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Facts
For A.Y. 2015-16, the assessee, Jasper Industries Pvt. Ltd., earned dividend income of Rs. 23,000/- from substantial equity investments. The Assessing Officer (A.O.) disallowed Rs. 53,90,000/- under Section 14A read with Rule 8D, considering a portion of administrative and indirect expenditure attributable to such investments. The assessee contended that no direct expenditure was incurred for exempt income and investments were for business purposes, but the CIT(A) upheld the A.O.'s disallowance.
Held
The Tribunal, relying on its own previous decision for A.Y. 2016-17 in the assessee's case and other judicial precedents, held that disallowance under Section 14A read with Rule 8D cannot exceed the actual exempt income earned during the relevant assessment year. Consequently, the Tribunal directed the A.O. to restrict the disallowance to the actual exempt dividend income of Rs. 23,000/-.
Key Issues
Whether disallowance under Section 14A read with Rule 8D can exceed the actual exempt dividend income earned by the assessee.
Sections Cited
14A, 36(1)(iii), 10(34), 10(38), 14A(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
करदाता का प्रतततितित्व/ : Shri EV Sri Krishna, C.A. Assessee Represented by राजस्व का प्रतततितित्व/ : Ms. G. Saratha, Sr. A.R. Department Represented by सुिवाई समाप्त होिे की ततति/ : 27.11.2025 Date of Conclusion of Hearing घोर्णध की तधरीख/ : 10.12.2025 Date of Pronouncement O R D E R PER MANJUNATHA G., A.M : This appeal filed by the assessee is directed against the order of the learned Addl/Joint Commissioner of Income Tax (Appeals) -1, 2 Jasper Industries Pvt. Ltd Nashik, dated 30.06.2025, pertaining to the assessment year 2015-16.
The grounds raised by the assessee reads as under :
“Ground No. 1 The learned CIT(A) erred in sustaining the disallowance of Rs. 53,90,000/- under Section 14A of the Income-tax Act, 1961, without appreciating the factual matrix that the investments were made purely for commercial and strategic business expediency and not for earning exempt income. Ground No. 2 The learned CIT(A) failed to appreciate that the appellant has not diverted any interest-bearing borrowed funds for making investments in equity shares and that disallowance under Section 36(1)(iii) is not applicable. Reliance is placed on the ITAT order for AY 2016–17, wherein similar facts were adjudicated in favour of the appellant. Ground No. 3 The learned CIT(A) erred in upholding the application of Rule 8D for disallowance under Section 14A, even though no income exempt under Section 10(34) or Section 10(38) was claimed as exempt and all dividend income received was offered to tax by the appellant. It is submitted that the disallowance under Section 14A should be restricted to the actual exempt income earned, if any, and not on the total value of investments. Ground No. 4 The learned CIT(A) erred in dismissing the ground on the absence of any expenditure directly relatable to exempt income, as no such expenditure has been incurred by the appellant for earning exempt income. Ground No. 5 The learned CIT(A) erred in overlooking the fact that the appellant company maintains proper books of account, audited by Chartered Accountants, and that application of Rule 8D is not justified in the absence of incorrect maintenance of books or non-identification of relevant expenditure by the A.O.
3 Jasper Industries Pvt. Ltd Ground No. 6 The learned CIT(A) failed to appreciate the principle established by the Hon’ble ITAT, Hyderabad in AY 2016–17 in & 6/Hyd/2021, where the issue of investment for business expediency and non-diversion of borrowed funds was adjudicated in favour of the appellant. The principle of consistency and judicial discipline requires the same view to be applied for AY 2015–16. Ground No. 7 Without prejudice, the learned CIT(A) erred in not restricting the disallowance under Section 14A to 0.5% (or proportionate percentage as declared in relevant rulings/notifications) of the value of investments on which dividend income was actually earned, rather than on the entire investments made by the appellant company. Ground No. 8 The learned CIT(A) erred in not appreciating that the investments in subsidiaries are integrally connected with the activities of the appellant’s principal business, are long-term and strategic in nature, and form part of commercial expediency to complement and supplement the dealership business, thereby not attracting disallowance under Section 14A. Ground No. 9 The appellant craves leave to add, alter, amend, modify, substitute or delete any of the above grounds of appeal at or before the time of hearing. Ground No.
10. The learned CIT(A) erred in not appreciating that the A.O. did not record the requisite satisfaction as required under Section 14A(2) of the Act before invoking and computing disallowance under Rule 8D. The A.O. failed to record any dissatisfaction with the correctness of the appellant’s claim regarding expenditure in relation to exempt income or to establish that any expenditure was incurred for earning exempt income and hence the impugned disallowance is invalid and liable to be deleted.”
