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Facts
The assessee challenged the disallowance of Rs. 17,92,689/- made under Section 14A read with Rule 8D for A.Y. 2016-17. The assessee contended that it had sufficient own funds for investments generating exempt income and that the Assessing Officer (AO) did not record the mandatory satisfaction before invoking Rule 8D.
Held
The Tribunal ruled that the Assessing Officer failed to record the requisite satisfaction as per Section 14A(2) before applying Rule 8D. Relying on various High Court precedents, the Tribunal affirmed that recording satisfaction with cogent reasons is a mandatory pre-condition. Consequently, the disallowance was found to be unsustainable and directed to be deleted.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D is valid when the Assessing Officer does not record satisfaction regarding the assessee's voluntary disallowance.
Sections Cited
Section 250, Section 143(3), Section 14A, Rule 8D
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the Assessee against the order of ld.Commissioner of Income Tax(Appeal)[NFAC] passed under section 250 of the Income Tax Act, 1961 for the A.Y.2016-17 dated 22.08.2025 emanating from the Assessment Order passed under 143(3) of the Act, dated 14.12.2018. The Assessee has raised the following grounds of appeal : “1 The learned CIT(A) erred in confirming the disallowance made by the AO under section 14A rw. Rule 8D amounting to Rs. 17.92,689/-, without properly appreciating the facts of the case, submissions made, and settled judicial precedents.
2. The learned CIT(A) failed to appreciate that own funds of the assessee were substantially higher than the investments, hence presumption applies that investments were made out of own funds, as held in Reliance Utilities & Power Ltd. (313 ITR 340, Bom HC). 3 The learned CIT(A) erred in upholding the disallowance of interest expenditure under section 14A r.w Rule 8D(2)(ii) at Rs.16,63,575/-, ignoring the fact that investments yielding exempt income were made out of own funds in earlier years and no borrowed funds were utilized. 4 The learned CIT(A) failed to appreciate that during the year under consideration the appellant company also earned the taxable interest income and therefore, the disallowance if any under Rule 8D(2)(ii) shall be made with reference to the net interest paid on loan and not gross interest. 5 The Appellant prays for appropriate relief. 6 The Appellant Trust craves leave to add to, alter, amend, modify and/or delete any or all of the above Grounds of Appeal.” Submission of ld.AR :
2. The ld.Authorised Representative(ld.AR) for the Assessee submitted that the disallowance made u/s.14A is bad in law, as Assessing Officer has not recorded any satisfaction which is mandatory. Ld.AR relied on the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs. Tata Chemicals Limited.Ld.AR 2.1 Ld.AR also submitted that Assessee was having sufficient own funds for the investments. Therefore, ld.AR submitted that it is presumed that the investments were made out of own funds. Ld.AR relied on the decision of Hon’ble Supreme Court in the decision of South Indian Bank Ltd., Vs. CIT [2021] 130 taxmann.com 178 (SC) order dated 09.09.2021. Ld.AR invited our attention to page no.9 of the Balance Sheet to prove that Assessee was having more than sufficient funds. Ld.AR read out the submission made before the Lower Authorities. Ld.AR submitted as under : “2) From the above Your Honour may appreciate that the appellant company has earned dividend of Rs. 26,39,653/- (i.e.) 99% of dividend) from the shares of Sudarshan Chemical Ind Ltd and Supreme Industries Ltd. It is submitted that the appellant company had made investments in these shares in long back to prior to 1995 and company is holding these shares since then in the form of either investment or a part of stock in trade. The appellant company has made this investment out of its own funds at that time and no borrowed funds were utilized for the purpose of making these investments. We are enclosing the relevant extract of the financial statements here with as Annexure-1 from which it can be seen that the value of investments in these companies as on 31/03/2015 & 31/03/2016 are same.” 2.2 Without prejudice to the submission, ld.AR submitted that for calculating disallowance, only those investments shall be considered which has given non-taxable income. 3 Findings & Analysis : 4. We have heard both the parties and perused the records. The only issue is disallowance made u/s.14A read with Rule 8D for A.Y.2016-17. The relevant paragraph 6 of the assessment order is reproduced here as under : “6. Disallowance u/s 14A RWR AD of the IT Rule 1962- 6.1 On verification of balance sheet, it is seen that there has made investments in unquoted/quoted equties of Rs. 2.6131,329) which is classified in the balance sheet as Non current investments. The assessee has eamed dividend income of Rs. 28.65.959/- during the year under consideration which has been claimed exempt. The details of total investment in equity instrument are as under Particulars of Investment 31.03.2016 31.03.2015 Investment in Equity Instrument 2,61,31,329 2,55,14,302 TOTAL 2,61,31,329 2,55,14,302 6.2 However, on examination of computation of total income, it is seen that the assessee has made disallowance of Rs. 4,937/- only and the disallowance has not been made u/s 14A RWR 8D.
