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Facts
The assessee company filed its return declaring NIL income under normal provisions but book profit under Section 115JB. It received exempt dividend income of Rs. 57,58,671/- and made a suo motu disallowance of Rs. 5,000/- under Section 14A. The Assessing Officer rejected the assessee's claim and applied Rule 8D to disallow Rs. 10,67,172/-.
Held
The Tribunal held that the Assessing Officer had recorded the necessary satisfaction as required by Section 14A(2) of the Act and Rule 8D, particularly given the assessee's failure to provide details or apportion common administrative/establishment expenses. The Tribunal concluded that the suo motu disallowance of Rs. 5,000/- was insufficient and upheld the disallowance of Rs. 10,67,172/- computed under Section 14A read with Rule 8D.
Key Issues
Whether the Assessing Officer recorded the necessary satisfaction under Section 14A(2) of the Income Tax Act before applying Rule 8D to disallow expenditure related to exempt income, and whether the quantum of disallowance was justified.
Sections Cited
14A, 14A(2), 14A(3), 115JB, 10(34), Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, HYDERABAD “SMC-B” BENCH: HYDERABAD
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD “SMC-B” BENCH: HYDERABAD BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MANJUNATHA G, ACCOUNTANT MEMBER ITA.No.113/Hyd./2025 Assessment Year 2017-2018 Prasad Film Laboratories The ACIT, Circle-6(1), Private Limited, Hyderabad. vs. Hyderabad – 500 004. PIN – 500 034. Telangana. Telangana. PAN AABCP2280P (Appellant) (Respondent) For Assessee : Sri V. Siva Kumar, Advocate For Revenue : Sri Vinodh Kannan, Sr. AR Date of Hearing : 07.08.2025 Date of Pronouncement : 13.08.2025 ORDER PER MANJUNATHA G. :
The above appeal has been filed by the assessee against the order dated 23.12.2024 of the learned Addl./Joint Commissioner of Income Tax-(Appeals)-5, Mumbai, relating to the assessment year 2017-2018.
The assessee has raised the following grounds in the instant appeal :
2 ITA.No.113/Hyd./2025 1. “The Order of the Commissioner of Income Tax, Appeal, ADDL/JCIT(A)-5, Mumbai dated 23-12-2024 is erroneous, contrary to law and facts of the case. 2. i) Commissioner of Income Tax (Appeals) is not justified in sustaining the disallowance of Rs. 10,67,172/- made by the Assessing Officer u/s.14A read with Rule 8D(2)(ii). ii) Commissioner of Income Tax (Appeals) ought to have seen that Appellant did not incur any expenses during the year for making investment, as investments were made in earlier years and also did not incur any expenditure for earning exempt income as dividends were declared by mutual funds on a daily basis and the same was utilised for allotting additional units every day without any effort by the Appellant. iii) Commissioner of Income Tax (Appeals) further ought to have seen that the Appellant had already disallowed Rs.5,000/- u/s. 14A in its computation of income towards the accounting work for recording the transactions but had not incurred any other expenditure. Hence, Commissioner of Income Tax (Appeals) is not justified in confirming the disallowance of Rs.10,67,172/- u/s.14A made by the Assessing Officer.
3. For all of the above and such other grounds as may be urged at the time of hearing it is prayed that the appeal be allowed and suitable directions be issued to the Assessing Officer to delete disallowance of Rs.10,67,172/- made u/s.14A in the Asst. Order in the interest of justice.”
The assessee has filed a petition for admission of additional ground by filing additional ground of appeal. The additional ground raised by the assessee before the Tribunal is as under : "On the facts and in the circumstances of the case and in law, the disallowance made by the Assessing Officer under Section 14A read with rule 8D is bad in law, as the Learned Assessing Officer failed to record his dissatisfaction with regard to the correctness of the appellant's claim, as required under Section 14A(2) of the Income-tax Act, 1961."
3 ITA.No.113/Hyd./2025 4. After hearing both the sides, we admit the additional grounds since it goes to the root of the matter by following the Judgment of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd., vs., CIT [1998] 229 ITR 383 (SC).
