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Facts
The assessee filed its return declaring a loss. The Assessing Officer (AO) made additions for transfer pricing adjustment, disallowance under Section 14A, and disallowance under Section 43B. The Commissioner of Income Tax (Appeals) (CIT(A)) partly allowed the assessee's appeal, prompting the Revenue to appeal to the ITAT regarding the deletion of the transfer pricing adjustment (Ground 1) and the disallowances under Section 14A (Grounds 2-5).
Held
For Ground 1 (Transfer Pricing adjustment), the assessee conceded the issue in favor of the Revenue, which was accordingly allowed without delving into its merits. For Grounds 2-5 (Section 14A disallowance), the ITAT upheld the CIT(A)'s decision, confirming that no disallowance under Section 14A can be made if no exempt income is earned, and that such disallowance cannot exceed the actual exempt income earned, even if the assessee had initially offered a higher suo motu disallowance.
Key Issues
Whether the CIT(A) erred in deleting the transfer pricing adjustment; and whether disallowance under Section 14A is applicable when no exempt income is earned, and if so, whether it can exceed the actual exempt income.
Sections Cited
143(3), 144C(3), 143(1), 143(2), 92CA(3), 14A, Rule 8D, 43B, 115JB(2)
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Income Tax Appellate Tribunal, MUMBAI BENCH ‘E’, MUMBAI
Before: SHRI AMIT SHUKLA, HON’BLE & SHRI ARUN KHODPIA, HON’BLE
O R D E R PER ARUN KHODPIA, AM:
The captioned appeal by the revenue, emerged out of the order of Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (In short “ld. CIT(A)/NFAC”), dated 15.04.2025 for the AY 2012-13, which in turn arises from the order u/s 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (In short “The Act”) dated 22.04.2016, passed by Joint Commissioner of Income Tax (OSD) – 6(3)(2), Mumbai (in short “Ld. AO”). The ground of appeal assailed by the revenue raising objections to the findings in the impugned order, read as under:
Grounds of appeal:
“1. On the facts and circumstances of the case and in law, the Ld, CIT(A) erred in deleting the transfer pricing adjustment in respect of outstanding receivable from Essar Africa Holding Ltd. (EAHL) without appreciating the facts that i) the adjustment is based on the term of agreement signed between EAHL and the assessee, (i) the charging of interest in next F.Y. does not absolve the assessee of mistake of not charging the interest in the F. Y. under consideration.
2. On the facts and in the circumstances of the case, the Ld CIT(A) erred in not disallowing u/s 14A of Rs. 105,05,09,930/ despite the fact that assessee itself has disallowed amount of Rs. 79,96,69,966/-u/s 14A of the Act in its return of income and AO has done further disallowance of Rs 25,08,39,964/- u/s 14A of the Act.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in restricting disallowance made under section 14A of the I.T. Act to the extent of tax exempt income earned during the year by overlooking the clarification of legislative intent provided by the CBDT vide Circular No. 5/2014 dated 11.02.2014 and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A of the Act."
4. On the facts and circumstances of the case, the Ld. CIT(A) erred in restricting the disallowance u/s 14A of the Income Tax Act r.w.r. 8D(2) (II, to the extent of exempt income received by the assessee during the year under consideration without appreciating the Circular No.5 of 2014 dated 11.02.2014 of CBDT and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A of the Income Tax Act, 1961." 5. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance made u/s. 14A of the Income Tax Act, 1961 to the book profit of the assessee without appreciating the provisions of clause (f) of explanation 1 to section 115JB(2) of the Income Tax Act, 1961 and the decision of the Hon'ble ITAT Mumbai 'F' Bench in the case of Deputy Commissioner of Income Tax, Central Circle-18 & 19, Mumbai vs. Viraj Profiles Ltd. in (Mum.) of 2013," The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal, if need be.”
The brief facts, emanating from records are that, during the year under consideration, the assessee was engaged in the business of operation of ships and other shipping related activities, has e-filed its return of income on 29.11.2012 declaring loss at (-) Rs.2,15,15,589/-.
