Case Law Details
Kavita Gupta Vs ACIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT), Delhi, allowed the assessee’s appeal after condoning a delay of 217 days in filing the appeal. The Tribunal accepted the assessee’s explanation that the delay occurred because legal advice to challenge the quantum order was received only after a penalty order under Section 271(1) of the Income-tax Act was passed. As the Revenue did not seriously oppose the condonation request, the delay was condoned and the appeal was heard on merits.
The assessee had filed the return of income for Assessment Year 2016-17 declaring a loss. The case was selected for limited scrutiny under Section 143(2) solely to examine the large deduction claimed under Section 57 under the head “Income from Other Sources.” During assessment proceedings, however, the Assessing Officer (AO) made a disallowance of ₹16,97,698 under Section 14A read with Rule 8D. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance on a substantive basis while deleting the protective addition.
Before the Tribunal, the assessee raised additional legal grounds contending that the disallowance under Section 14A was beyond the scope of the limited scrutiny for which the case had been selected. It was argued that the AO exceeded the jurisdiction permitted under the CBDT instructions governing limited scrutiny assessments, as the case had never been converted into complete scrutiny. The assessee also challenged the invocation of Rule 8D, the absence of satisfaction under Section 14A(2), and asserted that sufficient own funds and higher interest income existed.
The Tribunal admitted the additional ground after observing that it was purely legal in nature and all relevant facts were already available on record. It relied on the Supreme Court decision in NTPC Ltd. v. CIT for admitting the legal ground. The Tribunal also examined the earlier decision of the Coordinate Bench in Uday Punj (HUF) v. ITO, where a disallowance under Section 14A had been deleted because it fell outside the issues for which the assessment had been selected under limited scrutiny.
Applying the same principle, the Tribunal noted that the assessee’s case had been selected only for verification of the deduction claimed under Section 57 and not for examining any disallowance under Section 14A. It further observed that the Assessing Officer had not produced any approval or material showing that the assessment had been converted from limited scrutiny to complete scrutiny. In the absence of such conversion, the Tribunal held that the disallowance under Section 14A read with Rule 8D was beyond the scope of the limited scrutiny proceedings. Following the Coordinate Bench decision, the Tribunal directed the Assessing Officer to delete the disallowance made under Section 14A read with Rule 8D. The additional legal ground was allowed, and the appeal of the assessee was allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the assessee is directed against the order dated 31.01.2025 of Addl./ JCIT(A)-2, Mumbai, [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the assessment order dated 04.12.2018 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the Assessing Officer (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2016-17.
2. This appeal has been filed with a delay of 217 days. In this connection, the assessee has filed a condonation application. The relevant extracts of the said application are reproduced as under:
“1. That The Commissioner Of Income Tax, Appeal ADDL/JCIT (A)-2 Mumbai passed an order u/s 250 of the Income-tax Act, 1961 (‘the Act) for AY 2016-17 on 31.01.2025.
2. The Appellant had received the order u/s 250 of the Act on 31.01.2025. Accordingly, an appeal against the said order of the Ld. CIT(A) should have been filed before this Hon’ble Tribunal on or before 31.03.2025.
3. That the filing of appeal got delayed by approximately 214 days and therefore your appellant is filing the petition for condonation of delay along with the appeal. The reason for delay in filing the petition is discussed in subsequent paragraphs.
4. However, on 11.09.2025, the Ld. AO passed a penalty order under section 271(1) of the Act, wherein he has levied a penalty of Rs. 5,24,586/- for furnishing inaccurate particulars of income. It is submitted that the CIT(A) in quantum proceeding has disallowed the interest expenditure u/s 14A of the Act. of the Act. Therefore, the Appellant consulted counsel in relation to the penalty matter. The Counsel after going through the entire matter has advised to file an appeal against the quantum order passed by the CIT(A) with respect to disallowance of interest expenses as there will be adverse consequences on penalty and other consequential aspect. Hence, we are now filing the present quantum appeal with an application for condonation of delay.
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7. Your appellant states that there was a sufficient cause and bona fide reason for not filing this appeal within time and it would be in the interest of justice to condone the delay and in deciding the issues on merits.
