MANIPAL EDUCATION AND MEDICAL GROUP INDIA PVT. LTD. ,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(2), BENGALURU

The AO held that on examination of the accounts of the assessee, the same are not maintained in a manner to compute the expenditure relatable to income which is not included in the total income. It was further held that assessee deploys manpower and resources which attracts costs in the form of salaries, rent, audit fees etc. amongst other expenditure. The adhoc disallowance without providing the basis for such disallowance is not acceptable and sum of Rs.97,11,406 was worked out being 0.5 % of average investment u/r 8D 2 (ii) of The Income-tax Rules and disallowed u/s. 14A of the Act.

The assessee preferred appeal before the CIT(A) wherein assessee objected that disallowance is made u/s. 14A of the Act without assigning valid reason for such disallowance and submission of the assessee that no expenditure has been incurred was rejected without recording a satisfaction. The assessee also objected that only those investments are required to be considered for working out disallowance from which assessee has earned exempt income as well as disallowance cannot exceed the exempt income earned.

The ld. CIT(A) confirmed the disallowance rejecting all the contentions of the assessee. However, he restricted disallowance to the extent of exempt income earned.

Now the assessee is aggrieved with the above appellate order and has challenged it on the following grounds of appeal:-

That, the satisfaction of the Ld. AO is sine qua non for invoking the applicability of Sec.14A read with Rule 8D of the Rules, which is absent in the present case and the Ld. CIT(A) thus erred in having upheld such an invalid addition.

The main challenge by the assessee is that assessee has stated before the ld. AO that it has not incurred any expenditure pertaining to exempt income and the ld. AO without recording satisfaction about the correctness of the claim of the assessee has made disallowance u/s. 14A(2) of the Act by invoking provisions of rule 8D (2) of the Income Tax Rules.

The ld. counsel for the assessee submitted a paperbook wherein the financial statement of the assessee was submitted. It is the claim of the ld. counsel that when the assessee has submitted that it has not incurred any expenditure, when the accounts are available before the AO, without looking at the accounts of the assessee, the ld. AO has invoked the provisions of Rule 8D for making disallowance u/s. 14A. It was his claim that the initial query itself raised by the AO at the first instance was after computation of disallowance of Rs.97,11,407 applying rule 8D u/s 14 A of the act and assessee was asked that why disallowance of above sum should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules. He also referred to the Income & Expenditure A/c of the assessee stating that the dividend income is of Rs.23,09,005 and there is no expenditure incurred to earn that dividend income. He submits that all the expenditure incurred by the assessee are for the management business consultancy services of the assessee. He further stated that on identical facts and circumstances of the case of sister concern of the assessee in Manipal Health Systems Pvt. Ltd. vide order dated 24.10.2024, the coordinate Bench vide para 11 onwards has accepted the contention of the assessee that if no satisfaction is recorded about the correctness of the claim of the assessee, no disallowance can be made. Therefore relying on the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd., Walfort Shares & Stock Brokers P. Ltd. and decision of Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd. and Syndicate Bank, no disallowance should have been made.

In rejoinder, the ld. AR submitted the written statement and relied on the same stating that according to the provisions of section 14A (2), the AO is required to prove and show that assessee has incurred any expenditure to earn the exempt income. In support of aforesaid submissions, reliance has been placed on decisions in Godrej & Boyce Mfg. Co. Ltd. v. Dy.CIT [2017] 81 taxmann.com 111/247 Taxman 361/394 ITR 449 (SC) and 'Eicher Motors Ltd. v. CIT [2017] 86 taxmann.com 49/250 Taxman 532/398 ITR 51 (Delhi).

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The facts show that assessee is a company engaged in the business of management consultancy services to its group concern, which has earned exempt income of Rs.23,09,005 as dividend income which is claimed exempt u/s. 10(35) of the Act. The assessee did not make any disallowance of any expenditure u/s. 14A of the Act. The ld. AO in para 3.1 straight away stated that, “During the financial year relevant to this assessment year, the assessee company has made investments in mutual funds and equity investments in Indian companies, the income from which is not chargeable to tax. The asse was given an opportunity to explain why disallowance of Rs.97,11,407 should not be made under section 14A r.w. Rule 8D of the IT Rules.” Therefore, prior to the examining the account or statement of the assessee or the claim of the assessee, the ld. AO worked out disallowance under Rule 8D r.w.s. 14A of the Act.

