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Facts
The assessee company filed its return for AY 2016-17 and the Assessing Officer (AO) made a disallowance under Section 14A r/w Rule 8D and treated a capital subsidy as income. The CIT(A) deleted the capital subsidy addition but sustained the Section 14A disallowance.
Held
The Tribunal held that Section 14A disallowance can only be made if there is exempt income. As the assessee did not earn any exempt income, the disallowance made by the AO was restricted to the suo-motu disallowance made by the assessee.
Key Issues
Whether disallowance under Section 14A can be made in the absence of any exempt income earned by the assessee during the assessment year?
Sections Cited
14A, Rule 8D, 250
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Income Tax Appellate Tribunal, B BENCH: CHENΝΑΙ
Before: MS. PADMAVATHY.S & SHRI MANU KUMAR GIRI
आदेश / O R D E R
PER PADMAVATHY.S, A.M: This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals), Addl./JCIT(A), Agra (in short "FAA") passed u/s. 250 of the Income Tax Act, 1961 (in short "the Act") dated 09.06.2025 for Assessment Year (AY) 2016-17.
The assessee is a private limited company and filed the return of income for AY 2016-17 on 05.10.2016 declaring total income of Rs.1,53,15,921/-. The A.O completed the assessment by making a disallowance u/s. 14A r/w Rule 8D to the tune of Rs. 5,07,051/- and also Besmak Components P. Ltd. :- 2 -:
treating the capital subsidy received by the assessee amounting to Rs.31,03,800/- as income of the assessee. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) gave partial relief to the assessee by deleting the addition made towards capital subsidy and sustain the disallowance u/s. 14A r/w. Rule 8D. The relevant observation of the CIT(A) while sustaining the disallowance u/s. 14A is extracted here below: “4.1.3 Analysis: 4.1 Ground 1-Disallowance under Section 14A read with Rule 8D In the assessment order, the Learned Assessing Officer applied the provisions of section 14A read with Rule 8D to the appellant's corpus of investments and disallowed an expenditure of 5,07,051 on the ground that such investments were "capable of generating exempt income." It is now well settled position that for the purpose of section 14A, disallowance must be made not only in respect of investments which actually yield exempt income during the year but also in respect of investments which are capable of yielding such income, irrespective of whether they have done so in the year under appeal. In the present case, the appellant's investment schedule demonstrates that substantial sums were held in shares, mutual funds and other instruments capable of attracting dividend income or other exempt receipts, and the Assessing Officer was thus justified in applying Rule 8D to the entire investment corpus. The appellant's contention to restrict disallowance only to those investments from which exempt income was actually received overlooks the legislative intent to curb expenditure yielding tax-free returns in any form. Accordingly, Ground 1 is rejected and the addition of 5,07,051 under section 14A is confirmed in its entirety.”
The Ld. Authorized Representative (AR) of the assessee submitted the following table during the course of hearing.
The Ld. AR further submitted that the disallowance u/s. 14A of the Act can be made only with respect to those investments from where the assessee has received the exempt income. The Ld. AR also submitted that the investment made by the assessee in CNH Moulds Pvt. Ltd. is a strategic investment since the company is a 100% wholly owned subsidiary of the assessee.
We heard the parties and perused the material on record. During the year under consideration the assessee has earned certain exempt income and has made a suo-motu disallowance of Rs.18.103/- u/s.14A r.w.r.8D. The AO did not accept the submissions of the assessee that for the purpose of disallowance only those investments which have earned exempt income have been considered. The AO also rejected the submission the investment made in 100% subsidiary is a strategic investment and has not resulted in any exempt income. From the perusal of the orders of the lower authorities we notice that the disallowance has been enhanced for the reason that the investment made in the subsidiary has a potential to earn exempt income and has to be included for the purpose computing the disallowance u/s.14A r.w.r. 8D. We notice in this regard that the contention of the revenue is no longer res integra and it is a settled position that the disallowance u/s.14A of the Act could be made only if there is any exempt income during the impugned A.Y. The jurisdictional High Court judgments and coordinate bench have been consistently taking the view that disallowance u/s.14A of the Act cannot be made when there is no exempt income. We notice that the impugned issue has been considered by the Hon'ble Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. [2017] 80 taxmann.com 221/248 Taxman 55 (Madras) where it has been held that –
"9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. 9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.
In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 10.2 Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3 According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4 Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act."
In the present case it is an admitted fact that the assessee has not earned any exempt income during the year under consideration. The revenue did not bring any material on record during the course of hearing for us to take a contrary view. Therefore respectfully following the judicial precedence we direct the AO to restrict the disallowance to the suo-motu disallowance made by the assessee u/s.14A r.w.r.8D. It is ordered accordingly.
In result the appeal of the assessee is allowed. Order pronounced on 06th day of February, 2026 at Chennai.
Sd/- Sd/- (मनु कुमार िग"र) (पदमावती यस) (Manu Kumar Giri) (Padmavathy.S) �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य चे�नई/Chennai, �दनांक/Dated: 06th February, 2026. EDN, Sr. P.S