Loading judgment…
Facts
The Assessing Officer (AO) made an addition of Rs. 8,82,471/- under Section 14A of the Income Tax Act, read with Rule 8D, on account of expenditure incurred for earning exempt income. The assessee had suo motu disallowed Rs. 1,19,480/-. The CIT(A) confirmed the AO's disallowance.
Held
The Tribunal held that Section 14A of the Act must be applied in consonance with Rule 8D. It directed the AO to recompute the disallowance by considering only investments that yielded exempt income, and to give credit for the amount already disallowed by the assessee. The Tribunal also held that disallowance under Section 14A cannot be added for computing book profit under Section 115JB of the Act.
Key Issues
1. Whether the disallowance under Section 14A read with Rule 8D should be restricted to investments yielding exempt income. 2. Whether disallowance under Section 14A can be added to book profit for computing MAT under Section 115JB.
Sections Cited
14A, 8D, 115JB, 10, 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMC” BENCH, KOLKATA
Didu Investments Private Limited, 21, Strand Road Dalhousie, Kolkata - 700001 [PAN: AABCD1810F] ……..…...…………….... Appellant vs. Deputy Commissioner of Income Tax, Circle 6(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata - 700069 ................................ Respondent Appearances by: Assessee represented by : Saurav Garg, ACA, Anand Karnani, ACA Department represented by : Sima Das Biswas, JCIT, Sr. DR Date of concluding the hearing : 11.08.2025 Date of pronouncing the order : 13.08.2025 O R D E R
PER SANJAY AWASTHI, ACCOUNTANT MEMBER
The present appeal arises from order u/s 250 of the Income Tax Act, 1961 (hereafter “the Act”), passed by Ld. Addl./Joint Commissioner of Income Tax (Appeals), [hereinafter “the Addl/JCIT(A)], 2-Mumbai, vide order dated 11.10.2024.
1.1 In this case, the Ld. AO made an addition of Rs. 8,82,471/- u/s 14A of the Act read with Rule 8D of the IT Rules, 1962. This addition was made after allowing a benefit of Rs. 1,19,480/-, being the amount added back by the assessee on his own. The Ld. AO also considered the total addition made by him u/s 14A of the Act for the purposes of calculating book profit u/s 115JB of the Act.
The submissions of the appellant have been duly considered. In this case, evidently the expenditure is incurred for composite activities in which taxable and non-taxable income is received. It is only for this reason that the A.O. has applied his method of determining expenditure incurred for earning the tax free income. However, in the present scenario, in my opinion, Rule 8D is the appropriate method for determination of expenditure incurred for the purpose of earning tax free income which has been prescribed by the Income Tax Rules, 1962. The A.O. has duly recorded his satisfaction in para 3.1 of the assessment order that expenditure is incurred for earning the tax free income. Under the facts and circumstances of the case, disallowance of expenditure is called for under the provisions of section14A on the tax free income earned from the investments etc. The appellant himself has also given a suo moto calculation for disallowance to be made under Rule 8D(ii) and has also contended that the method adopted by the A.O. is not correct. The appellant contention that only one person was employed in the investment division and only his expense should be disallowance u/s 14A is also not acceptable. The case laws cited by the appellant are distinguishable as rule 8D has not been apparently considered therein. Considering the entirety of the facts, I am of the opinion that the tax free income calls for disallowance under section 14A, the AO having duly recorded his satisfaction. 6.2 The application of Rule 8D does not preclude an assessee from contending that he has not incurred any expenditure towards interest to earn the exempt income. Rule 8D(2) provides that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the three amounts mentioned in clauses (i) (ii) and (iii) thereof. The Assessing Officer must while applying Rule 8D compute each part of it. All the contentions of the assessee in regard thereto would be open. For instance, clause (ii) relates to the expenditure by way of interest which is not directly attributable to any particular income or receipt. It is open to the assessee in this regard to establish that it has not incurred any expenditure by way of interest during the previous year to earn the exempt income. The amount in clause (ii) of sub rule (2) of Rule 8D. would be nil where the assessee establishes that it has not incurred any expenditure by way of interest during the previous year to earn the exempt income. In this case the AO while computing the disallowance has considered the interest relating to earning exempt income as 0. Therefore the AO has accepted that no interest bearing funds were invested. However the AO held that under the provisions of section 14A of the Act, no expenditure incurred for the purpose of earning an exempt income shall be allowed against the taxable profits. The assessee has not attributed any portion of the expenditure debited to the P&L account towards the investments. The assessee incurs routine expenditure to maintain its establishment and towards administration, a portion of which can be attributed towards investments. The assessee also incurs managerial remuneration and claims the whole of the same as expenditure. The managerial staff and the Directors are involved in making decisions on investments. Such being the case, a portion of this managerial remuneration and Directors remuneration should also be attributed towards the investments, the return on which is exempt u/s 10 of the Act. The cases relied on by the appellant are not Didu Investments Private Limited applicable to the case as no disallowance has been worked out on the interest payment. Therefore the disallowance worked out as per Rule 8D only takes into consideration the general expenses. 