The brief facts of the case are that, the assessee, M/s. Jasper Industries Private Limited, is engaged in the business of 4 Jasper Industries Pvt. Ltd authorized dealership of Tata Motors Ltd. and is also engaged in providing servicing of vehicles through workshops, filed its return of income for the A.Y. 2015–16 on 30.09.2015, admitting a loss of Rs. 5,99,84,008/-. The case was selected for manual scrutiny and during the course of assessment proceedings, from the financial statements of the assessee, the A.O. noticed that the assessee had earned dividend income of Rs. 23,000/- on investment in equity instruments. The A.O. further noted that the assessee had made current investments of Rs. 5,302.61 lakhs as on 01.04.2014 and Rs. 5,479.11 lakhs as on 31.03.2015 in equity instruments.
The A.O. called upon the assessee to explain as to why disallowance should not be made under Section 14A read with Rule 8D of the Act in respect of expenditure allegedly incurred for earning exempt dividend income. In response, the assessee submitted that it has not incurred any direct expenditure for earning the dividend income and that the investments were made out of its own funds for business purposes. The assessee further submitted that the dividend income earned was only incidental and no administrative expenditure was attributable to such investments.
5 Jasper Industries Pvt. Ltd
The A.O., after considering the submissions of the assessee and also taking note of the financial statements for the impugned assessment year, opined that the assessee had made substantial investments in equity instruments and had also earned exempt dividend income. The A.O. further observed that considering the nature and magnitude of investments, certain portion of administrative and indirect expenditure is attributable to such investments. Accordingly, by invoking the provisions of Section 14A read with Rule 8D, as amended vide CBDT Notification No. 43/2016 dated 02.06.2016, the A.O. computed the disallowance at 1% of the annual average of the monthly average investments amounting to Rs. 53,90,00,000/- and worked out the disallowance at Rs. 53,90,000/-, which was added back to the returned loss of the assessee.
Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee reiterated the arguments made before the A.O. and submitted that the assessee is mainly engaged in the business of authorized dealership of Tata Motors Ltd. and is also engaged in providing servicing of vehicles through workshops. The assessee 6 Jasper Industries Pvt. Ltd further submitted that the investments made in equity instruments were out of its own funds and for business purposes and that no specific expenditure was incurred for earning the dividend income. Therefore, the A.O. is erred in invoking the provisions of Section 14A read with Rule 8D and making disallowance of Rs. 53,90,000/-. The assessee thus challenged the disallowance made under Section 14A of the Act.
The Ld. CIT(A), after considering the submissions of the assessee and also taking note of the material available on record, observed that the assessee had made substantial investments in equity instruments and had also earned exempt dividend income. The Ld. CIT(A) further observed that the expenditure claimed in the Profit & Loss Account is indirectly attributable to such investments. The Ld. CIT(A) held that the provisions of Section 14A read with Rule 8D are applicable to the facts of the case and that the A.O. has rightly computed the disallowance by applying 1% of the annual average of monthly average investments as prescribed under the amended Rule 8D. Accordingly, the Ld. CIT(A) sustained the addition of Rs. 53,90,000/- made by the A.O. under Section 14A read with Rule 8D of the Act.
7 Jasper Industries Pvt. Ltd
Aggrieved with the order of Ld. CIT(A), the assessee is now in appeal before us.
The learned counsel for the assessee Shri EV Sri Krishna, C.A. submitted that, the assessee had made investments in equity instruments and the value of such investments as on 01.04.2014 stood at Rs. 5,302.61 lakhs and as on 31.03.2015 stood at Rs. 5,479.11 lakhs. During the year under consideration, the assessee earned dividend income of Rs. 23,187/-, which was rounded off to Rs. 23,000/- in the assessment order. The Ld. counsel submitted that the assessee has not incurred any direct expenditure for earning such exempt income. He further submitted that in response to the show-cause notice issued by the A.O., the assessee had categorically explained that no expenditure was incurred for earning the exempt income. However, the A.O., not being satisfied with the said explanation, proceeded to apply the provisions of Section 14A read with Rule 8D and computed the disallowance at 1% of the average investment, which worked out to Rs. 53,90,000/-.
