Disallowance under Section 14A set-2
11
“No Section 14A Disallowance Without Exempt Income: SP Port Maintenance v. DCIT (ITAT Mumbai)”
Deputy Commissioner of Income-tax v. SP Port Maintenance (P.) Ltd. [2024] 164 taxmann.com 752 (Mumbai - Trib.)
(i) Issue Decided by the Court
Whether a disallowance under Section 14A read with Rule 8D can be made when no exempt income was earned by the assessee during the relevant assessment year, and whether such disallowance can be added back for the purpose of computing book profit under Section 115JB of the Income Tax Act, 1961.
(ii) Facts Relating to the Issue
The assessee, a company engaged in port-related services, made investments in unquoted equity shares and growth mutual funds.
It did not earn any exempt income (like dividend or long-term capital gains) in the relevant assessment years (AYs 2017–18 and 2018–19).
No interest or administrative expenditure was debited in relation to the investments.
The Assessing Officer applied Section 14A read with Rule 8D based on CBDT Circular No. 5/2014, and disallowed ₹2.77 crores.
He also added the same disallowance to book profits under Section 115JB.
The CIT(A) deleted both disallowances, which was challenged by the Revenue before the Tribunal.
(iii) Arguments of the Appellant (Revenue) in Brief
The AO was justified in applying Rule 8D despite the absence of exempt income because the investments had the potential to earn exempt income.
Disallowance under Section 14A was mandatorily applicable regardless of whether exempt income was earned.
The disallowed amount was rightly added to book profits under Section 115JB, relying on CBDT Circular and earlier tribunal precedents.
(iv) Arguments of the Respondent (Assessee) in Brief
Section 14A applies only when exempt income is actually earned during the year, as held by several High Courts.
No exempt income was received or receivable, so disallowance was inapplicable.
The investments were made from own funds (raised via optionally convertible debentures).
No interest or related expenditure was debited.
Book profit under Section 115JB cannot include Section 14A disallowance as per Bombay High Court’s judgment in CIT v. Bengal Finance & Investments (P.) Ltd.
(v) Decision of the Court
Disallowance under Section 14A read with Rule 8D was not sustainable since no exempt income was earned by the assessee during the relevant assessment years.
Addition of such disallowance to book profits under Section 115JB was also invalid.
Both appeals of the Revenue were dismissed.
(vi) Reasoning Given by the Court for Its Decision
CBDT Circular No. 5/2014 cannot override statutory provisions of Section 14A and Rule 8D.
Multiple High Courts, including Delhi HC in IL&FS Energy and Cheminvest Ltd., have held that no disallowance under Section 14A is permissible where no exempt income is earned.
Supreme Court's ruling in Maxopp Investment Ltd. was distinguished as it applied where there is some exempt income and disallowance relates to mixed funds.
Investments were made from assessee’s own funds, and no expenditure was incurred to earn exempt income.
For MAT computation under Section 115JB, the jurisdictional High Court (Bombay) in Bengal Finance & Investments (P.) Ltd. has conclusively held that Section 14A disallowance cannot be added to book profits.
(vii) Full Citation of the Judgement Relied Upon by the Court for Its Decision
Pr. CIT v. IL&FS Energy Development Co. Ltd. [2017] 84 taxmann.com 186 (Delhi)
Pr. CIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi)
Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi)
Pr. CIT v. Kohinoor Project (P.) Ltd. [2020] 121 taxmann.com 177 (Bom.)
CIT v. Bengal Finance & Investments (P.) Ltd. [ITA No. 337 of 2013, Bom. HC]
Distinguished: Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC)
(viii) Circumstances Where This Judgement Can Be Applied
Where no exempt income is earned during the assessment year.
When investments are made from own funds and no interest or related expenditure is incurred.
In case of disallowance under Section 14A read with Rule 8D without any exempt income.
To dispute additions to book profits under Section 115JB for notional disallowance under Section 14A.
When CBDT Circulars are cited as overriding judicial precedents or statute.
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12
“Presumption Favouring Assessee’s Own Funds Upheld: SC Dismisses SLP in Shapoorji Pallonji Case”
Principal Commissioner of Income-tax v. Shapoorji Pallonji and Co. Ltd. [2024] 164 taxmann.com 708 (SC) / [2024] 300 Taxman 182 (SC)
(i) Issue Decided by the Court
Whether the High Court rightly held that:
Investments should be presumed to be made out of interest-free funds when both interest-free and interest-bearing funds are available.