6.3 If the Assessing Officer justifiably is not satisfied with the correctness of the assessee's claim regarding the expenditure, he must resort to Rule 8D entirely for the determination of the expenditure incurred with respect to the exempt income for the purpose of section 14A. For instance, if the assessee claims that he has not incurred any interest expenditure but has incurred administrative expenses or vice-versa and the Assessing Officer disagrees with either claim, Rule 8D cannot be applied only in respect of any particular clause of sub-rule (2) of Rule 8D. He must then determine the amount of expenditure incurred in relation to exempt income entirely in accordance with Rule 8D. Therefore the computation at 0.5% of the average investments as administrative expenses is in order P & H High Court in the case of Punjab Tractors Ltd Vs CIT9393 ITR 223 (Punjab & Haryana)/[2017 held Assessing Officer was justified in presuming that assessee had incurred expenditure towards administrative activities necessary to earn said income and, thus, he was entitled to resort to rule 8D. Considering the same and the quantum of disallowance u/s 14A is confirmed. This ground is dismissed.
1.3 Aggrieved with this action of the first appellate authority, the assessee is in appeal with the following grounds:
“1. That on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in confirming the disallowance made by AO of Rs. 8,82,471/- u/s 14A r.w.r. 8D(2) without appreciating the fact that appellant has suo moto made disallowance of Rs. 1,19,480/- under normal provision of the Act.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in confirming the disallowance made by AO u/s 14A r.w.r. 8D(2) of Rs. 10,01,951/- while computing book profit under Sec. 115JB of the Act.
3. Without prejudice to the above, the Ld. CIT(A) erred in confirming the disallowance made by AO u/s 14A r.w.r. 8D(2) by considering investments from which exempt income was not earned during the year.
4. That the appellant craves leave to add, to amend, modify, rescind, supplement or alter any of the Grounds stated here-in-above, either before or at the time of hearing of this appeal.”
Before us, the Ld. AR argued and stated that the assessee had taken pains to identify all heads of expenditure which could have any connection with the earning of exempt income. Thereafter, the assessee had on its own disallowed reasonable amounts thereon. It was also stated that the Ld. AO had not recorded any explicit satisfaction before resorting to the provisions of section 14A of the Act. The Ld. AR also assailed the action of Ld. AO in Didu Investments Private Limited considering the disallowable amount u/s 14A of the Act for the purposes of computing MAT u/s 115JB of the Act. The Ld. AR relied on the written submissions filed. The Ld. AR concluded his arguments by saying that as an alternative prayer it deserves to be held that only those investments needed to be considered for the purposes of section 14A of the Act from which exempt income was earned. Since the Ld. AR relied on written submissions, hence some relevant from the same deserve to be extracted:
“2.3.1 Out of dividend income amounting to Rs. 3,62,07,826/-, dividend of Rs. 3,51,27,270/-was received from Shree Cement Limited, which are long-standing strategic investments, for which no day to day monitoring or market research was required. Further, investments made and sold during the year predominantly pertains to Group companies for which no substantial market research or active management intervention is required. Hence, the assumption of AO and Ld. CIT(A), that managerial remuneration and director oversight inherently relates to investment activities is factually incorrect in this case. 2.3.2 Reliance in this regard is placed in the decision of Hon'ble Chandigarh Tribunal in ISGEC Heavy Engineering -vs.- DCIT (ITA No. 797/CHD/2019 dated 13-10-2020) wherein it was held that when assessee has not made much effort to manage the old investments and the major chunk of the dividend amount was earned from strategic investments made in the subsidiaries, nominal disallowance u/s 14A would be reasonable. Since, in case of the appellant, an amount of Rs 1.19 lacs has already been suo moto disallowed by the appellant being actual expenditure incurred by for earning exempt income, no further disallowance is called for. 2.3.3 Further the finding of CIT(A) that no expenditure debited to P&I. account has been allocated towards investment is also incorrect as the appellant has suo moto disallowed the administrative expenses comprising of conveyance expense, printing & stationery and depository charges amounting to Rs. 46,346/- incurred in relation to earning of exempt income. 2.4 Expenditure also incurred towards earning of taxable income 2.4.1 The appellant has also earned interest income & other profit on sale of investments amounting to Rs. 47.80 lacs which has been completely ignored by the AO & CIT(A). AO erred in not considering that certain expenditure would have been incurred in relation to earning of such taxable income. Reliance in this regard is placed on the decision of Jurisdictional Tribunal in Shree Capital Services Ltd. - vs.- ACIT (In dated 23-07-20241. 3.0 Reliance placed by the Ld. CIT(A) on the decision of Punjab Tractors Ltd. -vs- CIT (2017) 78 taxmann.com 65 (P&H HC) dated 03-02-2017, is wholly misplaced and factually distinguishable. In that case, no expenditure u/s 14A was disallowed by the assessee despite incurring administrative expenses. Further, having a direct nexus between borrowed funds and investments, no disallowance u/s 14A was made. However, in the present case, the appellant has already made a suo-moto disallowance of Rs. 1.19.480/-u/s 14A. Further, there are no borrowed funds taken by the appellant and hence question of interest expenditure does not arise in the case of appellant.