8. In these circumstances, your appellant prays that the delay in filing appeal before Hon’ble Income Tax Appellate Tribunal may kindly be condoned and the appeal be heard on merits or on such order be passed as the learned members deems fit and proper.”
2.1 The Ld. Sr. DR did not raise any serious objection against the said delay. Considering the explanation filed by the assessee, the delay in filing of the appeal is condoned and the appeal is taken up for adjudication.
3. Brief facts of the case: The assessee e-filed return of Income for the Assessment Year 2016-17 on 29.03.2017 (acknowledgment number 714408191290317) declaring a loss of Rs. 46,58,130/-. It was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter, the Act’) electronically at the returned income. The case was selected for Limited scrutiny through CPC as per guidelines/procedure for selection of cases for scrutiny. The reason for selection for limited scrutiny is:
a) Large deduction claimed u/s 57 (Deduction claimed under the head “income from other sources” u/s 57 in Schedule OS of ITR).
3.1 Notice U/s 143(2) dated 19.09.2017 was accordingly issued as well as served upon the assessee by speed post as well as email.
3.2 The AO completed the assessment u/s 143(3) of the Act on 04.12.20218 making only one addition in the assessment order i.e. disallowance of Rs. 16,97,698/- u/s 14A of the Act on ‘Substantive Basis’ as well as on ‘Protective Basis’ for the reasons stated in the assessment order.
4. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) confirmed the disallowance of Rs. 16,97,698/- on ‘Substantive Basis’ and deleted the same addition of Rs. 16,97,698/- made on ‘Protective Basis’.
5. Aggrieved with the said order, the assessee filed an appeal before us on 5 grounds of appeal on the merits of the disallowance made in the assessment order. However, during the pendency of the appeal, the assessee filed an additional ground on 10.02.2026 on jurisdictional / legal issue that the disallowance of Rs. 16,97,698/-made u/s 14A of the Act was beyond the scope ‘limited scrutiny’ of the assessment and thus the disallowance of Rs. 16,97,698/- was not tenable as the assessment order framed was bad in law. The relevant extract of the submission for filing the additional ground of appeal and the grounds of appeal are reproduced as under:
“That the orders passed by the Ld. Assessing Officer (AO) and subsequently confirmed by the Ld. CIT(A) are bad in law, void ab initio, and passed without jurisdiction. The assessment was specifically selected for Limited Scrutiny under Section 143(2) of the Income Tax Act, 1961. However, the Ld. AO exceeded the defined jurisdiction by making additions on issues outside the scope of such limited scrutiny, thereby violating the mandatory directions contained in CBDT Instruction No. 5/2016 dated 14th July 2016, and CBDT Instruction No. 20/2015 dated 29th December 2015.
That the Lul. AO erred in law and on facts in making a disallowance under Section 14A read with Rule 8D without fulfilling the statutory condition precedent of recording satisfaction as mandated under Section 14A(2). It is submitted that the mechanical invocation of Rule 8D is arbitrary and unsustainable
That the disallowance under Section 14A is further untenable as the assessee possessed sufficient interest-free own funds to cover the subject investments. Furthermore, the assessee earned a total interest income of Rs. 48,37,178/ which significantly exceeds the interest expenditure of Rs. 33,67,233/-. Consequently, no nexus between interest-bearing borrowed funds and tax-exempt investments can be established, thereby rendering the entire disallowance arbitrary, without basis and is liable to be deleted.
Further, the impugned assessment order is bad in law and liable to be quashed since it is in violation of CBDT Instruction no.1/2011 dated 31-01-2011 as the returned income of the assessee is less than 20 lakhs and hence the asseement order should have been passed by ITO and thus the order passed by ACIT is wholly without jurisdiction and liable to be quashed.”
“Additional Ground of Appeal:-
1. “That, on the facts and circumstances of the case, the action of Ld. CIT(A) in confirming the action of AO in making addition in respect of issues not mentioned in limited scrutiny were beyond jurisdiction of Assessing officer as the scrutiny assessment was selected for limited scrutiny u/s 143(2) and not complete scrutiny”.
2. “That, on the fact and circumstances of the case, the order dated 04.12.2018 passed by Ld. Assessing officer is wholly without jurisdiction and bad in law and liable to be quashed in view of the per CBDT Instruction No. 1/2011 dated 31st January 2011 issued by CBDT.