Brief facts of the case are that, the assessee company filed return declaring Rs.NIL income under the normal provisions of the Income Tax Act, 1961 and book profit of Rs.1,90,54,810/- u/sec.115JB of the Income Tax Act, 1961. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that, the assessee was in receipt of dividend income of Rs.57,58,671/- which was claimed to be exempt u/sec.10(34) of the Income Tax Act, 1961 [in short “the Act”]. The Assessing Officer further noted that, assessee has made suo motu disallowance of expenditure of Rs.5,000/- u/sec.14A of the Income Tax Act, 1961. The Assessing Officer, called-upon the assessee to explain as to why disallowance contemplated u/sec.14A of the Act shall not be disallowed by invoking Rule 8D of I.T. Rules, 1962. In 4 ITA.No.113/Hyd./2025 response, the assessee submitted that, it has made investment in mutual fund out of it’s own funds on the advice of M/s. RLP Securities Pvt Limited, who are stockbrokers and the assessee did not pay any fees to them as they have come-forward to advise the assessee company on free of cost as they will be getting commission from mutual fund. The assessee further submitted that, the said mutual fund scheme is daily dividend scheme, which means that, the mutual fund declares dividend every working day and reinvests such dividend in its units. The assessee further submitted that, it had also redeemed the mutual fund units 4 times during the financial year under consideration. However, claimed that, they have not done any work in connection with earning dividend income and also not incurred any expenditure. The Assessing Officer after considering the relevant submissions of the assessee and also taken note of provisions of sec.14A of the Act, worked-out the disallowance contemplated u/sec.14A by applying the provisions of Rule 8D of I.T. Rules, 1962 and determined disallowance of Rs.10,67,172/- @ 1% of annual
5 ITA.No.113/Hyd./2025 average of monthly average of investments by holding that, the assessee has not maintained separate books of accounts for investments made in mutual funds and since, there is no separate expenditure recorded by the assessee towards investment activity, except debiting the amount of Rs.5,000/-, for which, there is no basis, the Assessing Officer observed that the assessee has failed to apportion administrative/establishment expenses for investment and business activity and in absence of relevant basis for making ad-hoc disallowance of Rs.5,000/-, the Assessing Officer rejected the explanation of assessee and computed the disallowance at Rs.10,67,172/- under section 14A read with Rule 8D of I.T. Rules, 1962.
Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). Before the CIT(A), the assessee contended that, the assessee has made investment in mutual funds, for which, it has not incurred any specific expenditure. Further, the investment in mutual fund is a daily dividend scheme and the same has been reinvested, for which, the assessee has not spend any time
6 ITA.No.113/Hyd./2025 or resources. Although, the assessee has not incurred any expenditure, but, has made disallowance of Rs.5,000/- considering the provisions of section 14A of the Act. The learned CIT(A) after considering the relevant submissions of the assessee and also taken note of certain judicial precedents held that, non-maintenance of separate books of accounts by the assessee with regard to expenditure incurred for earning non-taxable income is a ground for the Assessing Officer to reject the arguments of the assessee and computing disallowance under section 14A with reference to Rule 8D of I.T. Rules, 1962. The CIT(A) further held that, the object of section 14A is to ensure that so much of the expenditure incurred for earning income that do not constitute total income of the assessee, should not be allowed. In otherwords, when income is outside the tax net, expenditure incurred for earning such income also should not be allowed to set-off in the computation of taxable income. Since, the assessee has not filed any details as to maintenance of separate books of accounts for investment activity and business activity, the Assessing Officer has 7 ITA.No.113/Hyd./2025 rightly rejected the suo motu disallowance made by the assessee for Rs.5,000/- and applied provisions of Rule 8D of I.T. Rules, 1962 and computed the disallowance under section 14A read with Rule 8D of I.T. Rules, 1962 and made addition of Rs.10,67,172/- @ 1% of annual average of monthly average investments in mutual funds.
Aggrieved by the Order of the learned CIT(A), the assessee is now, in appeal before the Tribunal.