Interest disallowance under Section 36(1)(iii) is unwarranted when interest-free advances are made from assessee’s own surplus.
No addition to book profits under Section 115JB can be made if Section 14A disallowance is itself deleted.
(ii) Facts Relating to the Issue
The assessee, Shapoorji Pallonji and Co. Ltd., was subjected to disallowance under Section 14A by the Assessing Officer, alleging expenditure related to exempt income.
AO also disallowed interest under Section 36(1)(iii) on the presumption that borrowed funds were used for making interest-free advances.
The AO further added the Section 14A disallowance to the book profits for MAT computation under Section 115JB.
The High Court of Bombay held all three disallowances unjustified, and the Revenue challenged this decision by way of Special Leave Petition (SLP) before the Supreme Court.
(iii) Arguments of the Appellant (Revenue) in Brief
That disallowance under Section 14A was justified irrespective of the source of investment.
That interest on borrowed funds should be disallowed where interest-free advances were made.
That disallowance under Section 14A must also be considered for Section 115JB computation.
(iv) Arguments of the Respondent (Assessee) in Brief
The assessee had sufficient interest-free own funds exceeding the amount of interest-free advances.
No actual nexus between borrowed funds and investments/advances was established.
In absence of Section 14A disallowance under normal provisions, consequential addition under Section 115JB could not arise.
Relied on prior precedents, including Reliance Utilities, HDFC Bank Ltd., and CIT v. Essar Teleholdings.
(v) Decision of the Court
The Supreme Court dismissed the SLP, thereby affirming the decision of the Bombay High Court. The disallowances under Sections 14A, 36(1)(iii), and the consequential Section 115JB addition were held invalid in the assessee’s favour.
(vi) Reasoning Given by the Court for Its Decision
The High Court had followed well-settled legal principles:
Where own interest-free funds exceed investments, a presumption arises that investments are made out of own funds.
No disallowance under Section 36(1)(iii) if borrowed funds are not used for interest-free advances.
Section 115JB cannot apply Section 14A disallowance when no such disallowance exists under regular provisions.
The Supreme Court refused to interfere, noting that the questions raised were already covered by binding precedents.
The Court left the legal question open, indicating no adverse precedent was laid.
(vii) Full Citation of the Judgement Relied Upon by the Court for Its Decision
SLP dismissed against: Pr. CIT v. Shapoorji Pallonji and Co. Ltd. [2024] 164 taxmann.com 707 (Bombay HC)
Supreme Court: Principal CIT v. Shapoorji Pallonji and Co. Ltd., [2024] 164 taxmann.com 708 (SC)
(viii) Circumstances Where This Judgement Can Be Applied
When both interest-free and borrowed funds exist, and investments/advances are not clearly linked to borrowed funds.
When no exempt income is earned or Section 14A disallowance is deleted, preventing further MAT adjustments under Section 115JB.
In defending cases against disallowance of interest on advances made from own funds.
When CBDT Circulars or Rule 8D presumptions are invoked despite lack of factual basis for disallowance.
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13
“No Section 14A Disallowance When Shares Are Held as Stock-in-Trade: PNB v. PCIT (Delhi HC)”
Principal Commissioner of Income-tax v. Punjab National Bank [2024] 169 taxmann.com 620 (Delhi)
(i) Issue Decided by the Court
Whether disallowance under Section 14A of the Income-tax Act, 1961, is permissible when the assessee holds shares as stock-in-trade and not as investment, particularly when no exempt income has been earned during the relevant year.
(ii) Facts Relating to the Issue
The assessee, Punjab National Bank, held shares as stock-in-trade in the course of its banking operations.
During AY 2011–12, the assessee did not earn any exempt income from the shares held.
Despite this, the Assessing Officer applied Section 14A read with Rule 8D, disallowing ₹12.61 crore as expenditure allegedly incurred in relation to exempt income.
The CIT(A) upheld the disallowance, while the Tribunal deleted it.
The Revenue challenged the deletion before the Delhi High Court.
