,19,961/- Croreaccrued on loans and advances given to subsidiary/group companies. During the year, interest expenses of Rs.96,52,98,567/- accrued, out of which the appellant claimed interest expenses of Rs. 11,71,53,717/- as expenditure in the financial statements and interest on ICD accrued amounting to Rs.84,81,44,850/- was not recognized in the financial statements. In the financial statements the auditor made a remark that the interest income of Rs. 10,19,19,961/- Crore for year ended 31.03.2020 on Inter Corporate Deposit was not recognized due to non-recoverability. Further, the Auditor remarked that the interest expenses of Rs.84.81 crore on Inter Corporate Deposits taken from group companies and subsidiaries was also not recognized. The considering the mercantile system of accounting generally followed by the appellant included the accrued interest income as income and also included accrued interest expenses as expenditure. The AO made addition in respect of accrued interest income. The AO also included accrued interest expenditure as expenses, however, disallowed the accrued interest being incurred for non-business purpose as borrowed funds were utilized for giving loan to group companies without no nexus between business and loan given. The AO disallowed interest of Rs.84,81,44,850/-u/s.36(1)(iii) of the Act. As the appellant had suo-moto disallowed u/s 40(a)(ia) interest of Rs.22,44,43,455/- (30% of interest expenses of Rs.84,81,44,850/-), the AO made net disallowance of Rs.59,37,01,395/-u/s.36(1)(iii) of the Act.
5.3.2 During the appellate proceedings, the appellant submitted that as per para- 5 explanation to AS-9 uncertainties regarding determination of amount or its associated cost may influence the timing of the revenue. Further, as par para 9 of AS-9revenue recognition may be appropriate when it is reasonably certain that ultimate collection will be made. The appellant submitted that as per RBI's moratorium scheme the borrower had requested waiver of interest to be paid by them. Therefore, there was uncertainty in recognition of interest income and it could not be taxed u/s 5 of the IT Act. To support the argument the appellant relied upon the decisions in the case of Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92 (Delhi). The appellant also submitted that as per Para no. 4 and 5 of the ICDS04, revenue should be recognized when there is certainty of its ultimate collection and the ability to assess the ultimate collection with reasonable certainty is lacking in such case revenue recognition in respect of such should be postponed to the extent of uncertainty involved. As decided decisions in the case of Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92 (Delhi), ICDS could not override the provisions of section 145 of the Act. The appellant further submitted that on real income and not hypothetical income should be taxed under the IT Act. To support the appellant relied upon the decision in the case of CIT v. Excel Industries Ltd. CIVIL APPEAL NO. 125 OF 2013, Commissioner of Income Tax v. Shoorji Vallabhdas and Co., [1962] 46 ITR 144 (SC). Godhra Electricity Co. Ltd. v. Commissioner of Income Tax, [1997]
225 ITR 746 (SC). Simoco Systems And Infrastructure Solutions Limited v. ITO Ward-2(1) 2025 (1) TMI 274-ITAT KOLKATA, Deputy Commissioner of Income- tax, Central Circle-1(4) vs. Safari Biotech (P.) Ltd. [2023] 156 taxmann.com 571 (Ahmedabad - ITAT), Director of Income-tax vs. Brahamputra Capital Financial Services Ltd. [2011] 12 taxmann.com 387 (Delhi), Pranav Vikas (India) Ltd. vs. Assistant Commissioner of Income-tax, Circle-14(1), New Delhi [2009] 116 ITD 141 (Delhi), H.M. Kashiparekh & co. ltd. v. CIT (1960) 39 ITR 706 and State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC).
5.3.3 During the year, interest of Rs. 1,27,19,315/- and Rs. 8,92,00,646/- accrued on loan and advances given to M/s Bliss Abode Pvt. Ltd. and M/s DoIT Creation (India) Pvt. Ltd. Thus, total interest of Rs. 10,19,19,961/- accrued to the appellant company. It is a fact that the appellant is a company and it is following mercantile system of accounting. It is also a fact that interest has accrued to the appellant company on loans and advances given by the appellant company. The interest accrued is an income as per the provisions of section 4 and 5 of the I.T.Act. Even though the appellant has stated that there were uncertainties in realization of interest, however, the appellant has not demonstrated as to how there were uncertainties in realization of interest. As the appellant has followed mercantile system of accounting and the interest on loan and advances accrued during the year, therefore, the interest income on loans and advances is required to be offered for taxation in the year of accrual. Accordingly, the addition of Rs. 10,19,19,961/-made by the AO in respect of interest accrued on loans and advances given by the appellant is upheld.
