PODAR EDUCATION NETWORK PRIVATE LIMITED,MUMBAI vs. DCIT, CENTRAL CIRCLE - 1(4), MUMBAI, MUMBAI

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ITA 3849/MUM/2025Status: DisposedITAT Mumbai29 July 2025AY 2020-215 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Assessing Officer (AO) erred in making the disallowance of Rs. 1,55,056. The Tribunal found that the AO had not recorded any dissatisfaction with the assessee's working or computation of disallowance under Section 14A. The assessee had offered a disallowance of Rs. 1,96,644 based on a methodical working of monthly averages of investment, conforming to Rule 8D. The AO's action of invoking Rule 8D afresh and disallowing the entire exempt income of Rs. 3,51,700 was done without the mandatory recording of satisfaction as required under Section 14A(2). The Tribunal noted that the AO adopted the same average investment figure but arbitrarily used the exempt income as the ceiling for disallowance. The reliance by the AO and the CIT(A) on certain precedents was considered misplaced and irrelevant. Therefore, the Tribunal found no merit in the impugned disallowance of Rs. 1,55,056 and directed its deletion. The ratio decidendi is that a disallowance under Section 14A cannot be enhanced arbitrarily without rejecting the assessee's computation and recording cogent satisfaction.

What were the facts?

The assessee, Podar Education Network Private Limited, filed an appeal against the order of the CIT(A)-47, Mumbai, for Assessment Year 2020-21. The appeal challenged a disallowance of Rs. 1,55,056 made under Section 14A read with Rule 8D of the Income-tax Rules, 1962. The assessee had declared exempt income of Rs. 3,51,700 and voluntarily offered a disallowance of Rs. 1,96,644 based on its own computation under Rule 8D. The Assessing Officer (AO), however, invoked Rule 8D again without recording satisfaction regarding the incorrectness of the assessee's computation and made a disallowance of Rs. 3,51,700, equivalent to the entire exempt income. The AO's action was based on a mechanical reference to CBDT Circular No. 5/2014, which the assessee contended was inapplicable.

What were the issues?

1. Whether the Assessing Officer was justified in making a disallowance under Section 14A read with Rule 8D without recording proper satisfaction regarding the incorrectness of the assessee's own computation, as required by Section 14A(2)? (Question of law) Assessee's Contentions: - The AO failed to record any cogent satisfaction under Section 14A(2) to justify re-computing the disallowance. - The assessee had already offered a justifiable disallowance of Rs. 1,96,644 based on a methodical working of monthly averages of investment in equity shares, conforming to Rule 8D. - The AO mechanically applied Rule 8D and CBDT Circular No. 5/2014, which is inapplicable as the assessee had not only earned exempt income but also offered a disallowance. - The AO adopted the same average investment figure but used the entire exempt income as a ceiling without justification. - The AO's reliance on the decision in PCIT vs. State Bank of Patiala was misplaced, as it did not permit a blanket substitution of the assessee's computation. Revenue's Contentions: - The judgment records no specific contentions for the revenue.

Which sections of the Income-tax Act were involved?

Section 14A,Section 250,Section 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH MUMBAI

Before: SHRI AMIT SHUKLA & SMT RENU JAUHRI

For Appellant: Shri Ravi Ganatra
For Respondent: Shri Virabhadra S Mahajan
Hearing: 24/07/2025Pronounced: 29/07/2025

आदेश / O R D E R PER AMIT SHUKLA (J.M): This appeal has been preferred by the assessee against the order dated 25/03/2025 passed by the learned Commissioner of Income Tax (Appeals)–47, Mumbai [“ld. CIT(A)”], under section 250 of the Income-tax Act, 1961, in relation to the assessment order passed under section 143(3) for the assessment year 2020–21.

1.

Podar Education Network Private Limited 2. The solitary issue for adjudication pertains to the disallowance of Rs.1,55,056 made under section 14A read with Rule 8D of the Income-tax Rules, 1962, in addition to the suomoto disallowance of Rs.1,96,644 already offered by the assessee.

3.

The brief facts of the case are that the assessee had declared exempt income of Rs.3,51,700 from dividend income in its return of income and had, on its own volition, made a disallowance of Rs.1,96,644 under section 14A, computed in accordance with Rule 8D. The Assessing Officer, without recording any cogent satisfaction under section 14A(2) as to the incorrectness of the assessee’s computation having regard to its accounts, proceeded to invoke Rule 8D afresh, computing a disallowance equivalent to the entire exempt income of Rs.3,51,700. This was done with a mechanical reference to CBDT Circular No. 5/2014 dated 11/02/2014, which is inapplicable in the present case since the assessee has not only earned exempt income but also offered a justifiable suomoto disallowance.

4.

On a close scrutiny of the record, including the computation submitted by the assessee vide letter dated 24/03/2022, it is evident that the assessee’s disallowance was based on a methodical working of monthly averages of investment in equity shares, conforming to the mechanism prescribed in Rule 8D. The working, as placed at page 78 of the paper book, is reproduced below for clarity and completeness:

Monthly Average of Investment Opening Balance April 2019-Rs.148277680.49 Month Opening Closing Average Apr- 148277600.49 121860825.94 135069253.22 19 May- 121860825.94 121860825.94 121860825.94 19 Jul- 121860825.94 132373107.69 127116966.82 19 Aug- 132373107.69 132373107.69 132373107.69 19 Sep- 132373107.69 132373107.69 132373107.69 19 Oct- 119617796.44 128595501.59 124106649.02 19 Nov- 128595501.59 128595501.59 128595501.59 19 Dec- 128595501.59 128595501.59 128595501.59 19 Jan- 128595501.59 128595501.59 128595501.59 19 Feb- 128595501.59 128595501.59 128595501.59 19 Mar- 28595501.59 136930139.64 132762820.62 19

1,53,55,27,907.66 Loan Borrowed NIL Amount of exempt income earned during the year is Rs.3,51,700/- Total disallowance under section 14A 1,96,644/- read with Rule 8D (already disallowance in computation)

Further disallowance required under 1,55,056/- section 14A

5.

A perusal of the assessment order reveals that the Assessing Officer has not expressed any dissatisfaction with the assessee’s working or computation. In fact, the Assessing Officer has adopted the same figure of average investment and merely taken the exempt income as the ceiling for disallowance without justification. The invocation of Rule 8D is thus devoid of jurisdiction in the absence of the mandatory recording of satisfaction as required under section 14A(2). Furthermore, the reliance placed by the Assessing Officer on the decision of the Hon’ble Supreme Court in PCIT vs. State Bank of Patiala is entirely misplaced, as that ruling does not endorse a blanket substitution of the assessee’s Rule 8D computation with the amount of exempt income. The ld. CIT(A), in upholding this approach, has regrettably relied upon precedents that bear no relevance to the issue at hand.

Podar Education Network Private Limited 6. In light of the foregoing discussion, and having regard to the settled legal position that disallowance under section 14A cannot be enhanced arbitrarily without recording cogent satisfaction and without rejecting the assessee’s computation, we find no merit in the impugned disallowance of Rs.1,55,056. The same is accordingly directed to be deleted.

7.

In the result, appeal of the assessee is allowed.

Order pronounced on 29th July,2025.

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