3. “That, on the facts and circumstances of the case, the Ld. AO as well as CIT(A) erred in ignoring the fact that the assessee had substantial owned funds to invest in the partnership firm, thus disallowance u/s 14A is unwarranted”.
4. “That, on the facts and circumstances of the case and in law, the Ld. AO as well as CIT(A) erred in ignoring the fact that the assessee has earned interest income of RS. 48,37,178/- against the interest paid on amount borrowed to the tune of Rs. 33,67,233/-. Thus disallowance u/s 14A is grossly without any basis, unsubstantial and liable to be deleted”.
5. “That, on the facts and circumstances of the case, the Ld. CIT(A) erred in ignoring the fact that the AO invoked Rule BD without recording a mandatory satisfaction u/s 14A sub-section (2), suffering from jurisdictional infirmity and hence entire Rule 8D is unsustainable in law.”
5.1 The Sr. AR relied upon the above submission and relied upon the order of the Co-ordinate Bench of ITAT, Delhi in the case of Uday Punj (HUF) vs. ITO, Ward 32(2), New Delhi, ITA No. 643/Del/2020 order dated August 26, 2020, in support of the additional ground no. 1 of the appeal.
6. The AO filed a report vide letter dated Nil on the additional ground of appeal and the appeal filed by the assessee relevant extracts of the said submission for deciding the appeal is reproduced as under:
“GROUND-WISE REPLY
The Respondent is giving the Ground-wise reply to the aforesaid additional grounds of appeal-below:
Additional ground. I
In this ground the assessee contended that the action of Ld. CTT(A) in confirming the action of the Assessing Officer in making addition in respect of issues not mentioned in limited scrutiny were beyond jurisdiction of the Assessing Officer as the scrutiny assessment was selected for limited scrutiny u/s 143(2) and not complete scrutiny.
In this regard, it is stated the case was selected for limited scrutiny through CPC as per guidelines/procedure for selection of cases for scrutiny. The reason for selection is “Large deduction claimed u/s 57 (deduction claimed under the head income from other sources u/s 57 in schedule OS of ITR). Thereafter, the assessee was issued show cause notice dated 17.11.2018 as to why interest expenses of Rs. 33,67,233/- which was claimed u/s 57 of the act directly related to earning of exempt income not forming part of total income shall be disallowed under the purview of the section 14A r.w.R 8D.
After considering the reply of the assessee the Assessing Officer passed the order u/s 143(3) of the Act making an addition of Rs. 16,97,698/- in respect of interest expenses as per Rule 8D occurred by the assessee.
In view of the above, it is stated that the contention of the petitioner is not correct and liable to be rejected as the case was selected for limited scrutiny and the addition was made on the same ground and this case was not converted in the complete scrutiny marked portion on page 2 of the AO’s report”
6.1 The Ld. Sr. DR relied upon the orders of the authorities below and the above written submission of the AO.
7. We have heard both the parties and perused the material available on record. As noted above, the assessee has raised additional ground 1 & 2, in this appeal which are purely legal in nature. We further find that all the facts relevant for adjudication of the aforesaid additional ground no. 1 is already on record. Hence, in view of the decision of the Hon’ble Supreme Court in the case of NTPC Limited vs CIT 229 ITR 383(SC), the additional ground no. 1 raised by the assessee is hereby admitted and taken up for adjudication.
7.1 On similar facts the Co-ordinate Bench of ITAT, Delhi in the case of Uday Punj (HUF) vs. ITO, (supra) directed the AO to delete the disallowance of Rs. 28,64,419/- made u/s 14A of the Act read with Rule 8D where the case was selected for ‘limited scrutiny’ on the issue at i) whether sales turnover / receipts has been correctly offered for tax ii) Whether the investment and income relating to securities (derivative) transactions are duly disclosed but the AO made additions / disallowances u/s 14A of the Act. The relevant extracts of the order are reproduced as under:
“03. The brief facts of the case are that assessee is an individual who filed his return of income on 13.09.2016 declaring total income of Rs. 10,18,970/-. Assessee has also shown Short Term Capital Loss of Rs. 88,18,782/- which was carried forward for set off. The case was selected for limited scrutiny under CASS for verification of following items:-
i. Whether sales turnover / receipts has been correctly offered for tax
ii. Whether the investment and income relating to securities (derivative) transactions are duly disclosed.
