Suryamani Financing Company Ltd. Vs ITO (ITAT Kolkata)
Kolkata ITAT Restricts Section 14A Disallowance from ₹5.75 Lakh to ₹59,793: Only Investments Actually Yielding Exempt Income to Be Considered
Summary: The Kolkata Bench of the Income Tax Appellate Tribunal partly allowed the assessee’s appeal for Assessment Year 2010-11 concerning disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962. The Assessing Officer had restricted the computed disallowance to ₹5,75,293, being the total expenditure claimed by the assessee, and the Addl./JCIT(A) confirmed the addition. Before the Tribunal, the assessee submitted that only investments which yielded exempt income should be considered for computing the disallowance and relied upon Principal Commissioner of Income-tax Vs. REI Agro Ltd., Principal Commissioner of Income-tax Vs. Shalimar Pellet Feeds Ltd. and the coordinate Bench decision in CHNHB Health Insurance Co. Ltd. Vs. ACIT, Circle-6(1), Kolkata. The Tribunal considered the coordinate Bench decision and the principle stated therein that disallowance under section 14A read with Rule 8D is to relate to income which does not form part of total income and, for the relevant computation, the investments giving rise to such exempt income are to be considered. The assessee’s working restricted the relevant investment base to ₹1,19,58,683 and arrived at a disallowance of ₹59,793. The Tribunal accordingly directed the Assessing Officer to restrict the disallowance under clause (iii) of sub-rule (2) of Rule 8D only to investments which yielded exempt income and to verify the assessee’s working of ₹59,793, substituting that amount in place of ₹5,75,293 if verified. Ground No. 1 was therefore partly allowed, while the remaining grounds were treated as general and requiring no separate adjudication. The appeal was consequently partly allowed.
List of Cases Discussed / Relied Upon
- Principal Commissioner of Income-tax Vs. REI Agro Ltd., [2022] 140 taxmann.com 71 (Calcutta) — relied upon for the proposition that section 14A read with Rule 8D is to be applied with reference to investments giving rise to exempt income.
- Principal Commissioner of Income-tax Vs. Shalimar Pellet Feeds Ltd., [2022] 138 taxmann.com 124 (Calcutta)/[2022] 287 Taxman 134 (Calcutta)/[2023] 453 ITR 547 (Calcutta) — cited by the assessee in support of its contention.
- CHNHB Health Insurance Co. Ltd. Vs. ACIT, Circle-6(1), Kolkata, ITA No. 511/KOL/2025 for AY 2017-18, order dated 08.04.2026 — relied upon as the coordinate Bench decision directing recomputation of section 14A disallowance with reference to investments yielding exempt income.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the Addl/JCIT(A)-2, Coimbatore [hereinafter referred to as Ld. ‘Addl/JCIT(A)’] passed u/s 250 of the Act for AY 2010-11 dated 11.12.2025.
2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1. That on the facts and in the circumstances of the case the action of the Ld. CIT(A) to confirm the addition made by the A.O. of Rs.5,75,293/- u/s 14A of the Act is illegal and bad in law.
2. That the order of the Ld. CIT(A) confirming the addition made by the A.O. is arbitrary, excessive and illegal.
3. That the above grounds of appeal will be argued in details at the time of hearing and the appellant craves leaves to submit additional grounds of appeal if any and or alter, vary, modify or rectify the statement of facts and grounds of before the time of hearing.”
3. The appeal was filed originally before CIT(A)-3, Kolkata who passed an ex parte order on 5th September, 2017, which was set aside by the Tribunal and restored to the file of the Ld. CIT(A) vide order dated 22.06.2018, who subsequently passed an order dismissing the appeal. Brief facts of the case are that the assessee had filed the return of income for AY 2010-11 on 21.09.2010 declaring the total income at ₹1,61,232/-. The Assessing Officer (hereinafter referred to as Ld. ‘AO’) observed that the assessee had earned exempt dividend income of ₹32,77,383/-, yet claimed business expenditures comprising of ₹2,25,400/- towards payment to employees and ₹1,39,895/- towards administrative expenses despite having minimal trading activity throughout FY 2009-10. Consequently, the Ld. AO invoked the provisions of section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 to calculate the disallowance at ₹28,64,791/-, but ultimately restricted the disallowance to the total expenditure claimed in the profit and loss account and added a sum of ₹5,75,293/- to the income and assessed the total income at ₹5,99,440/- u/s 143(3) of the Act. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. Addl/JCIT(A), who upheld the assessment order by noting that the assessee’s substantial investment portfolio inherently required management personnel and professional expertise and concluded that the expenses were indeed incurred for earning the exempt income. Accordingly, the Ld. Addl/JCIT(A) confirmed the action of the Ld. AO and dismissed the appeal of the assessee.
