Case Law Details
Mahindra Lifespace Developers Ltd. Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai, partly allowed the assessee’s appeal for Assessment Year 2005-06 against the order of the Commissioner of Income Tax (Appeals) [NFAC] concerning disallowance under Section 14A of the Income-tax Act.
In the original assessment, the Assessing Officer had made a disallowance of ₹255.29 lakh under Section 14A. The CIT(A) granted partial relief, and the Tribunal subsequently remanded the issue to the Assessing Officer for fresh consideration. Following reconsideration, the CIT(A) sustained a disallowance of ₹20.50 lakh, computed at 0.5% of the average value of investments.
Before the Tribunal, it was undisputed that the assessee had earned exempt dividend income of only ₹8 lakh. The Tribunal observed that a disallowance of ₹20.50 lakh was wholly unjustified. It further noted that the computation mechanism under Rule 8D was not applicable for the relevant assessment year. Accordingly, the Tribunal directed the Assessing Officer to restrict the disallowance to 10% of the exempt income, amounting to ₹0.80 lakh, and deleted the balance disallowance. The Tribunal also held that, being an estimated disallowance, the amount should not be added to the book profits, following the Special Bench decision in Vireet Investments Pvt. Ltd. The appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2005-06 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 07.11.2025 in the matter of an assessment framed by Ld. AO u/s 143(3) r.w.s. 254 of the Act on 22.12.2017. The sole grievance of the assessee is confirmation of disallowance of indirect expenditure u/s 14A for Rs.20,50,139/- which has been computed @0.5% of average investment. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
2. In the regular assessment dated 26-12-2007, Ld. AO made disallowance u/s 14A for Rs.255.29 Lacs. The Ld. CIT(A) granted partial relief to the assessee. Upon further appeal, this issue was relegated by the Tribunal in common order ITA Nos. 837/Mum/2012 & ors. dated 19-10-2016 to Ld. AO for fresh consideration. The issue was reconsidered and ultimately Ld. CIT(A) retained indirect expense disallowance of Rs.20.50 Lacs which was computed @0.5% of average investments. Aggrieved, the assessee is in further appeal before us.
3. It is undisputed fact that the assessee has earned exempt dividend income of Rs.8 Lacs and suffered a disallowance of Rs.20.50 Lacs which is wholly unjustified. Further, Rule 8D computation mechanism is not applicable for this year. Therefore, we direct Ld. AO to restrict the disallowance to the extent of 10% of exempt income which comes to Rs.0.80 Lacs. The remaining disallowance stands deleted. Since this an estimated disallowance only, the same would not be added to the Book Profits as per the decision of Special Bench of Delhi Tribunal in Vireet Investments Pvt. Ltd. (2017) 165 ITD 27 (Delhi) (SB). We order so.
4. The appeal stands partly allowed.
Order pronounced on 12th June, 2026
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