(iii) Arguments of the Appellant (Revenue) in Brief
Section 14A is applicable irrespective of whether shares are held as investment or stock-in-trade.
Rule 8D provides for computational machinery for estimating expenditure linked to exempt income, and its invocation was automatic once exempt income could arise from investments.
Relied on CBDT Circular No. 5/2014, which asserts that Section 14A applies even when shares are held as stock-in-trade.
(iv) Arguments of the Respondent (Assessee) in Brief
No exempt income was earned or received during the relevant assessment year.
Shares were held as stock-in-trade, and the objective was to earn trading profits, not exempt income.
Reliance was placed on various High Court decisions, including CIT v. India Advantage Securities Ltd. (Bombay HC), holding that Section 14A does not apply to shares held as stock-in-trade when no exempt income is earned.
(v) Decision of the Court
The Delhi High Court dismissed the appeal filed by the Revenue, affirming the ITAT’s decision to delete the disallowance under Section 14A. The disallowance was held to be unjustified where shares were held as stock-in-trade and no exempt income was earned.
(vi) Reasoning Given by the Court for Its Decision
The Court reaffirmed the principle that Section 14A cannot be invoked in the absence of actual exempt income, aligning with the view taken in Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi HC).
Further noted that holding of shares as stock-in-trade alters the character of the income, as the intent is to earn business income, not exempt income.
The mere possibility of exempt income is not sufficient to trigger disallowance under Section 14A.
CBDT Circulars cannot override binding judicial precedent.
(vii) Full Citation of the Judgement Relied Upon by the Court for Its Decision
Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi HC)
CIT v. India Advantage Securities Ltd. [2015] 378 ITR 471 (Bom.)
PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi HC)
(viii) Circumstances Where This Judgement Can Be Applied
When no exempt income is earned or receivable during the assessment year.
Where shares/securities are held as stock-in-trade, especially by banking or NBFC entities.
Where Revenue invokes Section 14A mechanically without establishing nexus or actual exempt income.
In opposition to CBDT Circular No. 5/2014, if judicial precedents support a narrower interpretation.
In cases dealing with the distinction between business income vs. investment income.
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Disallowance under Section 14A (FA) set-2
14
"Recording of Dissatisfaction is a Precondition for Rule 8D Disallowance"
PCIT v. UK Paints India (P.) Ltd., [2025] 170 taxmann.com 52 (Delhi)
(i) Issue Decided by the Court
Whether, in the absence of any dissatisfaction recorded by the Assessing Officer (AO) with respect to the assessee’s suo moto computation of disallowance under Section 14A of the Income Tax Act, 1961, it was permissible for the AO to invoke Rule 8D of the Income Tax Rules, 1962 to compute a higher disallowance.
(ii) Facts Relating to the Issue
The assessee earned exempt dividend income of ₹8.55 crores during AY 2008–09.
It claimed the investment was passive and attributed only ₹7.5 lakhs as expenditure related to earning such exempt income.
The AO rejected the assessee's claim without recording any dissatisfaction and computed disallowance under Rule 8D at ₹93.62 lakhs.
CIT(A) accepted that no defect was found in the assessee’s computation but made an ad hoc disallowance of ₹20 lakhs.
The ITAT reversed this and restricted the disallowance to ₹7.5 lakhs, accepting the assessee’s original computation.
(iii) Arguments of the Appellant (Revenue) in Brief
The AO had correctly applied Rule 8D based on the formulaic approach prescribed under law.
The disallowance made under Section 14A read with Rule 8D was legally valid irrespective of the assessee’s suo moto disallowance.
The ITAT erred in ignoring the AO’s discretion in applying Rule 8D.
(iv) Arguments of the Defendant (Assessee) in Brief
The AO did not record dissatisfaction as required under Section 14A(2) before invoking Rule 8D.
The assessee had duly allocated ₹7.5 lakhs with proper explanation and supporting computations.
Since no fault was found in this computation by any authority, Rule 8D could not be invoked.
(v) Decision of the Court
The High Court upheld the decision of the ITAT and ruled in favour of the assessee, confirming that the disallowance under Section 14A should be restricted to ₹7.5 lakhs as originally computed by the assessee.
(vi) Reasoning Given by the Court for Its Decision
Recourse to Rule 8D is conditional upon the AO recording dissatisfaction regarding the correctness of the assessee’s computation, as per Section 14A(2).
