ITAT Mumbai Deletes ₹4.11 Crore Section 14A Disallowance Against Aishwarya Rai

ACIT Vs Aishwarya Rai Bachchan (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT) Mumbai delivered its order in the case of ACIT vs Aishwarya Rai Bachchan concerning the applicability of disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D for Assessment Year (A.Y.) 2022–23. The Revenue had filed an appeal against the order of the Commissioner of Income Tax (Appeals), Mumbai/National Faceless Appeal Centre (NFAC), Delhi, dated June 16, 2025, which granted relief to the assessee.

The Assessing Officer (AO) had proposed a disallowance under Section 14A in relation to expenses allegedly incurred in earning exempt income. The assessee filed her return of income for A.Y. 2022–23 on October 22, 2022, declaring a total income of ₹39,33,02,240. The case was selected for complete scrutiny. During the assessment proceedings, the assessee explained that she had already made a suo-moto disallowance of ₹49,08,657 under Section 14A, despite having incurred no expenditure specifically for earning exempt income. However, the AO rejected this explanation and proceeded to apply Rule 8D to compute disallowance.

Based on the AO’s computation, the total value of investments earning tax-free income was ₹9,21,26,77,726, with an average investment value of ₹4,60,63,38,863. The AO applied a disallowance rate of 1% on the average value, arriving at ₹4,60,63,388. After adjusting the assessee’s suo-moto disallowance of ₹49,08,657, the AO made an additional disallowance of ₹4,11,54,731 under Section 14A. The assessment was finalized under Section 143(3) at an income of ₹43,44,56,971 by order dated March 16, 2024.

The assessee appealed before the CIT(A), who, after examining the matter in detail, ruled in favour of the assessee. The CIT(A) relied on the Supreme Court’s decision in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC), which held that before applying Rule 8D, the AO must record satisfaction that the suo-moto disallowance made by the assessee is incorrect, taking into account the nature of the assessee’s accounts and investments. The CIT(A) observed that the assessee had already made a reasonable disallowance voluntarily, and in the absence of proper satisfaction recorded by the AO, further disallowance was unjustified.

The Revenue appealed to the ITAT, arguing that the AO had correctly applied Section 14A read with Rule 8D and had duly recorded satisfaction in paragraph 3.4 of the assessment order. The Departmental Representative (DR) contended that the AO had properly examined the assessee’s response before computing the disallowance and that the CIT(A)’s decision was erroneous.

The assessee’s Authorized Representative (AR) argued that no proper satisfaction had been recorded by the AO as required under Section 14A(2). The AR pointed out that in response to the show-cause notice, the assessee had filed a detailed reply on March 9, 2024, which was reproduced in the assessment order but disregarded without any findings or reasoning. The AO, according to the AR, failed to explain why the assessee’s computation was unsatisfactory. Furthermore, the AR emphasized that the total expenditure incurred by the assessee during the year was ₹2.48 crore, while the AO’s disallowance exceeded ₹4.60 crore, which was unreasonable and disproportionate. The AR also relied on the CIT(A)’s earlier decision for A.Y. 2014–15, where on similar facts, the addition under Section 14A had been deleted.

After reviewing the submissions and records, the Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal. The Tribunal noted that the assessee had already made a suo-moto disallowance of ₹49,08,657 under Section 14A in respect of exempt income of ₹2,14,26,224. This amount included direct expenses of ₹37,59,718, transaction tax of ₹1,65,189, Securities Transaction Tax (STT) of ₹4,95,328, and indirect expenses of ₹4,88,422, representing 5% of total expenses.

The Tribunal observed that under the principles laid down in Maxopp Investment Ltd. (Supreme Court), the AO is required to record clear satisfaction explaining why the assessee’s own computation is incorrect before invoking Rule 8D. In the present case, such satisfaction had not been recorded, and therefore, the AO’s action was procedurally defective. The Tribunal further noted that the assessee had submitted a computation as per Section 14A read with Rule 8D, considering only those investments that yielded exempt income during the year, consistent with the Special Bench ruling in Vireet Investments Pvt. Ltd. v. ACIT (165 ITD 27). Based on that computation, the correct disallowance would amount to ₹21,95,734, whereas the AO had computed ₹4,60,63,388 without segregating investments linked to exempt income.

Additionally, the Tribunal pointed out that total expenses claimed in the Profit & Loss account were ₹2,48,11,639, which made the AO’s disallowance of ₹4.60 crore clearly illogical and unreasonable. The AO, it held, had failed to properly analyze the facts and records, and the disallowance was made without due appreciation of the legal requirements and factual position. The ITAT concluded that the additional disallowance made by the AO, beyond the amount voluntarily disallowed by the assessee, lacked any valid basis and therefore deserved to be deleted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

ACIT Vs Aishwarya Rai Bachchan (ITAT Mumbai)

This appeal is filed by the Revenue against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 16.06.2025 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2022-23.

