Case Law Details
Indraprastha Gas Limited Vs JCIT (OSD) (ITAT Delhi)
Assessee, a leading distributor of CNG & PNG, filed its return declaring income of ₹914.49 crore. AO completed assessment u/s 143(3) determining total income at ₹927.94 crore after making two adjustments- disallowance of additional depreciation u/s 32(1)(iia) & disallowance u/s 14A read with Rule 8D amounting to ₹3.65 crore. CIT(A) deleted the disallowance of additional depreciation but upheld the disallowance u/s 14A.
Before Tribunal, Assessee contended that it had already made a suo motu disallowance of ₹25.84 lakh u/s 14A while computing income, following Maxopp Investment Ltd. (203 Taxman 364). It was argued that no fresh investments were made during the year, the dividend income arose from long-standing investments in associates (Maharashtra Natural Gas Ltd. & Central UP Gas Ltd.), & mutual fund gains were due to mark-to-market appreciation without any expenditure incurred. Assessee maintained that investments were made from own surplus funds, with no interest-bearing borrowings.
AO, however, rejected the working & applied Rule 8D mechanically, computing additional disallowance of ₹3.65 crore. CIT(A) affirmed the AO’s view.
Tribunal held that Rule 8D applies only when AO records a valid dissatisfaction about correctness of assessee’s claim. In this case, the AO’s satisfaction was general & unsubstantiated, without identifying any specific expenditure incurred for earning exempt income. Since there were no new investments & the assessee had sufficient own funds, no further disallowance of interest or indirect expenditure was warranted.
Relying on South Indian Bank Ltd. v. CIT (130 taxmann.com 178, SC) & CIT v. Reliance Utilities & Power Ltd. (178 Taxman 135, Bom), Tribunal held that where own funds exceed investments, presumption is that investments are made from own funds. The suo motu disallowance of ₹25.84 lakh was found reasonable & justified.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal preferred by the assessee for the Assessment Year (‘AY’) 2018-19 is directed against the order dated 12.03.2025 of the Commissioner of Income Tax (Appeals), NFAC, Delhi [‘CIT(A)’].
2. The sole substantive issue raised in this appeal is the disallowance made under section 14A of the Income Tax Act, 1961 (‘Act’) read with rule 8D of the Income Tax Rules, 1962.
3. The relevant facts giving rise to this appeal are that the assessee, a distributor of PNG and CNG, filed its Income Tax Return (‘ITR’) of the relevant year on 23.10.2018 declaring income of Rs.914,49,87,010/-. The case was picked up for scrutiny. Consequential scrutiny assessment was completed at income of Rs.927,94,09,651/-; wherein the Ld. Assessing Officer (‘AO’) disallowed the claim of (i) additional depreciation of Rs.9,78,36,988/- under Section 32(1)(iia) of the Act and (ii) expenditure of Rs.3,65,85,683/- under Section 14A of the Act. Aggrieved, the assessee filed appeal before the Ld. CIT(A) and succeeded partly. The Ld. CIT(A) deleted the disallowance of additional depreciation of Rs.9,78,36,988/-, but upheld the disallowance of Rs.3,65,85,683/- made under Section 14A of the Act.
4. With respect to disallowance of Rs.3,65,85,683/- made under section 14A of the Act, the Ld. Authorized Representative (‘AR’) submitted that the appellant/assessee while computing its income for the ITR, following the decision of Maxopp Investment Ltd. 203 taxman 364, had already made disallowance of Rs.25,84,720/- in accordance with section 14A of the Act read with Rule 8D of the Income Tax Rules. Therefore, further disallowance on this score was not called for. It was contended that the appellant assessee had not incurred any specific expenditure for earning the exempted income of Rs.19,70,75,320/- (Rs.10,22,25,320/- pertains to mark to market gain on growth of mutual fund and Rs.9,48,50,000/- dividend). It was categorically submitted that the dividend was derived on the investment made by the appellant assessee, in 2018, in its associates; Maharashtra Natural Gas Ltd. and Central UP Gas Ltd. These investments were resulting dividend income without incurring any expenditure thereon in the relevant year. It was further submitted that the investments in mutual funds were being managed by the Portfolio Manager and the appellant assessee was not required to do anything, after making initial investment in mutual fund, to derive the gain on account of market gain/ appreciation. It was specifically submitted that no fresh investment had been made during the relevant year. Further, it was also submitted that the appellant assessee had not claimed any exclusive expenditure in its Profit & Loss Account for earning the exempted income. However, the assessee had made suo-moto disallowance of Rs.25,84,720/-in the ITR in accordance with section 14A of the Act read with Rule 8D of the Income Tax Rules. The Ld. AR explained the working of suo-moto disallowance of Rs.25,84,720/-.