Subsequently, the appellant revised its return of income on 31.03.2014 declaring same loss at (-) Rs.2,15,15,589/-. The said return was processed u/s. 143(1) of the Act. Subsequently, the case of the appellant was selected for scrutiny assessment and accordingly notice u/s. 143(2) of the Act was served to the appellant. A reference dated determination of Arm’s Length Price. Consequently, the TPO, JCIT (TP)
2(1), Mumbai vide order u/s.92CA(3) of the Act dated 29.01.2016 has made an adjustment of Rs.36,57,688/-. Thereafter, the A.O. passed the assessment order u/s. 143(3) r.w.s. 144C(3) of the Act on 22.04.2016 by determining the total income at Rs. 25,08,39,960/- after making disallowances/additions towards TP adjustment of Rs.36,57,688/-, disallowance u/s.14A read with Rule 8D of Rs. 18,72,11,265/-, disallowance of leave encashment and other provisions u/s.43B of Rs.30, 15, 165/-.
Aggrieved by the aforesaid order of the A.O. u/s 143(3) r.w.s.
144C(3) of the Act, the assessee preferred an appeal before the First Appellate Authority, wherein the appeal of assessee was partly allowed, however the department remain aggrieved on the issues for which relief was allowed to the assessee. Consequently, the present appeal if filed by the department for our consideration.
Ground No. 1: The transfer pricing adjustment
Apropos, Ground no. 1 of the appeal of revenue, Ld. AR of the assessee requested to concede as per instructions of assessee vide letter dated 12.08.2025, to decide the same in favour of revenue. The contents of the request are extracted as under:
“Kindly refer to the above matter fixed for hearing before Your Honours on 13.08.2025. In this regard, it is submitted that in the present appeal, the Essar Ports Limited Department has challenged, inter alia, the deletion of transfer pricing adjustment of Rs. 36,57,688/- being notional interest on outstanding receivable from Associated Enterprise. Since the present appeal involves transfer pricing issues, the appeal ought to have been fixed before the 'K' Bench of the Hon'ble Tribunal. Be that as it may, in the interest of an early disposal of the appeal and looking at the smallness of the amount involved in the transfer pricing issue, it is submitted that this ground is conceded before Your Honours and may kindly be decided in favour of the revenue. It may kindly be noted that this concession is made without prejudice to our remaining grounds, which we intend to maintain and pursue before Your Honours.”
Having given a thoughtful consideration to the aforesaid request of assessee conceding and seeking decision in favour of revenue, which was not objected by the revenue, consequently, Ground No 1 of the instant appeal, with no findings as to merits of the issue, have been allowed in favour of the revenue.
Ground No 2 to 5: Disallowance U/s 14A of the Act rwr 8D of the IT Rules:
On this issue Ld. AO observed that the balance sheet of the assessee shows an investment in equity shares of Rs. 3,65,942/- Lakhs. It is further noted by the Ld. AO that the assessee has not earned divided income during the year but the investment in shares shows that the said shares are capable of earning dividend, therefore, why the disallowance u/s 14A should not be computed as per rule 8D. The query has been responded by the assessee, but the response was not found satisfactory by the Ld AO, accordingly the disallowance u/s 14A for Rs. 1.05,05,09,930/- was worked out, its computation for Rs. 79,96,69,966/-, so the balance has been added to the taxable income of the assessee for Rs. 25,08,39,964/-.
Against aforesaid disallowance assessee preferred an appeal before the Ld. CIT(A), wherein assessee submitted that no disallowance u/s 14A id called for in the present case as there was no exempt income earned by the assessee during the year, which is a fact ostensible on records and acknowledged by the Ld. AO also.
