GUJARAT INDUSTRIAL INVESTMENT CORPORATION LIMITED,GANDHINAGAR vs. DCIT, GANDHINAGAR CIRCLE, GANDHINAGAR, GANDHINAGAR

The assessee has raised the following Grounds of Appeal: “Being aggrieved by the order dated 17-01-24 (downloaded on 28-10-24) passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the learned CIT(A)) the appellant has preferred this appeal under the provisions of Section 253 of the Income Tax Act or Rules made there under. The grounds stated hereinafter are independent of one another. Item No. I: Disallowance of expenses u/s. 14A r.w.r. 8D of the Act of Rs. 10,71,620/- (Disallowance as per Assessment Order Rs. 28,47,180/- Less: already disallowed in the return Rs. 17,75,560/-) while calculating income under Normal Provisions of the Act. 1.1 The learned CIT(A) has grossly erred in confirming the disallowance of expenses U/s. 14A r.w.r. 8D of the Act of Rs. 10,71,620/- (Disallowance as per Assessment Order Rs. 28,47,180/- Less: already disallowed in the return Rs. 17,75,560/-) while calculating income under Normal Provisions of the Act 1.2 The learned CIT(A) has failed to consider that the appellant has already disallowed Rs. 17,75,560/- u/s. 14A of the Act while filing the return. 1.3 The learned CIT(A) has failed to appreciate that the appellant has made all the investment in the earlier years and out of surplus funds of the company. Further, the appellant has not made any new investments during the year on which exempt income is received. 1.4 The learned CIT(A) has grossly erred in not considering that no specific or administrative expenditure is incurred for earning such dividend income i.e. tax free income by the appellant. However, considering the possibility of indirect administrative expenses, the appellant company has itself proportionately disallowed Rs. 17,75,560/- being allocated employee cost & administrative / establishment cost based on "principle of apportionment of expenses" in view of decision of Maxopp Investment Ltd. V. CIT (SC) (2018) 1.5 The learned CIT(A) has failed to appreciate that for F.Y. 2006-07 (A.Y. 2007- 08) to F.Y. 2009- 10 (A.Y. 2010-11), Hon'ble ITAT vide order dated 18-09-18, has restricted the disallowance u/s.14A of the Act to 1% of total exempt income. Thus, during the consideration, the appellant company has suo-moto disallowed Rs. 17,75,560/- u/s. 14A of the Act which is much more than 1% of total exempt income i.e. Rs. 3.63 lakhs (being 1% of Rs. 3.63 Crore). 1.6 The learned CIT(A) has further failed to appreciate that for A.Y. 2011-12, Hon'ble ITAT has decided the issue of disallowance u/s. 14A in favour of appellant company. 1.7 The appellant humbly prays to your honour that the impugned Disallowance U/s. 14A r.w.r. 8 of the Act of Rs. 10,71,620/- (Disallowance as per Assessment Order Rs. 28,47,180/- Less: already disallowed in the return Rs. 17,75,560/-) while calculating income under Normal Provisions of the Act may kindly be deleted.

On appeal, the CIT(A) held as under: “7.4.1. First of all, it needs to be mentioned that the A.O. has computed disallowance u/s. 14A of the I. T. Act as per rule 8D(2) (iii) of I. T. Rules which has been worked out to Rs.28,47,180/- being 0.5% of average value of investment of Rs.56,94,36,000/- on which tax free income is received/receivable by the appellant. Thus no disallowance on account of amount of expenditure by way of interest debited to the profit and loss account has been made by the A.O. u/s. 14A r.w. rule 8D(2) (ii) of I. T. Rules. It is further noted that the suo-moto disallowance of Rs. 17,75,560/- computed by the appellant u/s. 14A of the I. T. Act is without any basis or authentic documentary evidences and is purely on ad-hoc basis. In view of provision u/s. 14A of the I. T. Act applicable to the current A.Y. disallowance u/s. 14A of the I.T. Act has to be computed in accordance with rule 8D(2) of I.T. Rules. 7.4.2. Further the appellant relied upon the decision of Hon'ble ITAT in its own case in Α.Υ. 2007-08 to 2010-11 wherein the Hon'ble Tribunal restricted the disallowance of administrative expense to 1% of exempt income. I have carefully gone through the said order of Hon'ble Tribunal and found that the facts in that A.Y. is different from the instant A.Y. in as much as in the A.Y. 2007-08, in the assessment order the A.O. invoked provision u/s. 14A of the I.T. Act and computed disallowance as per rule 8D(2) (ii) of I.T. 4 Rules being part disallowance of interest expenditure of Rs.6,25,83,251/- and as per rule 8D(2)(iii) of I.T. Rules of Rs.84,81,427/- being 0.5% of average investment on which exempt income is received/receivable by the appellant. In appeal the Ld. CIT(Appeal) deleted disallowance made as per rule 8D(2)(ii) and partly confirmed disallowance made under rule 8D(2) (iii) of I.T. Rules to the extent of Rs.25,00,000/-. On further appeal Hon'ble Tribunal held that provision of rule 8D(2) is not applicable to A.Y. 2007-08 and held that 1% of the exempt income received by the appellant is a fair and reasonable disallowance. As against this for the current A.Y. provision of rule 8D(2) is clearly applicable as also the A.O. was not satisfied with the correctness of appellant's claim of expenditure of Rs. 17,75,560/-. Therefore provision u/s. 14A of the I.T. Act is applicable to the current A.Y. and hence disallowance u/s. 14A of the I.T. Act has to be computed in accordance with rule 8D(2) of I.T. Rules 7.4.3.In view of the above facts of the case and in law, I concur with the view of the A.O. given in the assessment order and hence upheld the addition of Rs. 10,71,620/- being the difference in disallowance u/s. 14A computed as per rule 8D(2)(iii) of I.T. Rules and suo moto disallowance computed by the appellant. This ground of appeal raised by the appellant is thus dismissed.”