04. Subsequently, notice u/s. 143(2) of the I.T. Act was issued on 24.07.2017.
05. During the course of assessment proceedings, the AO observed that assessee has earned dividend income of Rs. 14,04,831/- and assessee was asked that why disallowance u/s. 14A of the Act should not be made. The assessee explained vide letter dated 18.12.2018 that assessee has debited total expenditure in Profit & Loss Account of only Rs. 9,20,749/- out of which a sum of Rs. 8,17,707/- is income tax, service tax, stamp duty and Security Transaction Tax (STT). Therefore, the assessee has incurred and claimed the expenditure of Rs. 1,03,042/- only. Out of this expenditure, Rs. 77,771/- are general expenditure and Rs. 25,271/- are DMAT charges. Assessee submitted that it has not claimed any expenditure which has yielded the exempt income. He submitted that security transaction tax has not been claimed by the assessee and already disallowed. The AO rejected the contentions of the assessee and noted that assessee has shown Consultation charges of Rs. 10,137/- and DMAT charges of Rs. 25,271/- and therefore, it has incurred expenditure for earning exempt income. Thereafter, the Ld. AO applied the Rule 8D and found that assessee himself has disallowed the STT paid of Rs. 86,735/-, AO calculated disallowance of Rs. 28,64,419/-. This disallowance was made u/s 14A of the Act and assessment order was passed on 29.12.2018 determining the total income of the assessee Rs. 38,83,389/- against the returned income of Rs. 10,18,970/-.
06. The assessee preferred appeal before the Ld. CIT(A), who confirmed the above disallowance and dismissed the appeal of the Assessee. Therefore, the assessee is aggrieved with the order of the Ld. CIT(A) and has preferred this appeal.
07. Ld. AR stated that
i. the case of the assessee was selected for limited scrutiny giving the reasons which did not include disallowance of expenditure u/s. 14A of the Act;
ii. the assessee has only incurred total expenditure of Rs. 1,03,042/-, therefore, the disallowance cannot exceed the total expenditure and
iii. assessee has himself disallowed the STT amounting to Rs. 86,735/- and therefore, the balance expenditure can only be considered for disallowance. He also referred to Profit and Loss Account of the assessee. He submitted that disallowance deserve to be deleted.
08. Ld. DR supported the order of the AO and submitted that the reasons for limited scrutiny included for investment and income relating to securities are duly disclosed or not. Therefore, disallowance u/s. 14A is part of the reasons. Even otherwise, he submitted that there is no infirmity in the working of disallowance made by the AO.
09. We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case, the case of the assessee was picked up for limited scrutiny for the reasons stated above. The reasons did not speak about any disallowance of expenditure u/s. 14A of the Act. If the AO wanted to go beyond the reasons of the limited scrutiny, then he should have invoked the provisions of complete scrutiny by obtaining the necessary approvals. In this case, no such approval or conversion of the case from limited scrutiny to complete scrutiny was shown. Undisputedly, case of the assessee was for limited scrutiny and the reasons for picking up of the case of assessee under limited scrutiny does not include the disallowance of expenditure u/s. 14A of the Act, hence, we cannot uphold the disallowance made by the AO and confirmed by the Ld. CIT(A). In the result, we direct the Assessing Officer to delete the disallowance of Rs. 28,64,419/- made u/s. 14A of the Act read with Rule 8D. The orders of the lower authorities are reversed. The solitary ground of the appeal of the assesee is allowed.
10. In the result, the Assessee’s Appeal is allowed.”
(emphasis supplied by us)
7.2 In the present case, also the case was selected for ‘limited scrutiny’ u/s 143(2) of the Act for the reasons as stated earlier, which did not include to verify the expenditure in terms of section 14A of the Act. Further, the AO in his report dated Nil has not furnished any approval or conversion of the case form limited scrutiny to complete scrutiny. Therefore, following the aforesaid order of the Co-ordinate Bench of the Tribunal, we direct the Assessing Officer to delete the disallowance of Rs. 28,64,419/- made u/s. 14A of the Act read with Rule 8D. The additional ground no. 1 of the appeal of the assessee is allowed.
8. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 21.05.2026.
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