4. Aggrieved with the order of the Ld. Addl/JCIT(A), the assessee has filed the appeal before the Tribunal.
5. Rival contentions were heard and the submissions made have been examined.
6. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. Addl/JCIT(A). Ground No. 1 relates to the action of the Ld. Addl/JCIT(A) in confirming the addition made by the Ld. AO for ₹5,75,293/- u/s 14A of the Act while Ground Nos. 2 & 3 are general in nature and do not require any separate adjudication. The assessee had filed the return of income for AY 2010-11 declaring total income at ₹16,12,332/- and had shown dividend income of ₹32,77,383/- and the investment made as per the balance sheet was ₹57.30 Crore. The Ld. AR submitted before us that the Ld. AO worked out a sum of ₹2,86,791/- as disallowance u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. Aggrieved with the disallowance made, the assessee filed an appeal before the Tribunal. It was conveyed before the Ld. Addl/JCIT(A) that the total investment made was ₹80,29,41,833/- and the investment relating to exempt income was only ₹1,19,58,683/-. It was submitted that during the year, the assessee had earned exempt income in the nature of dividend to the tune of ₹32,77,383/- from the following two scrips, which is mentioned at page 15 of the order of the Ld. Addl/JCIT(A) and is reproduced as under:
“a) India Tyre & Rubber Co. (India) Ltd. Rs.31,30,470/-
b) Mangalore Chemicals & Fertilizers Ltd. Rs. 1,46,913/-
Total Rs.32,77,383/-
The appellant during the course of assessment proceedings had submitted that only those investments be considered for calculation of disallowance as per the Rule 8D(2)(iii) which gave rise to dividend income. The appellant submitted calculation whereby the average value of such investments which gave rise to dividend income was Rs.1,19,58,683/- and consequently the disallowance worked out was 0.5% of Rs.1,19,58,683/- being Rs.59,793/-. The calculation of the average value of the investments which gives rise to exempt income is available in the balance sheet which is attached to the submissions.”
7. The Ld. AR submitted that the Ld. Addl/JCIT(A) noted as per the para 5.5 and 5.6 that the assessee had not furnished any proof that the assessee had clearly demarcated the exempt earning investment from the non-exempt earning investment and the details were already submitted before the Ld. the Ld. AO. He has further mentioned that even during the appeal proceeding no such proof or any material relating to the demarcation of the exempt earning investment from the non-exempt income earning investment was filed despite adequate opportunity being allowed. The turnover of the assessee during the year was ₹1,57,39,684/- and the sales were made throughout the FY 2009-10 and the major income was from dividend of ₹32,77,383/-. The Ld. Addl/JCIT(A) has further stated that the Ld. AO had rightly recorded the reason for invoking section 14A of the Act and Rule 8D of the IT Rules. He further held as under:
“5.7 From the reasons recorded by the AO it is observed that the trading activities done by the appellant was only once in each month and that does not require much expenditure and the investment made by the appellant as on 31.03.2020 is Rs.80,29,41,833/- which investment decisions requires management personnel and professional experts which needs administrative, managerial and establishment expenses including the expenses related to depreciable assets used by the personnel of the appellant company. Hence, it cannot be said that no expenses was incurred to earn the exempt income. Hence, the AO was correct in invoking the section 14A r.w.Rule 8D of the IT Act and worked out the same as Rs.28,64,791/-, but the total expenditure claimed by the appellant is Rs. 5,75,293/-, hence the amount of Rs. 5,75,293/- is added to total income of the appellant. Hence the addition made by the AO is hereby confirmed for the reasons discussed in the para 5.4 to 5.7 and the Grounds Raised by the appellant in Ground No 1 to 15 are hereby DISMISSED.”
8. The Ld. AR submitted that only the investment yielding exempt income could be considered for the disallowance in view of the decision of the Hon’ble jurisdictional High Court in the case of Principal Commissioner of Income-tax vs. REI Agro Ltd. [2022] 140 taxmann.com 71 (Calcutta)[07-03-2022] and the decision of the Hon’ble High Court in the case of Principal Commissioner of Income-tax vs. Shalimar Pellet Feeds Ltd. [2022] 138 taxmann.com 124 (Calcutta)/[2022] 287 Taxman 134 (Calcutta)/[2023] 453 ITR 547 (Calcutta)[22-02-2022]. A copy of the order of the coordinate bench in the case of CHNHB Health Insurance Co. Ltd. vs. ACIT, Circle-6(1), Kolkata in ITA No. 511/KOL/2025 for AY 2017-18 order dated 08.04.2026 has also been filed in support of the claim.