The learned counsel for the assessee further submitted that the appeal preferred by the assessee before the Ld. Addl./Joint 8 Jasper Industries Pvt. Ltd CIT(A) was dismissed mainly by placing reliance on the decision of the Hon’ble Supreme Court in the case of Maxopp Investments Ltd. and by holding that it is immaterial whether the assessee has actually earned dividend income or not. The Ld. counsel for the assessee submitted that the only legal issue involved in the present appeal is whether the disallowance made under Section 14A r.w.r. Rule 8D can exceed the exempt dividend income earned during the year. He submitted that in the assessee’s own case for the subsequent assessment year 2016–17, the Hon’ble Tribunal vide & 6/Hyd/2021 dated 05.06.2024 has held that disallowance under Section 14A r.w.r. Rule 8D cannot exceed the exempt income earned for the relevant assessment year. The Ld. counsel further submitted that the reliance placed by the Ld. CIT(A) on the decision of the Hon’ble Supreme Court in the case of Maxopp Investments Ltd. is misplaced, since in the present case, the A.O. has not identified any actual expenditure incurred for earning the exempt income and has merely applied the mathematical formula prescribed under Rule 8D. He submitted that the assessee is also not disputing the purpose of investment and the investments were not 9 Jasper Industries Pvt. Ltd held as stock-in-trade. He further submitted that various judicial precedents, including decisions of the Hon’ble Supreme Court, High Courts and different Benches of the Tribunal, have consistently held that disallowance under Section 14A r.w.r. Rule 8D has to be restricted to the amount of exempt income earned during the relevant year. He finally contended that the disallowance made under Section 14A r.w.r. Rule 8D be restricted to Rs. 23,000/-, being the exempt dividend income earned by the assessee during the year under consideration, and all other grounds may be treated as not pressed.
Ms. G. Saratha, Sr. A.R. for the Revenue, on the other hand, strongly relied upon the orders of the lower authorities. She submitted that the A.O. as well as the Ld. CIT(A) have rightly invoked the provisions of Section 14A read with Rule 8D having regard to the magnitude of investments made by the assessee and the exempt income earned. She further submitted that the Ld. CIT(A) has passed a well-reasoned order by applying the ratio laid down by the Hon’ble Supreme Court in the case of Maxopp Investments Ltd. and, therefore, the addition sustained by the Ld. CIT(A) does not call for any interference. Accordingly, she prayed 10 Jasper Industries Pvt. Ltd that the order of the Ld. CIT(A) be upheld and the appeal filed by the assessee be dismissed.
We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The only issue involved in the present appeal is with regard to the disallowance made under Section 14A read with Rule 8D amounting to Rs. 53,90,000/-. We find that under an identical set of facts, the Coordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2016–17 vide & 6/Hyd/2021 dated 05.06.2024 has examined an identical issue and held that disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned during the relevant assessment year. The Tribunal, after considering the judicial precedents on the issue, upheld the restriction of disallowance to the extent of exempt income. The relevant finding of the Coordinate Bench reads as under:
12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully considered various evidence filed by the assessee in light of relevant reasons given by the Ld.AO and the Ld.CIT(A) to deal with the issue of disallowance of interest u/s. 36(1)(iii) of the Act. The provisions of section 36(1)(iii) of the Act deals with deduction towards interest paid on borrowed capital. In case loans borrowed for the purpose of business are not utilized or in case a diversion of interest bearing funds for non- 11 Jasper Industries Pvt. Ltd business purpose, interest relatable to the portion of loans, which has been used for non-business purpose cannot be allowed as deduction. In the present case, the AO claimed that the assessee has diverted interest bearing funds for non-business purposes like investment in equity instruments. The AO has analysed the financial statement of appellant for the impugned assessment year and observed that there is an increase in short term and long term borrowings. According to the AO, the assessee could not establish business nexus with investment in equity instruments. Therefore, invoked the provisions of section 36(1)(iii) of the Act and disallowed proportionate interest. It was the argument of the Ld.Counsel for the assessee before the lower authorities that investment in equity instruments of various companies is for the purpose of commercial expediency. The assessee being a dealer of Tata Motors, has made investment in various joint ventures, promoted by Tata Group, which have directly or indirectly benefitted to the business of the assessee. Since the investment in equity instrument is for the purpose of business, the question of disallowance of interest expenditure does not arise. 