The AO did not examine the accounts nor recorded dissatisfaction in this case.
Both CIT(A) and ITAT noted the absence of such dissatisfaction and found no defect in the assessee’s computation.
Citing decisions in Coforge Ltd., H.T. Media Ltd., and Maxopp Investment Ltd., the Court reiterated that without recording satisfaction, Rule 8D cannot be applied.
The onus lies on the AO to establish inadequacy or inaccuracy in the assessee’s claim before resorting to Rule 8D.
(vii) Full Citation of the Judgement Relied Upon by the Court for Its Decision
Coforge Ltd. v. ACIT [2021] 128 taxmann.com 99 / 436 ITR 546 (Delhi)
H.T. Media Ltd. v. Pr. CIT-IV [2017] 85 taxmann.com 113 / 399 ITR 576 (Delhi)
Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 / 402 ITR 640 (SC)
(viii) Circumstances Where This Judgement Can Be Applied
Where an assessee has suo moto disallowed an amount under Section 14A.
Where the AO seeks to apply Rule 8D without recording dissatisfaction with the assessee’s computation.
In appeals involving AYs prior to the Finance Act, 2022 amendment to Section 14A, where the old provisions apply.
Where passive investments yield exempt income and minimal expense is logically and evidentially claimed.
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15
“Exempt Income Must Yield to Trigger Rule 8D Disallowance”
Bennett Property Holdings Company Ltd. v. DCIT, [2025] 170 taxmann.com 201 (Mumbai - Trib.)
(i) Issue Decided by the Court
The core issues before the Mumbai Tribunal were:
Whether disallowance under Section 14A read with Rule 8D(2)(ii) was justified when the assessee had already made a suo moto disallowance and the AO had not fully applied his mind.
Whether only investments yielding exempt income in the relevant year should be considered for computation under Rule 8D.
Whether Section 72A(2)(b) applied to demerger scenarios for the purpose of setting off business loss and unabsorbed depreciation.
Whether the Revenue's appeal is maintainable if tax effect is below ₹60 lakhs (as per CBDT Circulars No. 5 & 9 of 2024).
(ii) Facts Relating to the Issue
The assessee earned exempt dividend income from mutual funds and made a suo moto disallowance under Section 14A amounting to ₹4.40 lakh.
The AO invoked Rule 8D(2)(ii) and disallowed ₹6.38 crores without excluding investments that did not yield exempt income.
The assessee challenged the AO’s failure to exclude non-income-yielding investments (like growth funds and subsidiaries) from the Rule 8D computation.
Separately, the assessee claimed set-off of losses and depreciation from a demerged real estate undertaking, which the AO denied by applying Section 72A(2)(b).
(iii) Arguments of the Appellant (Assessee)
The AO failed to record objective dissatisfaction with the suo moto disallowance before invoking Rule 8D.
Investments that did not yield exempt income should be excluded under Rule 8D as per the Vireet Investments Special Bench ruling.
Section 72A(2)(b) applies only to amalgamations; demergers must be governed by Section 72A(4).
Denial of TDS credit and advance tax for amalgamated/demerged entities was incorrect.
(iv) Arguments of the Respondent (Revenue)
The AO did apply his mind and mentioned costs like personnel, administrative, and interest expenses, showing dissatisfaction with the assessee's computation.
All investments (irrespective of income generation) should be considered for Rule 8D purposes.
The denial of set-off under Section 72A(2)(b) was correct, as the section deals with loss absorption post amalgamation.
(v) Decision of the Court
The Tribunal upheld the AO’s application of Rule 8D but directed him to exclude investments that did not yield exempt income, in line with Vireet Investment Pvt. Ltd.
The appeal regarding disallowance under Section 14A was partly allowed.
It was held that Section 72A(2)(b) does not apply to demergers. Instead, the AO was directed to re-adjudicate the claim under Section 72A(4).
Revenue’s appeal was dismissed as the tax effect was below ₹60 lakhs.
(vi) Reasoning Given by the Court
The AO had applied his mind and referred to personnel and administrative costs, thereby satisfying the requirement under Section 14A(2).
However, inclusion of non-yielding investments was contrary to law. Only investments that generated exempt income could be considered under Rule 8D.