We have heard Shri S.N. Soparkar, Sr. Advocate and Shri Amit Pratap Singh, Sr. DR, and examined the orders and documents filed before us. Before coming back to the facts and the orders of the authorities below, it is pertinent to examine the provisions of section 14A(1) and (2) of the Act which are reproduced below: “Expenditure incurred in relation to income not includible in total income. 14A. (1) Notwithstanding anything to the contrary contained in this Act, 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.

In order to seek clarification of the fate of similar claims, if any, in the preceding and succeeding years the case was fixed again on 21-10-2026. Ms. Ukti Shah, Ld. A.R. appeared and submitted copies of orders for Asst. Year 2016-17 and 2018-19. In Asst. Year 2016-17, the assessee’s returned income was accepted in the original assessment u/s 143(3). Subsequently, this order was revised by the PCIT u/s 263. Pursuant to the direction of the PCIT, the A.O. had called for details regarding disallowance made by the assessee u/s 14A read with Rule 8D. After examining the details submitted by the assessee, the A.O. accepted the income as offered in the return. This fact is also affirmed by the email sent by the Jurisdictional Assessing Officer and submitted by the Ld. Sr. D.R. 7. For Asst. Year 2018-19 also an order u/s 263 was passed which was set aside by the ITAT vide order dated 24-07-2025 in ITA No. 942/Ahd/2024. In the meantime, the A.O. had passed the assessment order pursuant to directions in the order u/s 263 and made an addition to the book profit u/s 115JB of a sum of Rs.31,30,987/- disallowed u/s 14A. This addition was deleted in appeal by the CIT(A) and Revenue’s appeal against that order is pending.

It is now settled that section 14A seeks to disallow the ‘expenditure incurred’ in relation to an exempt income. Once it is ascertained that an assessee has incurred expenses in relation to an exempt income, then, if the A.O. is not satisfied with the quantification of such expenditure having regard to the accounts of the assessee, then the disallowable expenditure would be computed in accordance with the prescribed method, i.e., Rule 6 8D. In the present case, the assessee has determined the sum disallowable u/s 14A at Rs.17,75,560/-. The assessee stated that this was determined having regard to the time devoted by employees, stationary expenses, communications expenses and other overheads relating to managing the portfolio. The assessee also claims that it had not made any additional investment in securities earning exempt income in the relevant previous year. This is clearly borne out of the financial statements filed in the paper book.

The A.O., we note, has not alleged anywhere that he was not satisfied with the correctness of the sum of Rs.17,75,560/- determined by the assessee as the expenditure relatable to earning the exempt income. The A.O. has also steered clear of apportioning interest expenditure as the assessee has not made any additional acquisition in the year under appeal. The CIT(A) has merely stated that the suo-moto disallowance of Rs.17,75,560/- computed by the assessee u/s 14A of the Act was without any basis or authentic documentary evidence and was purely on ad-hoc basis. Even the CIT(A) has not given a finding that the amount offered for disallowance by the assessee was not correct.

In the absence of any finding by the A.O. to the effect that the expenditure as apportioned and offered for disallowance by the assessee was incorrect, we are of the view that there was no trigger to resort to Rule 8D of the Income-tax Rules, 1962. In view of the fact, that the assessee had not made any additional purchase of the relevant securities in the year under appeal and that the interest expenditure is not even alleged to relate to 7 earning the exempt income, the amount of Rs.17,75,560/- computed by the assessee as the administrative expenses attributable to managing the portfolio appears to be fair and adequate. There was no occasion to invoke Rule 8D in these circumstances. The addition of Rs.10,71,620/- on this account to the normal income of the assessee is deleted.

Assessee’s ground of appeal nos. 1.1 to 1.7 are allowed

Item No. 2: The next issue pertains to the same additional disallowance of Rs.10,71,620/- in the income computed u/s 115JB of the Act.

In the course of hearing before us, Shri S.N. Soparkar stated that this issue is now squarely covered by decisions of the Hon’ble Gujarat High Court and cited the following decisions: (i) Pr.CIT vs. Gujarat Urja Vikas Nigam Ltd.: R/Tax Appeal No. 35 of 2025 (ii) Pr.CIT vs. Adani Agro Pvt. Ltd.: R/Tax Appeal No. 70 of 2020 13.1. The Hon’ble High Court, after considering the issue at depth, held that the expenditure estimated under Rule 8D would not be added back to the book profits under clause (f) of Explanation to section 115JB. Respectfully following the decisions of the Jurisdictional High Court, we hold that the action of the lower authorities, of adding Rs.10,71,620/- (in addition to the Rs.17,75,560/- added suo-moto by the assessee) to the book profits u/s 115JB was erroneous in law and should be deleted on that ground.

Besides, we have also recorded a finding in this case that there was no occasion to invoke Rule 8D in this case. Therefore, the question of adding this incremental amount of Rs.10,71,620/- does not arise at all. This addition is deleted.

The assessee’s ground of appeal nos. 2.1 to 2.6 are allowed.

In the result, the appeal of the assessee is allowed. This Order is pronounced on 27 /10/2026