Section 14a OF The Act is as under :-

According to the provisions of section 14A of the Act, the assessee is not allowed deduction of any expenditure in relation to exempt income. According to the provisions of sub-section (2) of section 14A, the ld. AO is given a power to determine the amount of expenditure incurred in relation to exempt income according to the method prescribed. Such method is under Rule 8D of the I.T. Rules. However, such power is further circumscribed by the provision that before invoking the computation of disallowance according to that Rule, the AO has to record his satisfaction about the correctness of the claim of the assessee in respect of such expenditure which is incurred in relation to earning exempt income. Such claim of the assessee is liable to be examined having regard to the accounts of the assessee. Therefore, if the assessee says that it has incurred NIL expenditure or ‘X’ amount of expenditure, the ld. AO is duty bound to examine the statement of the assessee about not incurring the expenditure or also about the quantum of expenditure, as the case may be. Such claim is required to be examined naturally having regard to the accounts of the assessee. This is so because the claim of expenditure is generally what is recorded in the books of account. Thus the AO has to examine that has the assessee put any expenditure in the Profit & Loss

The Hon’ble Supreme Court also in the case of Maxopp Investment Ltd. vs. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC)/[2018] 254 Taxman 325 (SC)/[2018] 402 ITR 640 (SC)/[2018] 301 CTR 489 (SC)[12-02-2018]has categorically held that recording of the satisfaction is a sine qua non before making any disallowance where it has been held as under :-

This is also the mandate of Hon’ble Karnataka High Court decision in the case of Hindustan Aeronautics Ltd. vs. Assistant Commissioner of Income Tax-3(1)(2), Bangalore [2021] 125 taxmann.com 80 (Karnataka)/[2021] 278 Taxman 266 (Karnataka)[09-12-2020] where in it has been held that :-

Honourable Bombay High court in Principal Commissioner of Income-tax vs. Tata Capital Ltd. [2024] 161 taxmann.com 557 (Bombay)/[2024] 298 Taxman 714 (Bombay)/[2025] 475 ITR 559 (Bombay)[03-04-2024]

Therefore the general observation made by the AO that the company deploys manpower and resources which attract costs in the form of salaries, rent, audit fees, professional charges, etc. and therefore the claim of the assessee is not correct, cannot be said to be proper satisfaction.

Further the claim of the assessee is that it has not incurred any expenditure has also not been refuted by the ld. AO. When the complete Income & Expenditure statement is available before him, he is duty bound to have pointed out some expenditure which has been incurred for earning of exempt income to negate the claim of the assessee. We do not find any such satisfaction recorded by the ld. AO about the correctness of the claim of assessee that it has not incurred any expenditure for earning of the exempt income, the disallowance made u/s. 14A of the Act cannot be sustained.

In view of the above facts, the disallowance made by the ld. AO of Rs.97,11,406 which is restricted to Rs.23,09,005 to the extent of exempt income by the ld. CIT (A) , cannot be sustained. Therefore the ld. AO is directed to delete the disallowance confirmed by the ld. CIT(A) of Rs.23,09,005 u/s. 14A of the Act and thus the order of the ld. lower authorities are reversed. Accordingly ground Nos.1 & 2 of the appeal are allowed.

The brief facts show that assessee filed its return of income declaring a loss of Rs.3,54,33,454 on 25.9.2015 which resulted into an assessment order u/s. 143(3) of the Act on 18.12.2017 determining

The brief facts show that the ld. AO as per para 3.1 has given a show cause notice to the assessee that why a disallowance of Rs.1,55,54,382 should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules on 30.11.2017. The assessee replied that it has not incurred any expenditure and further only the investment from which exempt income is earned should be considered. As during the year, the assessee has earned exempt dividend income of Rs.1,67,01,894 which is claimed as exempt u/s. 10(35) of the Act and as assessee has not disallowed any sum u/s. 14A of the Act, the ld. AO computed the disallowance of Rs.1,55,54,382 u/s. 14A of the Act r.w. Rule 8D of the Rules.