Didu Investments Private Limited Ground No. 2: Disallowance u/s 14A under MAT provisions [Rs. 10,01,951/-] 1.0 In this regard, reliance is placed upon the decision of the Jurisdictional High Court in CIT -vs- Jayshree Tea & Industries Ltd. (G.A. No. 1501 of 2014, dated 19- 11-2014) (Calcutta) wherein it has been held that provision of Sec. 115JB is a complete code in itself and resort need not and cannot be made to Sec. 14A of the Act. The decision of Hon'ble High Court was relied upon by the Jurisdictional Tribunal in Tata Global Beverages Ltd. -vs- DCIT (2023) 151 taxmann.com 201 (Kolkata-Trib.) dated 13-02-2023 wherein it has been held that provisions of sub- sections (2) and (3) of Sec. 14A r.w.r. 8D does not find place in clause (f) of Sec. 115JB, and thus the disallowance u/s 14A.r.w.r. 8D cannot be made in computation of Book Profits u/s 115JB. 1.1 Reliance in regards to the above has been placed on the following judicial decisions: PCIT-vs.- Atria Power Corpn. Ltd. (2022) 142 taxmann.com 412 (Kar. HC) dated 23-12-2021 [SLP dismissed vide (2022) 142 taxmann.com 413 (SC) dated 26-08- 2022] CIT-vs-Gokaldas Images Pvt. Ltd. (2020) 429 ITR 526 (Kar) PCIT -vs- Moon Star Securities Trading & Finance Co (P) Ltd. (2024) 161 taxmann.com 158 (Del) Mcleod Russel India Ltd-vs- ACIT (ITA No. 454/Kol/2022 dated 17-06-2025) DCIT-vs.- Birla Corporation Ltd. (ITA No. 1024/Kol/2023 dated 24-12-2024) Usha Martin Ventures-vs.- DCIT (ITA No. 847/Kol/2013 dated 29-02-2016) ACIT-vs.- Vireet Investment (P.) Ltd. (2017) 165 ITD 27 (Delhi-Trib.) (SB) dated 16- 06-2017 Bata India Ltd. -vs- DCIT (2019) 180 ITD 464 (Kol-Trib.) dated 06-09-2019 2.0 Further, the reliance has been placed by the Ld. CIT(A) on following decisions while deciding the above ground against the appellant: DCIT-vs- Viraj Profile Ltd (2015) 64 taxmann.com 52 (Mum Trb) ITO-vs-RBK Shareholding (P) Ltd (2013) 37 taxmann.com 128 (Mum Trb) Ferani Hotels (P) Ltd -vs- ACIT (2015) 58 taxmann.com 42 (Mum Trb) Godrej Consumers Products Ltd -vs- ACIT (2014) 4 taxmann.com 293 (Mum Trb) 2.1 CIT(A) erred in not following binding judicial pronouncement of Jurisdictional Calcutta High Court and Hon'ble Kolkata Tribunal as stated above. Further, the aforesaid decisions of Mumbai Tribunal as relied by CIT(A) stands negated and overruled by later decisions of Hon'ble Mumbai Tribunal itself in the following decisions: DCIT-vs- M/s Mukund Global Finance Ltd. (MA No. 515/Mum/2018) dated 15-02- 2019 Didu Investments Private Limited DCIT -vs- Reliance Nippon Life Asset Management Ltd. (ITA No. 6444/Mum/2017 dated 26-02-2019) Shapoorji Pallonji and Company Private Limited -vs- DCIT (ITA No. 2025/Mum/2021 dated 28-03-2024) 3.0 Therefore, it is humbly prayed before your goodself to give direction to A.O. to delete the addition made u/s 14A while computing book profit u/s 115JB of the Act in the interest of justice.” 2.1 The Ld. DR relied on the orders of authorities below and stated that as per law, the Ld. AO had to work out an appropriate amount to be disallowed under the provisions of section 14A of the Act read with Rule 8D of the IT Rules, 1962.