6.3 The assessee company has debited expenses of Rs. 70.87.256/- on account of interest on the borrowed capital. The Assessee company has not maintained any separate fund flow of the borrowed interest bearing capital and own funds 4 Rule 8D gets attracted. Hence, the disallowance u/s 14A RWR 8D is being made as per the working below:
Computation of Disallowance u/s 14A RWR 8D : 1 Disallowance as per clause clause(i) : Rs. NIL Total amount of interest directly attributable to income which does not form part of total income 2 Clause(ii) A: An amount of expenditure by way of Rs.70,87,256/- interest other than the amount of interest included in clause(i) incurred during the previous year 3 B: Average value of investments, income from which Rs.2,58,22,815/- does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year,
31.03.2016 2,61,31,329 31.03.2015 2,55,14,302 4 C: Average of total assets as appearing in the balance Rs.110011778 sheet of the assessee of the first day and the last day of the previous year, 31.03.2016 108815094 31.03.2015 111208463 5 Disallowance as per clause (ii) = A X B/C Rs.16,63,575/- 6 Clause (iii): an amount equal to one-half percent of the Rs.1,29,114/- average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year (0.5% of 2,58,22,815) 7 Disallowance u/s.14A {Clause (i) + (ii) + (iii) } Rs.17,92,689/- In view of the above, disallowance u/s 14A RWR 8D of the Act, is being made at Rs.17,92,689/- and added to the total income.” 5 5. On perusal of the para 6 of the assessment order, it is observed that Assessee had made suo-moto disallowance of Rs.4,937/-. However, the Assessing Officer has not recorded any satisfaction before invoking provisions of Rule 8D. It is mandatory for Assessing Officer to record satisfaction as per Section 14A(2) of the Act.
Hon’ble Delhi High Court in the case of PCIT Vs. Security Printing and Mining Corporation of India Ltd. [2023] 459 ITR 261 (Del) vide order dated 26.09.2023 has held as under : “15. Admittedly, before recording the aforesaid disbelief, the Assessing Officer did not examine even a shred of accounts of the respondent/assessee. Without looking into accounts of the respondent/assessee, the Assessing Officer held that the respondent/assessee had infused funds by way of equity in the joint venture company and also held that it was not believable that no expenditure had been incurred in relation to the assets, income wherefrom does not form part of total income. Completely ignoring the version of the respondent/assessee that being a cash rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn the exempted income, the Assessing Officer recorded a conclusion that the respondent/assessee had infused significant funds by way of equity in the joint venture company. No cogent reasons, much less supported by data extracted from accounts of the respondent/assessee were advanced by the Assessing Officer to explain why the case set up by the 6 [A] respondent/assessee was not believable. Even the quantification of the disallowance was carried out under rule8D(iii) of the Rules without scrutinizing the accounts of the respondent/assessee and by jumping over the mandate to first proceed under section 14A of the Act.
Such conjectural decision of the Assessing Officer, that too, to the prejudice of the respondent/assessee cannot be sustained. Therefore, we are unable to find any infirmity in the impugned order of the learned Tribunal and the same is upheld, answering the question of law framed above against the appellant/revenue and in favour of the respondent/assessee.”
6.1 Hon’ble Delhi High Court in the decision of H.T. Media Ltd., Vs. PCIT(supra) has held as under : “40. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise.”
6.2 Hon’ble Bombay High Court in the decision of PCIT Vs. Bajaj Finance Ltd., [2019] 110 taxmann.com 303 vide order dated 02.04.2019 has held as under : “9. Question No. (ii) pertains to disallowance made by the Assessing Officer under Section 14A of the Act read with Rule 8D. The Tribunal, however, deleted the disallowance on the ground that the Assessing Officer had not recorded the necessary satisfaction for not accepting the disallowance offered by the assessee. As is well known, sub-section (2) of Section 14A provides that the Assessing Officer shall determine 7 [A] the amount of expenditure incurred in relation to income which is examined for tax if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The satisfaction of the Assessing Officer about the correctness of the expenditure offered for disallowance by the assessee therefore is a pre-condition. In the present case, we have perused the order of assessment in which the Assessing Officer had called upon the assessee to justify the limited disallowances voluntarily offered. The assessee made detailed representation inter alia pointed out that the assessee had not made any expenditure in the nature of administrative expenses. However, to avoid proceedings, a suo motu disallowance was made. The Assessing Officer did not in any manner reject this explanation of the assessee but merely proceeded to make disallowance by invoking Section 14A and applied Rule 8D which the Tribunal correctly reversed.
No question of law arises. Income Tax Appeals are dismissed.” 6.3 Hon’ble Bombay High Court in the decision of PCIT Vs. Tata Capital Ltd., [2024] 161 taxmann.com 557 vide order dated 03.04.2024 has observed as under: “7. Therefore, the most fundamental requirement is the Assessing Officer should record his dis-satisfaction with the correctness of the claim of the assessee in respect of the expenditure and to arrive at such dis-satisfaction he should give cogent reasons.”
6.4 Thus, the proposition of law laid down by Hon’ble Bombay High Court, Hon’ble Delhi Court is that the Assessing Officer must record his satisfaction giving cogent reason before invoking provisions of Rule 8D for disallowance u/s.14A of the Act. 8
In the case of the Assessee, we have already reproduced relevant paragraphs of the assessment order. We have already observed that Assessing Office has not recorded his satisfaction before invoking provisions of Rule 8D of Income Tax Rules, as per Section 14A of the Act. Therefore, respectfully following Hon’ble High Court(supra), we hold that the disallowance of Rs.17,92,689/- is not maintainable and accordingly, Assessing Officer is directed to delete the disallowance of Rs.17,92,689/-.
In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 19 January, 2026.