Accordingly, had requested to vacate the disallowance made by the Ld. AO for Rs. 25.08 Crores, as well as sought additional claim of disallowance made by assessee itself. For additional claim other than by filling a revised return, before the appellate authorities it is submitted that the appellate authorities have jurisdiction to entertain a new claim, reliance was place on the decision of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (P) Ltd. (349 ITR 336). Before Ld. CIT(A), it is submitted by the assessee that similar issue in assessee’s own case was decided by the ITAT, Mumbai for AY 2010-11 and have directed to restrict the disallowance u/s 14A to the extent of exempt Income earned. Ld. CIT(A) had decided the issue in favour of the assessee with following observations:
6.2.2 Decision: I have considered the assessment order of the A.O and the submissions along with case laws made by the appellant. It is observed that the A. O in the assessment order passed u/s 143(3) r.w.s. 144C(3) of the Act dated 22.04.2016, had worked out the disallowance u/s.14A r.w.r 8D at Rs. 105,05,09,930/- However, the assessee itself has disallowed amount of Rs. 79,96,69,966/- u/s. 14A in its return of income, the A.O. has done further disallowance of Rs. 25,08,39,964/- u/s. 14A of the Act.
6.2.3 During the course of assessment proceedings, the Appellant stated that the assessee company has not received any exempt income during the year. It is submitted that in absence of any exempt income earned by the assessee, no disallowance can be made u/s 14A of the Act. In order to support the said contention, reliance is placed on the decision of the Hon'ble Bombay High Court in the case of PCIT v. Ballarpur Industries (ITA No. 51 of 2016) dated 13.10.2016.
6.2.4 Further, the Appellant mentioned that disallowance u/s. 14A of the Act has been restricted to the extent of dividend income earned during the financial year in appellant's own case for the A.Y.2010-11 in vide order dated 06.01.2020, the notings of the Hon'ble ITAT in this regard is reproduced hereunder: -
"8. We find that the assessee has assailed the disallowance made by the A. O under Sec. 14A on the ground that the same as per the mandate of law could not have exceeded the exempt income that was earned by the assessee during the year.
Accordingly, it was the claim of the Id. A.R that the disallowance under Sec. 14A was liable to be restricted to the extent of the exempt dividend income of Rs. 53.04.157/-earned by the assessee during the year under consideration. In the backdrop of the aforesaid facts, we find, that our indulgence has been sought by the assessee for adjudication of two issues viz. (1), that, as to whether the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt dividend income earned by the assessee during the year; and (ii) that, is it permissible for the assessee to seek restriction of the disallowance under Sec. 14A at an amount lower than that which was suo moto offered in its return of income. Insofar, the first issue is concerned i.e. as to whether the disallowance under Sec. 14A cannot exceed the amount of exempt income earned by the assessee during the year, we find, that the said issue is squarely covered by the judgment of the Hon'ble High Court of Delhi in the case of Joint Investments Vs. CIT (372 ITR694) (Del). Also, a similar view had been taken by the Hon'ble High Court of Punjab & Haryana in Pr. CIT Vs. State Bank of Patiala (2017) 393 ITR 476 (P & H). The Special Leave Petition (for short "SLP") filed by the revenue against the aforesaid the order of the Hon'ble High Court of Punjab and Haryana had been dismissed by the Hon'ble Supreme Court in Principal CIT, Patiala Vs. State Bank of Patiala (2018) 259 Taxman 314 (SC).
Further, the coordinate benches of the Tribunal had also concluded that the disallowance under Sec. 14A cannot exceed the amount of exempt income earned by the assessee during the year in the following cases. (i) Mix Slyvex Cable Co. Pvt Ind Vs. Dy. CIT (ITA No.8581/Mum/2011 for A. Y. 2008- 09 dated 24.02.2016) (ii) Indus Valley Investments Vs. DCII (ITA No. 3763/Del 2013 for A. Y. 2009-10, dated 29.04.2015) (iii) M's Daga Global Chemicals ( Vs. Asst. CIT [ITA No. 5592/Mum/2012 dated 01.01.2015). (iv) M's Global Capital Lad. Vs. ACIT (ITA No. 6586/Del/2013 for A. Y. 2009-10, dated 27.11.2015] (v) DCIT VS. DCM Lad. [ITA No. 4467/Del/2012 for A. Y. 2009-10, dated 01.09.015)"
Accordingly, in terms of our aforesaid observations, we are of the considered view that the disallowance under Sec. 14A in the case of the present assessee was liable to be restricted to the extent of the amount of the exempt dividend income of Rs.53,04,157/- that was earned by the assessee during the year under consideration.
