KIBTZER PROPERTY VENTURES LIMITED,MUMBAI vs. MUM-C-1, RANGE-411, DEPUTY COMMISSIONER OF INCOME-TAX, MUMBAI

The brief facts of the case are that the assessee is a public limited company incorporated under provision of Companies Act, 1956. During the impugned assessment year, the assessee earned income from operations, interest income and dividend income from investment in mutual fund. The assessee filed the return by declaring total income Rs. 9,99,86,400/-. The assessee's case was selected under scrutiny and the assessment was completed u/s 143(3) of the Act on dated 30.06.2017. However, the assessee's case was reopened by issuing notice u/s 148 of the Act. During the reassessment proceedings, the Ld. AO disallowed amount to Rs. 5,81,250/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962 [in short, ‘Rules’] which is challenged before us. The Ld. AO determined the taxable income of the assessee amount to Rs.10,05,67,650/-. The Ld. AO had added back amount to Rs. 5,81,250/- u/s 14A of the Act in respect to the assessee's suo moto disallowance u/s 14A amount to Rs. 4,945/-. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) rejected the appeal of the assessee. Being aggrieved, the assessee filed an appeal before us.

The Ld. AR argued and filed a paper book comprising pages 1 to 371, which has been placed on record. The Ld. AR contended that the assessee, during the filing of the return had suo moto disallowed u/s 14A amount to Rs. 4,945/-. The assessee earned the dividend income from the mutual fund. The details of income earned by the assessee are as follows:

The Ld. AR contended that, for the purpose of disallowance under section 14A of the Act, the assessee had considered only those investments from which exempt income was actually earned. Accordingly, the following are the investments from which the assessee had earned dividend income during the relevant assessment year: Sl. No. Particulars Amount 1. Opening balance as on 01.04.2014 9,09,870/- 2. Closing balance as on 31.03.2015 10,67,997/- 9,88,934/- Average value of investment

The Ld. AR further contended that, while computing the disallowance under section 14A of the Act, the Ld. AO had considered the entire value of investments, including both the investments which had yielded exempt income and those which had not yielded any exempt income during the relevant assessment year. The Ld. AR submitted that the non-yielding investments could not be included in the value of investments for the purpose of computing the disallowance under section 14A of the Act. In support of this contention, the Ld. AR respectfully relied upon the decision of the Hon'ble Bombay High Court in the case of PCIT-7 v. Morgan Stanley India Securities Pvt. Ltd., Income Tax Appeal No.1701 of 2017, order dated 21.01.2020. The relevant portion of the said decision is reproduced as under:

The Ld. AR further argued that the assessee had considered only those investments for computing average value of investment which yielded exempt income during year. The identical view is taken by the Hon’ble Special Bench of ITAT-Delhi and he respectfully relied on the order of Hon'ble Special Bench ITAT, Delhi in case of ACIT vs Vireet Investment Private Limited, reported in (2017) 82 taxmann.com 415 (Delhi Trib.) (SB). The relevant paragraphs are reproduced as below: “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.”

The Ld. DR argued and stands in favor of the orders of revenue authorities. The Ld. DR invited our attention in observations of Ld. AO in impugned assessment order. The relevant paragraph of the impugned assessment order is reproduced as below: “The assessee has made investment in equity shares and mutual funds of Rs.9,09,870/- as on 31.03.2014 and Rs. 23,35,67,997/- (including investment in equity shares of Magnum Foundations Private Limited) as on 31.03.2015 respectively. However, while calculating the disallowances u/s 14A, assessee has not taken into account the investment of Rs. 23,25,00,000/- made in equity of M/s Magnum Foundation Pvt. Ltd., an associate of the assessee. Hence in pursuance of the Hon'ble CBDT's circular 5/2014 dated 11.02.2014, average value of investment works out to Rs. 11,72,38,934/-instead of Rs. 9,88,934/- (excluding the investment made in equity of M/s Magnum Foundation Pvt. Ltd) as worked out by the assessee. Thus, the disallowance @ 0.5% on the average value of investment of Rs. 11,72,38,934/- works out to Rs. of Rs. 5,86,195/-. In view of this, the difference between the disallowance as worked out above & that as disclosed by the assessee amounting to Rs.5,81,250/- (Rs.5,86,195/- minus Rs. 4,945/-) is added back to the total income of assessee.”

We have heard the rival submissions and perused the material available on record. The limited controversy before us is with regard to the computation of disallowance under section 14A of the Act read with Rule 8D(2)(iii) of the Rules. The assessee had earned dividend income of Rs.43,07,135/- during the relevant assessment year and had suo motu made a disallowance of Rs.4,945/- under section 14A by considering the average value of those investments which had actually yielded exempt income during the year. The average value of such investments was computed at Rs.9,88,934/-.

The Ld. AO, however, included the investment of Rs.23,25,00,000/- made in the equity shares of M/s Magnum Foundation Pvt. Ltd., which had not yielded any exempt income during the relevant assessment year. On such basis, the Ld. AO determined the average value of investments at Rs.11,72,38,934/- and computed the disallowance at Rs.5,86,195/-, resulting in an additional disallowance of Rs.5,81,250/- after reducing the assessee's suo motu disallowance of Rs.4,945/-. We find that the issue is squarely covered by the decision of the Special Bench of the Tribunal in Vireet Investment Pvt. Ltd., (supra). The Special Bench, in para 11.16, held that, for computing the average value of investments under Rule 8D(2)(iii), only those investments which yielded exempt income during the relevant year are to be taken into consideration. The said proposition has also been specifically reproduced in the present record. The reported text of the Special Bench decision confirms the same proposition. In the present case, the assessee has computed the disallowance by restricting the average value of investments to those investments which actually yielded exempt income during the relevant assessment year. The computation made by the Ld. AO, on the other hand, includes the investment which did not yield any exempt income during the year. Such inclusion is contrary to the ratio laid down by the Hon’ble Special Bench in Vireet Investment Pvt. Ltd. (supra). We, therefore, find no justification for sustaining the additional disallowance of Rs.5,81,250/- made by the Ld. AO under section 14A read with Rule 8D(2)(iii) of the Rules. Accordingly, the said addition is deleted and the suo motu disallowance of Rs.4,945/- made by the assessee is sustained.

In the result, the appeal of the assessee bearing ITA No. 6466/Mum/2026 is allowed. Order pronounced in the open court on 05th day of October 2026.