Sri V. Siva Kumar, Advocate-Learned Counsel for the Assessee referring to ledger account of HDFC Floating Rate Income Fund submitted that, the assessee-company has made investment in mutual funds in earlier financial year and the said mutual fund is a daily dividend declaration scheme and whatever dividend declared by the mutual fund, has been reinvested in the fund. Further, during the financial year relevant to assessment year under consideration, the assessee has redeemed the mutual funds on four occasions. Except this activity, the assessee has not carried-out any activity, which resulted in incurring any expenditure for earning dividend income. Since, the 8 ITA.No.113/Hyd./2025 assessee has not incurred any expenditure, has made only ad-hoc disallowance of Rs.5,000/- under section 14A of the Act. The Assessing Officer and the learned CIT(A) without considering the relevant facts, has simply made disallowance under section 14A read with Rule 8D of I.T. Rules, 1962 and made addition of Rs.10,67,172/- 8.1. Learned Counsel for the Assessee further referring to the additional grounds of appeal filed by the assessee submitted that, the disallowance made by the Assessing Officer under section 14A read with Rule 8D of I.T. Rules, 1962, cannot be sustained because, the Assessing Officer has failed to record satisfaction as required under section 14A(2) of the Act with reference to the books of accounts that, suo motu disallowance by assessee is not correct. In absence of any satisfaction, the disallowance made by the Assessing Officer under section 14A read with Rule 8D of I.T. Rules, 1962 cannot be upheld. In this regard, he relied upon certain judicial precedents i.e., decision of Hon’ble Bombay High Court in the case of PCIT vs., Tata Capital Ltd., [2024] 161 taxmann.com 557
9 ITA.No.113/Hyd./2025 (Bom.); decision of Hon’ble Madras High Court in the case of Marg Ltd., vs., CIT [2020] 120 taxmann.com 84 (Madras) and decision of ITAT, Mumbai in the case of Asian Paints Ltd., vs., ACIT [2024] 160 taxmann.com 356 (Mumbai- Trib.).
Sri Vinodh Kumar, learned Sr. AR for the Revenue, on the other hand, supporting the order of the learned CIT(A) submitted that, the Assessing Officer has recorded satisfaction with reference to suo motu disallowance made by the assessee, which is evident from the assessment order, where the Assessing Officer has not accepted the argument of the assessee in light of suo motu disallowance of Rs.5,000/- under section 14A of the Act and said findings of the Assessing Officer constitute satisfaction as required under section 14A(2) of the Act. Further, after amendment of Rule 8D with effect from the financial year 2016, computation of disallowance @ 1% on average monthly average of investments is mandatory, whether or not, the assessee has incurred any expenditure for the purpose of earning dividend income. Since, the assessee has 10 ITA.No.113/Hyd./2025 not justified suo motu disallowance of Rs.5,000/- made under section 14A, the Assessing Officer has rightly invoked the provisions of Rule 8D of I.T. Rules, 1962 and computed the disallowance at Rs.10,67,172/-. The learned CIT(A) after considering the relevant facts, has rightly sustained the addition made by the Assessing Officer and thus, the Order of the learned CIT(A) should be upheld.
We have heard both the parties, perused the material on record and the orders of the authorities below. The assessee has challenged disallowance under section 14A read with Rule 8D of I.T. Rules, 1962 in light of provisions of section 14A(2) of the Act and argued that, in absence of satisfaction with reference to the books of accounts maintained for the relevant assessment year, that the suo motu disallowance computed by the assessee is incorrect, the Assessing Officer cannot apply provisions of Rule 8D for computing disallowance under section 14A of the Act. The assessee has referred to certain judicial precedents in support of it’s arguments including the decision of Hon’ble Bombay High Court in the case of Tata
11 ITA.No.113/Hyd./2025 Capital Ltd., (supra). We have carefully considered the relevant arguments of the assessee in light of certain judicial precedents and we find that, as per the provisions of section 14A(2) of the Act, the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. As per section 14A(3), sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not farm part of the total income under this Act. A plain reading of the section 14A(2) of the Act, makes it very clear that, before computing disallowance under section 14A read with Rule 8D of I.T. Rules, 1962, the Assessing Officer shall arrive at a satisfaction that, the claim of the assessee that, no 12 ITA.No.113/Hyd./2025 expenditure has been incurred or suo motu disallowance made under section 14A is not correct, having regard to the books of accounts of the assessee for the relevant assessment year. This principle is also supported by the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd., vs., CIT (2018) 402 ITR 640 (SC) where the Hon’ble Supreme Court in para-41 observed that, “Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned, but, the Assessing Officer was not accepting the said apportionment, in that eventuality, it will have to record its satisfaction to this effect." Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer”.
