IL&FS SECURITIES SERVICES LIMITED,MUMBAI vs. NATIONAL FACELESS APPEAL CENTER MUMBAI & JURISDICTIONAL ASSESSING OFFICER, CIRCLE 4(1)(1) MUMBAI, MUMBAI

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ITA 2252/MUM/2026Status: DisposedITAT Mumbai23 September 2026AY 2017-187 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the issue regarding the computation of disallowance under Section 14A read with Rule 8D stands covered by the decision of the Hon'ble Special Bench of the Tribunal in ACIT v. Vireet Investment Private Limited [2017] 82 taxmann.com 415 (Delhi-Trib.) (SB). Following the ratio laid down in that decision, the Tribunal ruled that for the purpose of computing the disallowance under Section 14A read with Rule 8D, only such investments which have actually yielded exempt income during the relevant previous year are to be considered. The Tribunal found that the CIT(A)'s opinion that disallowance should be computed with reference to all investments capable of yielding exempt income, irrespective of whether such income has actually accrued, arisen, or been received during the relevant previous year, was contrary to the Special Bench decision. Accordingly, the impugned order of the CIT(A) was set aside to this extent, and the Assessing Officer was directed to recompute the disallowance under Section 14A read with Rule 8D in accordance with the principles laid down by the Hon'ble Special Bench in Vireet Investment (supra) and grant consequential relief to the assessee. The issue of Section 69C disallowance was not decided as it was set aside by the CIT(A) for fresh adjudication.

What were the facts?

The assessee, IL&FS Securities Services Limited, filed its return for Assessment Year 2017-18 on November 30, 2017. The assessment was completed under Section 143(3) on December 23, 2019, by the Assistant Commissioner of Income Tax, Circle 4(1)(1), Mumbai (the AO). The AO made two disallowances: Rs. 42,14,470 under Section 14A and Rs. 32,37,49,445 under Section 69C. The assessee appealed to the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi (the CIT(A)). The CIT(A) confirmed the Section 14A disallowance and set aside the Section 69C disallowance for fresh adjudication. The assessee's present appeal to the ITAT challenges the CIT(A)'s order confirming the Section 14A disallowance.

What were the issues?

1. Whether the disallowance under Section 14A of the Income Tax Act, 1961 (the Act) should be restricted to investments that have actually yielded exempt income during the year, or all investments capable of yielding exempt income. Assessee's contention: The disallowance under Section 14A should be restricted to Rs. 20,50,000, computed only on investments that actually yielded exempt income during AY 2017-18. The assessee argued that the Explanation to Section 14A is prospective and applicable from AY 2023-24 onwards. The assessee sought additional relief of Rs. 23,69,470. Revenue's contention: The Revenue relied on the order of the learned CIT(A). The CIT(A) was of the opinion that disallowance must be computed with reference to all investments capable of yielding exempt income, irrespective of whether such income actually accrued or arisen during the relevant previous year. The CIT(A) also noted that the assessee suo moto disallowed Rs. 44,19,740 and sought to reduce it to Rs. 20,05,000, which was not acceptable. The CIT(A) directed to enhance the addition to Rs. 44,19,740.

Which sections of the Income-tax Act were involved?

Section 14A,Section 143(3),Section 142(1),Section 69C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH, MUMBAI

Before: SHRI NARENDER KUMAR CHOUDHRY, JM & SHRI ARUN KHODPIA, AM

For Appellant: Shri Ajay Soneji, Sr. DR
Pronounced: 23.09.2026

आयकर अपीलीय अिधकरण �ायपीठ मुंबईम�। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JM & SHRI ARUN KHODPIA, AM I.T.A. No. 2252/Mum/2026 (Assessment Year: 2017-18) IL&FS Securities Services National Faceless Appeal Center Limited Mumbai & Jurisdictional Assessing Officer, Circle 4(1)(1), Mumbai Vs. Room No.640, 6th Floor, Aaykar IL&FS House, Plot No.14, Raheja Vihar, Chandivali, Bhavan, Maharishi Karve Road, Andheri East, Mumbai-400072 Churchgate, Mumbai-400020 PAN: CJYPS4423G Assessee- अपीलाथ� / Appellant Revenue-��थ�/ Respondent :

: Ms. Hetal Vora Assessee by : Shri Ajay Soneji, Sr. DR Revenue by : 01.07.2026 Date of Hearing Date of Pronouncement : 23.09.2026 O R D E R Per Arun Khodpia, AM: This appeal is preferred by the assessee, directed against the order of the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 24.12.2025 for the Assessment Year (AY) 2017-18, arises from the assessment order under section 143(3)/144 of the Income Tax Act, 1961 [in short, “the Act”] dated 23.12.2019, passed by Assistant Commissioner of Income Tax Circle 4(1)(1), Mumbai [in short, “the Ld. AO”].