On answering the aforesaid issue in affirmative, we shall now traverse to the second aspect i.e. whether is it permissible for the assessee to seek restriction of the disallowance under Sec. 14A at an amount lower than that which was offered on a suo motto basis in its return of income for the year under consideration. As observed by us hereinabove, the assessee had in its Original return of income voluntarily offered a disallowance under Sec. 14A of Rs.9,63,30,238/-. On the basis of a 'revised' return of income the assessee had reworked out the disallowance under Sec. 14A at Rs.5.29.95.132/- However, the A.O. being of the view that the revised return of income filed by the assessee was neither voluntary nor on account of discovery of any omission on its part, had thus declined to admit the same. Resultantly, the restriction of the disallowance under Sec. 14A at Rs.5,29,95,132/- in the revised return of income of the assessee was not considered by the A.O. As observed hereinabove, the A.O. initially in his draft assessment order passed under Sec. 144C(1) r.w.s. 143(3), dated 18.03.2014, had worked out the disallowance under Sec. 144 r.w.r. 8D at Rs. 130,98,64,725/- However, pursuant to the directions of the DRP that the disallowance under Sec. 14A r.w. Rule 8D was to computed after considering only those investments which had yielded exempt income during the year, the A.O. had scaled down the said disallowance to an amount of Rs. 9,63,30,238/- i.e. upto the extent the assessee had voluntarily offered the same in its "Original" return of income.
Now, the assessee had for the first time claimed before us that the disallowance under Sec. 14A was liable to be restricted to the extent of the exempt dividend income of Rs. 53,04.157/- that was earned by it during the year under consideration.
To sum up, the assessee by raising the aforesaid claim had sought the sealing down of the disallowance under Sec. 14A upto the amount of the exempt dividend income that was earned during the year, despite the fact that a higher amount was voluntarily offered as a disallowance under the aforesaid statutory provision in its return of income for the year under consideration. In our considered view, as there can be no estoppel in law, therefore, no infirmity can be related to the aforesaid claim of the assessee. As such, we hold a strong conviction that the assessed income can be lower than the returned income, if what the assessee had offered for tax was found as not taxable under the law. To sum up, the claim of the assessee that the disallowance under Sec. 14A be restricted upto the extent of the exempt dividend income of Rs.53,04,157/- cannot be jeopardised, for the reason, that the same would lead to an assessed income lower than the assessee's returned income. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Gujarat in the case of CIT Vs. MiltonLaminates Ltd. (2013) 37 taxmann.com 249 (Guj). In the aforesaid case, the issue before the Hon'ble High Court was as to whether the Tribunal was justified in law and on facts in directing the A.O to give effect to the order of the CIT(A) without restricting the income to the returned income. On a perusal of the facts as were involved in the aforesaid case before the Hon'ble High Court, we find, that the A.O was of the view that by virtue of the decision of the Hon'ble Supreme Court in the case of CIT V's. Shelly Products (2003) 261 ITR 367 (SC) and CBDT Circular No. 549, dated 31.10.1989, while giving effect to the order of the CIT(A) the assessed income of the assessee could not be brought below the returned income. On appeal, the CIT(A) upheld the aforesaid view of the A.O. However, the Tribunal by relying on the judgement of the Hon'ble High Court Gujarat in the case of Gujarat Gas Company Ltd. Vs. JCIT (2000) 245 ITR 84 (Guj) allowed the appeal of the assessee. On further appeal by the revenue, it was observed by the High Court that while giving the effect to the CITA) order in favour of the assessee, the resultant assessed income can go below the returned income It was observed by the Hon'ble High Court that the CBDT Circular No 549, dated 31 10.1989 which contemplated that the assessed income of an assessee cannot go below the returned income was invalid. The Hon'ble High Court while concluding on hereinabove, had observed, that the judgment of the Hon'ble Apex Court in the case of CIT V's. Shelly Products (2003)261 ITR 367 (SC) relied upon by the revenue was distinguishable on facts. Also, we find that a similar view hand been taken by a coordinate bench of the Tribunal in the case of Tejaskiran Pharamachem Industries Pvt. Ltd. Vs. Dy. CIT (ITA 3307/Mum/2014, dated 13.12.2017](Mum) In the said case, the Tribunal relying on the judgment of the Hon'ble High Court of Bombay in the case of Ahmedabad Electricity Company Itd. V's. CIT, & Godavari SugarMills Ltd. V's. CIT (1993) 199 ITR 351 (Bom), had observed, that the purpose of an appeal in an income tax matter is to ascertain the correct Tax liability of the assessee in accordance with law. On the basis of its aforesaid observation, the tribunal had observed that as there is no estoppel against law, therefore, income wrongly declared under a wrong notion or under mistaken notion can be deleted.