12.1. We have given our thoughtful consideration to the reasons given by the AO to disallow the interest expenditure u/s. 36(1)(iii) of the Act and section 14A r.w. Rule 8D of the Rules in light of various averments made by the Ld.Counsel for the assessee and we do not subscribe to the reasons given by the AO for the simple reason that, just because there is increase in investment in equity instrument, it cannot be said that the assessee has diverted interest bearing funds for non business purpose. Further, there is no finding from the AO with regard to the diversion of loan borrowed for the purpose of business for non-business purpose. Although the AO refers to increase in equity instruments and corresponding increase in long term and short term borrowings, but failed to make out a case that increase in investments in equity instruments is out of borrowed funds. Further, the assessee has filed all the evidences and proved that investment in equity instruments of various companies is for strategic business purpose and said investments gave business advantage to the assessee. We find that the assessee has made investments in various companies like M/s. Bhaskar Transport Pvt. Ltd., M/s. Bhubaneswar Power Pvt. Ltd., (BPPL), M/s. J.L. Power Ventures Pvt. Ltd., M/s. Aditya Automotive Applications Pvt. Ltd., M/s. Jasper Automobiles Pvt. Ltd., and M/s. Indicor Steel Pvt. Ltd. All these companies are directly or indirectly connected with business carried on by the assessee. If the amounts so invested is purely a strategic investment and for the purpose of commercial expediency, then the AO cannot held that the said investments are for non-business purpose. Further, by investing in various companies linked with Tata Group concern, the company got several advantages in its automobile dealership business, since the appellant is only a sole and exclusive authorised dealer of Tata Motors for the entire state of Telangana and in the three districts of Andhra Pradesh for commercial vehicles. Further, the 12 Jasper Industries Pvt. Ltd said investment has given various business advantages to the assessee. Therefore, we are of the considered opinion that the AO is erred in treating the investment in equity instruments is not for the purpose of business of the assessee. Ld.CIT(A) after considering the relevant submissions, has rightly held that the AO failed to make out a case of diversion of interest bearing funds for non-business purpose and consequently, provisions of section 36(1)(iii) of the Act, cannot be invoked. Thus, we are inclined to uphold the findings of the Ld.CIT(A), and reject the grounds raised by the Revenue. 12.2. Having said so, let us come back to the provisions of section 14A r.w. Rule 8D of the Rules. The AO had also invoked provisions of section 14A r.w. Rule 8D of the Rules and observed that said disallowance of interest is also covered under the provisions of Section 14A of the Act. Ld.CIT(A) has approved the findings of the AO insofar as invoking the provisions of section 14A r.w. Rule 8D of the Rules, however, directed the AO to restrict the disallowance of interest expenditure to the extent of exempt income earned by the assessee for the relevant assessment year. In our considered opinion, there is no error in the reasons given by the Ld.CIT(A) to restrict the disallowance interest expenditure u/s. 14A r.w. Rule 8D of the Rules to the extent of dividend income earned for the assessment year, because this issue is fully covered by the decisions of the Hon'ble Supreme Court in the case of CIT vs. Chettinad Logistics Pvt. Ltd., (2018) 95 taxmann.com 250 (SC). A similar view was also taken by the Hon'ble Delhi High Court in the case of Cheminvest Ltd., vs. CIT (2015) 61 taxmann.com 118 (Delhi), wherein it was clearly held that if no exempt income, then, no disallowance u/s. 14A r.w. Rule 8D of the Rules. In other words, disallowance u/s. 14A r.w. Rule 8D of the Rules does not exceed the exempt income earned for the relevant assessment year. In the present case, Ld.CIT(A) restricted the disallowance u/s. 14A r.w. Rule 8D of the Rules to the extent of exempt income earned by the assessee. Therefore, we are inclined to uphold the findings of the Ld.CIT(A) and reject the grounds raised by the assessee.
In this view of the matter and by respectfully following the decision of the Coordinate Bench of the ITAT, Hyderabad in the assessee’s own case for A.Y. 2016–17 in & 6/Hyd/2021 dated 05.06.2024 (supra), we set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to 13 Jasper Industries Pvt. Ltd restrict the disallowance made under Section 14A read with Rule 8D to the extent of exempt dividend income of Rs. 23,000/- only.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 10th December, 2025. श्री विजय पाल राि (मंजूनाथ जी) (VIJAY PAL RAO) (MANJUNATHA G.) उपाध्यक्ष /VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER Hyderabad, dated 10.12.2025. TYNM/sps आदेशकी प्रनतनलनप अग्रेनर्त/ Copy of the order forwarded to:-
1. 1. निर्धाररती/The Assessee : Jasper Industries Pvt. Ltd., H.No.8-2-269/10, Suite No.202, 2nd Floor, Trendset Towers, Road No.2, Banjara Hills, Hyderabad – 500034, Telangana. 2. रधजस्व/ The Revenue : The Deputy Commissioner of Income Tax, Circle 2(1), Hyderabad.