Mapaex Remedies LLP Vs ITO (ITAT Ahmedabad)
₹1.66 Lakh Dividend, ₹27.38 Lakh Disallowance: ITAT Applies the Section 14A Ceiling
Reopening Survived, but the Addition Was Substantially Reduced
The Ahmedabad Tribunal upheld the reopening of the assessee’s assessment but directed that the section 14A disallowance be restricted to the exempt income earned during the year.
Against exempt dividend income of ₹1,66,349, the Assessing Officer had computed a disallowance of ₹27,38,329 under section 14A read with Rule 8D. Following the Gujarat High Court decision in PCIT v. Gujarat Flurochemicals Ltd. [2023] 155 taxmann.com 135, the Tribunal restricted the disallowance to ₹1,66,349.
The assessee thus failed on its challenge to reassessment but obtained substantial relief on the quantum of the addition. The appeal was partly allowed.
Original Scrutiny Assessment Had Accepted the Returned Income
The assessee filed its return on 13 February 2021, declaring total income of approximately ₹10.85 crore. The original assessment was completed under section 143(3) on 21 September 2022, accepting the returned income.
Thereafter, reassessment proceedings were initiated on the ground that no disallowance under section 14A had been made against exempt dividend income of ₹1,66,349.
The reassessment was completed on 28 February 2025 under section 147 read with section 144B, adding ₹27,38,329 and determining total income at approximately ₹11.12 crore.
The CIT(A) dismissed the assessee’s appeal, leading to the present proceedings before the Tribunal.
Assessee’s Objection: The Issue Had Already Been Examined
The assessee challenged the reopening on the basis that section 14A had been specifically examined during the original scrutiny assessment.
Its representative submitted that the Assessing Officer had raised a query and that the assessee had expressly replied that no expenditure had been incurred in relation to the exempt income.
Accordingly, the assessee argued that reopening an assessment on the same issue was impermissible. It relied upon P.C. Snehal Engineers (P.) Ltd. v. ACIT [2023] 146 taxmann.com 54 (Guj.) and Lambda Therapeutic Research Ltd. v. DCIT [2023] 147 taxmann.com 442 (Guj.).
On merits, the assessee maintained that no expenditure had been incurred, directly or indirectly, to earn the dividend. Alternatively, it argued that the disallowance could not exceed the exempt income itself.
Revenue Relied on the Amended Reassessment Provisions
The Department defended the reopening by referring to the amendment of section 147 effective from 1 April 2021.
Its representative argued that the amended provision empowered the Assessing Officer to reopen an assessment when escapement of income subsequently came to notice.
The Revenue accordingly supported both the reassessment and the orders of the lower authorities.
Tribunal Distinguished the Reopening Decisions
The Tribunal rejected the assessee’s legal challenge. It recorded that the reassessment notice had been issued within three years from the end of the relevant assessment year and referred to the amended section 147.
The Bench distinguished the two Gujarat High Court decisions relied upon by the assessee because those cases involved reopening beyond four years. In P.C. Snehal Engineers, the requirement concerning failure by the assessee to disclose material facts was relevant to that extended period. Lambda Therapeutic Research also concerned reopening beyond four years.
On this reasoning, the Tribunal held that those decisions did not govern the facts before it and dismissed the reopening ground.
The ruling should be reported precisely: the Tribunal upheld this reopening on its stated reasoning. The order does not contain a detailed examination of the original assessment query and reply relied upon by the assessee.
Rule 8D Could Not Produce a Disallowance Above Exempt Income
On the quantum issue, the Tribunal accepted the assessee’s alternative contention.
Following Gujarat Flurochemicals Ltd., it held that disallowance under section 14A read with Rule 8D could not exceed the exempt income earned during the year.
The Assessing Officer was therefore directed to restrict the addition from ₹27,38,329 to ₹1,66,349, giving relief of ₹25,71,980.
The Tribunal did not accept the assessee’s claim for complete deletion. Its operative relief was confined to capping the disallowance at the exempt dividend income.
Author’s Comments
The most useful aspect of this decision is the clear application of the exempt-income ceiling. A Rule 8D computation exceeding ₹27 lakh could not sustain an addition when the exempt income was only ₹1.66 lakh.
For practitioners, the case also illustrates the importance of keeping jurisdictional and quantum arguments distinct. Failure of the reopening challenge did not prevent substantial relief against the addition.
The reopening discussion warrants a careful reading. The assessee specifically asserted that the issue had been examined earlier, but the Tribunal’s reasoning principally addressed the amended provision and the different limitation periods involved in the cited decisions. The order should not be presented as a comprehensive determination of every aspect of reopening an issue examined in scrutiny.
Equally, the quantum finding establishes a ceiling in this case; it does not establish that expenditure equal to the entire exempt income must invariably be disallowed. Here, the Tribunal restricted the existing disallowance rather than adjudicating a complete deletion on the no-expenditure argument.
Case Discussed:
- PCIT v. Gujarat Flurochemicals Ltd. [2023] 155 taxmann.com 135 (Gujarat High Court) — Followed. The Tribunal applied the principle that disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned during the year and restricted the addition accordingly.