5.3.4 During the appellate proceedings, the appellant submitted that in respect of interest income and interest expenditure it followed cash system of accounting. The appellant submitted that hybrid system of accounting has been upheld in the case of Commissioner of Income-tax, W.B.-III, Calcutta v. United Bank of India: [2015] 54 taxmann.com 213 (Calcutta), Principal Commissioner of Income-tax v. Davangere Urban Co-operative Bank Ltd, [2018] 93 taxmann.com 221 (Karnataka), L.K.P. Merchant Financing Ltd. v. Deputy Commissioner of Income- tax, [2022] 140 taxmann.com 548 (Bombay), Principal Commissioner of Income- tax v. North Eastern Electric Power Corporation Ltd. [2024] 164 taxmann.com 307 (Meghalaya), Cyber Media (India) Ltd. v. Commissioner of Income-tax; [2011] 198 Taxman 185 (Delhi), Principal Commissioner of Income-tax v. South Canara District, Central Co-operative Bank Ltd.; [2022] 139 taxmann.com 303 (Karnataka) and Bajaj Finance Ltd. v. Principal Commissioner of Income-tax, [2023] 152 taxmann.com 216 (Pune - Trib.).
The appellant also submitted that in the computation of income, under the head 'Decrease in profit on ICDs' the income was offered for taxation after offsetting interest expenditure of Rs. 59,37,01,395/-. Therefroe, it would lead to double taxation.
The appellant submitted that loan given to subsidiary/group companies was not a sham transaction, but such loans were advanced for commercial expediency. In this regard the appellant has relied upon decision in the case of Principal Commissioner of Income-tax, Panaji vs. V.S. Dempo Holding (P.) Ltd. [2021] 130 taxmann.com 456 (Bombay).
The appellant submitted that the meaning of 'for the purpose of business' is the same for section 36(1)(iii) also. The decisions rendered by various courts in respect of the meaning 'for the purpose of business' u/s. 37 would also be applicable for section 36(1)(iii) of the Act. With regard to the meaning of for the purpose of business', the appellant has relied upon the decision in the case of CIT v. Malayalam Plantations Ltd [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning & Weaving Mills Ltd [1971] 82 ITR 166 (SC), S.A. Builders Ltd v. CIT (Appeals), Chandigarh [2007] 288 ITR 1 (SC), Dalmia Cement 254 ITR 377, Hero Cycles (P.) Ltd. in Civil Appeal No. 514 OF 2008 dated 05.11.2015 [2015] 63 taxmann.com 308, Principal Commissioner of Income-tax. vs. Essel Infra Projects Ltd [2024] 161 taxmann.com 214 (Bombay) [31-01-2024], ACIT v. Rideema Toll (P.) Ltd 137 taxmann.com 252. Commissioner of Income-tax, Bangalore vs. Himatsingka Seide Ltd. [2016] 69 taxmann.com 259 (Karnataka)/[2016] 240 Taxman 753 (Karnataka), Rupee Finance & Management Pvt.Ltd v. DCIT reported in (2017) 57 ITR (Trib) 205 (Mum.), Commissioner of Income Tax vs Reliance Communications Infrastructure Limited, High Court of Gujarat in case of B. Nanji & Co. vs DCITandPCIT vs Gaursons Realty (P.) Limited [2020] 120 taxmann.com 259.
The appellant also submitted that the investment into subsidiary companies was for the strategic purposeand, therefore, it was for business purpose. For this, the appellant relied upon the decision in the case of DCIT v. Indian Hotels Co. Ltd [2005] 92 ITD 97 (MUM.)(TM).
