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Facts
The assessee incurred expenses that were considered by the AO to be related to exempt income. The AO computed a disallowance under Section 14A read with Rule 8D(2), which was upheld by the CIT(A). The assessee also challenged the levy of interest under Sections 234B & 234C.
Held
The Tribunal held that the assessee had already made substantial suo moto disallowances related to exempt income. The Tribunal found that the AO's actions were not supported by the facts or by coordinate bench rulings. Therefore, the disallowance under Section 14A was allowed.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D(2) is justified when the assessee has made suo moto disallowances, and whether interest under Sections 234B & 234C is leviable.
Sections Cited
14A, 8D(2), 234B, 234C, 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, KOLKATA
Appearances by: Assessee represented by : Sourav Garg & Anand Karnani, ARs Department represented by : Nicholas Murmu, Addl. CIT, SR. DR Date of concluding the hearing : 17.06.2025 Date of pronouncing the order : 25.06.2025 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. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, vide order dated 21.03.2024.
1.1 In this case, the major issue pertains to disallowance of Rs. 81,29,000/- under Section 14A read with Rule 8D(2) of the Income Tax Rules. The second issue pertains to levy of interest under Sections 243B/C of the Act.
1.2 It is seen that the AO found that on investment of Rs. 1,79,21,14,170/- the assessee had suo moto disallowed expenses of Rs. 6,08,573/-. The Ld. AO considered this to be inadequate and proceeded ahead to compute the disallowance as per Rule 8D(2)(ii) of the IT Rules.
Digvijay Finlease Ltd. The Ld. AO worked out a disallowance of Rs. 1,47,53,464/- which was restricted to Rs. 87,37,573/-, being the amount of all expenses debited to Profit & Loss Account. It is seen that the Ld. AO gave credit for the suo moto disallowance of Rs. 6,08,573/- in his computation.
1.2 Aggrieved with this action, the assessee approached the CIT(A), where also he could not succeed since apparently, he could not demonstrate that he had used his own funds to invest in the exempt income yielding instruments. Regarding the charging of interest also, the Ld. CIT(A) has given a finding against the assessee as per para 6 of the impugned order on pages 9-10 thereon.
2. Further aggrieved, the assessee has approached the ITAT 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 action of Ld. AO in making disallowance of Rs. 81,29,000/- u/s 14A r.w.r. 8D(2) without appreciating the fact that appellant has suo moto made disallowance of Rs. 6,08,573/-1/614A 2. That on the facts and in the circumstances of the case, the Ld. A.O was not justified in mechanically applying the provisions of Rule 8D(2) without recording any reasons for dissatisfaction with regard to correctness of claim of expenditure by the appellant as stated in Sec. 14A(2) of the Act.
3. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified in confirming the action of A.O. for levying interest u/s 234B & 234C.
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.” 2.1 Before us, the Ld. AR argued with the help of written submission. Some portions from the written submissions deserve to be extracted for reference:
“2.0 No interest expenditure has been incurred in relation to earning of Exempt Income: 2.1 Ld CIT(A) has merely confirmed the disallowance made by AO on the contention that the assessee was not been able to substantiate the status of funds utilized for the said investments made in earning the exempt income [Para 4.2, Pg 7 of Order]. However, it is humbly submitted that neither the assessee has raised any borrowings nor has paid any interest on borrowings and hence no interest expenditure has been incurred in relation to earning of exempt income.
Digvijay Finlease Ltd. 3.0 Expenditure to be disallowed u/s 14A only if it is 'incurred' in relation to exempt income. 3.1 Out of total 'other administrative expenses' debited to profit & loss amounting to Rs. 87.36 Lakhs., the appellant has suo moto disallowed an amount of Rs. 52.06 Lakhs details of which is given as below: SI Particulars of Debited to Disallowed Remarks No. expense P&L in Return 1. CSR Expense 51,01,000 51,01,000 Already disallowed in computation. Hence disallowance expenditure u/s 14A has resulted in double disallowance.
Professional & 17,94,280 - Such expenditure has been incurred legal charges w.r.t Company law matters, Income tax matters and internal audit matters. Hence have no link whatsoever with earning of exempt dividend income.
3. Repairs & 7,29,102 - Repairs & maintenance, Rent & Maintenance taxes has been incurred for regular and Rent, rates maintenance of computers & & taxes printers and for rent payment & maintenance of office buildings.
Communication 3,74,995 - Represents various postage & charges telegram expenses incurred by the appellant for despatching of its balance sheet & share certificates to its shareholders as required by law.
Printing & 4,03,272 - Expenditure was incurred for Stationery printing annual report & other statutory notices to be issued to Shareholders. 6 Misc Expense 1,74,602 1,05,868 Suo moto disallowed depository & & Travelling expenses charges general expense amounting to Rs 1,05,868/- incurred in relation to earning of exempt income 7 Audit fees & 1,15,000 - Fees paid to comply with Statutory Director sitting and Tax Audit under various laws fees & for attending compulsory meetings required under the company law 8 Advertisement 45,322 - Have no link with earning of exempt & GST income. expenses Digvijay Finlease Ltd. 3.2 Therefore, out of total administrative expense of Rs. 87,37,573/-, an amount of Rs 52,06,868/has already been disallowed by the appellant in its Return of Income and only balance expenditure of Rs. 35,30,705/- has been claimed as allowable expenditure for earning other taxable income of Rs. 3.36,27,278/- ie. interest income and Short term gain on sale of investments. 3.3 Further, the above administrative expenses are required to be incurred in relation to maintenance and safeguarding of assessee's assets and compliances of various legal and regulatory requirements. Any expenditure having nexus with the earning of exempt income has itself been identified by the appellant and disallowed under Section 14A as stated above. Therefore, disallowance of any further expenditure by Assessing Officer without demonstrate a specific link of any such administrative expense to earning of exempt income is not correct and legally not tenable.” The Ld. AR also relied on the cases of Emerald Company Pvt. Ltd., dated 03.06.2024 and also on the case of Shree Capital Services Ltd., ITA No. 641/Kol/2024, dated 23.07.2024.
2.2 The Ld. DR relied on the orders of authorities below and stated that once there were enabling conditions to the triggering of Rule 8D then the AO had no option but to compute the disallowance accordingly.
We have carefully perused the documents before us and have heard the rival submissions. We find that in this case, the assessee has made very pin-pointed disallowances on his own accord, pertaining to the exempt income earned. Admittedly the assessee has considered all items of expenditure which could co-relate with the earning of exempt income, this fact itself would preclude the triggering of section 14A read with Rule 8D. We are also persuaded by the Ld. AR’s arguments that considerable expenses amounting to Rs. 52,06,868/- have already been disallowed out of the total expenses of Rs. 87,37,573/-, as is visible in the chart contained in the submissions extracted supra. In light of these facts, we cannot support the Ld. AO's actions not only on the basis of the facts of this case, but also following the coordinate Bench orders in the case of Emerald Company Pvt. Ltd. (supra) and Shree Capital Services Ltd. (supra).
3.1 Regarding the charging of interest under Section 234B & C, we find merit in the findings of Ld. CIT(A) in paras 6 at page 9 and 10 of the impugned order. Accordingly, we support the same and reject these grounds of appeal of the assessee.
Digvijay Finlease Ltd. 4. With these remarks, grounds pertaining to disallowance u/s 14A read with Rule 8D are allowed and the ground pertaining to charge of interest is dismissed.
In result, this appeal is partly allowed.
Order pronounced on 25.06.2025