In the matter of set-off, Section 72A(2)(b) is confined to amalgamations. For demergers, the governing provision is Section 72A(4), which had not been examined.
The CBDT’s latest monetary limits for departmental appeals were binding, and the tax effect being below threshold, the Revenue’s appeal could not be entertained.
(vii) Full Citation of the Judgment Relied Upon by the Court
Asstt. CIT v. Vireet Investment Pvt. Ltd. [2017] 82 taxmann.com 415 / 165 ITD 27 (Delhi - Trib.) (SB)
Pr. CIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bombay)
(viii) Circumstances Where This Judgment Can Be Applied
In assessments involving Rule 8D, where the AO fails to exclude non-income-generating investments from average value computations.
In demerger cases where set-off of business losses and unabsorbed depreciation is claimed – AO must apply Section 72A(4), not 72A(2)(b).
Where tax effect is below the monetary threshold for departmental appeals as per the prevailing CBDT Circulars.
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16
“No Section 14A Disallowance Without Exempt Income”
CCl Products (India) Ltd. v. Assistant Commissioner of Income-tax, [2025] 171 taxmann.com 723 (Andhra Pradesh)
(i) Issue Decided by the Court
Whether the disallowance under Section 14A of the Income-tax Act, 1961 can be made when no exempt income is received or receivable by the assessee during the relevant assessment year.
(ii) Facts Relating to the Issue
The assessee had made investments in mutual funds and shares.
For the relevant assessment year (AY 2014–15), the assessee did not earn any exempt income such as dividend or income from mutual funds.
The Assessing Officer (AO) invoked Section 14A read with Rule 8D to make a disallowance of ₹50,89,000 on the ground that expenditure was incurred in relation to such investments.
The assessee contended that since there was no exempt income earned during the year, no disallowance could be made under Section 14A.
The CIT(A) confirmed the disallowance.
The matter was carried to the High Court.
(iii) Arguments of the Appellant (Assessee)
The core requirement of Section 14A is the earning of income which does not form part of total income.
No exempt income was earned or receivable during the year; hence, the provision of Section 14A does not apply.
Multiple High Courts including Delhi, Madras, Punjab & Haryana, and Karnataka have held that Section 14A disallowance is inapplicable in the absence of exempt income.
(iv) Arguments of the Respondent (Revenue)
The AO was empowered to disallow expenditure that is relatable to investments yielding exempt income, even if no income arises in the particular year.
The assessee had made substantial investments, which by their nature are capable of earning exempt income.
Mere absence of income in one year does not preclude the application of Section 14A, especially when the intent is to ensure that no expenditure relatable to exempt income is deducted from taxable income.
(v) Decision of the Court
The Andhra Pradesh High Court ruled in favour of the assessee and held that no disallowance under Section 14A can be made if no exempt income is received or receivable during the relevant previous year.
(vi) Reasoning Given by the Court for Its Decision
The Court referred to the Supreme Court decision in CIT v. Chettinad Logistics (P.) Ltd. [2018] 95 taxmann.com 250 (SC), which upheld that Section 14A disallowance is not sustainable in the absence of exempt income.
The Court emphasised the expression “in relation to income which does not form part of total income” in Section 14A, observing that this must refer to actual receipt or accrual of such income during the year.
The Court observed that administrative and interest expenditure, unless proven to be linked to the earning of exempt income, cannot be disallowed.
The retrospective amendment introduced by Finance Act, 2022 (clarifying the applicability even when no exempt income is received) is prospective in effect and cannot override judicial precedents for earlier assessment years.
(vii) Full Citation of the Judgment Relied Upon by the Court
CIT v. Chettinad Logistics (P.) Ltd. [2018] 95 taxmann.com 250 (SC)
PCIT v. Oil Industry Development Board [2019] 103 taxmann.com 326 (SC)
CIT v. Shivam Motors (P.) Ltd. [2014] 46 taxmann.com 361 (All)
CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Guj)
PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi)
(viii) Circumstances Where This Judgment Can Be Applied
For assessment years prior to AY 2022–23 where no exempt income is earned during the year.
In cases where the AO invokes Section 14A solely based on the presence of investments, without showing actual income or expenditure linkage.
When assessing appeals or reassessments involving disallowance under Section 14A without income under Section 10.