13 ITA.No.113/Hyd./2025 11. In the present case, going by the facts available on record, we find that, the Assessing Officer in categorical words in Para-3 of his order has recorded that, the suo motu disallowance of Rs.5,000/- made by the assessee has no basis going by the amount of investment in mutual funds and total expenditure incurred by the assessee for the year under consideration for Rs.7,31,06,945/- which includes administrative/establishment expenses etc. In our considered view, the said findings of the Assessing Officer constitutes satisfaction as required to be recorded u/sec.14A(2) of the Act and thus, the argument of the Learned Counsel for the Assessee that, the Assessing Officer has not recorded satisfaction as required under section 14A(2) before proceeding to compute the disallowance under section 14A read with Rule 8D of I.T. Rules, 1962 is devoid of merit and cannot be accepted.
We further note that, although, the assessee has relied upon certain judicial precedents including decision of Hon’ble High Court of Bombay in the case of PCIT vs., Tata Capital Ltd., (supra); decision of Hon’ble Madras High Court
14 ITA.No.113/Hyd./2025 in the case of Marg Ltd., vs., CIT [2020] 120 taxmann.com 84 (Madras) and decision of ITAT, Mumbai in the case of Asian Paints Ltd., vs., ACIT [2024] 160 taxmann.com 356 (Mumbai-Trib.), we find that, the Hon’ble Bombay High Court has given the categorical finding that, although, the Assessing Officer has stated that, the explanation of the assessee is not acceptable, he has not given reasons as to why it was not acceptable to him. Therefore, under those facts, the Hon’ble Bombay High Court came to the conclusion that in absence of relevant satisfaction as required under section 14A(2) of the Act, the computation of disallowance under section 14A read with Rule 8D of I.T. Rules, 1962, is not in accordance with law and disallowance under section 14A of the Act, cannot be upheld. In the present case, we have already noted in earlier part of this order that, the Assessing Officer has recorded satisfaction in light of arguments of assessee and suo motu disallowance made under section 14A read with Rule 8D of I.T. Rules, 1962 on the basis of total expenditure debited to P & L A/c and arrived at a satisfaction that, the suo motu disallowance
15 ITA.No.113/Hyd./2025 computed by the assessee for Rs.5,000/- under section 14A is not acceptable. Therefore, in our considered view, the said finding of the Assessing Officer is constitutes “satisfaction” as required to be recorded under section 14A(2) of the Income Tax Act, 1961 and thus, we reject the ground taken by the assessee.
Coming back to disallowance computed by the Assessing Officer for Rs.10,67,172/- under section 14A read with Rule 8D of I.T. Rules, 1962. Admittedly, the assessee has not maintained separate books of accounts for investment activity and business activity. Although, the assessee claims that, it has not incurred any expenditure for earning dividend income and further, has incurred only Rs.5,000/- for investment activity, in our considered view, going by the amount of expenditure debited to P & L A/c, the possibility of incurring certain administrative and establishment expenses out of common expenditure for investment activity and business activity cannot be ruled out. Since, the assessee has not furnished any details and also not apportioned the administrative and establishment
16 ITA.No.113/Hyd./2025 expenses to investment activity and business activity, in our considered view, the Assessing Officer has rightly applied the provisions of section 8D of I.T. Rules, 1962 and computed 1% of annual average on monthly average of investments and worked-out disallowance under section 14A to Rs.10,67,172/-. Therefore, we are of the considered view that, there is no merit in the arguments of the assessee and thus, we reject the argument of the assessee and uphold the addition made by the Assessing Officer under section 14A of the Income Tax Act, 1961.
In the result appeal of the assessee is dismissed.