On appeal before the ld. CIT(A), the above disallowance was confirmed.

Therefore the assessee is in appeal before us raising ground that without recording satisfaction about the correctness of the claim of assessee that it has not incurred any expenditure in relation to earning of exempt income, no disallowance should have been made.

The ld. AR & ld. DR both agreed that the order of the AO is identically worded as it was for AY 2014-15, therefore the arguments also remain the same.

We have carefully considered the rival contentions and for the reasons given by us in detail for AY 2014-15, we also do not find any reason to sustain the above disallowance in absence of satisfaction recorded by the ld. AO. Accordingly the disallowance made by the AO and confirmed by the ld. CIT(A) is directed to be deleted. In the result, ground Nos.1 & 2 of the appeal are allowed. is allowed.

This appeal is filed by the assessee for Ay 2017-18 against the order passed by the CIT(Appeals)-15, Bengaluru [ld. CIT(A)] dated 31.1.2025 wherein the disallowance made by the AO u/s. 14A of the Act of Rs.2,44,08,806 as per assessment order passed u/s. 143(3) of the Act dated 25.12.2019 by the ACIT, Circle 2(2), Bangalore [ld. AO] was confirmed.

The assessee is in appeal raising ground that the ld. AO has not recorded the satisfaction for invoking the applicability of section 14A r.w. Rule 8D.

Briefly stated the facts are that the assessee filed its return of income on 30.10.2017 at a total income of Rs.54,73,57,320 as pe the normal

Assessee challenged the matter before the ld. CIT(A) wherein a detail explanation was given stating that the expenditure incurred on earning exemption income is NIL and therefore no disallowance can be made.

The ld. CIT(A) rejected the explanation of the assessee upholding the disallowance to the normal computation of total income. However, addition to the book profit was deleted on the basis of decision of coordinate Bench in 165 ITD 27. Thus, assessee is in appeal before us.

The argument of the assessee is that disallowance has been made without recording a satisfaction by the ld. AO about the correctness of the claim of the assessee that it has not incurred any expenditure for earning exempt income. Before us he referred to plethora of judicial precedents including the decision of Hon’ble jurisdictional High Court in the case of Hindustan Aeronautics Ltd[ supra]

The ld. DR vehemently supported the order of the ld. AO and stated that the assessee has not computed the disallowance before the AO, the ld. AO has computed the same disallowance while working out the taxable income. It was further stated that proper satisfaction has been recorded by the ld. AO.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. For AYs 2014-15 & 2015-16, we have held that no satisfaction is recorded by the ld. AO about the correctness of the claim of assessee that it has not incurred any expenditure for earning exempt income. The ld. AO has merely stated that assessee has not maintained books of account in the manner from which expenditure incurred for earning exempt income can be worked out. It is a fact that assessee has maintained proper books of account in terms of the Companies Act, 1956. There is no error pointed out by the ld. AO that the books of account maintained by the assessee is not reliable, except making disallowance u/s. 14A to the returned income of the assessee of Rs.70.29 crores as well as the book profit computed u/s. 115JB of the Act was accepted as it is. Further, the ld. AO has not referred any item of expenditure from the books of account of the assessee which even remotely can be said to have incurred for earning of the exempt income. Thus, making a generalised statement without substance or evidence pointing out that the claim made by the assessee that it has not incurred any expenditure towards earning the exempt income, cannot be said to be satisfaction properly recorded in terms of section 14A of the Act. Accordingly, as held in the AYs 2014-15 & 2015-16, the addition made by the AO and confirmed by the ld. CIT(A) of Rs.2,44,08,806 u/s. 14A of the Act, following the decision of the Hon’ble jurisdictional High Court is directed to be deleted. Thus, the appeal filed by the assessee for AY 2017-18 is allowed.

