Case Law Details
Rohit Real Estates Pvt. Ltd. Vs ACIT (ITAT Lucknow)
The Lucknow Bench of the Income Tax Appellate Tribunal (ITAT) adjudicated an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre dated 16.08.2022 for Assessment Year 2017-18. The dispute related to disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules in relation to expenditure allegedly incurred for earning exempt dividend income.
The assessee challenged the disallowance of Rs.2,54,373 sustained by the CIT(A). The grounds of appeal included objections to the application of Section 14A read with Rule 8D, alleged misapplication of the Explanation inserted below Section 14A by the Finance Act, 2022, and the contention that the Explanation could not operate retrospectively. The assessee also alleged that the orders of the lower authorities were contrary to law and principles of natural justice.
The assessee company had filed its return of income declaring total income of Rs.8.22 crore on 29.10.2017. The case was selected for limited scrutiny under the Computer Assisted Scrutiny System (CASS) to examine expenditure incurred for earning exempt income. During assessment proceedings, the Assessing Officer noted that the assessee had earned exempt dividend income of Rs.31,070. The assessee contended that no expenditure had been incurred for earning such exempt income. The Assessing Officer did not accept this explanation and invoked Section 14A(2) read with Rule 8D(2)(ii), computing a disallowance of Rs.2,54,373 and assessing total income at Rs.8.25 crore. The CIT(A) upheld the addition, leading to the appeal before the Tribunal.
Before the Tribunal, the assessee argued that the Assessing Officer had failed to record proper satisfaction as required by law before rejecting the assessee’s suo motu disallowance. It was further submitted that the disallowance computed by the Assessing Officer exceeded the exempt income itself, which was legally impermissible. Reliance was placed on several judicial precedents, including decisions of the Bombay High Court, Calcutta High Court, and various Tribunal benches. The assessee also reiterated that the mandatory requirement of recording satisfaction before invoking Rule 8D had not been fulfilled.
The Departmental Representative opposed the appeal and argued that the Assessing Officer had in fact recorded the necessary satisfaction in the assessment order. However, the Revenue fairly conceded that judicial precedents on the issue of disallowance exceeding exempt income were against the department.
After hearing both parties and examining the record, the Tribunal noted that the assessee had earned dividend income of Rs.31,070 and had voluntarily disallowed Rs.3,085. The Assessing Officer, however, computed disallowance at Rs.2,57,458. The Tribunal observed that the extent of suo motu disallowance depends on the volume of transactions and the expenditure incurred for earning exempt income. It held that the administrative expenses disallowed by the assessee were not commensurate with the volume of investments and therefore rejected the contention that the satisfaction recorded by the Assessing Officer was unjustified.
At the same time, the Tribunal accepted the assessee’s argument that disallowance under Rule 8D could not exceed the exempt income earned. The Tribunal relied upon decisions including Unilever Industries Pvt. Ltd. v. DCIT and Pragathi Krishna Gramin Bank v. Joint CIT, as well as the decision in Nirved Traders (P.) Ltd. v. Dy. CIT, where it had been held that disallowance computed under Rule 8D(2)(ii) should not exceed exempt income. Respectfully following these precedents, the Tribunal directed the Assessing Officer to restrict the disallowance to the extent of the exempt income of Rs.31,070 earned by the assessee.
Accordingly, the Tribunal partly allowed the appeal of the assessee.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi dated 16.08.2022 pertaining to the assessment year 2017-18. The assessee has raised the following grounds of appeal: –
“1. Ld. CIT(A) has erred in law and on facts, in upholding disallowance of Rs.2,54,373/ – that had been made in the regular assessment order dated 28.08.2019, by applying section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules 1962;
2. the Authorities below, have misconstrued/ misapplied the explanation below section 14A of the Act, that had been inserted by the Finance Act, 2022;
3. in any case the explanation, even if clarificatory of nature, has no retrospective effect and the disallowance made/ sustained by the authorities below, is wholly erroneous;
4. the order appealed against is contrary to the facts, law and principles of natural justice.”
