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Facts
The assessee filed its return of income declaring Rs. 23,42,970/-. The AO observed investments in equity shares and a suo moto disallowance by the assessee. The AO then computed a higher disallowance under Section 14A read with Rule 8D, adding it to the book profit.
Held
The Tribunal held that for computing disallowance under Section 14A r.w. Rule 8D, the AO should consider the net interest (interest paid minus interest earned) and exclude investments that have not yielded exempt income. The disallowance should be restricted to the suo moto amount if it's higher.
Key Issues
Whether the disallowance under Section 14A and Rule 8D was computed correctly by the AO, considering net interest and only investments yielding exempt income.
Sections Cited
14A, 143(3), 8D, 271(1)(c), 234A, 234B
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Income Tax Appellate Tribunal, DELHI “F” BENCH: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
The present appeal is filed by assessee against the order dated 20.11.2017 passed by Ld. Commissioner of Income Tax (A)-38, Delhi [“Ld.CIT(A)”] in Appeal No. 202/2017-18 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated NIL passed u/s 143(3) of the Act pertaining to assessment year 2014-15.
Brief facts of the case are that the assessee is a company and filed its return of income on 29.11.2014, declaring total income of INR 23,42,970/-. The AO observed that the assessee has shown investment of INR 4,22,31,65,822/- in the equity shares in the Balance Sheet and a sum of INR 3,40,01,144/- being expenditure relatable to such income was suo motto disallowed. AO invoked the provisions of section 14A r.w. Rule 8D of the Income Tax Rules, 1962 (“the Rules”), has computed the total amount of disallowance of INR 11,67,38,556/- and made the addition/disallowance of INR 8,27,37,362/- being the difference between the amount suo motto disallowed by the assessee and as computed by the AO. Further the said disallowance was added to the book profit for the purpose of payment of MAT.
In first appeal, Ld. CIT(A) has confirmed such disallowance however, deleted the addition made in the book profits. Therefore, the assessee is in appeal before us by taking following grounds of appeal:- 1. “That the order passed by Assessing Officer ('AO') dated 16.12.2016 and by the Commissioner of Income Tax (Appeals) ('CIT(A)') dated 20.11.2017 and the additions/disallowances made are illegal, bad in law and without jurisdiction. The assessing officer has grossly erred in assessing the income of the assessee at Rs.8,50,80,330/- as against the returned income of Rs.23,42,970/-.
2. That the CIT(A) has erred in law and on the facts of the case, by upholding the addition of Rs. 8,27,37,362/- u/s 14A of the act over and above the amount of Rs. 3,40,01,194/-suo-moto disallowed by the assessee in its return of income.
3. That in view of the facts and circumstances of the case, the invocation of Sec 14A and Rule 8D against the assessee is illegal and bad in law. No valid satisfaction is recorded by the AO to invoke Sec 14A/Rule 8D against the assessee.
4. That the CIT(A) has failed to appreciate that the suo moto disallowance of Rs.3,40,01,194/-made by the assessee in its return is based on a scientific and logical calculations and the same have been ignored by the AO and CIT(A). No more disallowance is called for on the facts of the case.
5. That the calculations made by the AO to compute disallowance of Rs.8,27,37,362/-over and above the amount of Rs. 3,40,01,194/-suo-moto disallowed by the assessee is illegal, bad in law, and against various judgements of Income Tax Appellate Tribunal, High Court and Supreme Court.
6. That the AO and CIT(A) have erred in ignoring the fact that the majority of the dividend income earned by the assessee is from the strategic investments made in the group concerns and hence no disallowance is justified u/s 14A.
7. Without prejudice, the AO and CIT(A) have erred in not appreciating the fact that the assessee has earned exempt income from only four concerns and hence taking the entire investments for calculations u/s 14A and Rule 8D is completely illegal and unjustified.
8. That, in view of the facts and circumstances of the case, the AO/CIT(A) has erred on facts and in law in not appreciating the evidence filed by the assessee in a judicious manner.
9. That the additions/disallowances made are based on mechanical application of rule 8D. The additions/disallowances made are unjust, arbitrary, against the principles of natural justice and are also highly excessive.