In the result, all the 3 appeals filed by the assessee on the similar issue of non-recording of proper satisfaction by the ld. AO while making the disallowance u/s. 14A is deleted and all the appeals are allowed.

ITA number 722/Bangalore/2025 for assessment year 2018 – 19 is filed by Manipal Hospitals Private Limited, Bangalore (the assessee/appellant) against the appellate order passed by The Commissioner Of Income Tax (Appeals) – 15, Bangalore (the learned CIT – A) dated 31/1/2025 wherein the appeal filed by the assessee against the assessment order passed by The National e-Assessment Centre Delhi (the learned AO) under section 143 (3) of The Income - Tax Act, 1961 (The Act) on 18/3/2021 determining the total income of the assessee at a loss of ₹ 204 crores, was partly allowed.

The assessee is aggrieved with the same and has preferred this appeal raising solitary ground of the appeal that the disallowance of ₹ 2,412,478/– under section 14 A of The Income Tax Act was upheld and confirmed by the appellate order though the assessing officer has failed to record satisfaction as provided under section 14 A (2) of the act.

The brief facts of the case shows that the assessee company filed its return of income on 30/11/2018 declaring a total income of Rs. Nil. The return of income was selected for complete scrutiny for various reasons and therefore the notice under section 143 (2) of the act was issued on 22/9/2019 and further notice under section 142 (1) of the act was also issued along with the questionnaire dated 30/12/2020.

During the course of assessment proceedings it was found that assessee has received dividend income of ₹ 85 lakhs and claimed the same as exempt. The assessee has disallowed a sum of ₹ 460,000 under section 14 A of the act as expenses relatable to earning exempt income.

During the course of assessment proceedings the learned assessing officer asked the assessee to furnish the working of disallowance under section 14 A as per rule 8D of the income tax rules. The assessee company submitted a written submission along with the computation wherein the assessee stated that for the purpose of computing the average value of investment, the strategic investment securities and stock in trade and other such investment from which no exempt income is earned during the year, are excluded. The Ld. AO did not accept the disallowance u/s A made by the assessee of Rs 4.60 Lakhs. 1The learned assessing officer found that the working provided by the assessee under section 14 A is not correct and therefore the disallowance under section 14 A read with rule 8D and computed the disallowance of ₹ 2,872,478 being 1% of the annual average of monthly averages of the investment of ₹ 2872478 under rule 8D (2) (ii). The expenses directly related to exempt income are also found to be Rs. nil. Therefore, out of the total disallowance of ₹ 2872478/- by the learned assessing officer under 8D, as the assessee has already disallowed a sum of ₹ 460,000, the balance disallowance of ₹ 2,412,478 was made. Consequently, the assessment order under section 143 (3) read with section 143 (3A) and 143 (3B) of the act

The assessee preferred an appeal before the learned CIT – A who confirmed the action of the learned AO. Therefore the assessee is in appeal before us.

The Arguments of the ld. AR is that there is no satisfaction recorded by the ld. AO about the correctness of the claim of the assessee about suo moto disallowance u/s A of Rs 4.60 Lakhs. In absence of satisfaction disallowance by invoking rule 8D could not have been made. His arguments was similar to the earlier appeals stating several judicial precedents as well as precedent sin assessee’ own group concerns where the disallowance is completely deleted.

The ld. DR also submitted the same arguments

Both the parties agreed that facts and circumstances of the case is identical to earlier appeals and orders are also similar.

On hearing the parties, in views of similarity of facts and judicial precedents cited before us, for reasons given by us in earlier appeals that where there is absence of satisfaction u/s 14A (2) of the act about the correctness of disallowance of expenditure offered by the assessee, straightway jumping to disallow expenditure by invoking rule 8D is not proper, we direct the ld. AO to delete the disallowance of Rs 2412478/- made by the ld. AO and Confirmed by the ld. CIT

Briefly stated the facts of the case show that assessee is an Indian company engaged in the business of distance learning and education services. It filed return of income on 30.11.2017 at a total loss of Rs.39,25,92,840. Return of income was picked up for scrutiny and notices u/s. 143(2) as well as 142(1) of the Act were issued.

