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Facts
The assessee, engaged in civil contracting and construction, filed his return of income which was processed at a higher total income. Subsequently, during scrutiny assessment, the Assessing Officer made additions for disallowance under Section 14A and education cess. The CIT(A) directed the AO to re-compute the disallowance under Section 14A.
Held
The Tribunal noted that it had previously decided a similar appeal for the assessee for the same assessment year, restricting the disallowance under Section 14A to Rs.10 lakhs on an adhoc basis. Following this precedent, the Revenue's appeal was dismissed.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D should be restricted to Rs. 10 lakhs on adhoc basis based on previous year's order in assessee's own case.
Sections Cited
143(1), 143(3), 144B, 14A, 143(2), 142(1), 8D, 144
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & Ms. ASTHA CHANDRA
This appeal filed by the Revenue is directed against the order dated 25.03.2025 of the Ld. CIT(A), Pune - 12 relating to assessment year 2020-21.
Facts of the case, in brief, are that the assessee is an individual engaged in the business of civil contractors and builders. He filed his return of income on 31.01.2021 declaring total income of Rs.36,73,55,850/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) at total income of Rs.36,85,60,000/-. Subsequently the return was selected for complete scrutiny assessment under CASS. Accordingly statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee in response to which the assessee filed the requisite details. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 144B of the Act on 20.09.2022 assessing the total income at Rs.40,41,76,243/- after making addition of Rs.3,05,36,389/- on account of disallowance u/s 14A of the Act and Rs.50,79,854/- on account of education cess.
So far as the disallowance of Rs.3,05,36,389/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962 is concerned, the Assessing Officer noted that the assessee has earned exempt income of Rs.4,24,28,153/- which is the share of profit in firm, dividend and interest on PPF. However, the assessee has not disallowed any amount towards expenditure in relation to income which does not form part of total income. According to the Assessing Officer as per provisions of section 14A of the Act, the expenditure in relation to income, which does not form part of total income, cannot be allowed as deduction. He, therefore, confronted the same to the assessee. The assessee submitted that it has declared interest of Rs.24,37,39,440/- which is much higher than the interest paid for general purpose i.e. Rs.1,02,24,000/-. Therefore, income from interest is higher by Rs.23,35,15,440/- and therefore, there is no question of disallowance of any interest. It was submitted that in order to attract the provisions of section 14A, the assessee must incur the expenditure in relation to the income not forming part of the total income. Relying on various decisions it was submitted that no disallowance is called for.
However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and made disallowance of an amount of Rs.3,05,36,389/- by invoking provisions of section 14A read with Rule 8D. Similarly, the Assessing Officer disallowed education cess of Rs.50,79,854/- on the basis of the amendment by the Finance Act, 2022, according to which the amendment is retrospective in nature i.e. w.e.f. assessment year 2005-06 onwards and therefore, this amendment is applicable for the year under consideration.
In appeal, the Ld. CIT(A) relying on various decisions directed the Assessing Officer to re-compute the disallowance u/s 14A read with Rule 8D @ 1% by taking only those investments from which income not forming part of the total income has been earned by the assessee during the year under consideration.
Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:
1) The order of the Ld. CIT(A) is contrary to law and to the facts and circumstances of the case. 2) The Ld. CIT(A) has erred in directing the AO to re-compute the disallowance u/s 14A r.w.r 8D(2)(ii) @ 1% by taking only those investments from which income not forming part of the total income has been earned by the assessee during the year under consideration by ignoring the CBDT, New Delhi's Circular No.5/2014 dated 11/02/2014 which clarified that the Rule 8D r.w.s 14A of the Act provides disallowance of the expenditure even where taxpayer in the particular year has not earned any exempt income. 3) The Ld. CIT(A) has erred in directing the AO to re-compute the disallowance u/s 14A r.w.r 8D(2)(ii) @ 1% by taking only those investments from which income not forming part of the total income has been earned by the assessee during the year under consideration in view of his decisions for A.Yrs.2017-18 & 2018-19, even though the assessee has not made any such grounds in the instant year. 4) The appellant craves to add, amend, alter or delete any of the above ground of appeal during the course of appellate proceedings before the Hon'ble Tribunal.