2. The facts giving rise to the present appeal, in brief are that the assessee is a company duly incorporated under the Companies Act and filed its return of income declaring total income at Rs.8,22,96,116/- on 29.10.2017 for the A.Y. 2017-18. The case was selected for ‘limited scrutiny’ through Computer Assisted Scrutiny System (CASS) to examine and verify the expenses incurred for earning exempt income. Accordingly, a notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued to the assessee and specific query was raised with regard to the expenditure incurred for earning of exempt income in the form of dividend at Rs.31,070/-. The explanation of the assessee that it had not incurred any expenditure for earning the exempt income was not found acceptable by the Assessing Authority. Therefore, he proceeded to invoke provisions of Section 14A(2) r.w. Rule 8D(2)(ii) of the Income Tax Rules, 1962 (“Rules”, for short). Thereby, he made an addition of Rs.2,54,373/- and assessed income at Rs.8,25,50,493/-. Aggrieved against this, the assessee preferred an appeal before the Ld. CIT(A) who also sustained the addition and dismissed the appeal of the assessee. Now, the assessee is in appeal before this Tribunal.
3. Apropos to the grounds of appeal, the Ld. Counsel for the assessee, Shri K. Kapoor, C.A., advanced multifold submissions. Firstly, he contended that the law mandates recording of proper satisfaction by the Assessing Officer as to why the suo-moto disallowance made by the assessee is not correct. He further submitted that in the present case, the exempt income earned by the assessee is Rs.31,070/-, whereas the disallowance computed by the Assessing Officer is much higher than such exempt income, which is impermissible in law. In support of his contentions, the Ld. Counsel placed reliance on various judicial pronouncements, including the judgments of the Hon’ble Bombay High Court in PCIT vs. JSW Energy Ltd. (2023) 153 taxmann.com 208 (Bom), PCIT vs. Tata Capital Ltd. (2024) 161 taxmann.com 557 (Bom), and PCIT vs. Keti Construction Ltd. (2024) 162 taxmann.com 278, as well as the judgment of the Hon’ble Calcutta High Court in PCIT vs. Avantha Realty Ltd. (2024) 164 taxmann.com 376 (Cal). Reliance was also placed on the decisions in DCIT vs. Welspun Steel Ltd. (ITA No. 2137/ Mum/2021), Essilor India Pvt. Ltd. vs. DCIT (IT(TP)A No. 888/Bang/2022), Unilever Industries (P.) Ltd. vs. DCIT (2024) 158 taxmann.com 599 (Mum), SRS Industries (P.) Ltd. vs. ITO (2024) 163 taxmann.com 480 (Raipur-Trib), and Zodiac Ventures Ltd. vs. ITO (ITA No. 4754/Mum/2023). It was further submitted that the Assessing Officer has failed to record the requisite satisfaction as contemplated under the provisions of law before invoking the disallowance.
4. On the other hand, the Ld. Departmental Representative for the Revenue opposed the submissions and drew our attention to the assessment order to buttress his contention that this is not a case where the Assessing Officer had failed to record satisfaction. In fact, the Assessing Officer had duly recorded the requisite satisfaction. However, with regard to the submission that the disallowance cannot exceed the exempt income earned by the assessee, he fairly conceded that the judicial pronouncements on this issue is against the Revenue.
5. We have heard the Ld. Representatives of the parties and perused the material available on records. Undisputedly, in the present case, the assessee earned dividend income of Rs.31,070/-and made a suo-moto disallowance of Rs.3,085/-. However, the AO computed disallowance at Rs.2,57,458/-. So far as the question of disallowance of expenditure made suo-moto by the assessee is concerned, such disallowance depends upon the volume of transaction made and quantum of the expenditure incurred by the assessee for earning the exempt income. In the instant case, the administrative expenses disallowed by the assessee are not commensurate with the volume of investments. Therefore, the contention of the assessee that the satisfaction recorded by the Assessing Officer is unjustified is devoid of any merit. However, we find merit in the contention of the assessee that the Co-ordinate Bench of this Tribunal in the case of Unilever Industries Put. Ltd. vs. DCIT (2024) 158 taxmann.com 599 (Mum-Trib), following the judgment of the Hon’ble Karnataka High Court in Pragathi Krishna Gramin Bank vs. Jt. CIT (2018) 95 taxmann.com 41 / 256 Taxman 349 (Karn), has deleted similar disallowances. Further, in the case of M/ s. Nirved Traders (P.) Ltd. vs. Dy. CIT (IT Appeal No. 149 of 2017) dated 23.04.2019, has held that the disallowance computed under Rule 8D(2)(ii) should not exceed the exempt income so earned. Respectfully following the aforesaid judicial precedents, we direct the Assessing Officer to restrict the disallowance to the extent of the exempt income i.e. Rs.31,070/- earned by the assessee. Grounds raised in this appeal are partly allowed.
6. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 06/05/2026.
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