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited 2. The grounds of appeal raised by the assessee are as under: “1. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax ('Learned CIT(A)') erred by not restricting the disallowance u/s 14A of the Act to Rs. 20,50,000, computed on the investments which have actually yielded exempt income during the year under consideration as against the suo moto disallowance made in the tax return of Rs. 44,19,470. The Learned CIT(A) erred in rejecting the claim of the appellant on the basis of Explanation to section 14A without considering the fact that the said amendment is prospective in nature and shall take effect from 01 April 2022 1.e., AY 2023-24 onwards. The appellant prays before Your Honour that the disallowance u/s 14A be restricted to Rs. 20,50,000 and accordingly the Assessing Officer be directed to provide additional relief of Rs. 23,69,470.”

3.

The assessee is a company engaged in the business of providing various services relating to security service operations. The assessee company filed its return for assessment year 2017-18 on 30th November 2017, declaring taxable income of Rs. 73,76,60,600/-. The assessee was selected for scrutiny assessment. Accordingly notices under Section 143(2) and 142(1) were issued and the assessment was completed under Section 143(3) on 23/12/2019. Two disallowances were made by the AO, while completing the assessment: 1. Under Section 14A of the Act – Rs. 42,14,470/-

2.

under Section 69C of the Act – Rs. 32,37,49,445/-

4.

The aforesaid issues were carried before the learned CIT(A). The first appellate authority, had confirmed the disallowance under Section 14A, whereas the second disallowance under Section 69(1)(vii) was set aside by the AO for fresh adjudication.

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited 5. The assessee preferred the present appeal before us challenging the disallowance under Section 14A by the AO and affirmation of the same by the learned CIT(A).

6.

Regarding the issue of disallowance under Section 14A, the assessee has made a claim before the AO as well as the first appellate authority to restrict the disallowance to only those investments, which have actually yielded exempt income during the year and not all the investments capable of yielding exempt income. The CIT(A) was of the opinion that the disallowance has to be computed with reference to all investment capable of yielding exempt income, irrespective of whether such income has actually accrued, arisen, or been received during the relevant previous year. Ld. CIT(A), further observed that the assessee itself, suo moto, disallowed a sum of Rs. 44,19,740 and now wants to reduce it to Rs. 20,05,000/-, the same cannot be accepted as the working of disallowance by the assessee was in accordance with the mandate of law and therefore the AO has rightly made the addition. Further, Ld. CIT(A), then direct to enhance the addition to Rs.44,19,740 instead of Rs.42,14,470 while computing the book profit of the assessee.

7.

On the aforesaid aspect, we find that the issue stands considered in detail by the Hon’ble Special Bench of the Tribunal, Delhi, in ACIT v. Vireet Investment Private Limited [2017] 82 taxmann.com 415 (Delhi-Trib.) (SB). The Hon’ble Special Bench, while examining the computation of disallowance

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited under section 14A read with Rule 8D, specifically held that, for the purpose of computing the average value of investments under Rule 8D(2)(iii), only such investments as have yielded exempt income during the relevant previous year are to be taken into consideration. The relevant observations of the Hon’ble Special Bench are reproduced hereunder: “11.15 Under Article 227 of the Constitution of India, the courts function under the supervisory jurisdiction of Hon'ble High Court. The decisions rendered by Hon'ble High Court are binding on all subordinate courts working within its jurisdiction. In this regard we may refer to the following decisions: -

Yi) CIT' v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom.), wherein on the issue of "whose decision is binding on whom", the. Hon'ble Bombay Court considered in detail the hierarchy of the courts and has observed as under: "It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would conform to the law laid down by it. It is in that view of the matter that the Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 (at page 1905) declared: "We, therefore', hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it......" This position has been summed up by the Supreme Court in Mahadeolal Kanodia v. Administrator General of West Bengal AIR 1960 SC 936 (at page 941) as follows: "Judicial decorum no less than legal propriety forms the basis of judicial procedure. If one thing is more necessary in law than any other thing, it is the quality of certainty. That quality would totally disappear if judges of co-ordinate jurisdiction in a High Court start overruling one another's decisions. If one Division Bench of a High Court is unable to distinguish a previous decision of another Division Bench, and holding the view that the earlier decision is wrong, itself gives effect to that view, the result would be utter confusion. The position would be equally bad where a judge sitting singly in the High Court is of opinion that the previous decision of another single judge on a question of law is wrong and gives effect to that view instead of referring the matter to a larger Bench."