9. We have considered the submissions made and gone through the facts of the case. The coordinate bench in the case of CHNHB Health Insurance Co. Ltd. (supra) has held as under:
“5. Rival contentions were heard and the submissions made have been examined. It was submitted by the Ld. AR that the assessee had made the disallowance on proportionate basis and as per page 3 of the paper book filed, as the tax free dividend and interest was ₹2,33,02,492/- being 56.90% of the total dividend and interest of ₹4,09,49,451/-, therefore, on proportionate basis 56.90% of the expenses other than those related to insurance business which were ₹87,41,989/- (as per the Audited Accounts) and 56.90% of which worked out to ₹49,74,192/-, were disallowed suo moto by the assessee. The Ld. AO disallowed a sum of ₹1,15,53,269/- being 1% of the annual average or the monthly averages of the investment shown at ₹115,53,26,850/-. Our attention was also drawn to page 4 of the paper book in which the monthly averages of investment have been worked out by considering the entire equity shares while the assessee also had tax free bonds which are shown at ₹2,18,77,000/-. The Bench was of the view that the provisions of Rule 8D of the Income Tax Rules, 1962 were rightly applied, however, the computation done by the Ld. AO is not correct as he had invoked the provisions of rule 8D of the IT Rules, 1962 but had included the entire investment. It has been held by the Hon’ble Calcutta High Court in the case of Principal Commissioner of Income-tax vs. REI Agro Ltd. [2022] 140 taxmann.com 71 (Calcutta)[07-03-2022] as under:
“2. The revenue has raised the following substantial question of law for consideration:
(i) Whether on the facts and in the circumstances of the case the Learned Income-tax Appellate Tribunal, “C” Bench, Kolkata has erred in law in deleting the addition made by the Assessing Officer under section 36(1)(va) read with section 2(24)(x) of the Income-tax Act, 1961 on account of delayed deposit of employees’ contribution towards PF/ESI without considering CBDT’s Circular No. 22 of 2015 dated December 17, 2015 ?
(ii) Whether on the facts and in the circumstances of the case the Learned Income-tax Appellate Tribunal, “C” Bench, Kolkata has erred in law in holding that the disallowances under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 is to be in relating to the income which does not form a part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income while as per rule 8D, those investments are also to be taken income from which shall not form part of the total income ?
3. We have heard Mr. Debasish Chaudhuri, learned standing counsel appearing for the appellant/revenue.
4. The second substantial question of law framed for consideration is with regard to disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962. We have perused the order passed by the tribunal which affirmed the order passed by the Commissioner of Income-tax (Appeals) Central-II, Kolkata [CIT(A)]. Identical issue arose in the assessee’s own case for the assessment year 2008-09 which was decided in favour of the assessee by the CIT(A) and confirmed by the tribunal. The revenue preferred appeal before this Court and the appeal has been dismissed by judgment dated 9th April, 2014.
Thus, applying the decision of this Court, the said issue was decided against the revenue and in favour of the assessee, we find no ground to take a different view in the matter as the said issue has already been decided in favour of the assessee in the assessee’s own case for earlier assessment years. Accordingly, substantial question of law no. 2 is rejected.”
6. Thus, the disallowances under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 is to be in relating to the income which does not form a part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Hence, the order of the Ld. CIT(A) is hereby set aside and the issue is remanded to the Ld. AO to apply the provisions of Rule 8D of the IT Rules and recompute the disallowance in view of the findings of the Hon’ble Calcutta High Court in the case of REI Agro Ltd. (supra). The assessee is directed to bifurcate the dividend and the interest received and also the details of investments which yielded exempt income and which did not yield such exempt income and submit the same before the Ld. AO who shall thereafter recompute the disallowance as per Rule 8D of the IT Rules. Hence, all the grounds of appeal raised by the assessee are partly allowed for statistical purposes.”
10. As per the computation of the assessee the disallowance works out to ₹59,793/- as according to the assessee, clause (i) of sub-rule (2) of rule 8D of the IT Rules as applicable for the impugned assessment year is not applicable as there were no direct expenses and clause (ii) thereof is also not applicable as there was no expenditure relating to interest and only clause (3) was applicable being 1.5 percent of the average of the value of investment which yielded exempt income. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld.
11. We have considered the submissions made. Since the issue is covered by the decision of the judicial High Court has discussed in the case of CHNHB Health Insurance Co. Ltd. (supra); hence, relying upon the decision in the case of CHNHB Health Insurance Co. Ltd. (supra), we hereby direct the Ld. AO to restrict the disallowance under clause (iii) of sub-rule (2) of rule 8D of the IT Rules, 1962 only in relation to the investment which yielded exempt income and as per the working before the Ld. Addl/JCIT(A), the same works out to ₹59,793/-. The Ld. AO is directed to verify the same and substitute the same in place of ₹5,75,293/- disallowed by him and confirmed by the Ld. Addl/JCIT(A). Hence, Ground No. 1 is partly allowed, Ground No. 2, 3 & 4 are general in nature and do not require any separate adjudication.
12. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open Court on 25th August, 2026.