The appellant also submitted that the loan advanced to subsidiaries was out of commercial expediency, therefore, the interest paid is allowable u/s.36(1)(ii) of the Act. For this, the appellant relied upon the decision in the case of Vaman Prestressing Co. (P.) Ltd. vs. Additional Commissioner of Income-tax [2023] 154 taxmann.com 325 (Bombay) (15-09- 2023] and Principal Commissioner of Income Tax-9 vs. E City Investments And Holdings Company (P.) Ltd. [2020] 117 taxmann.com 124 (SC)[27-01-2020].
5.3.4.1 As far as recognition of expenditure in respect of interest accrued is concerned, the appellant is following mercantile system of accounting, therefore, the AO has rightly considered the interest expenditure as expenditure incurred during the year. The AO has disallowed the interest expenditure u/s 36(1)(iii) being incurred for non-business purpose.
The fact remains that as per Memorandum of Association of the appellant company, the appellant company was engaged in the business of purchase and acquisition of land, house and other immovable properties. The other object incidental or ancillary to attain the main object was investment in shares, debentures etc. The AO has disallowed interest paid on loan u/s.36(1)(iii) of the Act on the ground that the appellant company invested borrowed funds in the subsidiary/group companies which was not the business of the appellant company.
It is a fact that during the year appellant also advanced loans of Rs. subsidiary/group company. Regarding advance given to the subsidiary/group companies, the appellant has submitted that the same was made out of commercial expediency. The AO has not doubted the commercial expediency of loan advanced or Inter-corporate deposits with the subsidiary companies. The only objection of the AO is that the investment/loan given to subsidiary companies was not for business purpose.
It is a settled principle of law if the loan is advanced for commercial expediency, no disallowance u/s.36(1)(iii) of the Act could be made. In this regard, the appellant has relied upon the decision in the case of Vaman Prestressing Co. (P.) Ltd. vs. Additional Commissioner of Income-tax [2023] 154 taxmann.com 325 (Bombay) (15-09-2023] and Principal Commissioner of Income Tax-9 vs. E City Investments And Holdings Company (P.) Ltd. [2020] 117 taxmann.com 124 (SC) [27-01-2020]. Thus, respectfully following the decisions referred above, the appellant is allowed the claim of interest expenditure u/s.36(1)(iii) of the Act. Thus, the disallowance of Rs. 59,37,01,395/-u/s.36(1)(iii) is deleted.
After considering the order passed by the Ld. CIT(A), we find that the Ld. CIT(A) deleted the disallowance under Section 36(1)(iii) of the Act without appreciating the fact that such loans were not used for the purpose of the business of the assessee and were, on the contrary, invested in subsidiaries in the form of share capital.
Apart from this, the Ld. CIT(A) has not considered the fact that the assessee had invested borrowed funds in its sister concerns/subsidiary companies, which was neither in the course of its business nor for commercial expediency and, therefore, could not be considered as expenditure incurred for the purpose of business as mandated under Section 36(1)(iii) of the Act.
In this regard, the facts have not been verified by the Ld. CIT(A); therefore, these grounds require specific adjudication.
Accordingly, the Bench is of the view that the matter should be restored to the file of the Ld. CIT(A) with a direction to pass a fresh order after conducting a de novo adjudication and considering the two reasons mentioned above after proper appreciation and verification of the relevant facts. 39
24. Ground Nos. 3 and 4 are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) in respect of the disallowance made by the AO under Section 14A of the Act. In this regard, we have already upheld the findings of the Ld. CIT(A) while adjudicating the grounds raised by the assessee. Accordingly, these grounds raised by the Revenue stand rejected.
In the result, the appeal filed by the assessee stands dismissed, whereas the appeal filed by the Revenue stands partly allowed.
Order pronounced in the open court on 19.06.2026.
Sd/- Sd/-
BIJAYANANDA PRUSETH SANDEEP GOSAIN ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 19.06.2026 Copy to: RAB ENTERPRISES (INDIA) PRIVATE LIMITED, 307 & 308, 3 RD FLOOR, MIDAS 1 SAHAR PLAZA, ANDHERI KURLA ROAD, ANDHERI EAST., MUMBAI-400059, MAHARASHTRA THE DY CIT CC-6(4), 453, 4 TH FLOOR, KAUTILYA BHAVAN, C- 2 41 TO C-43, G BLOCK, BANDRA KURLA COMPLEX, BANDRA EAST., MUMBAI-400051, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE
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