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited The above decision was followed by the Supreme Court in Baradakanta Mishra v. Bhimsen Dixit, AIR 1972 SC 2466, wherein the legal position was reiterated in the following words (at page 2469) : "It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working; otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer," (ii) CIT v. Svnil Kumar (1995) 212 ITR 238 (Raj.), it was observed as under: The point which has been raised could have been considered to be debatable because other High Cours have taken a different view. But since the view taken by this court is binding on the Tribunal and other authorities under the Act in this State, it could not be considered to be a debatable point in view of the decision of this court in the case of CIT v. M.L., Sanghi (1988) 170 ITR 670" (ii) Indian Tube Company Ltd. v CIT & others (1953) 203 ITR 54 (Col), it was observed as under: "In the impugned order, respondent No.1 has rejected the petitioner's contention by stating that, although the Calcutta Hi High Court had held that on assessee was entitled to interest on such refund calculated up to the date of the order passed consequent upon an appeal or revision of the original assessment, this view had not been accepted by the Bombay High Court, the Allahabad High Court and the Kerala High Court. Respondent No.1, accordingly, chose to accept the view of the Bombay, Allahabad and Kerala High Courts in preference to the view of the Calcutta High Court. In my view, the order of respondent No. 1 cannot be sustained on the simple ground that respondent No. 1 is an authority operating within the State of West Bengal and is bound b by the decisions of the High Court of this State (see CIT v. Indian Press Exchange Lad. [1989] 176 ITR 331 (Col); East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1993, paragraph 29). In that view of the matter, the impugned order must be set aside and the Commissioner is directed to consider the matter afresh in keeping with the decisions of this court after giving the petitioners an opportunity of being heard. At least 48 hours clear notice must be given to the petitioners. The Commissioner will communicate the final order to the petitioner within eight weeks from the date of hearing. (iv) CIT v. J.K. Jain [1998] 230 ITR 839 (P&H), observing as under: "We have carefully examined the records and have heard learned counsel representing the parties. We are in respectful agreement with the view expressed by the Allahabad High Court in Omega Sports and Radio Works' case (1982) 134 ITR 28, as also the 5

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited decision of this court in Mohan Lal Kansal's case [1978] 114 ITR 583. Following the decision in the two cases referred to above, we hold that it was not a case of divergence of opinion inasmuch as the opinion expressed by this court was binding upon the Tribunal. 11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We. accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. 11.17 As far as argument relating to meaning to be ascribed to the phrase 'shall not' used in Rule 8D(2)(iii) is concerned, the Revenue's contention is that it refers to those investments which did not yield any exempt income during the year but if income would have been yielded it would have remain exempt. There is no dispute that if an investment has yielded exempt income in a particular year then it will enter the computation of average value of investments for the purposes of Rule 8D(2)(iii). The assessee's contention that if there is no certainty that an income, which is exempt in current year, will continue to be so in future years and, therefore, that investment should also be excluded, is hypothetical and cannot be accepted. 11.18 In view of above discussion, the matter is restored back to the file of AO for recomputing the disallowance u/s 14A in terms of above observations. Thus, revenue's appeal is dismissed and assessee's cross-objection, on the issue in question, stand allowed for statistical purposes, in terms indicated above.”

8.

Ld. Counsel of assessee requested for relief based on afore said decision of special bench. On the other hand, Ld. Sr. DR vehemently relied on the order of ld. CIT(A).

9.

Upon due consideration of the rival submissions and careful perusal of the material available on record, we find that the issue raised by the assessee stands squarely covered by the decision of the Hon’ble Special Bench of the Tribunal in the case of ACIT v. Vireet Investment Pvt. Ltd. (supra). Following the ratio laid down therein, only those investments which have actually yielded exempt income during the relevant previous year are to be considered for the purpose of computing the disallowance under section 14A read with Rule 8D.

ITA No. 2252/Mum/2026 IL&FS Securities Services Limited 10. Accordingly, the impugned order is set aside to this extent and the Assessing Officer is directed to recompute the disallowance under section 14A read with Rule 8D in accordance with the principles laid down by the Hon’ble Special Bench in Vireet Investment (supra) and grant consequential relief to the assessee in accordance with law.

11.

Resultantly, the appeal of assessee is allowed, in above terms.

Order pronounced in the open court on 23-09-2026.

Sd/- Sd/- (NARENDER KUMAR CHOUDHRY) (ARUN KHODPIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated : 23-09-2026. Ankit K., Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT

BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai

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