4.1 The Ld. AR further submitted that the Ld. AO had given the finding that investments had been made after quite intensive market research. However, in absence of any fresh investment made during the year, this finding had no relevance at all, contended the Ld. AR. No other specific reasons for not accepting the working of the assessee regarding the disallowance made under section 14A of the Act had been given by the Ld. AO. Reliance was placed on the decisions of the Hon’ble Courts in the cases of (i) Walfort Share and Stock Brokers P Ltd.; 326 ITR 1, (ii) Birla Corporation Ltd.; [2014] 55 taxman 33, (iii) Development credit Bank Ltd.; [2013] 40 taxman.com 532, (iv) Wella India Hair Cosmetics Pvt Ltd.; [2014] 51 taxman.com 203, (v) Hero Cycle; 323 ITR 518, (vi) Inductis India Pvt. Ltd. 157 taxmann.com 87, (vii) Eichear; 101 TTJ (Del.) 369, (vii) Godrej & Boyce Mfg. Co. Ltd.; 328 ITR 81 (Mum), (ix) Taikisha; 370 ITR 338 (Del.), (x) Priya Exhibitors (P) Ltd.; [2012] 54 SOT 356, (xi) Pukhraj Chunnilal Bafna; [2014] 47 taxman.com 288 and (xii) Magarpatta Township Development and Construction Company Ltd. [2014]. Besides these case laws, the Ld. AR also placed reliance on the decision of the coordinate bench in the cases of Punjab National Bank 176 taxmann.com 408, Bharti Airtel Ltd. 171 taxmann.com 754 and Saroj Agarwal (ITA No. 6263/Del/2012).
5. On the other hand, the Ld. Commissioner of Income Tax-Departmental Representative (CIT-DR) argued vehemently and defended orders of the Authorities below. He prayed for dismissal of this appeal.
6. We have heard both parties and have perused the material available on the record. In the relevant year, the AO has recorded his satisfaction/reasoning for invoking the Rule 8D read with section 14A of the Act. However, we do not find the said satisfaction sufficient for rejecting the assessee’s working of disallowance particularly when the assessee has not made any fresh investment during the relevant year and the assessee’s exempted income consists of market gain on growth of mutual fund and dividend income from the associate companies. The amount of expenditure in relation to exempt income has two aspects – (i) direct and (ii) indirect. The direct expenditure is straightaway taken into account by virtue Rule 8D(2)(i) of the Income Tax Rules. The indirect expenditure has to be considered as per Rule 8D(2)(ii) of the Income Tax Rules. The Rule 8D of the Income Tax Rules comes into effect only when the AO, having regard to the accounts of the assessee, records his dissatisfaction about the correctness of the claim of expenditure made by the assessee; or the claim made by the assessee that no expenditure has been incurred in relation to exempt income.
7. Here, we find the Ld. AO’s dissatisfaction recorded in general and is not corroborated with facts and specific finding. The Ld. AO has not specified any expenditure incurred exclusively for deriving the exempted income. There is no finding that there is interest expenditure directly attributable to any particular income or receipt. The disallowance of indirect expenditure is an artificial figure i.e. one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of the total income. We have perused orders of the Authorities below. We are of the considered view that the AO’s satisfaction for rejecting the appellant assessee’s working of suo-moto disallowance made under section 14A of the Act is not justified. Further, the AO has erred in working out the monthly averages of the opening and closing balances of the value of investment, to which the Ld. CIT-DR appeared in agreement. Here, the assessee has sufficient surplus to make investments from its own funds. Hence, the indirect expenditure should not include any disallowance of interest subsumed in the indirect expenditure. Reliance is placed on the judgment of Hon’ble Supreme Court in the case of South Indian Bank Ltd. 130 taxman.com 178(SC) 128 and CIT vs. Reliance Utilities & Power Ltd. (2009) 178 taxman 135 (Bombay). Thus, only the disallowance out of administrative expenditure can be made. The assessee has already made suo-moto disallowance of Rs.25,84,720/- in accordance with section 14A of the Act read with Rule 8D of the Income Tax Rules and has explained the working thereof. We are satisfied with the working of said disallowance of Rs.25,84,720/- under section 14A of the Act. We therefore, delete the disallowance of Rs.3,65,85,653/- made under section 14A of the Act. The assessee gets consequential relief.
8. In the result, the appeal of the assessee is allowed as above.
Order pronounced in open Court on 30th October, 2025
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