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Facts
The Revenue appealed against the order of the CIT(A) deleting additions made under Section 14A read with Rule 8D and Section 40(a)(i) of the Income Tax Act. The AO disallowed expenses under Section 14A for not earning exempt income and also disallowed payments made to foreign vendors for alleged non-deduction of TDS.
Held
The Tribunal held that Section 14A could not have been invoked when no exempt income was earned. Regarding the disallowance under Section 40(a)(i), the Tribunal found that the payments were for services utilized outside India and were not taxable in India, hence Section 195 was not applicable.
Key Issues
1. Applicability of Section 14A when no exempt income is earned. 2. Disallowance of payments to foreign vendors for non-deduction of TDS when services were rendered outside India.
Sections Cited
14A, 143(3), 144B, 195, 40(a)(i), 9
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES : C : NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI KRINWANT SAHAY
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Revenue against the order dated 14.03.2025 of the Ld. Commissioner of Income-tax (Appeals), NFAC, Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in appeal No.NFAC/2019-20/10181437, filed before him against the order dated 26.09.2022 passed u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Assessment Unit, Income-tax Department (hereinafter referred to as the Ld. AO, for short).
Heard and perused the records. The issue no. 1 concerns disallowance u/s Section 14A r.w. Rule 8D. The AO noted that the assessee had earned dividend income and had suo motu disallowed Rs.12,04,167 under Section 14A of the Act. However, the AO believed that the assessee incurred significant administrative and management costs in managing investments and therefore recomputed disallowance under Section 14A r.w. Rule 8D at Rs.1,02,45,641, resulting in an additional addition of Rs.90,42,474. The AO invoked Rule 8D because he was not satisfied with the correctness of the assessee’s suo motu claim. The AO held that the assessee "had to devote significant time, energy and infrastructural resources" to investments and was "not satisfied with the assessee's claim". The CIT(A) deleted the addition because he found that AO failed to record proper satisfaction under Section 14A(2) of the Act. The CIT(A) held that the AO did not examine the assessee’s accounts to establish that the suo motu disallowance was incorrect. The order states that the AO merely expressed a "casual dissatisfaction", which does not meet the statutory requirement of a recorded satisfaction based on accounts. The CIT(A) relied on case law such as DCIT v. Galileo India (Delhi ITAT), holding that Rule 8D can be applied only after proper satisfaction regarding incorrectness of the assessee’s claim. —this was missing here.
Ld. DR supported the grounds taken by the department in the subject appeal submitting that the due resons are recorded and as such reason need not be very illustrative. It was contended that Rule 8D is applicable to all 2 investments held during the financial year, regardless of whether they yielded exempt income or not and reliance was placd on following decisions; (i) Hon’ble Apex Court in Maxopp Investment Ltd. Vs CIT [2018] 91
taxmann.com 154 dated 12.02.2018 (ii) Hon’ble Delhi High Court in Cheminvest Ltd Maxopp Investment Ltd.
Vs CIT [2015] 61 taxmann.com 118 [Delhi] dated 02.09.2015 (iii) CBDTCir.05/2014dt. 11.02.2014
Now admittedly no exempt income exists hence Section 14A of the Act could not have been invoked. Ld. CIT(A) has dully appreciated this aspect coupled with the fact that assessee had made suo motto disallowance but no reasons are cited to not accept it. There is force in the contention of ld. DR that reasons need not be elaborate but should certainly be illustrative of the fact that financial were examined and there exited reasonable nexus in holding that assessee had to devote significant time, energy and infrastructural resources to earn the exempt income. No interference is needed. The corresponding ground has no substance.
The issue no. 2 concerns disallowance under Section 40(a)(i) of the Act, for payments to foreign vendors and alleged non-deduction of TDS under Section 195 of the Act. The AO observed that the assessee made payments of Rs.1,78,19,034 to foreign vendors without deducting TDS under Section 195.
Since the AO believed these payments were taxable in India, he invoked Section 40(a)(i) to disallow them and CIT(A) held that none of the payments were chargeable to tax in India, so Section 195 did not apply.
Though ld. DR has supported the findings of AO however, what is material is that payments for services used outside India are not taxable and factually the CIT(A) found that expenditures of the nature conference charges, sponsorships, fees and subscriptions and staff training were for services utilized outside India and not taxable under Section 9 of the Act and payments did not qualify as royalty or FIS under DTAA. These facts remain uncontroverted. Then reimbursements contain no income element so reimbursements (e.g., travel, hotel) paid abroad or to Indian residents contained no income element and hence fell outside Section 195 of the Act. Findings of ld. CIT(A) need no interference and corresponding grounds have no substance.
The appeal is dismissed. Order pronounced in the open court on 28.11.2025.