7. The Ld. Counsel for the assessee at the outset filed a copy of the order of the Tribunal in assessee’s own case for assessment year 2020-21 where the appeal filed by the assessee against the part relief granted by the Ld. CIT(A) has been decided and a lump sum amount of Rs.10 lakhs has been disallowed u/s 14A read with Rule 8D. He accordingly submitted that the appeal filed by the Revenue should be dismissed.
The Ld. DR fairly conceded that the Tribunal has already decided the appeal filed by the assessee and restricted the disallowance to Rs.10 lakhs as against the direction of the Ld. CIT(A) to compute the disallowance u/s 14A read with Rule 8D @ 1% by taking only those investments from which income not forming part of the total income has been earned by the assessee during the year under consideration.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Tribunal has already decided the issue while deciding the appeal filed by the assessee and restricted the disallowance to Rs.10,00,000/- on adhoc basis by observing as under: “9. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has earned the following exempt income: i. Profit from Firms and AOP of Rs.4,10,38,910/- ii. Dividend from shares held with Indian Companies of Rs.78,350/- iii. Interest on PPF Rs.1,06,745/- 10. We find the Assessing Officer, invoking the provisions of section 14A read with Rule 8D, made disallowance of Rs.3,05,36,389/-. We find the Ld. CIT(A) directed the Assessing Officer to re-compute the disallowance u/s 14A read with Rule 8D at 1% by taking only those investments from which income not forming part of the total income has been earned by the assessee during the year under consideration. It is the submission of the Ld. Counsel for the assessee that the Assessing Officer has not recorded any satisfaction as to the correctness of the claim of the assessee. It is also his submission that no expenditure was incurred during the year under consideration for earning income which does not form part of the total income and therefore, no disallowance is warranted under the provisions of section 14A of the Act. It is also his submission that the disallowance, if any, u/s 14A read with Rule 8D should be applicable only to such expenditure which may have any nexus with earning exempt income and not extend the disallowance to expenses having direct relation to earning taxable income.
11. We find some force in the above arguments of the Ld. Counsel for the assessee. A perusal of the order of the Ld. CIT(A) shows that he has given a finding at paras 4 and 5 that the assessee conducts his main business through two proprietary concerns viz. Nyati Housing and Nyati Consultants and Engineers. Separate books of account are maintained for these two businesses. Remaining activities are accounted for in the personal accounts of the assessee. A perusal of the submission made before the Ld. CIT(A) shows that the assessee during the appeal proceedings has given the details of administrative expenses of Rs.6,32,04,662/- appearing in the consolidated Profit & Loss Account out of which an amount of Rs.5,48,34,968/- pertains to Nyati Housing where there are no investments. Therefore, we find some force in the arguments of the Ld. Counsel for the assessee that an amount of Rs.5,48,34,968/- should be excluded for the purpose of disallowance u/s 14A of the Act. Further, a perusal of the total administrative expenses of Rs.1,06,94,843/- bifurcation of which is given at pages 15 and 16 of the order of the Ld. CIT(A) shows that the assessee has incurred various expenses as under:
Thus, we find that out of total amount of Rs.1,06,34,501/- an amount of Rs.50,79,854/- relates to education cess which has already been disallowed, Rs.23,25,150/- relates to depreciation, Rs.2,58,748/- relates to property insurance and Rs.12,78,739/- relates to the property tax which have no relevance to the earning of exempt income. However, for the remaining expenses, we are of the considered opinion that there is some nexus with earning of exempt income. Therefore, a balance approach has to be taken in the instant case. When it was pointed out to both sides, they agreed that a reasonable amount may be disallowed u/s 14A read with Rule 8D. Considering the peculiar facts and circumstances of the case, we are of the considered opinion that a reasonable disallowance of Rs.10 lakhs u/s 14A read with Rule 8D will meet the ends of justice. We hold and direct accordingly. The Assessing Officer is directed to restrict the disallowance u/s 14A read with Rule 8D to Rs.10,00,000/-. The grounds raised
by the assessee are accordingly partly allowed.”
10. Since the Tribunal has already decided the issue and restricted the disallowance to Rs.10 lakhs on adhoc basis, therefore, the grounds raised by the Revenue challenging the order of the Ld. CIT(A) has no merits and is liable to be dismissed. We accordingly dismiss the grounds raised by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 19th December, 2025.