2. The grounds of appeal are as follows:

“1. Whether the Ld. CIT(A) erred in not applying the principle laid down by the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) that Section 14A is attracted where the expenditure is incurred in relation to exempt income, and the availability of interest-free funds is not a standalone defense unless proven to be directly used for investments?”

3. The brief fact of the case are that the assessee filed her return for A.Y. 2022-23 on 22.10.2022 declaring total income of Rs. 39,33,02,240/-. The case was selected for complete scrutiny for verification of several issues. After considering the assessee response, the ld. AO proposed to make disallowance of expenses relating to exempt income u/s. 14A r/w Rule 8D of the Act. The assessee submitted that suo-moto disallowance of Rs. 49,08,657/- has already been made despite no expenditure being incurred for earning the exempt income.

However, ld. AO did not accept the assessee contention and made disallowance u/s. 14A r.w.s 8D as per the following computation:

Disallowance @1% of above = Rs. 4,60,63,388/-

After reducing the suo-moto disallowance of Rs. 49,08,657/-balance amount of Rs. 4,11,54,731/- was disallowed u/s. 14A of the Act and assessment completed at an income of Rs. 43,44,56,971/- vide order u/s. 143(3) dated 16.03.2024.

3.2 Aggrieved, the assessee preferred an appeal before the ld. CIT(A). After detailed examination of the issue, ld. CIT(A) allowed the assessee’s appeal with the following observations:

4.9. Also reliance is placed on the decision of Hon’ble Supreme court in the case of Maxopp Investment Ltd.. vs Commr.Of I.T New Delhi, as below-

“41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

4.10. In view of the above decision and also the fact that the appellant has already made the applicable disallowance suo moto in her ITR, I find merit in the

Aggrieved with the order above of ld. CIT(A), the revenue is in appeal before the Tribunal.

4. Before us, ld. DR has vehemently argued that the ld.AO has correctly applied the provisions of section 14A r.w.r. 8D to compute the disallowance of expenses incurred on earning the exempt income. He has further submitted that the ld. AO has duly recorded his satisfaction for invoking the provisions of section 14A r.w.r 8D in para 3.4 of his order. In view of these facts, the order of the ld. AO deserves to be upheld.

4.2 Ld. AR, on the other hand, has submitted that no proper satisfaction had been recorded by the ld. AO. In response to the show-cause notice, the assessee had submitted a detailed reply dated 09.03.2024 which has been reproduced in the assessment order by the ld. AO but it has been rejected without due consideration. Ld. AO has not given any findings on the merits of the assessee’s submissions and no satisfaction has been recorded as to why the AO disagrees with the explanation of the assessee. Ld. AR has further pointed out that the total expenditure incurred by the assessee is only Rs. 2.48 cr as against which the disallowance of Rs. 4.60 cr has been computed by the ld. AO which is preposterous. Lastly, Ld. AR has also placed reliance on the ld. CIT(A)’s order for A.Y. 2014-15 wherein on similar facts, he had deleted the addition made by ld. AO.

5. We have heard the rival submissions and perused the material available on record. Admittedly, the assessee had suo-moto made a disallowance of Rs. 49,08,657/- u/s. 14A in respect of total exempt income of Rs. 2,14,26,224/- at the time of filing her return of income. This amount includes direct expenses of Rs. 37,59,718/- transaction tax of Rs. 1,65,189/-, STT of Rs. 4,95,328/- and indirect expenses of Rs. 4,88,422/-being 5% of the total expenses. As per the settled legal position, in view decision of Hon’ble Apex Court in the case of Maxopp Investments Ltd. Vs. CIT(2018) 402 ITR 640, ld. AO had to record his satisfaction as to why the suo-moto disallowance made by the assessee was not acceptable which has not been done and, therefore, ld. CIT(A) has righty allowed relief to the assessee.

5.2 Further, the assessee had submitted the working as per section 14A r.w.r 8D after considering only those investments from which exempt income was earned during the year in view of the decision of the special bench in Vireet Investments Pvt. Ltd. V ACIT 165 TRD 27, as per which the disallowance works out to Rs. 21,95,734/-. Ld. AO simply rejected the computation submitted by the assessee and proceeded to compute the disallowance u/s. 14A r.w.r 8D at Rs. 4,60,63,388/- without segregating the investments from which exempt income was derived. Moreover, it is seen that the total expenses debited to the P&L account are only Rs. 2,48,11,639/- and thus the computation of disallowance of Rs. 4,60,63,38,863/- is devoid of any logic and clearly unreasonable. Thus it is clear that ld. AO has not considered the entire factual matrix of the case nor gone through the relevant accounts and the disallowance has been made without proper appreciation of facts in the light of the settled legal position. Accordingly, we are of the considered view, that the disallowance made by the ld. AO over and above the suo-moto disallowance made by the assessee is without any basis and deserves to be deleted.

6. In the result, the appeal of the revenue is dismissed.

Order Pronounced in Open Court on 31.10.2025