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17
“Unsigned Loose Sheet from Third Party Not Valid Basis for Section 68 Addition”
Pr.CIT v. Vadilal Enterprises Ltd., [2023] 155 taxmann.com 135 (Gujarat)
(i) Issue Decided by the Court
Whether an addition under Section 68 of the Income-tax Act, 1961 can be sustained solely on the basis of an unsigned and unverified loose sheet seized from a third party, when the assessee has denied its contents and the document lacks evidentiary value.
(ii) Facts Relating to the Issue
A search was conducted on one "Shri Rahul T. Vora" and not on the assessee, Vadilal Enterprises Ltd.
During the search, a loose unsigned paper was found at Shri Vora’s premises, allegedly showing a cash transaction of ₹4.53 crores involving the assessee.
Based solely on this paper, the AO invoked Section 153C and added ₹4.53 crores to the assessee’s income under Section 68.
The assessee denied the transaction and stated that the document was neither in its possession nor authenticated in any manner.
The CIT(A) and the ITAT deleted the addition.
The Revenue filed an appeal before the Gujarat High Court.
(iii) Arguments of the Appellant (Revenue)
The loose paper showed a cash payment by the assessee and therefore justified the invocation of Section 68.
The AO had reason to believe that the document belonged to the assessee.
The addition was valid based on the evidentiary value of the seized material and the lack of satisfactory explanation by the assessee.
(iv) Arguments of the Respondent (Assessee)
The document was not found in possession or control of the assessee but from a third party.
It was unsigned, unauthenticated, and not corroborated by any other evidence or statement.
No opportunity to cross-examine the alleged third party or any independent verification of the document was provided.
Section 68 cannot be invoked in the absence of credit entries in the books of the assessee and without meeting the burden of proof.
(v) Decision of the Court
The Gujarat High Court dismissed the Revenue’s appeal and upheld the deletion of the addition made under Section 68, affirming the decision of the ITAT and CIT(A).
(vi) Reasoning Given by the Court for Its Decision
Mere possession of an unauthenticated loose sheet by a third party does not meet the standards of evidence required to justify an addition under Section 68.
For invoking Section 153C and sustaining an addition, the document must "belong to" the assessee; mere reference to the assessee is insufficient.
The document lacked signature, corroboration, or any evidentiary support linking it to the assessee.
The burden of proof lies on the Revenue to establish a nexus between the assessee and the alleged transaction.
The assessee’s denial and the lack of cross-examination opportunity to verify the third party’s role further weaken the Revenue’s case.
(vii) Full Citation of the Judgement Relied Upon by the Court
CIT v. P.V. Kalyanasundaram [2007] 294 ITR 49 (SC)
CIT v. S.M. Aggarwal [2007] 293 ITR 43 (Del.)
(viii) Circumstances Where This Judgement Can Be Applied
When the Revenue bases additions solely on loose documents seized from third parties.
Where seized documents are unsigned, unauthenticated, or uncorroborated.
In block assessment or Section 153C proceedings where the condition of "belonging to the assessee" is not met.
When assessee denies a transaction and the AO fails to discharge the burden of proving its existence or authenticity.
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18
“Section 14A Disallowance Invalid Without Recorded Dissatisfaction and Nexus to Borrowed Funds”
Gujarat State Financial Services Ltd. v. ACIT, [2025] 174 taxmann.com 461 (Ahmedabad - Trib.)
(i) Issue Decided by the Court
Whether disallowance under Section 14A read with Rule 8D is permissible in a case where the assessee has sufficient interest-free funds, and where the Assessing Officer (AO) has not recorded dissatisfaction with the correctness of the assessee's claim of having incurred no expenditure for earning exempt income.
(ii) Facts Relating to the Issue
The assessee, a state-owned finance company, earned exempt income in the form of dividend and long-term capital gains.
It claimed that no expenditure was incurred to earn this exempt income.
The AO, without recording any dissatisfaction with this claim, invoked Section 14A and made a disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii).
The CIT(A) upheld the disallowance partially.
The assessee contested the disallowance before the ITAT.
(iii) Arguments of the Appellant (Assessee)
The assessee had substantial interest-free own funds, far exceeding the investments made.
No borrowed funds were used for investments yielding exempt income.