In the backdrop of our aforesaid deliberations, we are of considered view that as the disallowance under Sec. 14A on the basis of the settled position of law cannot exceed the amount of the exempt income, therefore, without prejudice to the fact that the assessee had voluntarily offered the disallowance under the aforesaid statutory provision at a higher amount in its return of income, the consequential relief to the assessee by restricting the disallowance under Sec. 14A up to the extent of its exempt income of Rs. 53,04, 157/-cannt be denied. To sum up, we herein direct the A.O. to restrict the disallowance under Sec. 14Aupto Essar Ports Limited the extent of the exempt dividend income of the assessee of Rs. 53,04, 157/- The Grounds of appeal Nos. 3 and 6 are allowed in terms of our aforesaid observations."
6.2.5 Accordingly, by following the decision of the Honourable High Court as no exempt income earned by the assessee, no disallowance can be made u/s 14A of the Act. Ground No. 5 & 6 of the appeal are hereby treated as allowed.”
Based on aforesaid observations, following the decision of ITAT, Mumbai in assessee own case for earlier AY, Ld. CIT(A) allowed the ground of appeal on the issue of disallowance u/s 14A in favour of the assessee, observing that as there is no exempt income earned by the assessee, no disallowance u/s 14A is called for.
9. The aforesaid findings of the Ld CIT(A) are not found acceptable by the revenue; therefore, the present appeal is instituted before us.
10. At the outset Ld CIT-DR, vehemently supported the order of Ld AO and submitted that the Ld. CIT(A) had erred in not confirming the disallowance made by Ld. AO for Rs. 105.05 Crore, despite the fact that assessee itself had suo moto disallowed an amount of Rs. 79.96 Crore U/s 14A of the Act. Ld.
CIT(A) had overlooked the legislative intent provided by CBDT vide circular No. 5/2014 dated 11.02.2014. the order of Ld. CIT(A) and the order of ITAT in the assessee’s own case for AY 2010-11 in dated 06.01.2020 and submitted that the issue decided by the Ld. CIT(A) is squarely covered by the decision of ITAT as well as judgment of various Hon’ble Courts referred therein (extracted supra), therefore, the order is justified and in accordance with the mandate of law, derives to be upheld.
Having given a thoughtful consideration to submissions of the rival parties, on perusal of material on record and case laws relied upon by the parties. We find that in present case, the issue of disallowance u/s 14A arises in a situation when assessee itself had suo moto computed a disallowance which was enhanced by the Ld. AO by recomputing the same in terms of rule 8D of the IT rules 1962. The assessee thereafter filed an appeal as a resource to seek relief of entire disallowance, may it be worked out by assessee or thereafter enhanced by the Ld. AO. The facts of case are examined by the Ld CIT(A) and decided the issue in favour of assessee and rightly so, by observing that the issue is squarely covered by the order of ITAT, Mumbai in assessee’s own case, wherein the ration of law has been adopted as expounded by Hon’ble High Courts (referred to supra), accordingly, held that disallowance u/s 14A can be made.
In back drop of aforesaid facts, circumstances and respectfully following the decisions referred to supra, we do not find any infirmity in the order of Ld CIT(A) which needs our interference qua the issue of disallowance u/s 14A of the Act, thus we uphold the same. Consequently, the contentions raised by the revenue in Ground no 2 to 5 of present appeal are dismissed, being bereft of merit and devoid of substance.
In result the appeal of revenue is partly allowed in terms of our aforesaid observations.