We have carefully considered the rival submissions and have gone through the documents before us. We may deal with each of the issues involved in this case so that all the major grounds are discussed. Regarding the claim of satisfaction being recorded by the Ld.AO, it deserves to be mentioned that in para 3.1 of his order the Ld.AO has recorded as under:
3.1 A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day to day analysis of market trends and decisions with regard to acquisition, retention, and sale of shares, units of mutual funds etc. at the most appropriate time. The investment requires availability of funds and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of directors for which administrative expenses are incurred. In view of above, Rule 8D of the IT Rules have been applied for computation of disallowance.
In this regard, it deserves to be held that the Ld. AO has recorded a finding which satisfies the requirement of law. In this regard, we are considerably guided by the case of FL Smidth (P.) Ltd. reported in 118 taxmann.com 272 (Madras). In this case law, paras 19 to 23 are on the issue of satisfaction with respect to section 14A of the Act. Suffice it to say that the Ld.AO is seen to have recorded an adequate satisfaction for the purposes of section 14A of the Act.
3.1 Regarding the issue of adequacy or otherwise of the amount disallowed by the assessee on its own, we need to consider such action in Didu Investments Private Limited the light of the section that we are dealing with. We have been made aware of a Coordinate Bench decision in the case of Eastern India Educational Institution, dated 31.07.2024, in which this issue has been discussed as under:
The rival contentions have been considered, along with documents placed before us. It would be appropriate to understand that Section 14A of the Act was inserted by the Finance Act, 2001 with retrospective effect from 01.04.1962. It provided that no deduction shall be made in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. By the Finance Act, 2006, with effect from 01.04.2007, sub-sections (2) & (3) were inserted to provide that the amounts disallowable u/s 14A of the Act will be calculated in accordance with the method prescribed under Rule 8D of the Rules. Rule 8D of the Rules provides that where the AO is not satisfied with the correctness of the claim of the expenditure made by the assessee or even where there is claim that no expenditure has been incurred in relation to income not forming part of total income, the disallowable expenditure shall be computed in accordance with sub-Rule (2) of Rule 8D of the Rules. We find that in this case the undeniable fact is of the assessee earning substantial exempt income. It is also seen that the assessee has estimated the disallowance of Rs. 12,723/- by adopting a value of 10% from certain heads of expenditure mentioned (supra). In fact, it is clearly visible that in the income and expenditure account filed in the paper book while he has deducted 10% from certain items of expenditure mentioned (supra) he has for some reason omitted to deduct any amount from audit fees of Rs. 25,960/-. This fact is mentioned merely to illustrate the point that there appears to be a degree of adhocism in terms of choosing the amounts from which 10% has been deducted and shown as suo moto disallowance u/s 14A of the Act. It is clear from a reading of the law on the subject that with effect from 01.04.2008 a clear-cut method has been provided for deducing expenditure relatable to earning of exempt income, especially when such expenditure is not clearly demarcated. However, it is also a fact that there are a catena of judgements which indicate that the exercise under Rule 8D of the Rules is not a mechanical and mindless exercise which can produce any figure for addition. Due care has to be taken to actually ensure that the disallowance is on a realistic basis from expenditure which can be attributed to the earning of exempt income.
Thus, in principle, it deserves to be held that in the present case section 14A of the Act would require to be dealt with in consonance with Rule 8D. However, it needs to be discussed as to the quantum of investments that needs to be considered for the purposes of making any disallowance herein.
3.2 There is considerable merit in the argument of the Ld. AR that only exempt income yielding investments need to be considered for the purposes of making any disallowances u/s 14A of the Act. The judicial pronouncements on this issue are in favour of the appellant in as much as it is fairly well settled as of now that any disallowance u/s 14A of the Act, (i) Williamson Financial Services Ltd. [166 taxmann.com 607 (Gauhati) (ii) Era Infrastructure (India) Ltd. [448 Itr 674 (Delhi) (iii) Avantha Realty Ltd. [164 taxmann.com 376 (Cal)] In light of these case laws, the Ld. AO is directed to recompute the disallowance u/s 14A of the Act by taking into account only exempt income yielding investments. Needless to say, the disallowance already made by the assessee will need to be given credit for.