The AO failed to record objective dissatisfaction with the assessee’s claim before applying Rule 8D, which is a precondition under Section 14A(2).
Several judicial precedents support the view that disallowance under Section 14A is not automatic and must follow due procedure.
(iv) Arguments of the Respondent (Revenue)
The AO was justified in invoking Rule 8D for computing disallowance since the assessee had earned exempt income.
The assessee failed to demonstrate a direct nexus between exempt income and the interest-free funds.
Rule 8D provides a standard method for disallowance and the AO was entitled to apply it based on reasonable assumptions.
(v) Decision of the Court
The Tribunal allowed the assessee's appeal and deleted the disallowance made under Section 14A read with Rule 8D, holding that:
No disallowance under Rule 8D(2)(ii) was warranted as the investments were made from interest-free own funds.
Rule 8D(2)(iii) could also not be invoked in absence of proper satisfaction recorded by the AO under Section 14A(2).
(vi) Reasoning Given by the Court for Its Decision
Precondition not met: The AO did not record dissatisfaction with the assessee’s claim, violating the mandatory requirement under Section 14A(2).
Own funds presumption: Following the ratio laid down by the Hon’ble Supreme Court in South Indian Bank Ltd. [2021] 438 ITR 1 (SC), where interest-free funds are available and investments are less than such funds, it is presumed that investments are made out of interest-free funds.
No proximate nexus: The Revenue failed to establish a direct nexus between any borrowed funds and the investments generating exempt income.
Consistency principle: In earlier years, similar disallowances were not made when facts were identical.
(vii) Full Citation of the Judgement Relied Upon by the Court
South Indian Bank Ltd. v. CIT [2021] 438 ITR 1 (SC)
CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom)
Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC)
Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2017] 394 ITR 449 (SC)
(viii) Circumstances Where This Judgement Can Be Applied
Where assessee has sufficient interest-free funds to cover investments yielding exempt income.
Where the AO fails to record dissatisfaction with the assessee’s explanation regarding expenses incurred to earn exempt income.
In assessments where mechanical application of Rule 8D is challenged without proper satisfaction and nexus being established.
Where consistency in treatment of Section 14A disallowance across years is disputed.
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19
“Section 14A: No Disallowance Without Exempt Income for Years Prior to 2022”
Pr.CIT v. Keti Construction Ltd., [2024] 162 taxmann.com 278 (Madhya Pradesh)
(i) Issue Decided by the Court
Whether the amendment to Section 14A of the Income-tax Act, 1961, made by the Finance Act, 2022 (by inserting an Explanation), applies retrospectively to earlier assessment years (i.e., prior to AY 2022–23), where the assessee has not earned any exempt income.
(ii) Facts Relating to the Issue
The assessee had made investments but did not earn any exempt income during the assessment year 2013–14.
The Assessing Officer disallowed certain expenditure under Section 14A read with Rule 8D, despite the absence of exempt income.
The CIT(A) and ITAT deleted the disallowance relying on the judicial principle that in the absence of exempt income, no disallowance can be made under Section 14A.
The Revenue challenged the ITAT’s order by arguing that the 2022 amendment to Section 14A (inserting an Explanation) was clarificatory and therefore retrospective.
(iii) Arguments of the Appellant (Revenue)
The Explanation to Section 14A inserted by the Finance Act, 2022 clarifies that the disallowance applies even in cases where no exempt income has been earned.
The amendment is declaratory and intended to clear ambiguity, and hence should be treated as retrospective.
Expenditure related to investments intended to yield exempt income must be disallowed, irrespective of actual exempt income earned.
(iv) Arguments of the Respondent (Assessee)
The law laid down by multiple High Courts and the Supreme Court establishes that in the absence of exempt income, Section 14A cannot be invoked.
The amendment introduced by the Finance Act, 2022 is prospective and applicable only from AY 2022–23.
The principle of lex prospicit non respicit (law looks forward, not backward) should apply.
The Revenue cannot apply the amendment retrospectively to reopen settled legal positions for prior assessment years.
(v) Decision of the Court
The Madhya Pradesh High Court dismissed the Revenue’s appeal and held that:
The Explanation to Section 14A inserted by the Finance Act, 2022 is prospective in operation.
For assessment years prior to AY 2022–23, no disallowance under Section 14A can be made if the assessee has not earned any exempt income.
