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Facts
The assessee company declared a loss for AY 2017-18. During assessment, the AO noted dividend income and disallowed expenses under Section 14A and Rule 8D, not accepting the assessee's method of computation. The CIT(A) confirmed the AO's order.
Held
The Tribunal held that disallowance under Section 14A read with Rule 8D(2)(ii) should be restricted to investments that actually yielded exempt dividend income. The AO's computation based on total investments was incorrect.
Key Issues
Whether disallowance under Section 14A and Rule 8D should be computed on total investments or only on investments yielding exempt income.
Sections Cited
14A, 8D, 250
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Income Tax Appellate Tribunal, “A” BENCH KOLKATA
Before: Shri Rajesh Kumar & Shri Pradip Kumar Choubey
order
: December 17, 2025 ORDER
Per Pradip Kumar Choubey, Judicial Member:
This appeal filed by the assessee is directed against the order dated 01.07.2025 of the Addl/JCIT(A)-1, Nashik [‘CIT(A)’] passed under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2017–18.
Brief facts of the case are that the assessee is a domestic company and filed its return of income for the assessment year 2017-18 electronically on 28.10.2017 declaring loss of Rs. 18,89,620/-. The said return was selected for scrutiny assessment under CASS. During the assessment proceedings, the Assessing Officer found that the assessee had earned total dividend income, which did not form part of total income to the tune of Rs.1,78,00,000/-. Before the Assessing Officer, the assessee made submission that while computing the disallowable expenses u/s 14A/8D, only those investments in respect of which Basant Properties Ltd dividend has been received is required to be taken into consideration and the other investments from which dividend has not been received during the year is not taken into account in computing the disallowable expenses u/s 14A r.w.r. 8D of the Act. The Assessing Officer has not accepted the assessee's method of computation of disallowable expenses and disallowed 1% of the annual average investment of Rs. 13,98,934/- u/s 14A r.w.s. 8D of the Act.
Being aggrieved by the said order, the assessee filed an appeal before the Ld. CIT(A) and the Ld. CIT(A) confirmed the order of the Assessing Officer.
Being aggrieved and dissatisfied by the order of the Ld. CIT(A), the assessee has filed this appeal before us challenging the impugned order thereby submitting that during the relevant previous year, the assessee held investments in shares & securities whose annual average of the monthly average value for the A.Y 2017-18 was Rs.13,98,93,379/-. The ld. AR submits that during the year, the assessee earned dividend income of Rs.1,78,00,000/- which was derived from investments whose annual average value of the monthly average for the AY 2017-18 was Rs.1,98,00,879/-. The ld. AR further submits that in the return of income, the assessee Suo-moto disallowed an aggregate sum of Rs.1,98,969/- u/s 14A r.w. Rule 8D and the Suo moto disallowance was computed with reference to investments which yielded exempt income. His submission is that the Assessing Officer wrongly computed aggregate disallowance of Rs.13,98,994/- with reference to total investments and thereby made further disallowance u/s 14A of Rs.12,00,925/- without considering the principle laid down by various judicial forum that the disallowance u/s 14A read with Rule 8D(2)(ii) has to be restricted to only to those investments which actually yielded exempt dividend income in AYs prior to AY 2022-23. He relied on the following decisions: 2 Basant Properties Ltd - Bengal Rubber Co. Ltd. vs. DCIT (ITA No.1200/Kol/2023) [ITAT Kol] dated 28.05.2024 - Rajasthan Industries Ltd Vs DCIT (ITA No.267/Kol/2024) [ITAT Kol]
Contrary to that, the ld. DR supports the impugned order.
Upon hearing the submissions of the counsels of the respective parties, we have perused the records. We find that during the year 2016- 17, the assessee-company held investments in shares & securities whose annual average in the A.Y 2017-18 was Rs.13,98,93,379/- and in the A.Y 2017-18, the assessee earned dividend income of Rs.1,78,00,000/- which was derived from investments whose annual average value was Rs.1,98,00,879/-. We also find that in the return of income, the assessee suo motu disallowed an aggregate sum of Rs.1,98,969/- u/s 14A r.w. Rule 8D [Rs.960/- being demat charges incurred for earning exempt dividend income + Rs.1,98,009/- being 1% of the average value of investments which had actually yielded dividend income]. We note that during the course of assessment, the assessee submitted the computation of disallowance of Rs.1,98,969/- u/s 14A of the Act but the Assessing Officer computed aggregate disallowance of Rs.13,98,994/- on total investments and thereby made further disallowance u/s 14A of Rs.12,00,925/-. We find that the Hon’ble jurisdictional Calcutta High Court in the case of PCIT Vs Shalimar Pellet Foods Ltd (453 ITR 547) wherein the methodology adopted by the assessee for computing disallowance of Rs.1,98,969/- as per Rule 8D with reference to dividend yielding investments has been approved and it has been held that, the disallowance under section 14A as per rule 8D is to be computed by taking into consideration only those shares which had yielded dividend income in year under consideration and the Hon’ble High Court has held as follows:- 3
The next substantial question of law is with regard to the disallowance under section 14A of the Act. The tribunal after noting several decisions has directed the assessing officer to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Though the Tribunal has noted the decision of the Tribunal in REI Agro Ltd. v. Dy. CIT [2013] 35 taxmann.com 404/144 ITD 141 (Kol. - Trib.), there are several other decisions on the said point and the machinery provision under rule 8D can be applied only with regard to the shares which yielded dividend income in the year under consideration. Therefore, we find that the tribunal rightly applied the legal principle and granted relief. Accordingly, the substantial question of law framed on the said issue, namely, the deduction under section 14A of the Act is decided against the revenue.
6.1 We have gone through the decision of Coordinate Bench of the Tribunal cited by the ld. AR in the case of Bengal Rubber Co. Ltd. vs. DCIT (supra) wherein the Tribunal has held as under:
“We further find that the Hon'ble Delhi High Court in the case of "Joint Investment Private Ltd. vs. CIT and further in the case of ACB India Ltd. vs ACIT has held that for computing the disallowance u/s 14A of the Act r.w.r. 8D(2)(iii) of the income Tax Rules 1962 the average value of only the investments yielding non-taxable income have to be considered and not the entire investment. Our attention has also been drawn regarding other judgment of the Coordinate Bench of the ITAT, Kolkata on this controversial issue. Going over the entire citation and the facts of the present case we are on this view that the present case is entirely covered with the above cited decisions. Accordingly, we allow the appeal and direct the Assessing Officer to consider only the investments yielding tax exempt income for computation of disallowance under Rule 8D(2)(iii) of the income tax Rules 1962.”
In view of the above discussion, we find that the suo moto disallowance of Rs.1,98,969/- made by the assessee u/s 14A read with Rule 8D with reference to dividend yielding investments is justified and Basant Properties Ltd the further disallowance u/s 14A of Rs.12,00,925/- made by the Assessing Officer is hereby deleted.
In the result, the appeal filed by the assessee is allowed.
Kolkata, the 17th December, 2025.