3.3 Regarding the issue of disallowance made u/s 14A of the Act being considered for the purposes of section 115JB of the Act, it deserves to be mentioned that in the case of Birla Corporation Ltd., (ITA No. 1024/Kol/2024 and CO 04/Kol/2024), dated 24.12.2024, the following finding will decide the issue in favour of the assessee:
“5. Regarding the upward adjustment of disallowance computed under Section 14A of the Act for computing "book profit under Section 115JB of the Act. It is seen that for A.Y. 2015-16 the matter has been decided against the assessee by the Hon'ble ITAT vide its order in (supra) as under: “32. The Id, counsel for the assessee, in this respect, has submitted that the provisions of section 115JB are complete code in itself and therefore, the Assessing Officer cannot tinker with the book profits. However, we do not find force in the aforesaid contention of the Id. counsel for the assessee in this respect. It is to be pointed out that as per Explanation 1(f), the book profit means the profit shown in the statement of profit and less account as increased by the amount of expenditure relatable to the exempt income. The said amount of expenditure has already been ordered to be determined as per our observations made above while adjudicating the issue relating to the disallowance u/s 14A vide Ground No. 10 of the revenue's appeal. It has to be further noted that section 115JB in itself does not prescribe any procedure to calculate the expenditure relatable to exempt income earned by the assessee. The said provision has been separately and specifically placed in the Act u/s 14A of the Act. Therefore, the book profits of the assessee are liable to be increased by the expenditure as Clause (f) of section 115JB of the Act. In view of this, it is directed that the book profits will be increased u/s 115JB of the Act by the disallowance calculated as per our directions given while adjudicating Ground No.10 of the revenue's appeal. This ground of the revenue's appeal is hereby allowed."
5.1 It is seen that while coming to the conclusion as extracted above, the Hon'ble Bench was presumably not made aware of the ITAT Special Bench decision in the case of ACIT Vs. Vireet Investments Pvt. Ltd. reported in 82 taxmann.com 415 (Delhi- Trib-SB). In this case it has been held that the computation u/s 115JB of the Act is to be made without resorting to computation as contemplated under Section 14A read with Rule 8D of the Rules. Furthermore, a review of literature on this issue reveals that the Hon'ble Karnataka High Court in the case of PCIT Vs. J.J. Glastronics Pvt. Ltd. reported in 446 ITR 712 (Kar) has specifically directed that the amount disallowed under Section 14A could not be added to net profit while computing book profit under Section 115.JB of the Act. Similarly, the Hon'ble Delhi High Court in the case of PCIT (Central)-1, Vs. Moon Star Securities Trade and Finance Co. (P) Ltd. reported in 161 taxmann.com 158 as also directed that disallowance made under Section 14A of the Act could not be considered while computing MAT under Section 115.JB of the Act. These authorities are merely cited as illustrations since there are other judicial pronouncements also on the subject, including an unreported judgement of the Hon'ble Calcutta High Court: CIT vs Jayshree Tea Limited (ITAT 47 of 2014 and GA 1501 of 2014, order dated 19.11.2014). Respectfully following these judgements, and differing from the order of ITAT for AY 2015-16 (supra), the issue of computing for book profits after including additions made under Section 14A read with Rule SD, cannot be supported and thus, the action of Ld. CIT(A) as per his findings on page 45 of the impugned order is upheld and the specific ground of the revenue is dismissed." 3.4 Considering the discussion above, it is directed that the Ld. AO would apply the provisions of Rule 8D only on investments which have yielded exempt income for the year. Needless to say, the amount disallowed by the assessee on its own would be duly given credit for. To this extent, we set aside the impugned order and remand the issue back to the Ld. AO for fresh computation of disallowance u/s 14A read with Rule 8D of the IT Rules.
Before parting with this issue, the argument of the Ld. AR that strategic investment made long back, for which no effort or expenses have been incurred during the year under consideration, should be outside of the purview of the provision of section 14A of the Act, deserves to be discussed in the light of the case of Maxopp Investment Limited reported in 402 ITR 640 (SC). In this case law, the relevant paragraphs 33 and 34 deserve to be extracted as under:
“33. here is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what Didu Investments Private Limited interpretation is to be given to the words 'in relation to' in the given scenario, viz, where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not.
Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. Thus, it is clear that the nature or purpose of investments would not qualitatively affect the computation u/s 14A of the Act, as long as exempt income is yielded.
With these remarks the appeal of the assessee is partly allowed.