(vi) Reasoning Given by the Court for Its Decision
The Court referred to the consistent judicial view, including that of the Supreme Court in Chettinad Logistics (P) Ltd., that expenditure can be disallowed under Section 14A only if there is actual exempt income.
The newly inserted Explanation seeks to reverse this interpretation, which shows that it is not clarificatory but substantive.
The Court emphasized that the legislature clearly stated the Explanation is effective from 1 April 2022, supporting the prospective nature of the amendment.
It also held that settled positions of law cannot be unsettled retrospectively unless expressly stated.
(vii) Full Citation of the Judgment Relied Upon by the Court
PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi)
CIT v. Chettinad Logistics (P) Ltd. [2018] 95 taxmann.com 250 (SC)
PCIT v. Oil Industry Development Board [2019] 103 taxmann.com 326 (SC)
CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Guj.)
(viii) Circumstances Where This Judgment Can Be Applied
For assessment years prior to AY 2022–23 where the assessee has not received or accrued any exempt income.
In appellate or reassessment proceedings where Revenue seeks to apply the 2022 amendment retrospectively.
When deciding whether expenditure related to exempt income can be disallowed in a zero-income year.
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20
No Disallowance under Section 14A Without Proper Satisfaction Recording
Principal Commissioner of Income-tax v. Tata Capital Ltd. ([2024] 161 taxmann.com 557 (Bombay)
(i) Issue Decided by the Court:
Whether the Assessing Officer (AO) was justified in invoking Rule 8D and making a disallowance under Section 14A of the Income-tax Act, 1961, without recording proper satisfaction regarding the correctness of the assessee’s claim of expenditure related to exempt income.
(ii) Facts Relating to the Issue:
The assessee, Tata Capital Ltd., declared NIL income for AY 2008–09.
It earned exempt income from dividends and long-term capital gains.
It also incurred interest expenses of approximately ₹94 crores.
The AO disallowed a part of the interest expenditure applying Rule 8D without explicitly recording dissatisfaction with the assessee’s claim.
CIT(A) and ITAT deleted the disallowance due to lack of proper satisfaction recording.
(iii) Arguments of the Appellant (Revenue) in Brief:
The AO's remark that the assessee’s explanation was “not acceptable” sufficed as dissatisfaction.
Rule 8D was justifiably invoked.
The CIT(A) and ITAT erred in relying on a distinguishable decision in Sesa Goa Ltd.
(iv) Arguments of the Respondent (Assessee) in Brief:
The AO did not comply with Section 14A(2) and Rule 8D prerequisites, namely, recording cogent reasons for dissatisfaction.
The disallowance was mechanical and violated judicial precedent.
CIT(A) correctly found that AO failed to provide a reasoned basis for applying Rule 8D.
(v) Decision of the Court:
The High Court dismissed the Revenue’s appeal and held in favour of the assessee.
(vi) Reasoning Given by the Court for Its Decision:
AO merely stated the assessee’s explanation was “not acceptable” without providing cogent reasons for such dissatisfaction.
Section 14A(2) read with Rule 8D mandates the AO must record satisfaction based on accounts before invoking Rule 8D.
The decision followed earlier Bombay HC rulings, including:
Pr. CIT v. JSW Energy Ltd. (2023) 153 taxmann.com 208
CIT v. Sesa Goa Ltd. (2021) 127 taxmann.com 354
The Court emphasized that application of Rule 8D is not automatic and requires due compliance with procedural requirements.
(vii) Full Citation of the Judgment Relied Upon by the Court:
Pr. CIT (Central) v. JSW Energy Ltd. [2023] 153 taxmann.com 208 / [2024] 460 ITR 496 (Bombay)
CIT v. Sesa Goa Ltd. [2021] 127 taxmann.com 354 / [2021] 436 ITR 17 (Bombay)
Principal CIT v. Bajaj Finance Ltd. [2019] 110 taxmann.com 303 (Bombay)
(viii) Circumstances Where This Judgment Can Be Applied:
Where AO makes disallowance under Section 14A without proper reasoning or recorded dissatisfaction.
In cases involving exempt income and large interest expenditure where the taxpayer’s claim is disallowed without proper application of mind.
To challenge mechanical invocation of Rule 8D.
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