10. Without prejudice, the total expenses debited to the profit and loss account for the year are Rs.9,61,86,680/- (excluding the loss on sale of investment), hence the disallowance by AO u/s 14A of Rs. 11,67,38,556/- is illegal, unjust, bad in law and arbitrary.
That the documents, explanations filed by the assessee and the material available on record has not been properly considered and judicially interpreted.
That in the view of facts and circumstances of the case the Assessing officer have erred in law and on facts in initiating penalty under section 271(1)(c).
That the interest charged u/s 234A and 234B is illegal, bad in law without jurisdiction. The said interest is wrongly charged and is wrongly worked out and is also highly excessive. All of the above grounds of appeal
are without prejudice and are mutually exclusive to each other. The assessee craves leave to add, amend, alter and or modify the grounds of appeal of the said appeal.”
4. Before us, Ld.AR for the assessee submits that the assessee has already suo motto disallowed the amount of expenditure directly relatable to such investments. He further submits that AO has computed the amount of disallowance in terms of Rule 8D at INR 11,67,38,556/- by ignoring the fact that he has not followed the procedure as prescribed u/s 14A of the Act wherein AO has not recorded the satisfaction about the correctness of the claim of the expenditure relatable to earning of such income. He further submits that the investments on which no exempt income was earned should be excluded from the value of investment considered for computing the disallowance as per Rule 8D of the Rules. He further submits that the assessee is having income from interest which deserves to be reduced out of the total interest payments and net interest is to be considered for making such disallowance in the instant case. He prayed accordingly.
5. On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of lower authorities and submits that the AO has invoked the provision of section 14A r.w. Rule 8D and computed the amount of disallowance and assessee has failed to point out any defect therein therefore, the disallowance made u/s 14A of the Act deserves to be confirmed.
6. Heard the contentions of both parties and perused the material available on record. In the instant case, AO has invoked the provision of section 14A as the assessee is having investments yielding exempt income and further, assessee itself has computed the amount of disallowance out of interest payments made as pertaining to or relatable to such exempt income. Before us, the assessee claimed that the interest paid considered for disallowance Page | 4 should be net of interest earned during the year for which reliance is placed on the judgement of Hon’ble Gujarat High Court in the case of PCIT vs Nirma Credit & Capital (P.) Ltd. [2018] 300 CTR 286 (Guj.). We find that Hon’ble Gujarat High Court in the case of PCIT vs Nirma Credit & Capital (P.) Ltd. (supra) followed the judgment of Hon’ble Bombay High Court in the case of CIT, Central-III vs Jubilliant Enterprises Pvt.Ltd.in dated 28.02.2017 wherein the Hon’ble High Court has held that prior to amendment w.e.f. 02.06.2016, net interest for the purpose of clause (2) of sub-Rule (2) of Rule 8D would be considered i.e. interest paid by the assessee on borrowings minus interest earned. Thus, by respectfully following the judgements of Hon’ble Gujarat High Court and Hon’ble Bombay High Court, we direct the AO to consider the net interest for the purpose of computing the disallowance u/s 14A r.w. Rule 8D by reducing the amount of interest received from total interest paid on the borrowings.
Further, for the purpose of average value of investment it was contended that those investments which had earned exempt income should only be considered. For this, reliance is placed on the judgment of Hon’ble Delhi High Court in the case of ACB India LTd. vs ACIT [2015] reported in 374 ITR 108, in the case of Pr.CIT-2 vs Caraf Builders and constructions P. Ltd.[2019] 414 ITR 122 in which the SLP filed before Hon’ble Supreme Court was also dismissed vide SLP (C) Dairy No.25130/2019 vide order dated 30.08.2019. In the aforesaid judgements, it is held by the Hon’ble Courts that for the purpose of computing the disallowance under Clause (ii) of Rule 8D(2), the investments which has not yielded exempt income should be excluded. Thus, by respectfully following the judgements of Hon’ble High Courts, we direct the AO to take the average value of those investments which yielded exempt income. With these directions, the appeal of the assessee is partly allowed. Here it is further clarified that in the event, the amount if disallowance computed based on the directions given herein above, is lower than the amount of disallowance already offered by assessee itself suo motto in the return of income filed, the disallowance should be restricted to the amount as already considered and disallowed by the assessee itself. Accordingly, grounds of appeal raised by the assessee are partly allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 15.10.2025.