- Lambda Therapeutic Research Ltd. v. DCIT [2023] 147 taxmann.com 442 (Gujarat High Court) — Relied upon by the assessee in challenging reopening; distinguished by the Tribunal because the cited proceedings involved reopening beyond four years.
- P.C. Snehal Engineers (P.) Ltd. v. ACIT [2023] 146 taxmann.com 54 (Gujarat High Court) — Relied upon by the assessee; distinguished because the reopening notice in that case had been issued beyond four years, making the statutory condition concerning failure to disclose material facts relevant.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal filed by the Assessee is directed against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] dated 25.02.2026 for the Assessment Year (A.Y.) 2020-21 in the proceeding u/s 147 r.w.s. 144B of the Income Tax Act [hereinafter referred as “the Act”].
2. The brief facts of the case are that the assessee had filed its return of income on 13.02.2021 declaring total income of Rs.10,84,96,790/-. The original assessment was completed u/s. 143(3) of the Act on 21.09.2022 accepting the return of the income. Thereafter, re-assessment proceeding u/s. 147 of the Act was initiated on the ground that disallowance u/s. 14A read with Rule 8D was not made in respect of assessee’s exempt dividend income of Rs. 1,66,349/-. The re-assessment was completed u/s. 147 r.w.s. 144B of the Act on 28.02.2025 at total income of Rs. 11,12,35,119/- wherein an addition of Rs. 27,38,329/- was made u/s. 14A read with Rule 8D of I.T Rules.
3. Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee dismissed.
4. Now, the assessee in second appeal before us. The following grounds have been taken in this appeal:
A. That on the facts and in the circumstances of the case the order of the learned lower authorities are vitiated on several grounds hence the same may kindly be quashed.
B. That the Learned lower authorities has erred on facts and in law in completing the assessment under section 147 read with section 144B of the Income-tax Act
C. That the Learned lower authorities has erred on facts of the case that the reopening the assessment is illegal and against the provisions of law.
D. That the order passed by the Learned lower authorities is erroneous both in law and on facts in as much as it has failed to appreciate the principles of Audi alteram partem and the purpose there of.
E. That the demand and the assessment order passed is illegal, arbitrary and without justification both in law and on facts.
F. That the Learned lower authorities has erred on facts and in law and was not justified in making an addition of Rs. 27,38,329/- by disallowing valid expenditure u/s. 14A r.w.s 8D of the Income Tax Act, 1961.
G. That the above grounds are independent to each other.
5. Shri Gagan Tiwari, the Ld. AR of the assessee submitted that the AO was not correct in reopening the case u/s. 147 of the Act, when the issue of disallowance u/s. 14A of the Act was duly examined by him in the course of original assessment. He submitted that the assessee had made a specific reply to the query of the AO that no expenditure was incurred in respect of exempt income. In this regard he relied upon the decision of Hon’ble Gujarat High Court in the case of P.C. Snehal Engineers (P.) Ltd. v. ACIT [146 Taxmann.com 54(Guj.)] and Lambda Therapeutic Research Ltd. Vs DICT [147 Taxmann.com 442(Guj.)]. On merits, the Ld. AR submitted that the assessee did not make any disallowance u/s. 14A of the Act for the reason that no expense was directly or indirectly incurred for earning of dividend income. He further, submitted that the disallowance u/s. 14A of the Act could not have been made in excess of exempt income of Rs. 1,66,349/- earned by the assessee during the year. In this regard he placed reliance on the decision of Hon’ble Gujarat High Court in the case of PCIT Vs. Gujarat Flurochemicals Ltd. [155 taxmann.com 135(Guj.)].
6. Per contra, Shri Amit Pratap Singh, the Ld. SR-DR submitted that provision of section 147 of the Act has undergone a change with effect from 01.04.2021 and the AO was empowered to reopen the case if any income had escaped assessment and such issue comes to his notice subsequently. He, therefore, strongly supported the order of the lower authorities.
7. We have considered the rival submissions. We do not find any merit in the legal ground taken by the assessee. In the present case, the notice u/s. 147 of the Act was issued within three years from the end of the relevant assessment year. Further, as per the amended provision of section 147 of the Act, effective from 01.04.2021, the AO was empowered to initiate re-assessment proceeding if escapement of any income comes to his notice. The facts of the cases relied upon by the assessee are found to be totally different. In the case of P C Snehal Engineers (P.) Ltd. (supra) the notice u/s. 148 of the Act was issued beyond four years for which the condition was required to be fulfilled that the income had escaped due to failure on the part of the assessee. In the case of Lambda Therapeutic Research Ltd.(supra) also the reopening was done beyond four years. Thus, the facts of the cases relied upon by the assessee are different and the ratio of those decisions cannot be imported to the facts of the present case. Therefore, the legal ground taken by the assessee on the issue of reopening is dismissed.
8. As regards merits of the addition, the Hon’ble Gujarat High Court has held in the case of Gujarat Flurochemicals Ltd. (supra) that the disallowance u/s. 14A read with Rule 8D, could not exceed exempt income. Respectfully following the judicial precedence, the AO is directed to restrict the disallowance made u/s. 14A read with Rule 8D of the I.T Rules to the extent of exempt income of Rs.1,66,349/- earned by the assessee during the year. Accordingly, the ground taken by the assessee is partly allowed.
9. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Court on 06/10/2026 at Ahmedabad.