During the course of assessment proceedings, the ld. AO noted that assessee company has made investment in mutual funds and equity instruments in Indian companies income from which is not chargeable to tax. Accordingly assessee has earned tax exempt dividend of Rs.28,72,601 and claimed exemption u/s. 10(35) of the Act. The ld. AO asked the assessee that why disallowance should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules. The assessee in its reply dated 24.12.2019 submitted that assessee has incurred only Rs.1,725 as Demat charges and no further expenditure has been incurred. It was further stated that the even the Demat expenses is for maintenance of investment in Demat form and not for earning any exempt income.

The assessee challenged the matter before the CIT(A) wherein 17 grounds were taken stating that there is no proper satisfaction, disallowance worked out is incorrect, it cannot exceed the exempt income and no addition can be made to the book profit.

The ld. CIT(A) rejected all other grounds, but restricted the disallowance to the exempt income of Rs.28,72,601. The addition to the book profit was also deleted.

Accordingly the assessee is aggrieved with the confirmation of disallowance of Rs.28,72,601 u/s. 14A of the Act and is in appeal before us.

The ld. AR vehemently submitted that without recording the satisfaction about the correctness of the claim of the assessee and without examining the books of account and in the absence of any proper satisfaction disallowance has been made by the AO mechanically. He submitted several judicial precedents of Hon’ble Supreme Court and Hon’ble jurisdictional High Court to state that in the absence of proper satisfaction, the disallowance could have been made.

The ld. DR vehemently supported the order of the ld. lower authorities.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. In the present case assessee has earned dividend income of Rs.28,72,601. The ld. AO questioned the assessee looking at the amount of investment of mutual funds and equity investments that these investments would be yielding exempt income. Therefore he questioned the assessee why disallowance should not be made u/s. 14A of the Act by employing methodology provided under Rule 8D of the I.T. Rules. In response to that, assessee categorically stated that it has incurred only expenditure of Rs.1,725 and no further expenditure is incurred. When the assessee was asked to produce information about the average monthly investment, it also gave details about those investment on the dividend income that has been earned by the assessee. However, the ld. AO stated that assessee has not maintained books of account in a manner in which the expenditure related to exempt income can be worked out. The company deploys manpower & resources, therefore there are expenditure incurred on rent, other expenditure etc. He further stated that there is a common pool of funds from which the investments are made. Thereafter the AO made disallowance u/s. 14A of the Act by employing the method provided under Rule 8D.

Such disallowance was upheld by the ld. CIT(A), but was restricted to the extent of exempt income.

We find that according to the provisions of section 14A(2) of the act, the ld. AO must examine the correctness of the claim of the assessee having regard to the books of account and thereafter record a satisfaction, then only the power of applying the provisions of Rule 8D can be relied upon. In the present case, there is no reference as to how the expenditure shown by the assessee of Rs.1,725 is not the only expenditure incurred by the assessee for earning of exempt income. The ld. AO has merely given generalised statement, but has not made any reference to item of expenditure from the books of account of assessee. This is not in accordance with the provisions of section 14A(2) of the Act. The Hon’ble Supreme Court in the case of Hindustan Aeronautics Ltd. has specifically held that no disallowance can be made u/s. 14A of the Act applying the provisions of Rule 8D of the I.T. Rules without recording a proper satisfaction that the claim of assessee is incorrect. In this case before us, we do not find that the ld. AO has recorded proper satisfaction. Therefore, the order of the ld. lower authorities are reversed are reversed and ld. AO is directed to delete the disallowance u/s. 14A working out the amount under the method prescribed under Rule 8D of Rs.28,72,601 except a sum of Rs 1725/- . Accordingly the solitary ground of appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed. to 721/Bang/2025 and 976/Bang/2025 are allowed.